Form 10-K/A

10-K/A 1 d10ka.htm FORM 10-K/A Form 10-K/A

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K/A

(Amendment No. 1)

(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, 2003

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-20646

CARAUSTAR INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)


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

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

(770) 948-3101

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $.10 par value

(Title of Class)

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 ¨

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 or any amendment to this Form 10-K. ¨

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

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2003, computed by reference to the closing sale price on such date, was $223,565,660. 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 March 5, 2004, 28,440,719 shares of Common Stock, $.10 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

EXPLANATORY NOTE

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, 2003 (the “2003 10-K”) is to amend certain disclosures in response to comments we received on the 2003 10-K from the accounting staff of the Division of Corporation Finance of the Securities and Exchange Commission. In order to preserve the nature and character of the disclosures set forth in the 2003 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 2003 10-K on March 15, 2004.


The Items of our 2003 10-K which are amended herein are:

Part I

Risk Factors (which are included in Part II of this Amendment).

Part II

Item 6. — Selected Financial Data.		2

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

Item 8 — Financial Statements and Supplementary Data.		33

Part IV

Item 15 — Exhibits, Financial Statement Schedules and Reports on Form 8-K.		77

Signatures.		79

Exhibits — Exhibits 23.01, 23.02, 31.01, 31.02, 32.01 and 32.02 have been refiled or refurnished, as applicable.		80

All information contained in the 2003 10-K, as amended herein, 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 2003 10-K. You should read this amendment together with these subsequent reports, for updated disclosures on certain matters discussed in our 2003 10-K.

PART II

INTRODUCTION

Caraustar Industries, Inc. operated its business through 26 subsidiaries across the United States, Canada, Mexico and the United Kingdom as of March, 2004. 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. Our corporate website is www.caraustar.com. You can access our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those filings, as well as our other filings with the Security and Exchange Commission (“SEC”), free of charge on our website via hyperlink to a third party database of documents filed electronically with the SEC. These documents are available for access as soon as reasonably practicable after we electronically file these documents with the SEC.

FORWARD-LOOKING INFORMATION

This amended annual report on Form 10-K/A, 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 annual report and the Company’s other filings with the SEC. With respect to such forward-looking statements, we claim protection under the Private Securities Litigation Reform Act of 1995. Our SEC filings are available from us, and also may be examined at public reference facilities maintained by the Securities and Exchange Commission or, to the extent filed via EDGAR, accessed through the website of the SEC (http://www.sec.gov). We do not undertake any obligation to update any forward-looking statements we make.

ITEM 6.

SELECTED FINANCIAL DATA


	Year Ended December 31,
	2003			2002			2001			2000			1999
	(In thousands, except per share data and ratios)
Summary of Operations
Sales	$	992,220		$	936,779		$	900,256		$	1,014,615		$	936,928
Cost of sales		819,349			767,955			720,018			810,705			730,611

Gross profit		172,871			168,824			180,238			203,910			206,317
Selling, general and administrative expenses		163,930			150,044			146,934			145,268			125,784
Restructuring and impairment costs		15,142			12,713			7,083			16,777			—

(Loss) income from operations		(6,201	)		6,067			26,221			41,865			80,533
Other (expense) income:
Interest expense		(43,905	)		(38,115	)		(41,153	)		(34,063	)		(25,456	)
Interest income		1,026			1,652			986			412			603
Loss on extinguishment of debt		—			—			(4,305	)		—			—
Write-off of deferred debt costs		(1,812	)		—			—			—			—
Equity in income (loss) of unconsolidated affiliates		8,354			2,488			(2,610	)		6,533			9,224
Other, net		208			130			(1,434	)		(918	)		(459	)

		(36,129	)		(33,845	)		(48,516	)		(28,036	)		(16,088	)

(Loss) income before minority interest and income taxes		(42,330	)		(27,778	)		(22,295	)		13,829			64,445
Minority interest in losses (income)		196			235			180			(169	)		(356	)
Benefit (provision) for income taxes		15,099			9,623			7,513			(5,485	)		(23,142	)

Net (loss) income	$	(27,035	)	$	(17,920	)	$	(14,602	)	$	8,175		$	40,947

Diluted weighted average shares outstanding		27,993			27,871			27,845			26,301			25,199
Per Share Data
Net (loss) income		(0.97	)		(0.64	)		(0.52	)		0.31			1.62
Cash dividends declared		0.00			0.00			0.18			0.72			0.72
Market price on December 31	$	13.80		$	9.48		$	6.93		$	9.38		$	24.00
Shares outstanding December 31		28,222			27,907			27,854			26,205			25,488
Total Market Value of Common Stock	$	389,464		$	264,558		$	193,028		$	245,803		$	611,712
Balance Sheet Data
Cash and cash equivalents	$	85,551		$	34,314		$	64,244		$	8,900		$	18,771
Property, plant and equipment, net		410,772			443,395			450,376			483,309			479,856
Depreciation and amortization		30,991			54,246			64,340			60,858			52,741
Capital expenditures		20,006			22,542			28,059			58,306			35,696
Total assets		960,545			990,333			960,981			934,097			879,880
Current maturities of long-term debt		106			70			48			1,259			16,615
Revolving credit loans		—			—			—			194,000			140,000
Long-term debt, less current maturities		531,001			532,715			508,691			272,813			269,739
Shareholders’ equity		219,877			241,681			279,579			279,808			279,184
Total shareholder’s equity and debt	$	750,984		$	774,466		$	788,318		$	747,880		$	705,538

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

We are a major manufacturer of recycled paperboard and converted paperboard products. We operate in three business segments. The paperboard segment manufactures 100% recycled uncoated and clay-coated paperboard and collects recycled paper and brokers recycled paper and other paper rolls. The tube, core and composite container segment produces spiral and convolute-wound tubes, cores and cans. The carton and custom packaging segment produces printed and unprinted folding carton and set-up boxes and provides contract manufacturing and packaging services.

Our business is vertically integrated to a large extent. This means that our converting operations consume a large portion of our own paperboard production, approximately 42% in 2003. The remaining 58% of our paperboard production is sold to external customers in any of the four recycled paperboard end-use markets: tube, core and composite containers; folding cartons; gypsum wallboard facing paper and other specialty products. These integration statistics do not include volume produced or converted by our 50% owned, unconsolidated, joint ventures Premier Boxboard Limited and Standard Gypsum, LLP. As part of our strategy to optimize our operating efficiency, each of our mills can produce recycled paperboard for more than one end-use market. This allows us to shift production among mills in response to customer or market demands.

Historically, we have grown our business, revenues and production capacity to a significant degree through acquisitions. Based on the difficult operating climate for our industry and our financial position over the last three years, the pace of our acquisition activity, and correspondingly, our revenue growth, has slowed as we have focused on conserving cash and maximizing the productivity of our existing facilities. During the third quarter of 2002, we acquired certain operating assets (excluding accounts receivable) of Smurfit-Stone’s Industrial Packaging Group. In addition, during the first quarter of 2003 we completed the purchase of our venture partner’s interest in Caraustar Northwest, LLC located in Tacoma, WA. See “–Liquidity and Capital Resources –Acquisitions.”

We are a holding company that operated our business through 26 subsidiaries as of March, 2004. We also own a 50% interest in two joint ventures with Temple-Inland, Inc. We account for these interests in our joint ventures under the equity method of accounting. See “—Liquidity and Capital Resources” below.

Key Business Indicator and Trends

Our industry has historically been closely correlated with the domestic economy in general, and with consumer nondurable consumption (packaging segment) and industrial production (tube, core and composite containers segment), specifically. These demand drivers tend to be cyclical in nature, with cycles lasting 3 – 5 years depending on such factors as gross domestic production (GDP), interest rates and other factors. As these demand drivers fluctuate, we typically experience decreases in volume and revenue in our business. Since late 1999, the recycled paperboard and converted paperboard products industry has been in a down cycle. While we believe that future operating results may improve, we cannot ascertain when or to what extent this may occur.

The key operating indicator of our business is paperboard mill capacity utilization. Capacity utilization is calculated as the ratio of days operated versus available days at expected production rates, taking into consideration planned downtime for maintenance. As paperboard mill capacity utilization increases, cost per ton of paperboard generally decreases. As these tons are sold, profitability increases since fixed production costs are absorbed by more tons produced. Additionally, higher capacity utilization rates generally provide enhanced opportunity to recover material and labor increases through improved pricing. This positively affects paperboard and converted products’ income from operations and cash flow. Paperboard mill capacity utilization is affected by demand and by mill closures. Industry demand decreased from 2000 – 2002 due primarily to a recessionary general economy, the continued migration of U.S. manufacturing offshore to lower labor cost environments and product substitution, e.g. plastic standup pouches used for packaging instead of boxes. The decrease in demand resulted in a decrease in capacity utilization. We expect the migration of U.S. manufacturing offshore and product substitution to continue, although at a slower rate, which could continue to negatively affect operating income and cash flow. We further expect these trends to be somewhat offset by the improving domestic economy and our own paperboard mill capacity reductions. Recent industry improvement in capacity utilization has been driven by paperboard mill closures, as over 1.7 million tons of capacity, or approximately 20% of the recycled paperboard mill total capacity, has been closed

since 2000. We have closed or idled approximately 323 thousand tons of our own paperboard mill capacity during this period to better match our supply capabilities to demand.

MILL CAPACITY UTILIZATION

LOGO

⁽¹⁾	Excludes closed or idled machines

Source: American Forest and Paper Association.

Restructuring has been a primary component of management’s strategy to address the decrease in demand resulting from secular trends, as discussed above, and generally weak domestic economic conditions. Between 2001 and 2003, restructuring charges have totaled $34.9 million, of which approximately $21.0 million have been noncash charges, See “Results of Operations 2003 – 2002 and 2002 – 2001.” We have also experienced increases in near-term manufacturing and selling, general and administrative costs as a result of our transitioning of business within our mill and converting systems to other company facilities. Our strategic initiatives are designed to enhance our competitiveness through reduced costs, increase revenue through delivery of differentiated quality products and services to our customers, and promote compliance with recent changes in legal and regulatory requirements. Our restructuring efforts have been directed toward reducing costs through manufacturing and converting facilities rationalization where we believed it was advantageous to do so due to geographic overlap, duplicative capabilities, changes in customer base and other factors. Rationalization of facilities typically results initially in increased cash outlays and expenses, such as severance costs.

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. Recovered fiber cost per ton averaged $88 and $85 during 2003 and 2002, respectively.

Excluding raw materials and labor, energy is our most significant manufacturing cost. Energy consists of electrical purchases and fuel used to generate steam used in the paper making process and to operate our paperboard machines and all of our converting machinery. In 2001, the average energy cost in our mill system was approximately $57 per ton compared to $50 per ton in 2002, a 12.3% decline. In 2003 energy costs averaged $61 per ton, an increase of 22.2% from 2002. Until the last few years, our business had not been significantly affected by energy cost increases, and we historically have not passed increases in energy costs through to our customers. Consequently, as the volatility of energy prices has increased dramatically over the last three years, we have not been able to pass through to our customers all of the energy cost increases we have incurred. As a result, our operating margins have been adversely affected. Although we continue to evaluate our energy costs and consider ways to factor energy costs into our pricing, we cannot give assurance that our operating margins and results of operations will not continue to be adversely affected by rising energy costs. See “— Risk Factors – Our operating margins may be adversely affected by rising energy costs.”

We raise our selling prices in response to increases in raw material and energy costs. However, we often are unable to pass the full amount of these costs through to our customers on a timely basis due to supply and demand in the industry, and as a result often cannot maintain our operating margins in the face of dramatic cost increases. We do have contractual arrangements with 10 customers as of the end of 2003 that permit us to adjust pricing periodically for changes in raw materials such as fiber and energy based on published indices. Revenue associated with such contracts was approximately $147.5 million in 2003 and $135.1 million in 2002.We experience margin shrinkage during all periods of cost increases due to customary time lags in implementing our price increases. We cannot give assurance that we will be able to recover any future increases in the cost of recovered fiber by raising the prices of our products. Even if we are able to recover future cost increases, our operating margins and results of operations may still be materially and adversely affected by time delays in the implementation of price increases. See “— Risk Factors – Our business and financial performance may be harmed by future increases in raw material costs.”

Critical Accounting Policies

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

Revenue Recognition. We recognize revenue and the related account receivable when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) ownership has transferred to the customer; (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. Generally, we recognize revenue when we ship our manufactured products or when we complete a service and title and risk of loss passes to our customers. Provisions for discounts, returns, allowances, customer rebates and other adjustments, which have averaged approximately 1.1% of sales for the years ended December 31, 2003, 2002 and 2001, are provided for in the same period as the related revenues are recorded and are determined based on historical experience or specific customer arrangements.

Accounts Receivable. We perform periodic credit evaluations of our customers and adjust credit limits based upon payment history and the customers’ current credit worthiness, as determined by our review of their current credit information. We 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. When we become aware of a customer whose continued operating success is questionable, we closely monitor collection of their receivable balance and may require the customer to prepay for current shipments. If a customer enters a bankruptcy action, we monitor the progress of that action to determine when and if an additional provision for noncollectibility is warranted. We evaluate the adequacy of the allowance for doubtful accounts on at least a quarterly basis. The allowance for doubtful accounts at December 31, 2003, 2002 and 2001 was $4.2 million, $4.1 million and $3.5 million, respectively, and our provision for uncollectible accounts was $7.0, $6.4 and $5.3 million for the years ending 2003, 2002 and 2001, respectively. 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. These estimates may prove to be inaccurate, in which case we may have overstated or understated the reserve required for uncollectible accounts receivable. During the second quarter of 2003 one of our significant carton customers, Spalding Sports, filed Chapter 11 bankruptcy unexpectedly, and we were required to write-off uncollectible accounts receivable of $2.2 million, net of the $1.1 million recovery recorded in the third quarter of 2003.

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 reviews inventory at least quarterly to determine the necessity of write-offs for excess, obsolete or unsaleable inventory. Inventory over six months old is generally deemed unsaleable at first quality prices unless customer arrangements or other special circumstances exist. We reserve for inventory obsolescence and shrinkage based on management’s judgment of future realization. These reviews require management to assess customer and market demand. These estimates may prove to be inaccurate, in which case we may have overstated or understated the write-offs required for excess, obsolete or unsaleable inventory; however, in 2003, 2002 and 2001, these write-offs, other than those related to specific customer bankruptcies, were insignificant.

Goodwill. We test the carrying amount of goodwill at least annually as of the beginning of the fourth quarter and whenever events or circumstances indicate that impairment may have occurred. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. Impairment testing is performed

in accordance with SFAS 142, Goodwill and Other Intangible Assets and is based on a discounted cash flow approach to determine the fair value of each reporting unit. The determination of fair value requires significant management judgment, including estimating future sales volumes, growth rates of selling prices and costs, changes in working capital, investments in property and equipment and the selection of an appropriate discount rate. We also test the sensitivities of fair value estimates to changes in our growth assumptions of sales volumes, selling prices and costs. If the carrying amount of a reporting unit that contains goodwill exceeds fair value, a possible impairment would be indicated. If a possible impairment were indicated, we would estimate the implied fair value of goodwill by comparing the carrying amount of the net assets of the unit excluding goodwill to the total fair value of the unit attributed to those net assets. If the carrying amount of goodwill exceeds its implied fair value, an impairment charge would be recorded. We also use judgment in assessing whether we should test for impairment more frequently than annually. Factors such as unexpected adverse economic conditions, competition, product changes and other external events may require more frequent assessments. Based on our annual goodwill impairment testing, we have determined that none of our $183.1 million of goodwill is impaired.

Impairment of Long-Lived Assets. Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we periodically evaluate long-lived assets, including property, plant and equipment and definite lived intangible assets whenever events or changes in conditions may indicate that the carrying value may not be recoverable. Factors that management considers important that could initiate an impairment review include the following:

•

significant operating losses

•

recurring operating losses

•

significant declines in demand for a product produced by an asset capable of producing only that product

•

assets that are idled or held for sale

•

assets that are likely to be divested

The impairment review requires management to estimate future undiscounted cash flows associated with an asset or group of assets and sum the estimated future cash flows. If the future undiscounted cash flows is less than the carrying amount of the asset, then we must estimate the fair value of the asset. If the fair value of the asset is below the carrying value, then the difference will be written-off. Estimating future cash flows requires management to make judgments regarding future economic conditions, product demand and pricing. Although we believe our estimates are appropriate, significant differences in the actual performance of the asset or group of assets may materially affect our asset values and results of operations.

Impairment costs of $2.1 million were recorded in 2003 related to assets held for sale. The costs represent the difference between the carrying value of the assets and their estimated fair value.

Self-Insurance. We are self-insured for the majority of our workers’ compensation costs and health care costs, subject to specific retention levels. Consulting actuaries and administrators assist us in determining our liability for self-insured claims. Our self-insured workers compensation liability is estimated based on actual claims as established by a third party administrator and increased by factors that reflect our historical claim development. The “developed” claim, net of amounts paid, represents the liability that we record in our financial statements. The primary controllable driver of our workers compensation liability is the loss development factor, which estimates the amount to which one dollar in actual claims incurred will ultimately grow over the life of the claim, which may be several years. A 10.0% change in the loss development factors utilized for 2003 would have resulted in a $245 thousand change in workers’ compensation expense and accrued liability at December 31, 2003. Our self-insured health care liability is estimated based on our actual claim experience and multiplied by a time lag factor of 75 days. The lag factor represents an estimate based on historical experience of claims that have been incurred and should be recorded as a liability, but have not been reported. A 10% change in the lag factor would have resulted in a $530 thousand change in our healthcare costs and accrued liability at December 31, 2003. Future actual costs related to self-insured coverages will depend on claims incurred, medical cost trends, which have increased in recent years, safety performance and various other factors related to our employee population, which has decreased in recent years. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our workers’ compensation costs and group health insurance costs.

Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting

purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

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

At December 31, 2003, we had net federal and state deferred tax assets related to net operating losses of $34.5 million. Valuation allowances of $4.0 million have been established for a portion of these deferred tax assets. For additional information, see Note 11 to Consolidated Financial Statements.

Pension and Other Postretirement Benefits. We maintain a noncontributory defined benefit pension plan (the “Pension Plan”). The Pension Plan provides 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. Our policy is to fund benefits attributed to employees’ services to date as well as service expected to be earned in the future. During September 2003, the maximum deductible contribution of $11.7 million was made to the Pension Plan relating to the 2002 plan year. Based on our current estimate of future funding requirements, we do not expect to make a contribution during the year ended December 31, 2004.

During 1996, we adopted a supplemental executive retirement plan (“SERP”), which provides benefits to certain named participants based on average compensation. The SERP covers certain executives of the Company commencing upon retirement. The SERP was unfunded at December 31, 2003.

The determination of our pension benefit obligation and expense is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the weighted average discount rate, the weighted average expected rate of return on plan assets and the weighted average rate of compensation increase. The following table is a summary of the significant assumptions we used to determine our projected benefit obligation as of:


	December 31,
	2002		2003
Weighted average discount rate	6.75	%	6.25	%
Weighted average rate of compensation increase	3.00	%	3.00	%

The following table is a summary of the significant assumptions to determine net periodic pension expense for the years ended:


	December 31,
	2001		2002		2003
Weighted average discount rate	7.75	%	7.50	%	6.75	%
Weighted average expected rate of return on plan assets	9.50	%	9.50	%	9.00	%
Weighted average rate of compensation increase	3.00	%	3.00	%	3.00	%

In developing the weighted average discount rate, we evaluated input from our actuaries, including estimated timing of obligation payments and yields for long-term bonds that received one of the two highest ratings given by a recognized rating agency. The discount rate, determined on this basis, was lowered from 6.75% at December 31, 2002 to 6.25% at December 31, 2003. Based on analysis of the rating and maturity of the long-term bonds, the timing of payment obligations and the input from our actuaries, we concluded that a discount rate of 6.25% is appropriate and reflects the yield of a portfolio of high-quality bonds that has the same

duration as the plan obligations. Future actual pension expense and benefit obligations will depend on future investment performance, changes in future discount rates and various other factors related to populations participating in our pension plans. A 0.25% change in the discount rate would result in a change in the December 31, 2003 projected benefit obligation of approximately $3.3 million and estimated 2004 net pension expense of approximately $540 thousand.

In developing our weighted average expected rate of return on plan assets, we evaluated such criteria as return expectations by asset class and long-term inflation assumptions. Our expected weighted average rate of return is based on an asset allocation assumption of 70% equity and 30% fixed income. We regularly review our asset allocation and periodically rebalance our investments to our targeted allocation when considered appropriate. As a result of this analysis, we concluded that the expected weighted average rate of return of 9.0% for December 31, 2003 is appropriate. A 0.25% change in the weighted average expected rate of return would change estimated 2004 net pension expense $186 thousand.

The investment performance during 2003, combined with the $11.7 million contribution, decreased our under-funded status of the Pension Plan and the SERP plan by approximately $5.9 million in 2003. While we believe that the assumptions we have used are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our Pension Plan and SERP liability.

We also provide postretirement medical benefits at certain of our subsidiaries. Our net periodic postretirement benefit cost for medical costs was approximately $507 thousand, $593 thousand and $195 thousand for the years ended December 31, 2001, 2002 and 2003, respectively. The accumulated postretirement benefit obligations at December 31, 2002 and 2003 were determined using a weighted average discount rate of 6.75% and 6.25%, respectively. The rate of increase in the costs of covered health care benefits is assumed to be 8.0% in 2003, decreasing 0.5% each year to 4.5% by the year 2010. Increasing the assumed health care costs trend rate by one percentage point would have increased the accumulated postretirement benefit obligation as of December 31, 2003 by approximately $672 thousand and would have increased net periodic postretirement benefit cost by approximately $66 thousand for the year ended December 31, 2003.

Depreciation. Management is required to make estimates regarding useful lives and salvage values of long-lived assets. These estimates can significantly affect depreciation expense and accordingly, both results of operations and the asset values reflected on the balance sheet. In the fourth quarter of 2002, we completed a comprehensive review of the remaining estimated useful lives of our machinery and equipment. As a result of this review, we revised our estimate of the useful lives for production machinery and equipment from an average of approximately 10 years to an average of approximately 20 years. We believe that the change more appropriately reflects the useful lives of the assets. The effect of this change in estimated useful lives has been accounted for on a prospective basis. The estimated impact of this change was a decrease in depreciation expense in the fourth quarter of 2002 of approximately $7.6 million and a decrease of $22.5 million in 2003. This change decreased the net loss and net loss per common share by approximately $4.8 million or $0.17 per common share and $14.1 million or $0.51 per common share for the years ended December 31, 2002 and 2003.

Freight Cost Reclassification Freight costs represent the cost of delivering finished goods to our customers and include amounts paid to a third party or the costs of using our own delivery trucks. Freight costs are now reported as a component of cost of sales. However, in prior years, freight costs were reported as a separate line item after gross profit. This reclassification was made because management felt that this presentation is more comparable to our competitors and would be beneficial to users of our financial statements. The freight costs reclassified in 2002 and 2001 and the resulting impact on gross profit was as follows (in thousands):


	Years Ended December 31,
	2002			2001
Gross profit reported in 2002 10-K	$	225,881		$	233,514
Freight cost reclassification		57,057			52,806
Other reclassification		0			470

Gross profit reported in 2003 10-K	$	168,824		$	180,238

Percentage change in gross profit		25	%		23	%

Results of Operations 2002 — 2003

The following table shows paperboard shipment volume, selling price per ton, recovered fiber cost per ton for the paperboard mills, and paperboard cost per ton for the tube and core operations for the periods indicated. The information below showing average net selling price, average cost per ton, and selling price in excess of cost is presented because management believes they are the most significant indicators of profitability for the paperboard segment and the tube, core and composite container segment. These are considered non-GAAP measures and a reconciliation to comparable GAAP measures is presented below. Historically, recovered fiber has been our largest raw material cost component and has fluctuated significantly due to market and industry conditions. However, these drivers are not the only factors that can impact these segments. See – “Risk Factors” for additional discussion of factors that impact our business. Also note that a portion of our sales do not have related paperboard volume, such as sales of contract packaging services and sales of recovered fiber. 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.


	Years Ended December 31,
	2002		2003		Change			% Change
Paperboard tons shipped by production source (in thousands):
From internal paperboard mill production		952.8		958.9		6.1		0.6	%
Purchases from external sources		118.5		118.5		0.0		0.0	%

Total paperboard tonnage		1,071.3		1,077.4		6.1		0.6	%

Paperboard tons shipped by end-use market (in thousands):
Tube, core and composite container volume
Paperboard (internal)		206.5		248.1		41.6		20.1	%
Purchases from external sources		27.0		32.7		5.7		21.1	%

Tube, core and composite container converted products		233.5		280.8		47.3		20.3	%
Unconverted paperboard shipped to external customers		39.5		43.3		3.8		9.6	%

Tube, core and composite container volume		273.0		324.1		51.1		18.7	%
Folding carton volume
Paperboard (internal)		97.2		87.5		(9.7	)	(10.0	)%
Purchases from external sources		82.8		69.3		(13.5	)	(16.3	)%

Folding carton converted products		180.0		156.8		(23.2	)	(12.9	)%
Unconverted paperboard shipped to external customers		265.6		261.4		(4.2	)	(1.6	)%

Folding carton volume		445.6		418.2		(27.4	)	(6.1	)%
Gypsum wallboard facing paper volume
Unconverted paperboard shipped to external customers		138.1		106.6		(31.5	)	(22.8	)%
Other specialty products volume
Paperboard (internal)		64.7		70.7		6.0		9.3	%
Purchases from external sources		8.7		16.5		7.8		89.7	%

Other specialty converted products		73.4		87.2		13.8		18.8	%
Unconverted paperboard shipped to external customers		141.2		141.3		0.1		0.1	%

Other specialty products volume		214.6		228.5		13.9		6.5	%

Total paperboard tonnage		1,071.3		1,077.4		6.1		0.6	%


Paperboard mills ($/ton):
Average net selling price	$	402	$	418	$	16		4.0	%
Average recovered fiber cost		85		88		3		3.5	%

Paperboard mill selling price in excess of recovered fiber cost	$	317	$	330	$	13		4.1	%

Tube and core facilities ($/ton)::
Average net selling price	$	789	$	807	$	18		2.3	%
Average paperboard cost		445		464		19		4.3	%

Tube and core selling price in excess of paperboard cost	$	344	$	343	$	(1	)	(0.3	)%

The following table shows paperboard shipment volume for each of our business segments (thousands of tons).


	Years Ended December 31,
	2002	2003	Change		% Change
Paperboard
Unconverted paperboard shipped to external customers	584.4	552.6	(31.8	)	-5.4	%
Paperboard shipped internally to converters in the paperboard segment	49.8	53.8	4.0		8.0	%
Paperboard purchased externally by converters in the paperboard segment	3.6	2.0	(1.7	)	-46.0	%

Total volume	637.8	608.3	(29.5	)	-4.6	%

Tube, core and composite container
Paperboard (internal)	221.4	265.1	43.6		19.7	%
Purchases from external sources	32.1	47.2	15.1		47.0	%

Total volume converted	253.5	312.3	58.7		23.2	%

Carton and custom packaging
Paperboard (internal)	97.2	87.5	(9.7	)	-10.0	%
Purchases from external sources	82.8	69.3	(13.5	)	-16.3	%

Total volume converted	180.0	156.8	(23.2	)	-12.9	%

Total paperboard tonnage	1,071.3	1,077.4	6.1		0.6	%

The following is a reconciliation of non-GAAP measures for our paperboard segment and tube, core and composite container segment to a comparable GAAP measure (dollars in thousands).


	Years Ended December 31,
	2002			2003
Paperboard Segment
Unconverted paperboard shipped to external customers (tons)		584,400			552,600

Non-GAAP Sales ⁽¹⁾	$	234,929		$	230,987
GAAP Adjustment ⁽²⁾		88,088			91,000

GAAP Sales		323,017			321,987


Non-GAAP Cost of Sales ⁽³⁾		(49,674	)		(48,629	)
GAAP Adjustment ⁽⁴⁾		(190,793	)		(183,548	)

GAAP Cost of Sales		(240,467	)		(232,177	)


Non-GAAP Gross Profit		185,255			182,358
GAAP Adjustments		(102,705	)		(92,548	)

GAAP Gross Profit	$	82,550		$	89,810


Non-GAAP Paperboard mill selling price in excess of recovered fiber cost per ton	$	317		$	330

GAAP gross profit per ton	$	141		$	163


	Year Ended December 31,
	2002			2003
Tube, Core and Composite Container Segment
Tube and core volume (tons) excluding partition and composite container volume		226,875			281,682
Non-GAAP Sales ⁽⁵⁾	$	179,004		$	227,317
GAAP Adjustment ⁽⁶⁾		114,213			152,827

GAAP Sales		293,217			380,144

Non-GAAP Cost of Sales ⁽⁷⁾		(100,959	)		(130,700	)
GAAP Adjustment ⁽⁸⁾		(147,693	)		(199,175	)

GAAP Cost of Sales		(248,652	)		(329,875	)

Non-GAAP Gross Profit		78,045			96,617
GAAP Adjustments		(33,480	)		(46,348	)

GAAP Gross Profit	$	44,565		$	50,269

Non-GAAP tube and core selling price in excess of paperboard cost per ton	$	344		$	343
GAAP gross profit per ton	$	196		$	178

⁽¹⁾	Non-GAAP sales are comprised of all sales generated as a result of shipping unconverted paperboard to external customers, exclusive of brokered sales transactions.

⁽²⁾	GAAP adjustments consist of brokered sales transactions which have no related fiber costs.

⁽³⁾	Recovered fiber costs.

⁽⁴⁾	GAAP adjustments include the cost of labor, energy, freight, repairs and maintenance, other manufacturing overhead and all other costs of sales excluding recovered fiber cost.

⁽⁵⁾	Non-GAAP sales consist of converted volume at the average net selling price, exclusive of partition, plastic and composite container sales.

⁽⁶⁾	GAAP adjustments consist of converted products other than tube, core and composite containers; chemical sales; and packaging and plastic products.

⁽⁷⁾	Paperboard costs.

⁽⁸⁾	GAAP adjustments include the cost of labor, energy freight, repairs and maintenance, other manufacturing overhead and all other costs of sales excluding paperboard costs.

The following is a reconciliation of GAAP gross profit to consolidated statements of operations (in thousands).


	Years Ended December 31,
	2002		2003
Paperboard segment gross profit	$	82,550	$	89,810
Tube, core and composite container gross profit		44,565		50,269
Carton and custom packaging gross profit		41,709		32,792

Consolidated gross profit	$	168,824	$	172,871

Paperboard tonnage. Total paperboard tonnage for 2003 was nearly flat, increasing only 0.6% from 2002. Likewise, tons sold from paperboard mill production increased by only 0.6% in 2003. Total tonnage converted increased 7.8% in 2003.

The positive effects on 2003 tonnage were primarily related to:

•

Higher internal conversion by our tube, core and composite container segment. The higher conversion was primarily driven by the tube and core plants acquired in September 2002.

•

Higher internal conversion by our other specialty converting operations, primarily the partition plants that were acquired in September of 2002.

These improvements were largely offset by:

•

A decrease in internal conversion by our folding carton operations due to weak demand.

•

A decrease in sales of unconverted paperboard to the gypsum wallboard facing paper end-use market. This decrease was primarily due to the transfer of volume from our Buffalo paperboard mill, which was closed in March 2003, to our 50% owned, unconsolidated, Premier Boxboard joint venture. Including the volume from Premier Boxboard, gypsum volume increased 5.2% to 187 thousand tons in 2003 compared with 178 thousand tons for the same period in 2002.

•

The decision to stop serving certain customers in conjunction with idling one of the two coated recycled paperboard machines at our Rittman, Ohio facility.

•

A decrease in sales of unconverted paperboard to the folding carton end-use market due to weak demand in that end-use market.

Sales. Our consolidated sales for the year ended December 31, 2003 increased 5.9% to $992.2 million from $936.8 million in 2002. The following table presents sales by business segment (in thousands):


	For Years Ended December 31,				$ Change			% Change
	2002		2003		$ Change			% Change
Paperboard	$	323,017	$	321,987	$	(1,030	)	(0.3	)%
Tube, core and composite container		293,217		380,144		86,927		29.6	%
Carton and custom packaging		320,545		290,089		(30,456	)	(9.5	)%

Total	$	936,779	$	992,220	$	55,441		5.9	%

Paperboard Segment

Sales for the paperboard segment decreased primarily due to lower volume of 31,800 tons, as explained above, which accounted for approximately $12.8 million of the decline and was partially offset by an increase in selling prices accounting for approximately $9.4 million in higher sales. In addition, sales from the paperboard segment converting and chemical sales operations improved by approximately $2.3 million.

Tube, Core and Composite Container Segment

Sales for the tube, core and composite container segment increased primarily due to acquisitions, which accounted for approximately $80.6 million of the increase and higher selling prices which accounted for approximately $4.2 million of the increase.

Carton and Custom Packaging Segment

Sales for the carton and custom packaging segment declined due to the following:

•

Lower volume, which accounted for approximately $22.2 million of the decline due primarily to the downsizing and eventual closure of the Ashland Carton plant

•

Lower contract packaging sales, which accounted for approximately $5.5 million of the decline in sales

•

Lower selling prices, which account for approximately $3.2 million

Gross Profit Margin. Gross profit margin for 2003 decreased to 17.4% of sales from 18.0% in 2002. This margin decrease was due primarily to the following:

•

Higher energy costs in our mill system of $10.8 million, which was driven primarily by higher natural gas prices

•

Costs to consolidate and reconfigure our operations of approximately $10.5 million

•

The combination of lower volume, lower selling prices and higher paperboard costs in the carton and custom packaging segment of approximately $8.0 million

•

Higher pension costs of approximately $3.2 million

•

Higher insurance costs of approximately $1.4 million

These factors were partially offset by:

•

Lower depreciation expense of $21.5 million

•

Higher gross paper margins in the Paperboard segment accounting for approximately $7.6 million improvement in gross profit

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $163.9 million in 2003, an increase of 9.3% from 2002. The increase in selling, general and administrative expenses was the result of the following:

•

$11.4 in Selling, general and administrative expenses associated with acquired locations

•

Costs of consolidating operations of $8.6 million, including the downsizing and the eventual closure of the Ashland carton facility

•

Cost of idling one of the two coated recycled paperboard machines at our Rittman, Ohio facility and associated costs of transitioning that mill’s volume to other locations of $2.9 million

•

A $1.3 million increase in pension and insurance costs

These increases were partially offset by approximately $10.4 million in selling, general and administrative expense reductions through savings initiatives, including facility closures.

Restructuring and Impairment Costs. In March 2003, we announced the permanent closure of our Buffalo Paperboard mill located, in Lockport, New York. We recorded a charge of approximately $4.4 million in connection with this closure. The majority of the Buffalo mills sales were transferred to our other paperboard mills and our Premier Boxboard joint venture.

In June 2003, we initiated a plan to permanently close our Ashland, Ohio carton facility. We recorded a charge of $6.7 million in connection with this closure. We restructured this facility in December 2002; however, due to severe margin pressure and excess industry capacity, the aggressive downsizing undertaken in December 2002 was unsuccessful so the facility was permanently closed.

In December 2003, we recorded a $986 thousand asset impairment charge related to the closing of the Hendersonville tube and core facility located in Hendersonville, North Carolina, a $223 thousand asset impairment charge related to the closing of the Jacksonville tube and core facility located in Jacksonville, Florida and a $609 thousand asset impairment charge related to the closure of the Halifax recycling plant located in Roanoke Rapids, North Carolina.

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 2003 we recorded an additional $82 thousand asset impairment charge and an additional $477 thousand related to other exit costs.

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 asset impairment charge.

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 2003 we recorded a reduction in expenses of $581 thousand due to a revised estimate of impaired assets and expensed and paid an additional $72 thousand for severance and other termination benefits.

In December 2002, we initiated a plan to consolidate our specialty products converting operations in Fayetteville, North Carolina into Carolina Component Concepts, Inc., also located in North Carolina, and recorded a pretax charge to operations of approximately $6.0 million. The $6.0 million charge included a $2.4 million asset impairment charge. In 2003, we recorded a $2.2 million charge which included a $914 thousand asset impairment charge, a $113 thousand charge for severance and other termination benefits and a $1.1 million charge for other exit costs.

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

Income (loss) from operations. Loss from operations for 2003 was $6.2 million, a decrease of $12.3 million compared with operating income of $6.1 million in 2002. The following table presents income (loss) from operations by business segment (in thousands):


	For the Year Ended December 31,						$ Change			% Change
	2002			2003			$ Change			% Change
Paperboard	$	12,268		$	20,013		$	7,745		63.1	%
Tube, core and composite container		11,383			8,688			(2,695	)	(23.7	)%
Carton and custom packaging		973			(12,758	)		(13,731	)	N/A
Corporate expense		(18,557	)		(22,144	)		(3,587	)	19.3	%

Total	$	6,067		$	(6,201	)	$	(12,268	)	N/A

Paperboard Segment

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

•

Lower depreciation expense of $13.2 million

•

Higher gross paper margins, which accounted for approximately $7.6 million of the increase

•

A decrease in restructuring costs of $3.2 million from 2002

•

Results from acquisitions of approximately $1.0 million

This increase was partially offset by:

•

Higher energy costs of approximately $10.8 million

•

Higher pension and insurance costs of approximately $1.9 million

•

Cost of idling one of the two coated recycled paperboard machines at our Rittman, Ohio facility of $2.9 million

Tube, Core and Composite Container Segment

The decline in income from operations is the result of the following:

•

Costs of consolidating acquired operations of approximately $7.5 million

•

Higher pension and insurance costs of approximately $2.0 million

These costs were partially offset by:

•

Lower depreciation expense of approximately $2.8 million

•

Results from acquisitions of approximately $1.0 million

Carton and Custom Packaging Segment

The decline in operating results is the result of:

•

Lower selling prices, lower volume, and high paperboard prices of approximately $8.0 million

•

Higher restructuring and impairment costs of $4.4 million

•

Costs to consolidate and reconfigure operations $3.4 million

•

Higher energy, pension and insurance costs of $2.0 million

This decline was partially offset by lower depreciation expense of $5.5 million.

Other Income (Expense). Interest expense increased 15.2% to $43.9 million for 2003 from $38.1 million in 2002. This increase was due to the unwinding of fixed to floating interest rate swaps. See “—Liquidity and Capital Resources” for additional information regarding our debt, interest expense and interest rate swap agreements.

Equity in income from unconsolidated affiliates was $8.4 million in 2003, an improvement of $5.9 million over 2002. This increase was primarily due to a $7.1 million improvement in operating results for Premier Boxboard Limited, our paper mill joint venture with Temple-Inland. The improved results were due primarily to an increase in gross paper margins and volume and lower depreciation expense. Standard Gypsum’s results declined $1.1 million in 2003 compared to 2002 primarily due to increased raw material and energy costs, which were partially offset by increased volume and lower depreciation expense.

Benefit for income taxes. The effective rate of income tax benefit for the year ended December 31, 2003 was 35.7% compared with 34.6% for the same period last year. The effective rates for both periods are different from the statutory rates due to permanent tax adjustments. In addition, the year ended December 31, 2003 included $700 thousand of additional tax expense relating to an estimated future impairment of state net operating losses.

Net Loss. Due to the factors discussed above, net loss for 2003 was $27.0 million, or $0.97 net loss per common share, compared to net loss of $17.9 million, or $0.64 net loss per common share, in 2002.

Results of Operations 2001 — 2002


	Years Ended December 31,		Change		% Change
	2001	2002	Change		% Change
Paperboard tons shipped by production source shipped (in thousands):
From internal paperboard mill production	892.4	952.8	60.4		6.8	%
Purchases from external sources	123.1	118.5	(4.6	)	(3.7	)%

Total paperboard tonnage	1,015.5	1,071.3	55.8		5.5	%

Paperboard tons shipped by end-use market (in thousands):
Tube, core and composite container volume
Paperboard (internal)	187.6	206.5	18.9		10.1	%
Purchases from external sources	25.9	27.0	1.1		4.2	%

Tube, core and composite container converted products	213.5	233.5	20.0		9.4	%
Unconverted paperboard shipped to external customers	32.7	39.5	6.8		20.8	%

Tube, core and composite container volume	246.2	273.0	26.8		10.9	%
Folding carton volume
Paperboard (internal)	85.2	97.2	12.0		14.1	%


Purchases from external sources		92.2		82.8		(9.4	)	(10.2	)%

Folding carton converted products		177.4		180.0		2.6		1.5	%
Unconverted paperboard shipped to external customers		232.4		265.6		33.2		14.3	%

Folding carton volume		409.8		445.6		35.8		8.7	%
Gypsum wallboard facing paper volume
Unconverted paperboard shipped to external customers		151.5		138.1		(13.4	)	(8.8	)%
Other specialty products volume
Paperboard (internal)		68.0		64.7		(3.3	)	(4.9	)%
Purchases from external sources		5.0		8.7		3.7		74.0	%

Other specialty converted products		73.0		73.4		0.4		0.5	%
Unconverted paperboard shipped to external customers		135.0		141.2		6.2		4.6	%

Other specialty products volume		208.0		214.6		6.6		3.2	%

Total paperboard tonnage		1,015.5		1,071.3		55.8		5.5	%

Paperboard mills ($/ton):
Average net selling price	$	413	$	402	$	(11	)	(2.7	)%
Average recovered fiber cost		65		85		20		30.8	%

Paperboard mill selling price in excess of recovered fiber cost	$	348	$	317	$	(31	)	(8.9	)%

Tube and core facilities ($/ton):
Average net selling price	$	783	$	789	$	6		0.8	%
Average paperboard cost		447		445		(2	)	(0.4	)%

Tube and core selling price in excess of paperboard cost	$	336	$	344	$	8		2.4	%

The following table shows paperboard shipment volume on our business segment basis (thousands of tons).


	Years Ended December 31,		Change		% Change
	2001	2002	Change		% Change
Paperboard
Unconverted paperboard shipped to external customers	551.5	584.4	32.9		6.0	%
Paperboard shipped internally to converters in the paperboard segment	55.1	49.8	(5.3	)	-9.6	%
Paperboard purchased externally by converters in the paperboard segment	0.8	3.6	2.8		356.1	%

Total volume	607.4	637.8	30.4		5.0	%
Tube, core and composite container
Paperboard (internal)	200.6	221.4	20.8		10.4	%
Purchases from external sources	30.1	32.1	2.0		6.6	%

Total volume converted	230.7	253.5	22.8		9.9	%
Carton and custom packaging
Paperboard (internal)	85.2	97.2	12.0		14.1	%
Purchases from external sources	92.2	82.8	(9.4	)	-10.2	%

Total volume converted	177.4	180.0	2.6		1.4	%
Total paperboard tonnage	1,015.5	1,071.3	55.8		5.5	%

The following is a reconciliation of non-GAAP measures for our paperboard segment and tube, core and composite container segment to a comparable GAAP measure (dollars in thousands).


	Years Ended December 31,
Paperboard Segment	2001			2002
Unconverted paperboard shipped to external customers (tons)		551,500			584,400


Non-GAAP Sales ⁽¹⁾	$	227,770		$	234,929
GAAP Adjustment ⁽²⁾		85,273			88,088

GAAP Sales		313,043			323,017


Non-GAAP Cost of Sales⁽³⁾		(35,848	)		(49,674	)
GAAP Adjustment⁽⁴⁾		(179,787	)		(190,793	)

GAAP Cost of Sales		(215,635	)		(240,467	)


Non-GAAP Gross Profit		191,922			185,255
GAAP Adjustments		(94,514	)		(102,705	)

GAAP Gross Profit	$	97,408		$	82,550


Non-GAAP Paperboard mill selling price in excess of recovered fiber cost per ton	$	348		$	317

GAAP gross profit per ton	$	177		$	141


	Years Ended December 31,
Tube, Core and Composite Container Segment	2001			2002
Tube and core volume (tons) excluding partitions and composite container volume		207,133			226,875


Non-GAAP Sales ⁽⁵⁾	$	162,185		$	179,004
GAAP Adjustment⁽⁶⁾		99,879			114,213

GAAP Sales		262,064			293,217


Non-GAAP Cost of Sales⁽⁷⁾		(92,588	)		(100,959	)
GAAP Adjustment ⁽⁸⁾		(131,150	)		(147,693	)

GAAP Cost of Sales		(223,738	)		(248,652	)


Non-GAAP Gross Profit		69,597			78,045
GAAP Adjustment		(31,271	)		(33,480	)

GAAP Gross Profit	$	38,326		$	44,565


Non-GAAP selling price in excess of paperboard cost per ton	$	336		$	344

GAAP gross profit per ton	$	185		$	196

⁽¹⁾	Non-GAAP sales are comprised of all sales generated as a result of shipping unconverted paperboard to external customers, exclusive of brokered sales transactions.

⁽²⁾	GAAP adjustments consist of brokered sales transactions which have no related fiber costs.

⁽³⁾	Recovered fiber costs.

⁽⁴⁾	GAAP adjustments include the cost of labor, energy, freight, repairs and maintenance, other manufacturing overhead and all other costs of sales excluding recovered fiber cost.

⁽⁵⁾	Non-GAAP sales consist of converted volume at the average net selling price, exclusive of partition, plastic and composite container sales.

⁽⁶⁾	GAAP adjustments consist of converted products other than tube, core and composite containers; chemical sales; and packaging and plastic products.

⁽⁷⁾	Paperboard costs.

⁽⁸⁾	GAAP adjustments include the cost of labor, energy freight, repairs and maintenance, other manufacturing overhead and all other costs of sales excluding paperboard costs.

The following is a reconciliation of GAAP gross profit to consolidated statements of operations (in thousands).


	Years Ended December 31,
	2001		2002
Paperboard segment gross profit	$	97,408	$	82,550
Tube, core and composite container gross profit		38,326		44,565
Carton and custom packaging gross profit		44,504		41,709

Consolidated gross profit	$	180,238	$	168,824

Paperboard Tonnage. Total paperboard tonnage for 2002 increased 5.5% to 1,071.3 thousand tons from 1,015.5 thousand tons in 2001. Tons sold from paperboard mill production increased 6.8% in 2002. Total tonnage converted increased 5.0% in 2002. These increases were primarily due to the following:

•

Higher shipments of unconverted paperboard to external customers in the folding carton, tube, core and composite container and other specialty markets.

•

Higher internal conversion by our operations in the tube, core and composite container segments and the carton and custom packaging segments.

These improvements were partially offset by a decrease in gypsum wallboard facing paper volume. However, including gypsum facing paper volume transferred to our 50% owned, unconsolidated Premier Boxboard joint venture, gypsum facing paper volume was essentially unchanged compared to prior year.

Sales. Our consolidated sales for the year ended December 31, 2002 increased 4.1% to $936.8 million from $900.3 million in 2001. The following table presents sales by business segment (in thousands):


	Years Ended December 31,
	2001		2002		$ Change			% Change
Paperboard	$	313,042	$	323,017	$	9,975		3.2	%
Tube, core and composite container		262,064		293,217		31,153		11.9	%
Carton and custom packaging		325,150		320,545		(4,605	)	(1.4	)%

Total	$	900,256	$	936,779	$	36,523		4.1	%

Paperboard Segment

The increase in sales is primarily due to higher volume of 32,900 tons, which accounted for approximately $13.6 million of the increase but was partially offset by a decrease in selling prices. The selling price decrease accounted for approximately $6.1 million of the decline in sales.

Tube, Core and Composite Container Segment

Sales for the tube, core and composite container segment increased primarily due to acquisitions, which accounted for $30.5 million for the increase.

Carton and Custom Packaging Segment

Sales for the carton and custom packaging segment declined due to a decrease in selling prices, partially offset by an increase in volume.

Gross Profit Margin. Gross profit margin for 2002 decreased to 18.0% of sales from 20.0% in 2001. This decrease was due primarily to the following:

•

Lower margins in the paperboard segment due to a decline in selling prices and higher recovered fiber costs, which accounted for a decline in gross profit of $17.1 million.

•

The comparative effect of the $7.1 reduction in reserves recorded in 2001 related to expiring unfavorable supply contracts at the Sprague paperboard mill.

These factors were partially offset by:

•

Lower depreciation expense of approximately $6.6 million, which was the result of the change in depreciable lives of machinery and equipment during the fourth quarter of 2002.

•

Improved margins in the tube, core and composite container segment accounting for an approximately $1.8 million increase in gross profit.

Restructuring and Impairment 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 $4.4 million charge included a $2.2 million asset impairment charge.

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 asset impairment charge.

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

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $150.0 million in 2002, an increase of $3.1 million compared to 2001. This increase was a result of the following:

•

Selling, general and administrative expenses associated with acquired locations of approximately $4.4 million.

•

Higher corporate expenses related to amendment fees for our senior credit facility of approximately $1.0 million.

•

Higher executive recruiting and severance costs of $800 thousand.

•

Costs related to an aborted debt issuance of $400 thousand.

These increases were partially offset by:

•

Lower goodwill amortization of $4.4 million.

Income from Operations. Income from operations for 2002 was $6.1 million, a decrease of $20.2 million, or 76.9% from 2001. The following table presents income (loss) from operations by business segment (in thousands):


	Years Ended December 31,
	2001			2002			$ Change			% Change
Paperboard	$	31,365		$	12,268		$	(19,097	)	(60.9	)%
Tube, core and composite container		7,016			11,383			4,367		62.2	%
Carton and custom packaging		2,324			973			(1,351	)	(58.1	)%
Corporate expense		(14,484	)		(18,557	)		(4,073	)	(28.1	)%

Total	$	26,221		$	6,067		$	(20,154	)	(76.9	)%

Paperboard Segment

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

•

Higher recovered fiber costs and lower selling prices, which accounted for approximately $17.1 million of the decline.

•

Higher restructuring costs of $6.0 million.

•

The comparative effect of the $7.1 million reduction in reserves recorded in 2001 related to expiring unfavorable supply contracts at the Sprague paperboard mill.

This decline was partially offset by:

•

Lower depreciation expense of $4.1 million.

•

Lower goodwill amortization expense of $2.2 million.

•

Results from acquisitions of $1.1 million.

Tube, Core and Composite Container Segment

The increase in income from operations was primarily from a decrease in depreciation of $1.0 million, acquisition results of $1.6 million and lower goodwill amortization expense of $500 thousand.

Carton and Custom Packaging Segment

The decline in income from operations was a result of lower selling prices, which resulted in an estimated $4.6 million reduction in operating income, partially offset by lower depreciation expense of $1.7 million and lower goodwill amortization expense of $1.7 million.

Other Income (Expense). Interest expense decreased 7.4% to $38.1 million for 2002 from $41.2 million in 2001. This decrease was due to savings from interest rate swap agreements that effectively converted portions of our fixed rate notes into variable rate obligations. See “—Liquidity and Capital Resources” for additional information regarding our debt, interest expense and interest rate swap agreements.

Equity in income from unconsolidated affiliates was $2.5 million in 2002, an improvement of $5.1 million from equity in loss from unconsolidated affiliates of $2.6 million in 2001. This increase was primarily due to an $8.6 million improvement in operating results for Standard Gypsum, L.P., our gypsum wallboard joint venture with Temple-Inland. The improved results were due primarily to higher selling prices in 2002 compared to 2001. Standard Gypsum’s improved results were partially offset by $3.5 million in losses at Premier Boxboard Limited, our paper mill joint venture with Temple-Inland. The increased losses at Premier Boxboard were due to lower selling prices and higher recovered fiber costs.

Benefit for income taxes. The effective rate of income tax benefit for the year ended December 31, 2002 was 34.6% compared with 33.7% for 2001. The effective rates for both periods are different from the statutory rates due to permanent tax adjustments

Net Loss. For the reasons discussed above, net loss was $17.9 million in 2002, or $0.64 net loss per common share compared with a net loss of $14.6 million, or $0.52 net loss per common share in 2001.

Liquidity and Capital Resources

Liquidity Sources and Risks. Our primary sources of liquidity are cash from operations and borrowings under our senior credit facility, described below. Downturns in operations can significantly affect our ability to generate cash. Factors that can affect our operating results and liquidity are discussed further in this annual report under “— Risk Factors” . In 2003, we generated $55.4 million in cash from operations, which is $7.8 million lower than 2002. Although the timing or certainty of the following events cannot be assured, we believe that our existing cash and liquidity position will be strengthened through the sale of the real estate at our

Chicago, Illinois and Baltimore, Maryland paperboard mills and internal cost reduction initiatives. We believe that our cash on hand at December 31, 2003 of $85.6 million and borrowing availability under our senior credit facility will be sufficient to meet our cash requirements for the year ended December 31, 2004. Additionally, based on our historical ability to generate cash, we believe we will be able to meet our long-term cash requirements. However, if we are unable to generate cash at historic levels our ability to generate cash sufficient to meet long-term requirements is uncertain. The following are factors that could impact our future ability to generate cash from operations:

•

Continued contraction in domestic demand for recycled paperboard and related packaging products that our industry experienced in 2001 and 2002.

•

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

•

Continued export of domestic manufacturing operations to countries where the costs of manufacturing are lower.

•

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

See “Key Business Indicator and Trends” for additional discussion.

Although we believe that our liquidity will be sufficient to meet expected needs for the foreseeable future, we could require additional funds from external sources.

The availability of liquidity from borrowings is primarily affected by our continued compliance with the terms of the agreement governing our senior credit facility, including the payment of interest and compliance with various covenants and financial maintenance tests. We were in compliance with the covenants under our senior credit facility during 2003. Absent further material deterioration of the U.S. economy as a whole or the specific sectors on which our business depends (see “—Risk Factors— Our business and financial performance may be adversely affected by downturns in industrial production, housing and construction and the consumption of durable and nondurable goods”), we believe it is likely that we will be in compliance with our covenants under the senior credit agreement during 2004.

Borrowings. At December 31, 2002 and 2003, total debt (consisting of current maturities of debt and long-term debt, as reported on our consolidated balance sheets) was as follows (in thousands):


	2002		2003
Senior credit facility	$	—	$	—
9 7/8% senior subordinated notes		285,000		285,000
7 3/8% senior notes		193,250		193,250
7 1/4% senior notes		29,000		29,000
Other notes payable		9,880		9,895
Mark-to-market value of interest swap agreements		15,153		(1,145	)
Realized interest rate swap gains⁽¹⁾		502		15,107

Total debt	$	532,785	$	531,107

⁽¹⁾

Net of original issuance discounts and accumulated discount amortization. As described below under “Interest Rate Swap Agreements,” realized gains resulting from unwinding interest rate swaps are recorded as a component of debt and will be accreted as a reduction to interest expense over the remaining term of the debt.

Effective June 24, 2003, we completed a refinancing of our senior credit facility. The new facility provides for a revolving line of credit of $75.0 million and is secured primarily by a first priority security interest in our accounts receivable and inventory. The facility matures in June 2006. Borrowing availability is subject to borrowing base requirements established by eligible accounts receivable and inventory. The facility includes a subfacility of $50.0 million for letters of credit, usage of which reduces availability under the facility. As of December 31, 2003, no borrowings were outstanding under the facility; however, an aggregate of $44.0 million in letter of credit obligations were outstanding. Availability under the facility at December 31, 2003 was limited to $21.0 million after taking into consideration outstanding letter of credit obligations and minimum borrowing availability requirements.

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

The facility contains covenants that restrict, among other things, our ability and our subsidiaries’ ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, make capital expenditures in excess of $30.0 million per year or change the nature of our business. The facility also contains a fixed charge coverage ratio covenant, which applies only in the event borrowing availability falls below $10.0 million or suppressed availability falls below $20.0 million. Suppressed availability is defined as the amount of eligible accounts receivable and inventory (less reserves and aggregate credit outstandings) in excess of $75.0 million or the amount of eligible inventory (less reserves and aggregate credit outstandings) in excess of $37.5 million. The fixed charge ratio covenant did not require measurement at December 31, 2003. Based on levels of accounts receivable and inventory and liquidity at December 31, 2003 and expectations for 2004, we do not expect to be required to measure the fixed charge ratio covenant in 2004.

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

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. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 7 3/8% senior notes is 6.4%. See “-Interest Rate Swap Agreements” below regarding transactions that lowered the effective interest rates of the 7 3/8% senior notes. In connection with the offering of our 7 1/4% senior notes and 9 7/8% senior subordinated notes, as described below, our subsidiary guarantors also guaranteed our 7 3/8% senior notes. In February 2002, we purchased $6.75 million in principal amount of our 7 3/8% senior notes in the open market. This purchase lowered our interest expense approximately $500 thousand annually.

On March 29, 2001, we 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. 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. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 9 7/8% senior subordinated notes is 9.2%. See “-Interest Rate Swap Agreements” below regarding transactions that lowered the effective interest rates of the 9 7/8% senior subordinated notes. These publicly traded notes are unsecured, but are guaranteed, on a joint and several basis, by all of our domestic subsidiaries (“subsidiary guarantors”), other than two that are not wholly-owned.

We have certain obligations and commitments to make future payments under contracts, such as debt and lease agreements. See “—Contractual Obligations” below and the notes to the consolidated financial statements, which detail these future obligations and commitments.

Interest Rate Swap Agreements. During 2001, we entered into four interest rate swap agreements in notional amounts totaling $285.0 million. The agreements, which had payment and expiration dates that corresponded to the terms of the note obligations they covered, 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 were based on the three-month LIBOR plus a fixed margin.

In October 2001, we unwound our $185.0 million interest rate swap agreement related to the 9 7/8% senior subordinated notes and received $9.1 million from the bank counter-party. Simultaneously, we executed a new swap agreement with a fixed spread that was 85 basis points higher than the original swap agreement. The new swap agreement was the same notional amount, had the same terms and covered the same notes as the original agreement. The $9.1 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 $9.1 million gain lowered the effective interest rate of the 9 7/8% senior subordinated notes by approximately 50 basis points.

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 covered 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 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 by approximately 20 basis points. The $3.4 million gain lowered the effective interest rate of the 7 3/8% senior notes by approximately 30 basis points.

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 the lenders under our senior credit facility. In exchange, we received approximately $4.3 million. We will accrete this gain into interest expense over the remaining term of the notes, which will partially offset the increase in interest expense. The gain will lower the effective interest rate of the 9 7/8% senior subordinated notes by approximately 30 basis points.

In May 2003, we unwound the remaining $50.0 million of our $50.0 million interest rate swap agreement related to the 9 7/8% senior subordinated notes, and received approximately $4.6 million from the bank counter-party. Simultaneously, we unwound $50.0 million of our remaining interest rate swap agreements related to the 7 3/8% senior notes, and received approximately $7.1 million. We will accrete the $11.7 million gain into interest expense over the life of the notes, and it will partially offset the increase in interest expense. The $4.6 million gain lowered the effective interest rate of the 9 7/8% senior subordinated notes by approximately 30 basis points. The $7.1 million gain lowered the effective interest rate of the 7 3/8% senior notes by approximately 80 basis points.

In July 2003 we entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and expiration dates that correspond to the terms of the note obligations it covers, effectively converted $50.0 million of our fixed rate 9 7/8% senior subordinated notes into variable rate obligations. The variable rates are based on the six–month LIBOR plus a fixed margin.

In December 2003 we entered into a second interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and expiration dates that correspond to the terms of the note obligations it covers, effectively converted $50.0 million of our fixed rate 9 7/8% senior subordinated notes into variable rate obligations. The variable rates are based on the six–month LIBOR plus a fixed margin.

See “—Subsequent Events” regarding the unwind of the $50.0 million interest rate swap in March 2004.

Off-Balance Sheet Arrangements – Joint Venture Financings. As noted above, we own a 50% interest in two joint ventures with Temple-Inland, Inc.: Standard Gypsum, L.P. and Premier Boxboard Limited LLC. Because we account for these interests in our joint ventures under the equity method of accounting, the indebtedness of these joint ventures is not reflected in the liabilities included on our consolidated balance sheets. Standard Gypsum manufactures gypsum wallboard, and Premier Boxboard is a low-cost recycled paperboard mill that produces a lightweight gypsum facing paper along with containerboard grades. See Note 5 to our consolidated financial statements in Part II, Item 8 of this report for summarized financial information for these joint ventures.

Standard Gypsum is the obligor under reimbursement agreements pursuant to which direct-pay letters of credit in the aggregate amount of approximately $56.2 million were originally issued for its account in support of industrial revenue bond obligations. Standard Gypsum replaced these letters of credit in October 2003 with new direct-pay letters of credit in the aggregate amount of $57.4 million, issued by a replacement lender. We are severally obligated for 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 guaranteed 50% of Standard Gypsum’s obligations. As of December 31, 2003, the outstanding letters of credit totaled approximately $57.4 million, for one-half of which we are obligated (approximately $28.7 million). If either joint venture partner had defaulted under its support arrangements, our total obligation would have been $28.7 million at December 31, 2003.

As of December 31, 2003, our obligation with respect to these letters of credit is supported by a letter of credit in the face amount of $28.7 million, issued in favor of the Standard Gypsum lender. This letter of credit was issued under our senior credit facility and expires on October 24, 2004. The letter of credit may be drawn in the event of a default under the Standard Gypsum reimbursement agreement, and such a default would be triggered by, among other things, our failure to renew or extend this letter of credit. In the event we are unable to renew, extend or otherwise replace this letter of credit, the lender under the Standard Gypsum facility would be entitled to draw under the letter of credit to satisfy our support obligations, and we would then be obligated to reimburse our senior lenders for the amount of such drawing.

Premier Boxboard is the borrower under a credit facility, the aggregate principal amount of which was reduced from $30.0 million to $20.2 million pursuant to an amendment completed on March 28, 2003. Pursuant to this amendment, the maturity date of the facility was shortened from June 29, 2005 to January 5, 2004. On December 22, 2003, an additional amendment was completed that extended the maturity date of the facility to January 5, 2005. We are severally obligated for 50% of Premier Boxboard’s obligations for reimbursement letter of credit drawings, interest, fees and other amounts. Temple-Inland has guaranteed 50% of Premier Boxboard’s obligations. As of December 31, 2003, the outstanding principal amount of borrowings under the facility was approximately $10.6 million (including a $632 thousand undrawn letter of credit), for one-half of which we are obligated (approximately $5.3 million). If either joint venture partner had defaulted under its support arrangements, our total obligation would have been $5.3 million at December 31, 2003. Our obligation is supported by a letter of credit in the face amount of $5.3 million, issued in favor of the Premier Boxboard lenders. This letter of credit was issued in June 2003 under our new senior credit facility in replacement of a guarantee agreement, and expires in January 2005.

Any reductions of outstanding loans under the Premier Boxboard credit facility may not be reborrowed and will permanently reduce the commitments. The reduction of the commitments under this credit facility eliminates availability for borrowings unless we are able to reduce outstandings under the facility, and effectively requires 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. If we are not able to 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, 2005, the entire facility would become immediately due and payable and the lenders under the Premier Boxboard facility would be entitled to draw under the letter of credit to satisfy our support obligations.

In the event that we were called upon to reimburse drawings under either or both of our joint venture letter of credit support obligations, we believe that we would be able to satisfy such obligations by having our senior lenders treat these reimbursement obligations as revolving credit loans under our senior credit agreement. The full $34.0 million of these letter of credit obligations and other letter of credit obligations outstanding as of December 31, 2003 has already been included in determining the $21.0 million in borrowing availability under our senior credit facility as of December 31, 2003. Our cash on hand is also a potential source of repayment of some or all of these reimbursement obligations. However, we can give no assurance that we will be able to obtain, on a timely basis, the renewals, extensions or refinancings necessary to avoid being called upon to satisfy either or both of our joint venture support obligations, or that we will be able to reimburse our senior lenders in the event of drawings under one or both of the letters of credit. Any resulting acceleration and default in repayment of these support obligations could cause 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 addition to the general default risks discussed above with respect to the joint ventures, a substantial portion of the assets of Premier Boxboard are pledged as security for $50.0 million in outstanding principal amount of senior notes under which Premier Boxboard is the obligor. These notes are guaranteed by Temple-Inland, but are not guaranteed by us. A default under the Premier Boxboard credit facility would also constitute an event of default under these notes. In the event of default under these notes, the holders would also have recourse to the assets of Premier Boxboard that are pledged to secure these notes. Thus, any resulting default under these notes could result in the assets of Premier Boxboard being utilized to satisfy creditor claims, which would have a material adverse effect on the financial condition and operations of Premier Boxboard and, accordingly, our interest in Premier Boxboard. Further, in such an event of default, these assets would not be available to satisfy obligations owing to unsecured creditors of Premier Boxboard, including the lenders 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 both partners. 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, 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 currently do not anticipate experiencing material liquidity events resulting from either additional capital contributions or buy-sell contingencies with respect to our joint ventures during 2004. However, in light of the recent amendments to the Premier Boxboard credit facility, as described above, we could be required to fund Premier Boxboard’s operations with additional cash contributions to the extent it is unable to fund operations with internally generated cash. We cannot give assurance that material liquidity events will not arise with respect to our joint ventures, and the occurrence of any such events could materially and adversely affect our liquidity and financial condition.

Contractual Obligations. The following table summarizes our contractual obligations as of December 31, 2003, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):


Contractual Obligations	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-term debt obligations ¹	$	517,145	$	106	$	219	$	195	$	516,625
Interest payment obligation		312,106		45,437		136,273		113,029		17,367
Capital lease obligations		280		154		126		—		—
Operating lease obligations		82,428		20,323		28,272		19,889		13,944
Purchase obligations		6,705		4,789		994		922		—
Other long-term liabilities		78		18		50		10		—

Total	$	918,742	$	70,827	$	165,934	$	134,045	$	547,936

The long-term debt obligation included in this table represents the principal amount to be paid in future periods. The amounts reported on our consolidated balance sheet include realized interest rate swap gains and the mark-to-market value of interest rate swaps. See note 6 to our consolidated financial statements in Part 1, Item 8 of this report.

For the purposes of this table, purchase obligations included in the table above are agreements for purchase of goods or services that are enforceable and legally binding on Caraustar and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions. This table does not include the aggregate amount of routine purchase orders outstanding as of December 31, 2003, because they are not enforceable and legally binding.

Cash from Operations. Cash generated from operations was $55.4 million for the year ended December 31, 2003, compared with $63.2 million in 2002. The decline in operating cash flow from 2002 to 2003 is primarily due to a decrease in operating results. In addition to the decline in operating results, other factors that negatively affected operating cash flows are as follows:

•

$11.3 million was contributed to the pension plan

•

A $5.6 million reduction in accrued liabilities due primarily to the payment of accrued restructuring costs

•

A $3.0 million reduction in accrued compensation due primarily to year-end timing differences in payroll cycles

The decline in operating results and the other factors listed above was partially offset by the following:

•

A $30.7 million decline in accounts receivable. This decline was due to an increase in accounts receivable in 2002 related to the acquisition of the Smurfit Industrial Packaging Group, which resulted in a decrease in operating cash flows in 2002 of approximately $15.3 million. During 2003, we decreased accounts receivable by $12.2 million, which was primarily the result of management initiatives to improve working capital.

•

During 2003, as a part of management’s initiatives to improve working capital, we extended payment terms to vendors to be more consistent with industry averages, which resulted in a $15.0 million increase in accounts payable.

•

A $14.5 million improvement in inventory, which was also a result of management initiatives to improve working capital.

If the management initiatives mentioned above had not been successfully executed, cash from operations would have been significantly lower in 2003. In addition to the working capital reductions achieved in 2003, we also received federal income tax refunds of $18.8 million in the years 2002 and 2003. Unless federal tax laws are enacted to extend the federal net operating loss carry back period, it is unlikely we will receive additional refunds in the future. As of December 31, 2003 we had net federal operating losses of $21.2 million that could be carried back in the event such tax laws are enacted.

Capital Expenditures. Capital expenditures were $20.0 million in 2003 versus $22.5 million in 2002. Aggregate capital expenditures of approximately $24.0 million are anticipated for 2004. Further, we believe that our decision to extend the useful lives of our production machinery and equipment from an average of approximately 10 years to an average of approximately 20 years (see Critical Accounting Policies where discussed) is a direct manifestation of improved equipment and maintenance technology as well as a change in investment and asset deployment strategy. We have invested in and will continue to invest in assets that we believe:

•

are capable of serving expected long term demand for our markets;

•

recognize the unique characteristics of the specific product and the prospect of replacement or competitive products;

•

provide new technology that significantly improves the product characteristics or lowers the product cost structure.

Furthermore, we have closed or idled those mills and machinery that in our opinion do not meet the criteria for continued, long-term survival in our mix of businesses.

We have been in the process of restructuring our production capabilities (see Restructuring and Impairment Costs in Results of Operations 2002 – 2003) to reflect the above-mentioned attributes and, as such, believe that major capital expenditures for the refurbishment of machinery and equipment will occur less frequently than in the past. In the future, we expect major capital expenditures for machinery and equipment (our largest component of fixed assets) to occur, on average, every 20 years and to approximate our level of current expenditures.

Acquisitions. In April 2002, we acquired the remaining 51% of the outstanding stock of Design Tubes Company Limited (“Design Tubes”), Toronto, Ontario, Canada in consideration for shares of a subsidiary exchangeable at the holder’s option (for no additional consideration) for approximately 141 thousand shares of our common stock, valued at $1.5 million. We originally acquired our minority interest in Design Tubes in November 1998 and accounted for our 49% ownership using the equity method. Design Tubes manufactures paperboard tubes and also produces paper tube manufacturing equipment for companies throughout North America. Goodwill in the amount of $2.0 million was recorded in the connection with the Design Tubes acquisition.

On September 30, 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 $43.2 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.

Dividends. In February 2002, we announced that we would suspend future dividend payments on our common stock until our earnings performance and cash flow performance improve. As described under ”— Liquidity and Capital Resources,” our debt agreements contain certain limitations on the payment of dividends and currently preclude us from doing so.

Inflation

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

Subsequent Events

On January 13, 2004, we announced the closure of the Cedartown paperboard mill located in Cedartown, Georgia. All of the paperboard produced at this facility had been consumed internally by our converting operations. The paperboard production will be transitioned to our other paperboard mills. This closure is not expected to have a significant impact on our operations and is expected to improve operating results and capacity utilization.

In March 2004, we unwound one of our two $50.0 million interest rate swap agreements related to our 9 7/8% senior subordinated notes and received approximately $400 thousand from the bank counter-party. The $400 thousand gain will be recorded as a component of debt and will be accreted to interest expense over the remaining life of the notes.

New Accounting Pronouncements

In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). This pronouncement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which was generally before an actual liability had been incurred. We adopted SFAS No. 146 effective January 1, 2003 and are accounting for exit and disposal activities initiated during 2003 in accordance with this pronouncement. The adoption of this statement has resulted in the accrual of liabilities as incurred.

See “Item 8 — Notes to the Consolidated Financial Statements” regarding other new accounting pronouncements that did not have a material impact on our consolidated financial statements.

Risk Factors

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

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

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

More recently, we have announced price increases on our products to help offset increases in other operating costs as well, such as energy, freight, employee benefits and insurance. Although we seek to realize the full benefit of these announced price increases, our ability to do so is dependent on numerous factors, such as customer acceptance of these increases, pricing strategies of our competitors, and contractual commitments that may limit our ability to raise prices. For all these reasons, we may not be able to realize the full benefits of pricing increases that we announce and attempt to implement.

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

Excluding raw materials and labor, energy is our most significant manufacturing cost. Energy costs consist of electrical purchases and fuel used to generate steam used in the paper making process and to operate our paperboard machines and all of our other converting machinery. Our energy costs increased steadily throughout 2003 compared to 2002. In 2002, the average energy cost in our mill system was approximately $50 per ton. In 2003, energy costs increased by 22.2% to $61 per ton. This increase was due primarily to increases in natural gas and fuel oil costs. We expect that energy prices may continue to rise in response to conditions in the Middle East, natural gas shortages in the United States and other economic conditions and uncertainties regarding the outcome and implications of such events. Until the last few years, our business had not been significantly affected by energy costs, and we

historically have not passed energy cost increases through to our customers. Consequently, as the volatility of energy prices has increased dramatically over the last three years, we have not been able to pass through to our customers all of the energy cost increases we have incurred. As a result, our operating margins have been adversely affected. Although we continue to evaluate our energy costs and consider ways to factor energy costs into our pricing, we cannot give assurance that our operating margins and results of operations will not continue to be adversely affected by rising energy costs.

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 — long-term interest rates, 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. 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, downturns in these sectors may increase the risk of our customers or suppliers filing for bankruptcy protection. Companies involved in bankruptcy proceedings pose greater financial risks to us, consisting principally of possible claims of preferential payments for certain amounts paid to us prior to the bankruptcy filing date, as well as increased collectibility risk for accounts receivable, particularly those accounts receivable that relate to periods prior to the bankruptcy filing date.

Also, as the general trend toward reducing the amount of packaging materials used in our end use markets continues, demand for our products, and our our revenues and results of operations, may be adversely affected.

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

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

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

Historically, we have grown our business, revenues and production capacity to a significant degree through acquisitions. In the current difficult operating climate facing our industry and our financial position, the pace of our acquisition activity (with the exception of the 2002 purchase of certain assets of the Smurfit Industrial Packaging Group), 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. We cannot give assurance that our acquired businesses will achieve the same levels of revenue, profit or productivity as our existing locations or otherwise perform as we expect.

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

•

assumption of unanticipated liabilities and contingencies;

•

diversion of management’s attention; and

•

possible reduction of our reported earnings because of:

•

goodwill and intangible asset impairment;

•

increased interest costs;

•

issuances of additional securities or debt; and

•

difficulties in integrating acquired businesses.

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

•

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

•

identify suitable acquisition candidates;

•

complete additional acquisitions; or

•

integrate acquired businesses into our operations.

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

As described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” we have entered into a new senior credit facility that, among other things, imposes limitations on our ability to make acquisitions or other strategic investments. In addition, our operations are highly capital-intensive. Although, as part of our restructuring efforts, we have sought to limit capital expenditures in the short-term, we may have to incur substantial capital expenditures in the future to maintain, upgrade or expand our facilities. 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. 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. 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 — Liquidity and Capital Resources” and the consolidated financial statements included in Part II of this annual report. In addition, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Off-Balance Sheet Arrangements — Joint Venture Financings,” we have provided credit support to 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, including compliance with financial covenants;

•

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;

•

adversely affect the value of our common stock and;

•

affect our viability as a going concern.

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 2003 we entered into two interest rate swap agreements in order to take advantage of market conditions. These agreements effectively converted $100.0 million of our fixed rate 9 7/8% senior subordinated notes into variable rate obligations. The variable rates are based on the six-month LIBOR plus a fixed margin. These swap agreements lowered our interest expense in 2003, and we expect these agreements to continue to positively impact our interest expense. If, however, the six-month LIBOR increases significantly, our interest expense could be adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on our swap agreements.

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

Compliance with the environmental requirements of international, federal, state and local governments significantly affects our business. Among other things, these requirements regulate the discharge of materials into the water, air and land and govern the use and disposal of hazardous substances and of our solid waste landfills. 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 at times we have initiated response actions or obtained indemnities from certain predecessor owners. We regularly make capital and operating expenditures to stay in compliance with environmental laws. Despite these compliance efforts, risk of environmental liability is part of the nature of our business. We cannot give assurance that environmental liabilities, including compliance and response costs, will not have a material adverse effect on our business. 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, discoveries of past releases, failure of idemnitors to fulfill their obligations, or further investigation of the potential health hazards of certain products or business activities.

Our industry is highly competitive and price fluctuations and volatility could diminish our sales volume and revenues.

The industry in which we operate is highly competitive. Our competitors include other large, vertically integrated paperboard, packaging and gypsum wall board manufacturing companies, including National Gypsum Company, The Newark Group, Inc., Rock-Tenn Company, Smurfit-Stone Container Corporation, Sonoco Products Company and USG Corporation, along with numerous smaller paperboard and packaging companies. As a result of product substitution, we also compete indirectly with manufacturers of similar products using other materials. In addition, we face increasing competition from foreign paperboard and packaging producers as a result of the continued migration of U.S. manufacturing offshore to lower labor cost environments and the emergence of new foreign competitors in these countries. The industry in which we compete is particularly sensitive to price pressure, as well as other factors, including quality, service, innovation and design, with varying emphasis on these factors depending on the

product line. To the extent that one or more of our competitors becomes more successful with respect to any key competitive factors, our ability to attract and retain customers could be materially adversely affected. Some of our competitors are less leveraged than we are and have access to greater resources. These companies may be able to adapt more quickly to new or emerging technologies, respond to changes in customer requirements and withstand industry-wide pricing pressures. If our facilities are not as cost efficient as those of our competitors or if our competitors lower prices, we may need to temporarily or permanently close such facilities, which would negatively affect our sales volume and revenues.

We have incurred and may incur additional material restructuring charges in the future, and we may not be successful in achieving the cost reductions contemplated by our recent and future restructuring activities.

Restructuring has been a primary component of our management’s strategy to address the decrease in demand resulting from secular trends and generally weak domestic economic conditions. Between 2001 and 2003, restructuring charges have totaled $34.9 million, of which approximately $21.0 million have been noncash charges. We have also experienced increases in near-term manufacturing and selling, general and administrative costs as a result of transitioning of business within our mill and converting systems to other company facilities. Our restructuring efforts have been directed toward reducing costs through manufacturing and converting facilities rationalization. However, we can give no assurance that the cost reductions contemplated by our recent and future restructuring activities will be achieved within the expected time frame, or at all. Any delays or failure in delivering products to our customers due to our facilities rationalization may result in order cancellations or termination of customer relationships, all of which could adversely impact our competitive position and would offset any cost savings we might have achieved. In addition, although, under current market conditions, we expect that restructuring charges will continue to decline, we may continue to incur material restructuring charges in the future, which may exceed our expectations if market conditions change.

Our business is seasonal and weather conditions could have an adverse effect on our revenues and operating results.

Certain of our products are used by customers in the packing of food products, including fruit and vegetables. Due principally to the seasonal nature of these products, sales of our products to these customers have varied from quarter to quarter. In addition, poor weather conditions that reduce crop yields of packaged food products and adversely affect customer demand for food containers can adversely affect our revenues and our operating results. Our overall level of sales and operating profits have historically been lower in our fourth quarter, due in part to closures by us and our customers for the Thanksgiving, Christmas and New Year’s holidays and to the cyclicality of the demand for our products.

Significant disruptions to our operations may materially and adversely affect our earnings.

We operate over 100 mills and converting facilities in the United States and in certain foreign countries. Natural disasters, such as hurricanes, tornadoes, fires, ice storms, wind storms, floodings and other weather conditions, unforeseen operating problems and other events beyond our control may adversely affect the operations of our mills and converting facilities, which in turn would materially and adversely affect our earnings. Any losses due to such events may not be covered by our existing insurance policies.

In addition, a significant percentage of our hourly employees are represented by labor unions, with all principal union contracts expiring between 2004 and 2009. Although we consider our relations with our employees to be good, we cannot provide any assurance that the union contracts will be renewed in a timely manner, on terms acceptable to us, or at all, or that there will not be any work stoppage or other labor disturbance at any of our facilities. Work stoppages or other labor disturbances at one or more of our facilities may cause significant disruptions to our operations at such facilities, which may materially and adversely impact our results of operations.

Our business is subject to changing regulation of corporate governance and public disclosure that has increased both our costs and the risk of noncompliance.

Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and Nasdaq, have recently issued new requirements and regulations and continue developing additional regulations and requirements in response to recent corporate scandals and laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. Our efforts to comply with these new regulations have resulted in, and

are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities.

In particular, our efforts to prepare to comply with Section 404 of the Sarbanes-Oxley Act and related regulations regarding our management’s required assessment of our internal control over financial reporting and our independent auditors’ attestation of that assessment has required, and continues to require, the commitment of significant financial and managerial resources. In part to prepare for compliance with Section 404, as well as to generally improve our internal control environment, we have undertaken substantial measures, including, among other things, costly projects to centralize our accounting functions and reorganize our information technology department. These projects, which represent both operational and compliance risks, require significant resources and must be completed in a timely manner in order to enable us to comply with the Section 404 requirements. Although management believes that ongoing efforts to improve our internal control over financial reporting will enable management to provide the required report, and our independent auditors to provide the required attestation, under Section 404 as of December 31, 2004, we can give no assurance that such efforts will be completed on a timely and successful basis to enable our management and independent auditors to provide the required report and attestation.

Moreover, because the new and changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.

ITEM 8:

FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	December 31,
	2003			2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	85,551		$	34,314
Receivables, net of allowances for doubtful accounts, returns, and discounts of $5,302 and $5,386 in 2003 and 2002, respectively		93,892			105,669
Inventories		87,608			107,644
Refundable income taxes		250			13,681
Current deferred tax asset		7,457			6,364
Other current assets		12,461			8,978

Total current assets		287,219			276,650

PROPERTY, PLANT AND EQUIPMENT:
Land		12,211			14,337
Buildings and improvements		141,022			150,565
Machinery and equipment		617,688			643,863
Furniture and fixtures		15,225			14,894

		786,146			823,659
Less accumulated depreciation		(375,374	)		(380,264	)

Property, plant and equipment, net		410,772			443,395

GOODWILL		183,130			180,545
INVESTMENT IN UNCONSOLIDATED AFFILIATES		54,623			52,830
OTHER ASSETS		24,801			36,913

	$	960,545		$	990,333

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of debt	$	106		$	70
Accounts payable		75,013			60,027
Accrued interest		8,832			8,749
Accrued compensation		9,800			12,841
Accrued pension		—			11,279
Other accrued liabilities		31,307			36,866

Total current liabilities		125,058			129,832

SENIOR CREDIT FACILITY		—			—
OTHER LONG-TERM DEBT, less current maturities		531,001			532,715
DEFERRED INCOME TAXES		58,920			65,749
PENSION LIABILITY		18,632			13,572
DEFERRED COMPENSATION		1,522			1,500
OTHER LIABILITIES		5,031			4,584
MINORITY INTEREST		504			700
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS’ EQUITY:
Preferred stock, $.10 par value; 5,000,000 shares authorized, no shares issued		—			—
Common stock, $.10 par value; 60,000,000 shares authorized, 28,222,205 and 27,906,674 shares issued and outstanding at December 31, 2003 and 2002, respectively		2,822			2,791
Additional paid-in capital		185,031			182,369
Unearned compensation		(1,865	)		(145	)
Retained earnings		52,531			79,566
Accumulated other comprehensive (loss) income:
Minimum pension liability adjustment		(19,244	)		(22,313	)
Foreign currency translation		602			(587	)

Total accumulated other comprehensive loss		(18,642	)		(22,900	)

Total Shareholders’ Equity		219,877			241,681

	$	960,545		$	990,333

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

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


	For the Years Ended December 31,
	2003			2002			2001
SALES	$	992,220		$	936,779		$	900,256
COST OF SALES		819,349			767,955			720,018

Gross profit		172,871			168,824			180,238
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		163,930			150,044			146,934
RESTRUCTURING AND IMPAIRMENT COSTS		15,142			12,713			7,083

(Loss) income from operations		(6,201	)		6,067			26,221
OTHER (EXPENSE) INCOME:
Interest expense		(43,905	)		(38,115	)		(41,153	)
Interest income		1,026			1,652			986
Write-off of deferred debt costs		(1,812	)		—			—
Loss on extinguishment of debt		—			—			(4,305	)
Equity in income (loss) of unconsolidated affiliates		8,354			2,488			(2,610	)
Other, net		208			130			(1,434	)

		(36,129	)		(33,845	)		(48,516	)

LOSS BEFORE MINORITY INTEREST AND INCOME TAXES		(42,330	)		(27,778	)		(22,295	)
MINORITY INTEREST IN LOSSES		196			235			180
BENEFIT FOR INCOME TAXES		15,099			9,623			7,513

NET LOSS	$	(27,035	)	$	(17,920	)	$	(14,602	)

OTHER COMPREHENSIVE LOSS:
Minimum pension liability adjustment		3,069			(22,313	)		—
Foreign currency translation adjustment		1,189			223			(57	)

COMPREHENSIVE LOSS	$	(22,777	)	$	(40,010	)	$	(14,659	)

BASIC
NET LOSS PER COMMON SHARE	$	(0.97	)	$	(0.64	)	$	(0.52	)

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING		27,993			27,871			27,845

DILUTED
NET LOSS PER COMMON SHARE	$	(0.97	)	$	(0.64	)	$	(0.52	)

DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING		27,993			27,871			27,845

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

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2003, 2002 and 2001

(In thousands, except share data)


	Common Stock					Additional Paid-In Capital			Unearned Compensation			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
	Shares		Amount			Additional Paid-In Capital			Unearned Compensation			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
BALANCE, December 31, 2000	26,204,567		$	2,620		$	161,378		$	(554	)	$	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	)		(115	)		—			—			—			(116	)
Issuance of common stock under 1998 stock purchase plan	451			—			—			—			—			—			—
Issuance of common stock under director equity plan	8,339			1			75			—			—			—			76
Amortization of unearned compensation expense	—			—			—			265			—			—			265
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			180,405			(289	)		97,488			(810	)		279,579
Net loss	—			—			—			—			(17,920	)		—			(17,920	)
Issuance of common stock for acquisitions	34,003			3			321			—			—			—			324
Issuance of common stock under nonqualified stock option plan	3,239			1			30			—			—			—			31
Forfeiture of common stock under 1993 stock purchase plan	(8,864	)		(1	)		(73	)		—			—			—			(74	)
Issuance of common stock under 1998 stock purchase plan	1,332			—			—			—			—			—			—
Issuance of common stock under director equity plan	8,690			1			78			—			—			—			79
Issuance of common stock under employee benefit plan	14,068			2			134			—			—			—			136
Amortization of unearned compensation expense	—			—			—			144			—			—			144
Convertible shares issued for acquisition	—			—			1,472			—			—			—			1,472
Minimum pension liability adjustment, net of taxes of $13,595	—			—			—			—			—			(22,313	)		(22,313	)
Foreign currency translation adjustment	—			—			—			—			—			223			223
Stock dividend paid	309			—			2			—			(2	)		—			—

BALANCE, December 31, 2002	27,906,674			2,791			182,369			(145	)		79,566			(22,900	)		241,681
Net loss	—			—			—			—			(27,035	)		—			(27,035	)
Forfeiture of common stock under 1993 stock purchase plan	(572	)		—			(4	)		—			—			—			(4	)
Issuance of common stock under 1998 stock purchase plan	75,402			7			718			—			—			—			725
Issuance of common stock under long-term equity incentive plan	229,900			23			1,855			(1,878	)		—			—			—
Issuance of common stock under director equity plan	10,801			1			93			—			—			—			94
Amortization of unearned compensation expense	—			—			—			158			—			—			158
Minimum pension liability adjustment, net of taxes of $1,871	—			—			—			—			—			3,069			3,069
Foreign currency translation adjustment	—			—			—			—			—			1,189			1,189

BALANCE, December 31, 2003	28,222,205		$	2,822		$	185,031		$	(1,865	)	$	52,531		$	(18,642	)	$	219,877

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

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	For the Years Ended December 31,
	2003			2002			2001
OPERATING ACTIVITIES:
Net loss	$	(27,035	)	$	(17,920	)	$	(14,602	)

Adjustments to reconcile net loss to net cash provided by operating activities:
Loss from extinguishment of debt		—			—			4,305
Depreciation and amortization		30,991			54,246			64,340
Write-off of deferred debt costs		1,812			—			—
Disposal of property, plant and equipment, net		3,507			1,267			470
Equity in income of unconsolidated affiliates, net of distributions		(2,204	)		8,167			3,610
Deferred income taxes		(9,631	)		5,976			15,811
Provision for deferred compensation		190			223			226
Minority interest		(196	)		(235	)		(180	)
Restructuring costs		11,862			5,167			3,987
Changes in operating assets and liabilities, net of acquisitions:
Receivables		12,180			(18,547	)		6,848
Inventories		20,036			5,580			9,737
Other assets and liabilities		(5,108	)		(4,729	)		(8,951	)
Accounts payable and accrued liabilities		5,630			19,737			(14,770	)
Income taxes		13,348			4,268			(13,628	)

Total adjustments		82,417			81,120			71,805

Net cash provided by operating activities		55,382			63,200			57,203

INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(20,006	)		(22,542	)		(28,059	)
Acquisition of businesses, net of cash acquired		(695	)		(69,547	)		(34	)
Proceeds from disposal of property, plant and equipment		2,321			2,145			267
Investment in unconsolidated affiliates		—			(200	)		—
Other, net		—			(230	)		436

Net cash used in investing activities		(18,380	)		(90,374	)		(27,390	)

FINANCING ACTIVITIES:
Proceeds from note issuance		—			—			291,200
Proceeds from senior credit facility		—			38,000			18,000
Repayments of senior credit facility		—			(38,000	)		(212,000	)
Repayments of short and long-term debt		(95	)		(6,693	)		(67,110	)
Proceeds from swap agreement unwind		15,950			6,163			9,093
7.74% senior notes prepayment penalty		—			—			(3,565	)
Dividends paid		—			(833	)		(8,870	)
Deferred debt costs		(2,214	)		(1,528	)		(1,217	)
Issuances of stock, net of forfeitures		594			135			—

Net cash provided by (used in) financing activities		14,235			(2,756	)		25,531

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		51,237			(29,930	)		55,344
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		34,314			64,244			8,900

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	85,551		$	34,314		$	64,244

SUPPLEMENTAL DISCLOSURES:
Cash payments for interest	$	42,990		$	36,199		$	35,352

Income tax refunds, net of payments	$	18,783		$	18,784		$	7,980

Stock issued for acquisitions	$	—		$	324		$	18,799

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

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003, 2002 and 2001

1.	Nature of Business and Summary of Significant Accounting Policies

Nature of Business

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

Consolidation

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.

Cash and Cash Equivalents

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

Inventories

Inventories are carried at the lower of cost or market. The costs included in inventory include raw materials (recovered fiber for paperboard products and paperboard for converted products), direct and indirect labor and employee benefits, energy, depreciation, general manufacturing overhead and various other costs of manufacturing. General and administrative costs are not included in inventory costs.

Market, with respect to all inventories, is replacement cost or net realizable value. The Company reviews inventory at least quarterly to determine the necessity of write-offs for excess, obsolete or unsaleable inventory. The Company estimates reserves for inventory obsolescence and shrinkage based on management’s judgment of future realization. These reviews require management to assess customer and market demand. All inventories are valued using the first-in, first-out method.

Inventories at December 31, 2003 and 2002 were as follows (in thousands):


	2003		2002
Raw materials and supplies	$	37,294	$	46,781
Finished goods and work in process		50,314		60,863

Total inventory	$	87,608	$	107,644

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Expenditures for repairs and maintenance not considered to substantially lengthen the asset lives or increase capacity or efficiency are charged to expense as incurred. The recoverability of property, plant, and equipment is periodically reviewed by management based on current and anticipated conditions.

In the fourth quarter of 2002, the Company revised the estimated useful lives of production equipment from an average 10 year life to an average 20 year life. Management considered a number of factors in their change in estimates, including a detailed study evaluating the useful lives, technological advances, and knowledge of changes in the industry. In addition, in 2002, we announced our capacity reduction efforts and accelerated our reorganization, which dramatically changed our operating philosophy, including the expanded use of our production equipment and machinery across locations. The useful lives of partially depreciated production equipment acquired before October 1, 2002 and originally assigned lives of 10 to 19 years was extended up to an additional 10 years to a maximum life of 20 years. The effect of this change in estimated useful lives was accounted for on a prospective basis. The estimated impact of the change in depreciable lives for production equipment placed in service prior to October 1, 2002 was a decrease in depreciation expense in the fourth quarter of 2002 of approximately $7.6 million and a decrease of approximately $22.5 million in

2003. This change decreased the net loss and net loss per common share by approximately $14.1 million or $0.51 per common share and $4.8 million or $0.17 per common share for the years ended December 31, 2003 and 2002, respectively.

Depreciation is computed using the straight-line method over the following estimated useful lives of the assets after the change in estimate for the production equipment in 2002:


Buildings and improvements		10-45 years
Furniture and fixtures		5-10 years
Machinery and equipment:
Small tools		1 year
Computer software		3 years
Small machinery and vehicles		4-8 years
Production equipment		20-25 years

The production equipment range before the change in estimate was 10 – 25 years. Approximately 90% of the production equipment was at a 10 year useful life prior to the change in estimate and was revised to a 20 year useful life. Small tools, computer software, and small machinery and vehicles lives were unchanged.

Depreciation expense was $29.4 million, $50.9 million and $57.4 million for the years ended December 31, 2003, 2002 and 2001.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 long-lived assets, goodwill and intangibles; 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 and the differences could be significant.

Revenue Recognition

The Company recognizes revenue and the related account receivable when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) ownership has transferred to the customer; (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. Generally, the Company recognizes revenue when it ships its manufactured products or when it completes a service and title and risk of loss passes to its customers. Provisions for discounts, returns, allowances, customer rebates, and other adjustments are provided for in the same period as the related revenues are recorded.

Freight Costs

The costs of delivering finished goods to the Company’s customers are recorded as a component of cost of sales. Those costs include the amounts paid to a third party to deliver the finished goods or the Company’s cost of using its own delivery trucks and drivers. Any freight costs billed to and paid by a customer are included in revenue.

Self-Insurance

The Company is self-insured for the majority of its workers’ compensation costs and health care costs, subject to specific retention levels. Consulting actuaries and administrators assist the Company in determining its liability for self-insured claims. The Company’s self-insured workers compensation liability is estimated based on actual claims as established by a third party administrator, increased by factors that reflect the Company’s historical claim development. The “developed” claim, net of amounts paid, represents the liability that the Company records in its financial statements. The Company’s self-insured health care liability is estimated based on its actual claim experience and multiplied by a time lag factor. The lag factor represents an estimate of claims that have been incurred and should be recorded as a liability, but have not been reported to the Company.

Foreign Currency Translation

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.” Assets and liabilities of the non-U.S. subsidiaries are translated at current rates of exchange. The resulting translation adjustments were recorded in accumulated other comprehensive loss. Income and expense items were translated at the average exchange rate for the year. Gains and losses were reported in the net loss and were not material in any year.

Goodwill

Goodwill was amortized using the straight-line method over periods ranging up to 40 years for fiscal years prior to 2002. Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under this pronouncement, goodwill is no longer amortized, but instead requires the Company to perform a goodwill impairment test at least annually. The Company’s most recent impairment test was performed during the fourth quarter of 2003 and did not result in an impairment charge.

Impairment of Long-Lived Assets

Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company periodically evaluates long-lived assets, including property, plant and equipment and definite lived intangible assets whenever events or changes in conditions may indicate that the carrying value may not be recoverable. Factors that management considers important that could initiate an impairment review include the following:

•

significant operating losses;

•

recurring operating losses;

•

significant declines in demand for a product produced by an asset capable of producing only that product;

•

assets that are idled or held for sale;

•

assets that are likely to be divested

The impairment review requires the Company to estimate future undiscounted cash flows associated with an asset or group of assets and sum the estimated future cash flows. If the future undiscounted cash flows is less than the carrying amount of the asset, the Company must estimate the fair value of the asset. If the fair value of the asset is below the carrying value, then the difference will be written-off. Estimating future cash flows requires the Company to make judgments regarding future economic conditions, product demand and pricing. Although the Company believes its estimates are appropriate, significant differences in the actual performance of the asset or group of assets may materially affect the Company’s asset values and results of operations.

Impairment costs of $2.1 million was recorded in 2003 related to assets held for sale. These assets are land and buildings for operations that have been permanently closed in conjunction with the Company’s restructuring activities. The costs represent the difference between the carrying value of the assets and the estimated fair value.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. In accordance with SFAS No. 109, deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense (benefit) is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

Under SFAS No. 109, a valuation allowance is required when it is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income.

Income or Loss Per Share

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 per share reflects the potential dilution that

could occur if convertible securities were converted into common stock, or other contracts to issue common stock resulted in the issuance of common stock. Since the years ended December 31, 2003, 2002 and 2001 were net losses, the impact of the dilutive effect of stock options, if any, were not added to the weighted average shares.

Stock-Based Compensation

On December 31, 2002 the Company was required to adopt SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”). SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for companies that voluntarily elect to adopt the fair value recognition and measurement methodology prescribed by SFAS No. 123.

In addition, regardless of the method a company elects to account for stock-based compensation arrangements, SFAS No. 148 requires additional disclosures in the Summary of Significant Accounting Policies footnote of both interim and annual financial statements regarding the method the Company uses to account for stock-based compensation and the effect of such method on the Company’s reported results.

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations (“APB No. 25”) in accounting for its employee stock options. However, pro forma information regarding net income and earnings per share is required by SFAS 123, which requires that the information be determined as if the Company has accounted for its employee stock options granted under the fair value method of that statement. The fair values for these options were estimated as of the grant dates using a Black-Scholes option pricing model. The following assumptions were used for options granted for the years ended December 31, 2003, 2002 and 2001:


	2003	2002	2001
Risk-free interest rate	3.54% — 4.22%	3.39% — 4.94%	4.92% — 5.36%
Expected dividend yield	0%	0%	1.16% — 1.63%
Expected option lives	8-10 years	8-10 years	8-10 years
Expected volatility	39%	39%	41%

The total fair values of the options granted during the years ended December 31, 2003, 2002 and 2001 were computed to be approximately $1.0 million, $2.3 million and $470 thousand, respectively. If the Company had accounted for these plans in accordance with SFAS No. 123 and included the amortization expense related to options vesting each year, the Company’s reported and pro forma net loss and net loss per share for the years ended December 31, 2003, 2002 and 2001 would have been as follows (in thousands, except per share data):


	2003			2002			2001
Net loss:
As reported	$	(27,035	)	$	(17,920	)	$	(14,602	)
Stock based compensation expense determined pursuant to SFAS 123, net of related tax effects		(1,440	)		(1,692	)		(1,154	)

Pro forma		(28,475	)		(19,612	)		(15,756	)
Diluted loss per common share:
As reported	$	(0.97	)	$	(0.64	)	$	(0.52	)
Pro forma		(1.02	)		(0.70	)		(0.57	)

New Accounting Pronouncements

In July 2001, the FASB issued Statement of Financial Accounting Standards (“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. The Company adopted SFAS No. 143 effective January 1, 2003. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). This pronouncement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which was generally before an actual liability had been incurred. The Company adopted SFAS No. 146 effective January 1, 2003 and is accounting for exit and disposal activities initiated during 2003 in accordance with this pronouncement. The adoption of this statement has resulted in the accrual of liabilities as incurred.

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others” (“FIN 45”) which requires companies to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 provides specific guidance identifying the characteristics of contracts that are subject to its guidance in its entirety from those only subject to the initial recognition and measurement provisions. The recognition and measurement provisions of FIN 45 were effective on a prospective basis for guarantees issued or modified after December 31, 2002. The Company adopted FIN 45 effective January 1, 2003. The adoption of this pronouncement did not have a material effect on the Company’s consolidated financial statements.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB 51” (“FIN 46”). The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”). This new model for consolidation applies to an entity if either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures regarding the nature, purpose, size and activities of the VIE and the enterprise’s maximum exposure to loss as a result of its involvement with the VIE. The Company adopted this interpretation effective July 1, 2003. The Company does not currently hold any VIEs and the adoption of this interpretation did not have an impact on the Company’s consolidated financial statements or disclosures.

In April 2003, the Financial Accounting Standards Board issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement was

generally effective for contracts entered into or modified after June 30, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

In May 2003, the Financial Accounting Standards Board issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003. The adoption of this statement on June 1, 2003 did not have an impact on the Company’s consolidated financial statements.

Reclassifications

Reclassifications of previously recorded amounts have been made to conform with 2003 presentations. Freight costs were reclassified as a component of cost of sales. The loss on disposals of property, plant and equipment was reported as a component of other non-operating expenses in prior years. These expenses are now classified as a component of cost of sales. In addition, certain items which were classified as a component of freight costs are now classified as a reduction in sales.

2.	Shareholders’ Equity

Preferred Stock

The Company has authorized 5.0 million shares of $0.10 par value preferred stock. The preferred stock is issuable 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.

3.	Acquisitions

Each of the following acquisitions was accounted for applying the provisions of SFAS No. 141. As a result, the Company recorded the assets and liabilities of the acquired companies at their estimated fair values with the excess of the purchase price over these amounts being recorded as goodwill. Actual allocations of goodwill and other identifiable assets may change during the allocation period, generally one year following the date of acquisition. The financial statements for the years ended December 31, 2003, 2002 and 2001 reflect the operating results of the acquired businesses for the periods after their respective dates of acquisition.

Caraustar Northwest

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

Design Tubes

In April 2002, the Company acquired the remaining 51% of the outstanding stock of Design Tubes Company Limited (“Design Tubes”), located in Toronto, Ontario, Canada in consideration for shares of a subsidiary of the Company exchangeable at the holder’s option (for no additional consideration) for approximately 141 thousand shares of the Company’s common stock, valued at $1.5 million. The Company originally acquired its minority interest in Design Tubes in November 1998 and accounted for its 49% ownership using the equity method. Design Tubes manufactures paperboard tubes and also produces paper tube manufacturing equipment for companies throughout North America. Goodwill in the amount of $2.0 million was recorded in connection with the Design Tubes acquisition.

Smurfit Industrial Packaging Group

On September 30, 2002, the Company acquired certain operating assets (excluding accounts receivable) of the Smurfit Industrial Packaging Group (“Smurfit”), 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. Goodwill of approximately $34.5 million and intangible assets of approximately $8.7 million were recorded in conjunction with the Smurfit Industrial Packaging Group acquisition. The intangible assets are associated with the value of acquired customer relationships and will be amortized over 15 years.

The Company also entered into operating lease agreements with a third party to lease machinery and equipment at certain acquired Smurfit locations. The terms of the agreements are six years. The future minimum rental payments required under these leases are approximately $1.7 million each year in 2004 through 2007 and $1.3 million in 2008. The Company will recognize operating lease expense of approximately $2.0 million each year in 2004 through 2007 and $1.4 million in 2008.

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. The Company believes that these assets enhance the Company’s capabilities in its tube, core and composite container market and position the Company as a prominent producer in this market. In conjunction with the acquisition, the Company is evaluating its existing and acquired locations to determine which locations should be closed or consolidated to achieve economies of scale and other efficiencies. As of December 31, 2003, the Company has closed a total of eight of the acquired tube and core locations and announced the closure of the acquired Cedartown paperboard mill in January 2004.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):


Cash paid to Jefferson Smurfit Corporation (U.S)			$	67,140
Acquisition expenses				2,342

Total allocable cost				69,482

Assets acquired:
Current assets	$	11,279
Intangible asset		8,672
Property, plant & equipment		29,052

Total assets purchased				49,003

Liabilities assumed:
Current liabilities		12,273
Long-term debt		1,745

Total liabilities assumed				14,018

Net assets acquired				34,985

Total goodwill			$	34,497

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


	For the Years Ended December 31,
	2002			2001
Total revenues	$	1,058,332		$	1,051,442
Net loss	$	(13,079	)	$	(13,602	)
Net loss per share:
Basic and diluted	$	(0.47	)	$	(0.49	)

Vivid Graphics

In September 2002, the Company acquired a provider of digital imaging services for 34 thousand shares of its common stock valued at approximately $324 thousand. Goodwill of approximately $170 thousand was recorded in connection with the acquisition.

4.	Goodwill and Other Intangible Assets

Goodwill

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under this pronouncement the Company no longer amortizes goodwill but instead performs an impairment test at least annually. The Company’s most recent impairment test was performed during the fourth quarter of 2003 and did not result in an impairment charge.

Net loss and related loss per share for the year ended December 31, 2001, adjusted to exclude goodwill amortization expense, is as follows, net of tax (in thousands, except per share information):


	For the Year Ended December 31, 2001			Income Per Share
	For the Year Ended December 31, 2001			Basic^(A)			Diluted^(A)
Reported net loss	$	(14,602	)	$	(0.52	)	$	(0.52	)
Goodwill amortization		2,996			0.11			0.11

Adjusted net loss	$	(11,606	)	$	(0.42	)	$	(0.42	)

^(A)	Column does not sum due to rounding.

The following is a summary of the changes in the carrying amount of goodwill, by segment, for the years ended December 31, 2002 and 2003 (in thousands):


	Paperboard		Carton and Custom Packaging		Tube, Core and Composite Containers		Total
Balance as of December 31, 2001	$	77,648	$	43,170	$	25,647	$	146,465
Goodwill acquired		5,040		170		28,870		34,080

Balance as of December 31, 2002		82,688		43,340		54,517		180,545
Goodwill acquired		—		—		2,585		2,585

Balance as of December 31, 2003	$	82,688	$	43,340	$	57,102	$	183,130

Intangible Assets

As of December 31, 2003 and 2002, the Company had an intangible asset of $7.8 million, net of $858 thousand of accumulated amortization, and $8.3 million, net of $290 thousand of accumulated amortization, respectively, which is classified with other assets. Amortization expense for the year ended December 31, 2003 and 2002 was $568 thousand and $290 thousand, respectively. The intangible asset is associated with the acquisition of certain assets of the Smurfit Industrial Packaging Group and is attributable to the acquired customer relationships. This intangible asset is being amortized over 15 years. Scheduled amortization of the intangible asset for the next five years is as follows (in thousands):


2004	$	568
2005		568
2006		568
2007		568
2008		568

Five year total	$	2,840

5.	Equity Interest in Unconsolidated Affiliates

The Company owns a 50% interest in a limited liability company, Standard Gypsum, L.P. Standard Gypsum owns two gypsum wallboard manufacturing facilities. One facility is located in McQueeney, Texas and the other is in Cumberland City, Tennessee. Standard Gypsum is operated as a joint venture and is managed by Temple-Inland, Inc., which also owns 50% of the joint venture. The Company accounts for its interest in Standard Gypsum under the equity method of accounting. The Company’s equity interest in the earnings or loss of Standard Gypsum for the years ended December 31, 2003, 2002 and 2001 was earnings of $6.8 million, earnings of $8.2 million, and a loss of $946 thousand, respectively. The Company received distributions based on its equity interest in Standard Gypsum of $6.2 million, $10.7 million, and $1.0 million in 2003, 2002 and 2001, respectively.

During 1999, Standard Gypsum received financing from two industrial revenue bond issuances by Stewart County, Tennessee, totaling $56.2 million, in order to complete the financing for the construction of the Cumberland City, Tennessee facility. Standard Gypsum is the obligor under reimbursement agreements pursuant to which direct-pay letters of credit in the aggregate amount of approximately $56.2 million were originally issued for its account in support of the outstanding industrial revenue bond obligations. Standard Gypsum replaced these letters of credit in October 2003 with new direct-pay letters of credit in the aggregate amount of $57.4 million, issued by a replacement lender. The Company is severally obligated for 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 guaranteed 50% of Standard Gypsum’s obligations. As of December 31, 2003 and 2002, the outstanding letters of credit totaled approximately $57.4 million and $56.2 million, respectively, for one-half of which the Company is obligated (approximately $28.7 million and $28.1 million, respectively). If either joint venture partner had defaulted under its support arrangements, the Company’s total obligation would have been $28.7 million at December 31, 2003.

As of December 31, 2003, the Company’s obligation with respect to these letters of credit is supported by a letter of credit in the face amount of $28.7 million, issued in favor of the Standard Gypsum lender. This letter of credit was issued under the Company’s senior credit facility and expires on October 24, 2004. The letter of credit may be drawn in the event of a default under the Standard Gypsum reimbursement agreement, and such a default would be triggered by, among other things, the Company’s failure to renew or extend this letter of credit. In the event the Company is unable to renew, extend or otherwise replace this letter of credit, the lender under the Standard Gypsum facility would be entitled to draw under the letter of credit to satisfy the Company’s support obligations, and the Company would then be obligated to reimburse its senior lenders for the amount of such drawing.

In March 2003, the Company completed an amendment to its former senior credit facility. Prior to this amendment, the Company’s obligation related to Standard Gypsum’s letter of credit was supported by a guarantee agreement and the guarantee agreement contained financial maintenance covenants that were identical to those contained in the Company’s former senior credit facility. However, the lenders to Standard Gypsum were unwilling to agree to the modification that the Company made under the amendment to the former senior credit facility. In order to avoid an event of default under that guarantee, the Company obtained a letter of credit under its former senior credit facility in the face amount of $28.4 million. This letter of credit replaced 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 interest in the Company’s accounts receivable and inventory. In June 2003, the letter of credit issued under the Company’s former senior credit facility was replaced with a letter of credit issued under the Company’s current senior credit facility.

Summarized financial information for Standard Gypsum at January 3, 2004 and December 28, 2002, and for the fiscal years ended January 3, 2004, December 28, 2002 and December 29, 2001, respectively, is as follows (in thousands):


	2003		2002
Current assets	$	15,834	$	13,680
Noncurrent assets		64,189		67,098
Current liabilities		7,394		6,434
Long-term debt		56,200		56,200
Long-term liabilities		7		20
Net assets		16,422		18,124


	2003		2002		2001
Sales	$	103,850	$	98,558	$	71,297
Gross profit		23,669		26,103		5,886
Operating income		15,946		18,881		292
Net income (loss)		13,598		16,364		(1,892	)

Note that Standard Gypsum’s fiscal year-end is the Saturday closest to December 31.

During 1999, the Company formed a joint venture with Temple-Inland to own and operate a containerboard mill located in Newport, Indiana. Under the joint venture agreement, the Company contributed $50.0 million to the joint venture, Premier Boxboard Limited, LLC, and Temple-Inland contributed the net assets of the mill valued at approximately $98.0 million, and received $50.0 million in notes issued by Premier Boxboard. Upon formation, Premier Boxboard undertook an $82.0 million project to modify the mill to enable it to produce a new lightweight gypsum facing paper along with other containerboard grades. Premier Boxboard is operated as a joint venture managed by the Company. The modified mill began operations on June 27, 2000. The Company and Temple-Inland each have a 50% interest in the joint venture, which is being accounted for under the equity method of accounting. There have been no cash distributions to the joint venture partners since formation of the joint venture. The Company’s equity interest in the earnings or loss of Premier Boxboard for 2003, 2002 and 2001 were approximately $2.1 million in earnings, a $4.6 million loss and a $1.9 million loss, respectively.

Premier Boxboard is the borrower under a credit facility, the aggregate principal amount of which was reduced from $30.0 million to $20.2 million pursuant to an amendment completed on March 28, 2003. Pursuant to this amendment, the maturity date of the facility was shortened from June 29, 2005 to January 5, 2004. On December 22, 2003, an additional amendment was completed that extended the maturity date of the facility to January 5, 2005. The Company is severally obligated for 50% of Premier Boxboard’s obligations for reimbursement of letter of credit drawings, interest, fees and other amounts. Temple-Inland has guaranteed 50% of Premier Boxboard’s obligations. As of December 31, 2003, the outstanding principal amount of borrowings under the facility was approximately $10.6 million (including a $632 thousand undrawn letter of credit), for one-half of which the Company is obligated (approximately $5.3 million). If either joint venture partner had defaulted under its support arrangements, the Company’s total obligation would have been $5.3 million at December 31, 2003. The Company’s obligation is supported by a letter of credit in the face amount of $5.3 million, issued in favor of the Premier Boxboard lenders. This letter of credit was issued in June 2003 under the Company’s new senior credit facility in replacement of a guarantee agreement, and expires in January 2005.

Any reductions of outstanding loans under the Premier Boxboard credit facility may not be reborrowed and will permanently reduce the commitments. The reduction of the commitments under this credit facility eliminates availability for borrowings unless the Company is able to reduce outstandings under the facility, and effectively requires 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. If the Company is not able to fund Premier Boxboard’s operations in this manner, Premier Boxboard’s performance could be adversely affected. Further, if the Company is unable to refinance this facility prior to January 5, 2005, the entire facility will become immediately due and payable and the lenders under the Premier Boxboard facility will be entitled to draw under the letter of credit to satisfy the Company’s support obligations.

In the event that the Company is called upon to reimburse drawings under either or both of its joint venture letter of credit support obligations, the Company believes that it would be able to satisfy such obligations by having the Company’s senior lenders treat these reimbursement obligations as revolving credit loans under its senior credit agreement. The full $34.0 million of these letter of credit obligations and other letter of credit obligations outstanding as of December 31, 2003 has already been included in determining the $21.0 million in borrowing availability under the Company’s senior credit facility as of December 31, 2003. The Company’s cash on hand is also a potential source of repayment of some or all of these reimbursement obligations. Any resulting acceleration and default in repayment of these support obligations could cause defaults and acceleration under the Company’s 9 7/8% senior subordinated notes, the 7 1/4% senior notes and the 7 3/8% senior notes.

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 the Company. 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, the Company’s 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 lenders under the credit facility, which might make it more likely that the Company’s

guarantee of the Premier Boxboard credit facility would be the primary source of repayment under the facility in the event Premier Boxboard cannot pay.

Summarized financial information for Premier Boxboard at December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001, respectively, is as follows (in thousands):


	2003		2002
Current assets	$	18,021	$	12,983
Noncurrent assets		144,655		149,640
Current liabilities		11,723		6,074
Long-term liabilities		624		228
Long-term debt		60,000		70,000
Net assets		90,329		86,321


	2003		2002			2001
Sales	$	89,818	$	74,649		$	75,171
Gross profit		23,161		7,923			16,463
Operating income (loss)		9,016		(4,555	)		1,640
Net income (loss)		4,125		(9,335	)		(3,784	)

Additional contingencies relating to the Company’s joint ventures that could affect the Company’s liquidity include possible additional capital contributions and buy-sell triggers which, under certain circumstances, give the Company and its 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 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 the Company is always the party entitled, or obligated, as the case may be, to purchase.

The Company had an additional joint venture with an unrelated entity during 2001 and 2002. In January 2003, the Company acquired its venture partner’s 50% equity interest. Prior to acquiring the 50% interest, the Company accounted for the joint venture using the equity method of accounting.

6.	Senior Credit Facility and Long-Term Debt

At December 31, 2003 and 2002, total long-term debt consisted of the following (in thousands):


	2003			2002
Senior credit facility	$	—		$	—
9 7/8 % senior subordinated notes		285,000			285,000
7 3/8 % senior notes		193,250			193,250
7 1/4 % senior notes		29,000			29,000
Other notes payable		9,895			9,880
Mark-to-market value of interest rate swap agreements		(1,145	)		15,153
Realized interest rate swap gains ⁽¹⁾		15,107			502

Total debt		531,107			532,785
Less current maturities		(106	)		(70	)

Total long-term debt	$	531,001		$	532,715

⁽¹⁾

Net of original issuance discounts and accumulated discount amortization. As described below under “Interest Rate Swap Agreements”, realized gains resulting from unwinding interest rate swaps are recorded as a component of debt and will be accreted as a reduction to interest expense over the remaining term of the debt.

The carrying value of total debt outstanding at December 31, 2003 maturing during the next five years and thereafter is as follows (in thousands):


2004	$	106
2005		127
2006		92
2007		95
2008		100
Thereafter		530,587

Total debt	$	531,107

Senior Credit Facility

Effective June 24, 2003, the Company completed a refinancing of its senior credit facility. The new facility provides for a revolving line of credit of $75.0 million and is secured primarily by a first priority security interest in the Company’s accounts receivable and inventory. The facility matures in June 2006. Borrowing availability is subject to borrowing base requirements established by eligible accounts receivable and inventory. The facility includes a subfacility of $50.0 million for letters of credit, usage of which reduces availability under the facility. As of December 31, 2003, no borrowings were outstanding under the facility; however, an aggregate of $44.0 million in letter of credit obligations were outstanding. Availability under the facility at December 31, 2003 was limited to $21.0 million after taking into consideration outstanding letter of credit obligations and minimum borrowing availability requirements.

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

The facility contains covenants that restrict, among other things, the Company’s ability and its subsidiaries’ ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, make capital expenditures in excess of $30.0 million per year or change the nature of the Company’s business. The facility also contains a fixed charge coverage ratio covenant, which applies only in the event borrowing availability falls below $10.0 million or suppressed availability falls below $20.0 million. Suppressed availability is defined as the amount of eligible accounts receivable and inventory (less reserves and aggregate credit outstandings) in excess of $75.0 million or the amount of eligible inventory (less reserves and aggregate credit outstandings) in excess of $37.5 million. The fixed charge ratio covenant did not require measurement at December 31, 2003.

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

In conjunction with refinancing the senior credit facility in June 2003, a letter of credit of approximately $10.1 million was issued under the new facility in favor of the lenders to the Company’s 50% owned Premier Boxboard joint venture. In exchange for this letter of credit, the lenders terminated the Company’s former Premier Boxboard guarantee agreement and released their security interest in certain assets of the Company and its subsidiaries that were pledged to secure such guarantee. The Company is required to maintain this letter of credit in place during the term of the Premier Boxboard credit facility. Premier Boxboard paid off a portion of

the outstanding borrowings during the third and fourth quarters of 2003, and the letter of credit was lowered to $5.3 million as of December 31, 2003.

Former Senior Credit Facility

The Company’s former senior credit facility provided for a revolving line of credit of $75.0 million, subject to borrowing base requirements established by eligible accounts receivable and inventory. The facility included subfacilities of $10.0 million for swingline loans and $15.0 million for letters of credit, usage of which reduced availability under the facility. No borrowings were outstanding under the facility at December 31, 2002. The Company’s obligations under the facility were unconditionally guaranteed, on a joint and several basis, by all of its existing and subsequently acquired wholly-owned domestic subsidiaries and were secured by a first priority security interest in the accounts receivable and inventory of the Company and all of its existing and subsequently acquired wholly-owned domestic subsidiaries (see discussion below of amendments to the senior credit facility).

Borrowings under the former facility were subject to interest at a rate equal, at the Company’s option, to 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 of 3.00% for Eurodollar rate loans and 1.50% for base rate loans. Additionally, the undrawn portion of the facility was subject to a facility fee at an annual rate that is set at 0.55%.

The former facility contained covenants that restricted, 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 its business. The former facility also contained several financial maintenance covenants, including covenants establishing a maximum leverage ratio, minimum tangible net worth and a minimum fixed charge coverage ratio.

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

During 2001 and 2002, the Company completed five amendments to its former senior credit facility agreement. The first amendment, dated September 10, 2001, allowed the Company to acquire up to $30.0 million of its senior subordinated notes so long as no default or event of default exists on the date of the transaction, or will result from the transaction.

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

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

In connection with the Company’s acquisition of the Smurfit Industrial Packaging Group, the Company entered into a fourth amendment to its former senior credit facility in September 2002. The purpose of this amendment was to obtain the required lender consent for the consummation of the acquisition (and the incurrence of up to $60.0 million in subordinated debt financing to refinance borrowings under the former 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 was at least $50.0 million and the Company had 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.

On December 27, 2002, the Company completed a fifth amendment to its former senior credit facility. This amendment modified the calculation of net worth for purposes of the Company’s 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. This amendment also allowed 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 did not exceed $16.0 million, on an after-tax basis.

During the first quarter of 2003, the Company completed a sixth amendment to its former 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 leverage ratio and net worth covenants, this amendment also established 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 increased 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 its Standard Gypsum joint venture guarantee as described above. This amendment 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. The Company’s lenders also required the establishment of a borrowing base that restricted 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 were not secured or replaced by letters of credit.

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 was to become effective on July 1, 2003.

The former senior credit facility was replaced with the current senior credit facility on June 24, 2003 as described above. All obligations under the former senior credit facility were extinguished upon replacement with the new senior credit facility.

Senior and Senior Subordinated Notes

On March 29, 2001, the Company issued $285.0 million of 9 7/8% senior subordinated notes due April 1, 2011 and $29.0 million of 7 1/4% senior notes due May 1, 2010. These senior subordinated notes and senior notes were issued at a discount to yield effective interest rates of 10.5% and 9.4%, respectively. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 9 7/8% senior subordinated notes is 9.2%. See “- Interest Rate Swap Agreements” below regarding transactions that lowered the effective interest rate of the 9 7/8% senior subordinated notes. These publicly traded senior subordinated and senior notes are unsecured, but are guaranteed, on a joint and several basis, by all of the Company’s domestic subsidiaries, other than two that are not wholly-owned.

On June 1, 1999, the Company issued $200.0 million in aggregate principal amount of 7 3/8% senior notes due June 1, 2009. The 7 3/8% senior notes were issued at a discount to yield an effective interest rate of 7.47% and pay interest semiannually. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 7 3/8% senior notes is 6.4%. See “- Interest Rate Swap Agreements” below regarding transactions that lowered the effective interest rate of the 7 3/8% senior notes. The 7 3/8% senior notes are unsecured obligations of the Company. In February 2002, the Company purchased $6.75 million of these notes in the open market.

Interest Rate Swap Agreements

During 2001, the Company entered into four interest rate swap agreements in notional amounts totaling $285.0 million. The agreements, which had payment and expiration dates that corresponded to the terms of the note obligations they covered, effectively converted $185.0 million of the Company’s fixed rate 9 7/8% senior subordinated notes and $100.0 million of the Company’s fixed rate 7 3/8% senior notes into variable rate obligations. The variable rates were based on the three-month LIBOR plus a fixed margin.

In October 2001, the Company unwound its $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, the Company executed a new swap agreement with a fixed spread that was 85 basis points higher than the original swap agreement. The new swap agreement was the same notional amount, had the same terms and covered the same notes as the original agreement. The $9.1 million gain, which was classified as a component of debt, will be accreted to interest expense over the life of the notes and will partially offset the increase in interest expense. The $9.1 million gain lowered the effective interest rate of the 9 7/8% senior subordinated notes by approximately 50 basis points.

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 was the same notional amount, had the same terms and covered 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.

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 agreements related to the 7 3/8% senior notes, and received approximately $3.4 million. The $6.2 million gain, which was classified as a component of debt, will be accreted to interest expense over the life of the notes and will partially offset the increase in interest expense. The $2.8 million gain lowered the effective interest rate of the 9 7/8% senior subordinated notes by approximately 20 basis points. The $3.4 million gain lowered the effective interest rate of the 7 3/8% senior subordinated notes by approximately 30 basis points.

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 $4.3 million gain, which was classified as a component of debt, will be accreted to interest expense over the life of the notes and will partially offset the increase in interest expense. The gain lowered the effective interest rate of the 9 7/8% senior subordinated notes by approximately 30 basis points.

In May 2003, the Company unwound the remaining $50.0 million of its interest rate swap agreement related to the 9 7/8% senior subordinated notes, and received approximately $4.6 million from the bank counter-party. Simultaneously, the Company unwound $50.0 million of its remaining interest rate swap agreement related to the 7 3/8% senior notes, and received approximately $7.1 million. The $11.7 million gain, which was classified as a component of debt, will be accreted to interest expense over the life of the notes and will partially offset the increase in interest expense. The $4.6 million gain lowered the effective interest rate of the 9 7/8% senior subordinated notes by approximately 30 basis points. The $7.1 million gain lowered the effective interest rate of the 7 3/8% senior notes by approximately 80 basis points.

In July 2003, the Company entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and expiration dates that correspond to the terms of the note obligations it covers, effectively converted $50.0

million of the Company’s fixed rate 9 7/8% senior subordinated notes into variable rate obligations. The variable rates are based on six-month LIBOR plus a fixed margin.

In December 2003, the Company entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and expiration dates that correspond to the terms of the note obligation it covers, effectively converted $50.0 million of the Company’s fixed rate 9 7/8% senior subordinated notes into variable rate obligations. The variable rates are based on six-month LIBOR plus a fixed margin.

See Note 18 “Subsequent Events” regarding the unwind of the $50.0 million interest rate swap in March 2004.

The following table identifies the debt instrument hedged, the notional amount, the fixed rate and the variable rate in effect at December 31, 2003 for each of the Company’s interest rate swaps.


Debt Instrument	Notional Amount (000’s)		Fixed Rate		Variable Rate ⁽¹⁾		Total Variable Rate
9 7/8% senior subordinated notes	$	50,000	5.700	%	1.180	%	6.880	%
9 7/8% senior subordinated notes		50,000	5.505		1.206		6.711

⁽¹⁾	The variable rate is the six-month LIBOR and is the rate in effect at inception of the swap. The variable rate resets every six months.

Under the provisions of SFAS No. 133, the Company has designated and accounted for its interest rate swap agreements as fair value hedges. The Company has assumed no ineffectiveness with regard to these agreements as they qualified for the short-cut method of accounting for fair value hedges of debt obligations, as prescribed by SFAS No. 133. The December 31, 2003 aggregate estimated liability related to the swaps was $1.1 million and is classified as a component of other long-term liabilities, with a corresponding adjustment to long-term debt in the accompanying balance sheet. The December 31, 2002 aggregate fair value of the swaps was $15.2 million and is classified as a component of other long-term assets, with a corresponding adjustment to long-term debt in the accompanying balance sheet.

7.	Commitments and Contingencies

Leases

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, 2003, 2002 and 2001 is as follows (in thousands):


	2003		2002		2001
Minimum rentals	$	21,363	$	16,993	$	14,312
Contingent rentals		463		322		507

Total	$	21,826	$	17,315	$	14,819

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, 2003 (in thousands):


2004	$	20,323
2005		15,805
2006		12,467
2007		11,558
2008		8,331
Thereafter		13,944

Total	$	82,428

Litigation

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

8.	Loss Per Share

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


	For the Years Ended December 31,
	2003			2002			2001
Calculation of Basic Loss Per Share:
Net loss	$	(27,035	)	$	(17,920	)	$	(14,602	)
Weighted average number of common shares outstanding		27,993			27,871			27,845

Basic loss per share	$	(0.97	)	$	(0.64	)	$	(0.52	)

Calculation of Diluted Loss Per Share:
Net loss	$	(27,035	)	$	(17,920	)	$	(14,602	)
Weighted average number of shares outstanding		27,993			27,871			27,845

Diluted loss per share	$	(0.97	)	$	(0.64	)	$	(0.52	)

Since 2003, 2002 and 2001 were net losses, the impact of the dilutive effect of stock options, if any, were not added to the weighted average shares.

9.	Stock Option and Deferred Compensation Plans

Director Equity Plan

During 1996, the Company’s board of directors and shareholders 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 granted options each year 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 thousand shares of common stock may be granted under this plan. During 2003, 2002 and 2001, 11 thousand, 9 thousand and 8 thousand shares, respectively, of common stock were issued under this plan. Options to purchase 7 thousand, 6 thousand and 6 thousand shares of common stock were issued under this plan in 2003, 2002 and 2001, respectively.

Incentive Stock Option and Bonus Plans

During 1992, the Company’s board of directors and shareholders 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. The options expire after eight years. The Company’s board of directors authorized 1.4 million common shares for grant under the 1993 Plan. No compensation expense was recorded in 2003 related to this plan. Compensation expense of approximately $62 thousand and $186 thousand related to bonus shares was recorded in 2002 and 2001, respectively.

During 1998, the Company’s board of directors and shareholders 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% 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 3.8 million common shares for grant under the 1998 Plan. No options were issued during 2003 under this plan. The Company issued 588 thousand and 108 thousand options during 2002 and 2001, respectively, under the 1998 Plan. During 2003, 2002 and 2001, the Company issued 1 thousand, 2

thousand and 1 thousand shares, respectively, of restricted stock. The Company recorded approximately $69 thousand, $78 thousand and $82 thousand of compensation expense related to the issuance of restricted stock during 2003, 2002 and 2001, respectively.

Long-term Equity Incentive Plan

In May 2003, the Company’s board of directors and shareholders approved a long-term equity incentive plan, which became effective May 7, 2003. Under the provisions of the plan, participating key employees are rewarded, in the form of common share purchase options, restricted common shares, or a combination of both, for improving the Company’s financial performance in a manner that is consistent with the creation of increased shareholder value. All options awarded under the plan will have an exercise price not less than 100% of the fair market value of a share of common stock on the date of grant. Options will have a vesting schedule of up to five years and expire after ten years. The Company’s board of directors authorized and shareholders approved, an aggregate of 4.0 million common shares for issuance under this plan. As of December 31, 2003, 233 thousand stock options and 230 thousand restricted shares have been granted under this plan. The Company recorded compensation expense of $89 thousand related to the issuance of restricted stock in 2003.

The following is a summary of stock option activity for the years ended December 31, 2003, 2002 and 2001:


	Shares		Weighted Average Exercise Price
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
Granted	588,150			7.49
Forfeited	(187,364	)		20.84
Exercised	(3,239	)		9.36

Outstanding at December 31, 2002	2,191,788			18.14
Granted	239,600			8.13
Forfeited	(255,747	)		20.02
Exercised	(76,426	)		7.78

Outstanding at December 31, 2003	2,099,215		$	17.14

Options exercisable at:
December 31, 2003	1,173,649		$	21.75
December 31, 2002	1,076,420			22.66
December 31, 2001	989,897			22.22

The following table is a summary of information about the Company’s stock options outstanding at December 31, 2003:


Range of Exercise Price	Outstanding at December 31, 2003	Weighted Average Remaining Life (In Years)	Weighted Average Exercise Price		Exercisable at December 31, 2003	Weighted Average Exercise Price
$6.94 —$16.88	995,906	8.2	$	8.30	301,092	$	9.04
17.94 — 23.75	529,208	5.2		19.57	351,280		19.58
24.44 — 29.75	216,432	4.8		25.84	178,646		25.86
30.13 — 40.80	357,669	3.3		32.92	342,631		33.01

$6.94 —$40.80	2,099,215	6.3	$	17.14	1,173,649	$	21.75

Deferred Compensation Plans

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 $190 thousand, $223 thousand and $226 thousand for the years ended December 31, 2003, 2002 and 2001, respectively. Accruals of approximately $1.5 million related to these plans are included in deferred compensation in the accompanying balance sheets at December 31, 2003 and 2002.

The Company also provides a voluntary nonqualified deferred compensation plan for key employees and the Company’s Board of Directors. The plan is funded by the participants. The plan allows employees to defer compensation on a pre-tax basis via contributions to a grantor trust. The plan provides the participants with six investment options to invest on a tax deferred basis.

10.

Pension Plan and Other Postretirement Benefits

Pension Plan and Supplemental Executive Retirement Plan

Substantially all of the Company’s employees participate in a noncontributory defined benefit pension plan (the “Pension Plan”). The Pension Plan calls for benefits to be paid to all eligible employees at retirement based primarily on years of service with the Company and compensation rates in effect near retirement. The Pension Plan’s assets consist of shares held in collective investment funds and group annuity contracts. The Company’s policy is to fund benefits attributed to employees’ service to date as well as service expected to be earned in the future. Contributions to the Pension Plan totaled approximately $11.7 million, $7.1 million and $8.3 million in 2003, 2002 and 2001, respectively. Based on estimated at December 31, 2003 no contributions will be required for the year ended December 31, 2004.

During 1996, the Company adopted a supplemental executive retirement plan (“SERP”), which provides benefits to participants based on average compensation. The SERP covers certain executives of the Company commencing upon retirement. The SERP is unfunded at December 31, 2003.

Pension expense for the Pension Plan and the SERP includes the following components for the years ended December 31, 2003, 2002 and 2001 (in thousands):


	2003			2002			2001
Service cost of benefits earned	$	5,266		$	4,179		$	4,016
Interest cost on projected benefit obligation		5,600			5,070			4,632
Actual (return) loss on plan assets		(13,594	)		11,340			310
Net amortization and deferral		12,718			(15,789	)		(5,234	)

Net pension expense	$	9,990		$	4,800		$	3,724

Net pension expense for 2004 is estimated to be $8.7 million.

The table below presents various obligation, plan asset and financial statement information for the SERP and the Pension Plan as of December 31, 2003 and 2002 (in thousands):


	SERP						Pension Plan
	2003			2002			2003			2002
Change in benefit obligation:
Projected benefit obligation at end of prior year	$	4,736		$	3,790		$	77,841		$	63,657
Service cost		238			148			5,027			4,031
Interest cost		359			271			5,241			4,798
Actuarial loss		786			650			7,298			8,708
Plan amendments		—			(123	)		466			583
Benefits paid		—			—			(4,289	)		(3,937	)

Projected benefit obligation at end of year	$	6,119		$	4,736		$	91,584		$	77,840

Change in plan assets:
Fair value of plan assets at end of prior year	$	—		$	—		$	52,285		$	60,495
Actual return (loss) on plan assets		—			—			13,594			(11,340	)
Employer contributions		—			—			11,732			7,068
Benefits paid		—			—			(4,289	)		(3,938	)

Fair value of plan assets at end of year	$	—		$	—		$	73,322		$	52,285

Funded status of the plans:
Ending funded status	$	(6,119	)	$	(4,736	)	$	(18,262	)	$	(25,555	)
Unrecognized transition obligation		911			1,024			—			—
Unrecognized prior service cost		16			18			1,458			1,270
Unrecognized net loss		1,678			989			35,039			39,970

Net amount recognized	$	(3,514	)	$	(2,705	)	$	18,235		$	15,685

Amounts recognized in the balance sheet:
Accrued benefit liability	$	(5,016	)	$	(3,358	)	$	(13,616	)	$	(21,493	)
Intangible asset		927			653			1,458			1,270
Deferred tax asset		218			—			11,506			13,595
Accumulated other comprehensive loss		357			—			18,887			22,313

Net amount recognized	$	(3,514	)	$	(2,705	)	$	18,235		$	15,685

Plans with accumulated benefit obligations in excess of plan assets:
Projected benefit obligation	$	6,119		$	4,736		$	91,585		$	77,841
Accumulated benefit obligation		5,016			3,358			86,938			73,780
Plan assets	$	—		$	—		$	73,322		$	52,285

Other comprehensive income (loss):
(Increase) decrease in additional minimum liability	$	(849	)	$	22		$	5,327		$	(37,178	)
Increase (decrease) in intangible asset		274			(22	)		188			1,270
(Increase) decrease in deferred tax liability		218			—			(2,089	)		13,595

Other comprehensive income (loss)	$	(357	)	$	—		$	3,426		$	(22,313	)

In accordance with SFAS No. 87, the Company has recorded an additional minimum pension liability related to its Pension Plan and SERP plan representing the excess of unfunded accumulated benefit obligations over previously recorded pension liabilities. The Company’s additional minimum liability for its Pension Plan was $31.9 million and $37.2 million at December 31, 2003 and 2002, respectively. The December 31, 2003 and 2002 additional minimum liability was offset by an intangible asset of $1.5 million and $1.3 million, respectively, which represents unrecognized prior service cost. The cumulative additional minimum liability for the SERP totaled $1.5 million and $653 thousand at December 31, 2003 and 2002, respectively, and has been offset by intangible assets of $927 thousand and $653 thousand in 2003 and 2002, respectively.

The determination of the Company’s pension expense and benefit obligation is dependent on its selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the weighted average discount rate, the weighted average expected rate of return on plan assets and the weighted average rate of compensation increase. The following table is a summary of the significant assumptions used to determine the projected benefit obligations as of:


	December 31,
	2003		2002
Weighted average discount rate	6.25	%	6.75	%
Weighted average rate of compensation increase	3.00	%	3.00	%

The following table is a summary of the significant assumptions to determine net periodic pension expense for the years ended:


	December 31,
	2003		2002		2001
Weighted average discount rate	6.75	%	7.50	%	7.75	%
Weighted average expected rate of return on plan assets	9.00	%	9.50	%	9.50	%
Weighted average rate of compensation increase	3.00	%	3.00	%	3.00	%

In developing the weighted average discount rate, the Company evaluated input from its actuaries, including estimated timing of obligation payments and yields for long-term bonds that received one of the two highest ratings given by a recognized rating agency. The discount rate, determined on this basis, was lowered from 6.75% at December 31, 2002 to 6.25% at December 31, 2003. Based on analysis of the rating and maturity of the long-term bonds, the timing of payment obligations and the input from the Company’s actuaries, the Company concluded that a discount rate of 6.25% is appropriate and reflects the yield of a portfolio of high-quality bonds that has the same duration as the plan obligations. Future actual pension expense and benefit obligations will depend on future investment performance, changes in future discount rates and various other factors related to populations participating in the Company’s pension plans. A 0.25% change in the discount rate would result in a change in the December 31, 2003, projected benefit obligation of approximately $3.3 million and estimated 2004 net pension expense of approximately $540 thousand.

In developing the Company’s weighted average expected rate of return on plan assets, the Company evaluated such criteria as return expectations by asset class, historical returns by asset class and long-term inflation assumptions. The Company’s expected weighted average rate of return is based on an asset allocation assumption of 70% equity and 30% fixed income. The Company regularly reviews its asset allocation and periodically rebalances its investments to its targeted allocation when considered appropriate. As a result of this analysis, the Company concluded that the expected weighted average rate of return of 9.0% for December 31, 2003 is appropriate. A 0.25% change in the weighted average expected rate of return would change estimated 2004 net pension expense $186 thousand.

The Company’s pension plan weighted-average asset allocations as of December 31, 2003 and 2002, respectively, were as follows:


	2003		2002
Large capitalization U.S. equity	46	%	51	%
Small-capitalization U.S. equity	15	%	15	%
Mid-capitalization U.S. equity	14	%	10	%
International equity	—		4	%

Total equity	75	%	80	%
Short term fixed	6	%	5	%
Fixed income (intermediate-term maturities)	19	%	15	%

Total fixed income	25	%	20	%

The Company’s investment policy includes the following objectives:

•

Provide a long-term investment return greater than the actuarial assumptions.

•

Maximize investment return commensurate with appropriate levels of risk.

•

Comply with the Employee Retirement Income Security Act of 1974 (ERISA) by investing the funds in a manner consistent with ERISA’s fiduciary standards.

The Company’s policy for 2004 is to allocate pension plan funds based on percentages for each major asset category as follows:


Large capitalization U.S. equity	44	%
Small-capitalization U.S. equity	13	%
Mid-capitalization U.S. equity	13	%

Total equity	70	%
Short term fixed	5	%
Fixed income (intermediate-term maturities)	25	%

Total fixed income	30	%

The Company’s actual investment allocation at December 31, 2003 was not consistent with the policy above because the Company was in the process of shifting its allocation from the former 80% equity and 20% fixed income allocation to the current allocation policy.

Other Postretirement Benefits

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

Net periodic postretirement benefit cost for the years ended December 31, 2003, 2002 and 2001 included the following components (in thousands):


	2003			2002		2001
Service cost of benefits earned	$	80		$	89	$	103
Interest cost on accumulated postretirement benefit obligation		405			459		404
Amortization		(290	)		45		—

Net periodic postretirement benefit cost	$	195		$	593	$	507

Postretirement benefits totaling $541 thousand, $695 thousand and $650 thousand were paid during 2003, 2002 and 2001, respectively. Benefit payments of $595 thousand are estimated for 2004.

The accrued postretirement benefit cost as of December 31, 2003 and 2002 consists of the following (in thousands):


	2003			2002
Change in benefit obligation:
Projected benefit obligation at end of prior year	$	6,880		$	6,248
Service cost		80			89
Interest cost		405			459
Actuarial (gain) loss		(133	)		779
Plan curtailment gains		(1,149	)		—
Benefits paid		(541	)		(695	)

Projected benefit obligation at end of year	$	5,542		$	6,880

Funded status	$	(5,542	)	$	(6,880	)
Unrecognized net loss		2,561			2,688

Net amount recognized	$	(2,981	)	$	(4,192	)

The curtailment gain was the result of eliminating postretirement medical benefits pursuant to two collective bargaining agreements which were amended during 2003.

The accumulated postretirement benefit obligations at December 31, 2003 and 2002 were determined using a weighted average discount rate of 6.25% and 6.75%, respectively. The rate of increase in the costs of covered health care benefits is assumed to be 8.0% in 2003, decreasing 0.5% each year to 4.5% 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, 2003 by approximately $672 thousand and would increase net periodic postretirement benefit cost by approximately $66 thousand for the year ended December 31, 2003.

Retirement Savings Plan (401(k) Plan)

The Company sponsors and maintains a 401(k) retirement savings plan that permits participants to make contributions by salary reductions pursuant to Section 401(k) of the Internal Revenue Code. The Company matches 50% of contributions up to a maximum of 6% of compensation as defined by the 401(k) Plan. During the years ended December 31, 2003, 2002, and 2001, the Company recorded matching expense of approximately $4.0 million, $3.9 million, and $3.5 million, respectively, related to the 401(k) Plan.

11.

Income Taxes

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 (benefit) provision for income taxes for the years ended December 31, 2003, 2002 and 2001 consisted of the following (in thousands):


	2003			2002			2001
Current:
Federal	$	(6,248	)	$	(16,379	)	$	(24,418	)
State		780			780			1,094

		(5,468	)		(15,599	)		(23,324	)
Deferred		(9,631	)		5,976			15,811

	$	(15,099	)	$	(9,623	)	$	(7,513	)

The principal differences between the federal statutory tax rate and the provision for income taxes for the years ended December 31, 2003, 2001 and 2000 are as follows:


	2003		2002		2001
Federal statutory tax rate	(35.0	)%	(35.0	)%	(35.0	)%
State taxes, net of federal tax benefit	(2.9	)	(2.9	)	(2.4	)
Other	2.2		3.3		3.7

Effective tax rate	(35.7	)%	(34.6	)%	(33.7	)%

Significant components of the Company’s deferred income tax assets and liabilities as of December 31, 2003 and 2002 are summarized as follows (in thousands):


	2003			2002
Deferred income tax assets:
Deferred employee benefits	$	283		$	169
Postretirement benefits other than pension		2,065			659
Postemployment benefits		6,523			9,181
Accounts receivable		861			1,180
Insurance		1,619			1,545
Tax loss carryforwards and credits		37,387			13,792
Inventories		2,495			2,377
Other		2,301			4,499

Total deferred income tax assets		53,534			33,402

Deferred income tax liabilities:
Depreciation and amortization		(90,407	)		(78,171	)
Asset revaluation		(3,846	)		(3,846	)
Losses on contractual sales commitments		(4,446	)		(4,446	)
Other		—			(781	)

Total deferred income tax liabilities		(98,699	)		(87,244	)

Valuation allowance		(6,298	)		(5,543	)

	$	(51,463	)	$	(59,385	)

At December 31, 2003, the tax affect of the Company’s federal net operating losses was $21.2 million. The federal loss carryforwards will expire in 2023. The tax affect of the Company’s state net operating losses was $13.3 million and $11.0 million at December 31, 2003 and 2002, respectively, which will expire in varying amounts between 2004 and 2023. The Company has a

valuation allowance of $4.0 million at December 31, 2003 which increased $700 thousand from $3.3 million at December 31, 2002, for estimated future impairment related to the state net operating losses. The Company also has state tax credit carryforwards of approximately $2.9 million and $2.8 million at December 31, 2003 and 2002, respectively, which will expire in varying amounts between 2004 and 2018. The Company recorded a valuation allowance of $2.3 million at December 31, 2003 and 2002 for estimated future impairment related to the state tax credit carryforwards.

12.

Quarterly Financial Data (Unaudited)

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


	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
2003:
Sales	$	252,902		$	246,843		$	253,013		$	239,462
Gross profit		46,556			42,771			44,621			38,923
Net loss		(7,128	)		(9,835	)		(1,147	)		(8,925	)
Diluted loss per common share	$	(0.26	)	$	(0.35	)	$	(0.04	)	$	(0.32	)
2002:
Sales	$	218,902		$	229,122		$	236,729		$	252,026
Gross profit		43,409			44,236			38,204			42,975
Net income (loss)		499			(581	)		(4,489	)		(13,349	)
Diluted income (loss) per common share	$	0.02		$	(0.02	)	$	(0.16	)	$	(0.48	)

13.

Guarantor Condensed Consolidating Financial Statements

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

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE SHEETS

(In thousands)


	As of December 31, 2003
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	84,303		$	—		$	1,248		$	—		$	85,551
Intercompany funding		(15,638	)		26,415			(10,777	)		—			—
Receivables, net of allowances		—			88,937			4,955			—			93,892
Intercompany accounts receivable		—			77			212			(289	)		—
Inventories		—			83,941			3,667			—			87,608
Refundable income taxes		250			—			—			—			250
Current deferred tax asset		7,457			—			—			—			7,457
Other current assets		3,942			8,034			485			—			12,461

Total current assets		80,314			207,404			(210	)		(289	)		287,219

PROPERTY, PLANT, AND EQUIPMENT		12,101			752,601			21,444			—			786,146
Less accumulated depreciation		(7,601	)		(358,851	)		(8,922	)		—			(375,374	)

Property, plant, and equipment, net		4,500			393,750			12,522			—			410,772

INVESTMENT IN CONSOLIDATED SUBSIDARIES		572,865			131,108			—			(703,973	)		—

GOODWILL		—			179,628			3,502			—			183,130

INVESTMENT IN UNCONSOLIDATED AFFILIATES		54,623			—			—			—			54,623

OTHER ASSETS		14,429			10,332			40			—			24,801

	$	726,731		$	922,222		$	15,854		$	(704,262	)	$	960,545


LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Current maturities of debt	$	75		$	31		$	—		$	—		$	106
Accounts payable		15,820			54,890			4,303			—			75,013
Intercompany accounts payable		—			212			77			(289	)		—
Accrued interest		8,758			74			—			—			8,832
Accrued compensation		738			8,870			192			—			9,800
Accrued pension		—			—			—			—			—
Other accrued liabilities		10,551			19,756			1,000			—			31,307

Total current liabilities		35,942			83,833			5,572			(289	)		125,058

SENIOR CREDIT FACILITY		—			—			—			—			—

OTHER LONG-TERM DEBT, less current maturities		522,747			8,254			—			—			531,001

DEFERRED INCOME TAXES		45,229			12,242			1,449			—			58,920

PENSION LIABILITY		1,366			17,266			—			—			18,632

DEFERRED COMPENSATION		1,469			53			—			—			1,522

OTHER LIABILITIES		1,222			3,809			—			—			5,031

MINORITY INTEREST		—			—			—			504			504

SHAREHOLDERS’ EQUITY
Common stock		2,708			772			523			(1,181	)		2,822
Additional paid-in capital		189,676			601,239			7,922			(613,806	)		185,031
Unearned compensation		(1,865	)		—			—			—			(1,865	)
Retained (deficit) earnings		(52,519	)		194,754			(214	)		(89,490	)		52,531
Accumulated other comprehensive (loss) income		(19,244	)		—			602			—			(18,642	)

		118,756			796,765			8,833			(704,477	)		219,877

	$	726,731		$	922,222		$	15,854		$	(704,262	)	$	960,545

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE SHEETS

(In thousands)


	As of December 31, 2002
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	33,544		$	—		$	770		$	—		$	34,314
Intercompany funding		80,974			(71,550	)		(9,424	)		—			—
Receivables, net of allowances		—			100,011			5,658			—			105,669
Intercompany accounts receivable		—			459			135			(594	)		—
Inventories		—			102,698			4,946			—			107,644
Refundable income taxes		13,333			149			199			—			13,681
Current deferred tax asset		6,364			—			—			—			6,364
Other current assets		2,414			5,497			1,067			—			8,978

Total current assets		136,629			137,264			3,351			(594	)		276,650

PROPERTY, PLANT, AND EQUIPMENT		11,660			782,734			29,265			—			823,659
Less accumulated depreciation		(6,220	)		(357,259	)		(16,785	)		—			(380,264	)

Property, plant, and equipment, net		5,440			425,475			12,480			—			443,395

INVESTMENT IN CONSOLIDATED SUBSIDARIES		594,464			129,849			—			(724,313	)		—

GOODWILL		—			177,578			2,967			—			180,545

INVESTMENT IN UNCONSOLIDATED AFFILIATES		52,130			700			—			—			52,830

OTHER ASSETS		27,479			9,294			140			—			36,913

	$	816,142		$	880,160		$	18,938		$	(724,907	)	$	990,333


LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Current maturities of debt	$	70		$	—		$	—		$	—		$	70
Accounts payable		20,162			36,320			3,545			—			60,027
Intercompany accounts payable		—			135			459			(594	)		—
Accrued interest		8,677			72			—			—			8,749
Accrued compensation		652			11,919			270			—			12,841
Accrued pension		7,279			4,000			—			—			11,279
Other accrued liabilities		6,855			27,345			2,666			—			36,866

Total current liabilities		43,695			79,791			6,940			(594	)		129,832

SENIOR CREDIT FACILITY		—			—			—			—			—

OTHER LONG-TERM DEBT, less current maturities		524,515			8,200			—			—			532,715

DEFERRED INCOME TAXES		52,113			12,243			1,393			—			65,749

PENSION LIABILITY		13,572			—			—			—			13,572

DEFERRED COMPENSATION		1,447			53			—			—			1,500

OTHER LIABILITIES		—			4,584			—			—			4,584

MINORITY INTEREST		—			—			—			700			700

SHAREHOLDERS’ EQUITY
Common stock		2,730			897			523			(1,359	)		2,791
Additional paid-in capital		208,036			600,379			7,922			(633,968	)		182,369
Unearned compensation		(145	)		—			—			—			(145	)
Retained (deficit) earnings		(7,508	)		174,013			2,747			(89,686	)		79,566
Accumulated other comprehensive loss		(22,313	)		—			(587	)		—			(22,900	)

		180,800			775,289			10,605			(725,013	)		241,681

	$	816,142		$	880,160		$	18,938		$	(724,907	)	$	990,333

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)


	For the Year Ended December 31, 2003
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
SALES	$	—		$	1,170,003		$	36,871		$	(214,654	)	$	992,220
COST OF SALES		—			1,000,039			33,964			(214,654	)		819,349

Gross profit		—			169,964			2,907			—			172,871
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		24,517			134,054			5,359			—			163,930
RESTRUCTURING AND IMPAIRMENT COSTS		—			15,142			—			—			15,142

(Loss) income from operations		(24,517	)		20,768			(2,452	)		—			(6,201	)
OTHER (EXPENSE) INCOME:
Interest expense		(43,581	)		(311	)		(422	)		409			(43,905	)
Interest income		1,436			(2	)		1			(409	)		1,026
Write-off of deferred debt costs		(1,812	)		—			—			—			(1,812	)
Equity in income of unconsolidated affiliates		8,354			—			—			—			8,354
Other, net		—			286			(78	)		—			208

		(35,603	)		(27	)		(499	)		—			(36,129	)

(LOSS) INCOME BEFORE MINORITY INTERESTS AND INCOME TAXES		(60,120	)		20,741			(2,951	)		—			(42,330	)
MINORITY INTEREST IN LOSSES		—			—			—			196			196
BENEFIT (PROVISION) FOR INCOME TAXES		15,109			—			(10	)		—			15,099

NET (LOSS) INCOME	$	(45,011	)	$	20,741		$	(2,961	)	$	196		$	(27,035	)

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)


	For the Year Ended December 31, 2002
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
SALES	$	—		$	1,091,360		$	26,289		$	(180,870	)	$	936,779
COST OF SALES		—			926,566			22,259			(180,870	)		767,955

Gross profit		—			164,794			4,030			—			168,824
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		19,105			125,557			5,382			—			150,044
RESTRUCTURING AND IMPAIRMENT COSTS		—			12,713			—			—			12,713

(Loss) income from operations		(19,105	)		26,524			(1,352	)		—			6,067
OTHER (EXPENSE) INCOME:
Interest expense		(37,772	)		(326	)		(401	)		384			(38,115	)
Interest income		2,024			7			5			(384	)		1,652
Equity in income (loss) of unconsolidated affiliates		2,652			(164	)		—			—			2,488
Other, net		—			258			(128	)		—			130

		(33,096	)		(225	)		(524	)		—			(33,845	)

(LOSS) INCOME BEFORE MINORITY INTERESTS AND INCOME TAXES		(52,201	)		26,299			(1,876	)		—			(27,778	)
MINORITY INTEREST IN LOSSES		—			—			—			235			235
BENEFIT FOR INCOME TAXES		9,623			—			—			—			9,623

NET (LOSS) INCOME	$	(42,578	)	$	26,299		$	(1,876	)	$	235		$	(17,920	)

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)


	For the Year Ended December 31, 2001
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
SALES	$	—		$	1,031,012		$	22,453		$	(153,209	)	$	900,256
COST OF SALES		(7,308	)		862,066			18,469			(153,209	)		720,018

Gross profit		7,308			168,946			3,984			—			180,238
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		14,386			126,910			5,638			—			146,934
RESTRUCTURING AND IMPAIRMENT COSTS		—			7,083			—			—			7,083

Operating (loss) income		(7,078	)		34,953			(1,654	)		—			26,221
OTHER (EXPENSE) INCOME:
Interest expense		(40,773	)		(857	)		(370	)		847			(41,153	)
Interest income		1,773			42			18			(847	)		986
Loss on extinguishment of debt		(4,305	)		—			—			—			(4,305	)
Equity in loss of unconsolidated affiliates		(2,525	)		(85	)		—			—			(2,610	)
Other, net		—			(1,366	)		(68	)		—			(1,434	)

		(45,830	)		(2,266	)		(420	)		—			(48,516	)

(LOSS) INCOME BEFORE MINORITY INTERESTS AND INCOME TAXES		(52,908	)		32,687			(2,074	)		—			(22,295	)
MINORITY INTEREST IN LOSSES		—			—			—			180			180
BENEFIT FOR INCOME TAXES		7,513			—			—			—			7,513

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

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWS

(In thousands)


	For the Year Ended December 31, 2003
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	38,223		$	15,615		$	1,544		$	—	$	55,382

Investing activities:
Purchases of property, plant and equipment		(1,724	)		(17,009	)		(1,273	)		—		(20,006	)
Acquisitions of businesses, net of cash acquired		—			(695	)		—			—		(695	)
Proceeds from disposal of property, plant and equipment		—			2,114			207			—		2,321

Net cash used in investing activities		(1,724	)		(15,590	)		(1,066	)		—		(18,380	)

Financing activities:
Repayments of short and long-term debt		(70	)		(25	)		—			—		(95	)
Proceeds from swap agreement unwind		15,950			—			—			—		15,950
Issuances of stock, net of forfeitures		594			—			—			—		594
Deferred debt costs		(2,214	)		—			—			—		(2,214	)

Net cash provided by (used in) financing activities		14,260			(25	)		—			—		14,235

Net increase in cash and cash equivalents		50,759			—			478			—		51,237
Cash and cash equivalents at beginning of period		33,544			—			770			—		34,314

Cash and cash equivalents at end of period	$	84,303		$	—		$	1,248		$	—	$	85,551

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWS

(In thousands)


	For the Year Ended December 31, 2002
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations		Consolidated
Net cash (used in) provided by operating activities	$	(24,519	)	$	86,505		$	1,214		$	—	$	63,200

Investing activities:
Purchases of property, plant and equipment		(1,687	)		(20,177	)		(678	)		—		(22,542	)
Acquisitions of businesses, net of cash acquired		—			(69,432	)		(115	)		—		(69,547	)
Proceeds from disposal of property, plant and equipment		—			2,145			—			—		2,145
Investment in unconsolidated affiliates		—			(200	)		—			—		(200	)
Other, net		(819	)		775			(186	)		—		(230	)

Net cash used in investing activities		(2,506	)		(86,889	)		(979	)		—		(90,374	)

Financing activities:
Proceeds from senior credit facility		38,000			—			—			—		38,000
Repayments of senior credit facility		(38,000	)		—			—			—		(38,000	)
Repayments of short and long-term debt		(6,645	)		(48	)		—			—		(6,693	)
Proceeds from swap agreement unwind		6,163			—			—			—		6,163
Dividends paid		(833	)		—			—			—		(833	)
Issuances of stock, net of forfeitures		135			—			—			—		135
Deferred debt costs		(1,528	)		—			—			—		(1,528	)

Net cash used in financing activities		(2,708	)		(48	)		—			—		(2,756	)

Net (decrease) increase in cash and cash equivalents		(29,733	)		(432	)		235			—		(29,930	)
Cash and cash equivalents at beginning of period		63,277			432			535			—		64,244

Cash and cash equivalents at end of period	$	33,544		$	—		$	770		$	—	$	34,314

CARAUSTAR INDUSTRIES, INC. AND SUBSIDARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENTS OF CASH FLOWS

(In thousands)


	For the Year Ended December 31, 2001
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	30,841		$	25,977		$	385		$	—	$	57,203

Investing activities:
Purchases of property, plant and equipment		(1,471	)		(25,399	)		(1,189	)		—		(28,059	)
Acquisitions of businesses, net of cash acquired		(34	)		—			—			—		(34	)
Proceeds from disposal of property, plant, and equipment		—			267			—			—		267
Other, net		74			49			313			—		436

Net cash used in investing activities		(1,431	)		(25,083	)		(876	)		—		(27,390	)

Financing activities:
Proceeds from note issuance		291,200			—			—			—		291,200
Proceeds from senior credit facility		18,000			—			—			—		18,000
Repayments of senior credit facility		(212,000	)		—			—			—		(212,000	)
Repayments of other short and long –term debt		(66,277	)		(833	)		—			—		(67,110	)
Proceeds from swap agreement unwind		9,093			—			—			—		9,093
7.74% senior notes prepayment penalty		(3,565	)		—			—			—		(3,565	)
Dividends paid		(8,870	)		—			—			—		(8,870	)
Deferred debt costs		(1,052	)		(165	)		—			—		(1,217	)

Net cash provided by (used in) financing activities		26,529			(998	)		—			—		25,531

Net increase (decrease) in cash and cash equivalents		55,939			(104	)		(491	)		—		55,344
Cash and cash equivalents at beginning of period		7,338			536			1,026			—		8,900

Cash and cash equivalents at end of period	$	63,277		$	432		$	535		$	—	$	64,244

14.

Segment Information

The Company operates principally in three business segments organized by products. The paperboard segment consists of facilities that manufacture 100% recycled uncoated and clay-coated paperboard and facilities that collect recycled paper and broker recycled paper and other paper rolls. The tube, core, and composite container segment is principally made up of facilities that produce spiral and convolute-wound tubes, cores, and composite cans. The carton and custom packaging segment consists of facilities that produce printed and unprinted folding cartons and set-up boxes and facilities that provide contract manufacturing and contract packaging services. Intersegment sales are recorded at prices which approximate market prices. Sales to external customers located in foreign countries accounted for approximately 5.6%, 6.6% and 7.3% of the Company’s sales for 2003, 2002 and 2001, respectively.

Operating results include 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; deferred tax assets; property, plant and equipment; and investments in unconsolidated affiliates.

The following table presents certain business segment information as of and for the years ended December 31, 2003, 2002 and 2001 (in thousands):


	2003			2002			2001
Sales (aggregate):
Paperboard	$	499,525		$	471,780		$	448,896
Tube, core, and composite container		384,572			297,564			265,985
Carton and custom packaging		291,151			321,386			325,743

Total	$	1,175,248		$	1,090,730		$	1,040,624

Sales (intersegment):
Paperboard	$	177,538		$	148,763		$	135,854
Tube, core, and composite container		4,428			4,347			3,921
Carton and custom packaging		1,062			841			593

Total	$	183,028		$	153,951		$	140,368

Sales (external customers):
Paperboard	$	321,987		$	323,017		$	313,042
Tube, core, and composite container		380,144			293,217			262,064
Carton and custom packaging		290,089			320,545			325,150

Total	$	992,220		$	936,779		$	900,256

Income (loss) from operations:
Paperboard ^(A)	$	20,013		$	12,268		$	31,365
Tube, core, and composite container ^(B)		8,688			11,383			7,016
Carton and custom packaging ^(C)		(12,758	)		973			2,324

		15,943			24,624			40,705
Corporate expense		(22,144	)		(18,557	)		(14,484	)

(Loss) income from operations		(6,201	)		6,067			26,221
Interest expense		(43,905	)		(38,115	)		(41,153	)
Interest income		1,026			1,652			986
Write-off of deferred debt costs		(1,812	)		—			—
Loss on extinguishment of debt		—			—			(4,305	)
Equity in income (loss) of unconsolidated affiliates		8,354			2,488			(2,610	)
Other, net		208			130			(1,434	)

Loss before income taxes and minority interest		(42,330	)		(27,778	)		(22,295	)
Minority interest in losses		196			235			180
Benefit for income taxes		(15,099	)		(9,623	)		(7,513	)

Net loss	$	(27,035	)	$	(17,920	)	$	(14,602	)

Identifiable assets:
Paperboard	$	376,444		$	410,534		$	400,035
Tube, core, and composite container		204,124			202,441			134,462
Carton and custom packaging		212,035			236,796			252,207
Corporate		167,942			140,562			174,277

Total	$	960,545		$	990,333		$	960,981

Depreciation and amortization:
Paperboard	$	16,079		$	29,272		$	35,916
Tube, core, and composite container		5,184			6,723			7,537
Carton and custom packaging		6,821			13,456			16,827
Corporate		2,907			4,795			4,060

Total	$	30,991		$	54,246		$	64,340

Purchases of property, plant and equipment, excluding acquisitions of businesses:
Paperboard	$	10,621		$	13,992		$	15,334
Tube, core, and composite container		3,698			2,347			6,536
Carton and custom packaging		3,963			4,516			4,718
Corporate		1,724			1,687			1,471

Total	$	20,006		$	22,542		$	28,059

^(A)

Results for 2003, 2002 and 2001 include charges to operations for restructuring and impairment costs of $7.2 million, $10.4 million and $4.4 million, respectively, related to closing and consolidating operations within the paperboard segment. Results for 2001 also include a $7.1 million reduction in reserves related to expiring unfavorable supply contracts at the Sprague paperboard mill.

^(B)	Results for 2003 include charges to operations for asset impairment costs of $1.2 million related to the decline in value of land and buildings that were permanently closed in conjunction with the Company’s restructuring activities within the tube, core and composite container segment.

^(C)	Results for 2003, 2002 and 2001 include charges to operations for restructuring and impairment costs of $6.7 million, $2.4 million and $2.6 million, respectively, related to closing and consolidating operation within the carton and custom packaging segment.

15.

Restructuring and Impairment Costs

2003 Restructuring Initiatives

In March 2003, the Company announced the permanent closure of its Buffalo Paperboard mill located in Lockport, New York. The Company recorded a charge of approximately $4.4 million in connection with this closure. The $4.4 million charge included a $3.2 million impairment charge for assets, a $670 thousand accrual for severance and other termination benefits, and a $607 thousand accrual for other exit costs. During 2003, $670 thousand of the accrual was paid for severance and other termination benefits, $604 thousand was paid for other exit costs and an accrual of $3 thousand remained at December 31, 2003 for other exit costs. As of December 31, 2003 there were no employees remaining at the mill. The Company is currently marketing the property for sale.

In June 2003, the Company initiated a plan to permanently close its Ashland, Ohio carton facility. As mentioned below, the Company downsized this facility in December 2002; however, due to severe margin pressure and excess industry capacity, the Company decided to close the facility. During 2003, the Company recorded a charge of approximately $6.7 million, which includes a $4.1 million impairment charge for assets, a $1.2 million accrual for severance and other termination benefits and an accrual of $1.4 million for other exit costs. During 2003, $937 thousand of the accrual paid for severance and other termination benefits and almost all the other exit costs had been paid leaving an accrual of $302 thousand for severance and other termination benefits and $8 thousand for other exit costs. Substantially all of the Ashland carton sales will be transferred to the Company’s other carton manufacturing facilities.

In December 2003, the Company recorded a $986 thousand asset impairment charge related to closing the Hendersonville tube and core facility located in Hendersonville, North Carolina and a $223 thousand asset impairment charge related to closing the Jacksonville tube and core facility located in Jacksonville, Florida. The facilities were acquired as a part of the Smurfit Industrial Packaging Division. The Company previously announced the closure of these facilities. These impairment charges represent the decline in estimated fair value of the real estate held for sale subsequent to the acquisition.

In December 2003, the Company recorded a $609 thousand asset impairment charge related to the closure of the Halifax Recycling plant located in Roanoke Rapids, North Carolina. This facility was closed along with the Halifax paperboard mill in December 2002, but there were no significant restructuring or impairment charges related to this closure until December 2003.

For restructuring activities initiated during 2003, the paperboard segment recorded $5.0 million of restructuring and impairment costs. The estimated total restructuring and impairment costs related to these initiatives is $5.1 million. The carton and custom packaging segment recorded $6.7 million of restructuring and impairment costs. The estimated total restructuring and impairment costs related to these initiatives is $7.6 million.

2002 Restructuring Initiatives

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. During 2003, $197 thousand of other exit costs were paid at the Chicago paperboard mill and an additional $82 thousand was accrued for asset impairments at Camden.

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 foreseeable conditions of paperboard demand. In connection with this plan, the Company recorded a 2002 pretax charge to operations of approximately $3.4 million. The $3.4 million charge included a $3.0 million impairment charge and a $370 thousand accrual for other exit costs. During 2003, $322 thousand of the accrual was paid for other exit costs and an accrual of $47 thousand remained. In addition, $72 thousand was expensed

and paid for severance and other termination benefits incurred and a reduction of expense of $581 thousand was recorded as a result of a revised estimate of impaired assets. As of December 31, 2003, there were no employees remaining at the mill. The remaining other exit costs are expected to be paid by June 30, 2004. The Company is currently marketing the property for sale.

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 a $2.4 million impairment charge for assets and a $3.6 million accrual for other exit costs. A substantial portion of the other exit costs is related to a real estate lease for which no future economic benefit will be derived. During 2003, the Company recorded a pretax charge to operations of $2.2 million. The $2.2 million charge included a $914 thousand impairment charge for assets, a $113 thousand charge for severance and other termination benefits and a $1.1 million accrual for other exit costs. As of December 31, 2003 the $113 thousand accrual had been paid for severance and other termination benefits and $1.0 million had been paid for other exit costs leaving an accrual of $3.7 million related to other exit costs. The Carolina Converting, Inc. facility ceased operations in the first quarter of 2003. As of December 31, 2003, two employees remained to wind down the business, dismantle the machinery and equipment and clean the facility. The other exit costs will be paid through December 2006, the end of the real estate lease. The Company will complete the exit plan upon fulfilling its obligations under the real estate lease.

Also 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 impairment charge of $1.2 million for assets, a $494 thousand accrual for severance and other 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. During 2003, all costs were paid related to severance and other termination benefits and a $35 thousand remaining over accrual for other exit costs was reclassified to other exit costs related to the 2003 Ashland closure. As of December 31, 2003, there was no liability remaining related to the 2002 restructuring of the Ashland carton plant.

2001 Restructuring Initiatives

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 $4.4 million. The $4.4 million charge included a $2.2 million noncash asset impairment write-down of fixed assets to estimated net realizable value and a $1.2 million accrual for severance and termination benefits for 16 salaried and 59 hourly employees terminated in connection with this plan as well as a $989 thousand accrual for other exit costs. No employees remained at the mill at the end of the year. During 2003 and additional $477 thousand was accrued for other exit costs at the Chicago paperboard mill. The remaining other exit costs are expected to be paid by September 30, 2004. The Company has completed the exit plan with the exception of the sale of the property. The property is being actively marketed for sale at a price that is reasonable in relation to its fair value. The mill closure did not have a material impact on the Company’s operating performance.

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 $2.6 million. The $2.6 million charge included a $1.8 million noncash asset impairment write-down of fixed assets to estimated net realizable value and a $464 thousand accrual for severance and termination benefits for 5 salaried and 31 hourly employees terminated in connection with this plan as well as a $422 thousand accrual for other exit costs. All exit costs were paid as of December 31, 2001, and the exit plan was completed.

The following is a summary of restructuring and other costs and the restructuring liability for the years ended December 31, 2003, 2002 and 2001(in thousands):


	Asset Impairment Charge		Severance and Other Termination Benefits Costs			Other Exit Costs			Restructuring Liability Total			Total Restructuring Costs and Asset Impairment Charge⁽¹⁾
Liability balance, December 31, 2000 ⁽²⁾			$	178		$	622		$	800

2001 costs	$	3,987		1,685			1,411			3,096		$	7,083

Expenditures				(1,863	)		(1,567	)		(3,430	)

Liability balance, December 31, 2001				—			466			466

2002 costs	$	7,591		494			4,628			5,122		$	12,713

Expenditures				—			(289	)		(289	)

Liability balance, December 31, 2002				494			4,805			5,299

2003 costs	$	9,498		2,094			3,550			5,644		$	15,142

Expenditures and adjustment				(2,286	)		(4,125	)		(6,411	)

Liability balance, December 31, 2003			$	302		$	4,230		$	4,532

⁽¹⁾	Asset impairment charge, severance and other termination benefit costs and other exit costs are aggregated and reported as restructuring and impairment costs on the statement of operations.

⁽²⁾

The liability balance at December 31, 2000 represents accrued restructuring costs related to the Camden paperboard mill, which was closed in 2000. During 2001, all of the remaining severance and termination benefits were paid and $548 thousand of the other exit costs were paid, leaving a $74 thousand accrual as of December 31, 2002. During 2002, the remaining other exist costs were paid related to the Camden paperboard mill.

16.

Disclosures About Fair Value of Financial Instruments

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 (in thousands).


	Fair Value		Carrying Amount⁽¹⁾
9 7/8 % senior subordinated notes	$	306,731	$	294,510
7 1/4 % senior notes		28,420		26,068
7 3/8 % senior notes		202,188		201,779

	$	537,339	$	522,357

⁽¹⁾	The carrying amount excludes the $1.1 million adjustment for the fair value of the interest rate swap agreements discussed in Note 6.

17.

Related Party

A director and former Chairman of the Board of Directors is a shareholder in the firm of Robinson, Bradshaw & Hinson, P.A., the Company’s principal outside legal counsel which performed services for the company during the last three years. The amount of fees paid were $1.2 million, $1.1 million, and $1.9 million for the years ended December 31, 2003, 2002 and 2001, respectively.

The Company sold $18.4 million, $16.0 million and $14.0 million for the years ended December 31, 2003, 2002 and 2001, respectively, to Standard Gypsum, a 50% owned joint venture. There was no account receivable due from Standard Gypsum as of December 31, 2003. Accounts receivable due from Standard Gypsum were $45 thousand as of December 31, 2002.

The Company sold $7.8 million, $3.2 million and $1.0 million for the years ended December 31, 2003, 2002 and 2001, respectively, to Premier Boxboard, a 50% owned joint venture. Accounts receivable due from Premier Boxboard were $750 thousand and $183 thousand as of December 31, 2003 and 2002, respectively. The Company purchased paperboard totaling $3.8 million, $3.0 million and $2.6 million for the years ended December 31, 2003, 2002 and 2001, respectively, from Premier Boxboard. Payables due to Premier Boxboard were $437 thousand and $176 thousand as of December 31, 2003 and 2002, respectively.

The Company performs certain treasury functions on behalf of Premier Boxboard. As a result, the Company had a receivable due from Premier Boxboard of $500 thousand as of December 31, 2003 and a payable due to Premier Boxboard of $4.7 million as of December 31, 2002.

18.

Subsequent Events

On January 13, 2004, the Company announced the closure of the Cedartown paperboard mill located in Cedartown, Georgia. All of the paperboard produced at this facility had been consumed internally by the Company’s converting operations. The paperboard production will be transitioned to the Company’s other paperboard mills. This closure is not expected to have a significant impact on the Company’s operations and is expected to improve operating results and capacity utilization.

In March 2004, the Company unwound one of its two $50.0 million interest rate swap agreements related to the 9 7/8% senior subordinated notes and received approximately $400 thousand from the bank counter-party. The $400 thousand gain will be recorded as a component of debt and will be accreted to interest expense over the remaining life of the notes.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Caraustar Industries, Inc.

Austell, Georgia

We have audited the accompanying consolidated balance sheets of Caraustar Industries, Inc. and subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the 2003 and 2002 financial statements of Standard Gypsum LP, the Company’s investment in which is accounted for by use of the equity method. The Company’s equity of $9,107,000 and $9,605,000 in Standard Gypsum’s net assets at December 31, 2003 and 2002, respectively and in $6,799,000 and $8,182,000 in that company’s net income for the years ended December 31, 2003 and 2002, respectively, are included in the accompanying consolidated financial statements. The financial statements of Standard Gypsum were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for such company is based solely on the report of such other auditors.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (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 and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Caraustar Industries, Inc. and subsidiaries as of December 31, 2003 and 2002 and the results of their operations and their cash flows for the three years ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for costs associated with exit or disposal activities to conform to Statement of Financial Accounting Standards No. 146 (“SFAS 146”) “Accounting for Costs Associated with Exit or Disposal Activities”, which was adopted by the Company as of January 1, 2003.

As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142 (“SFAS 142”) “Goodwill and Other Intangible Assets”, which was adopted by the Company as of January 1, 2002.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

March 11, 2004

REPORT OF INDEPENDENT AUDITORS

The Partners

Standard Gypsum LP

We have audited the accompanying balance sheets of Standard Gypsum LP (“Standard”) as of January 3, 2004 and December 28, 2002, and the related statements of operations, partners’ equity and cash flows for the years then ended. These financial statements are the responsibility of Standard’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Standard as of December 29, 2001, and for the year then ended were audited by other auditors who have ceased operations and whose report dated February 1, 2002 expressed an unqualified opinion on those financial statements before the reclassification adjustments described in Note 2.

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 Standard Gypsum LP as of January 3, 2004 and December 28, 2002 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

As discussed above, the financial statements of Standard as of December 29, 2001, and for the year then ended were audited by other auditors who have ceased operations. As described in Note 2, these financial statements have been revised. We audited the reclassification adjustments described in Note 2 that were applied to revise the 2001 financial statements. In our opinion, such reclassification adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of Standard other than with respect to such reclassification adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.

/s/ ERNST & YOUNG LLP

Austin, Texas

February 6, 2004

ITEM 15.

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

a. Documents filed as part of the Report

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


Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2003 and 2002		33

Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001		34

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001		35

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001		36

Notes to Consolidated Financial Statements		37

Report of Independent Public Accountants		75

Schedule II — Valuation and Qualifying Accounts and Reserves

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 or 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.

b. Reports on Form 8-K.

We furnished three current reports during the quarter ended December 31, 2003.

The first report, furnished on October 8, 2003, included excerpts from a management presentation.

The second report, furnished on November 4, 2003, included the contents of our press release announcing our financial results for the third quarter of 2003.

The third report, furnished on November 19, 2003, included excerpts from a management presentation.

SCHEDULE II

CARAUSTAR INDUSTRIES, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

For the Years Ended December 31, 2003, 2002 and 2001

(In Thousands)


			Additions		Deductions
	Balance at Beginning of Year		Charged to Costs and Expenses		Write-offs and Deductions Allowed			Balance at End of Year
December 31, 2003
Allowances deducted from accounts receivable
Allowance for doubtful accounts	$	4,139	$	3,997	$	(3,901	)^(a)	$	4,235
Allowance for sales returns and discounts	$	1,247	$	7,041	$	(7,221	)^(b)	$	1,067

Total	$	5,386	$	11,038	$	(11,122	)	$	5,302
December 31, 2002
Allowances deducted from accounts receivable
Allowance for doubtful accounts	$	3,512	$	3,654	$	(3,027	)^(a)	$	4,139
Allowance for sales returns and discounts	$	738	$	6,428	$	(5,919	)^(b)	$	1,247

Total	$	4,250	$	10,082	$	(8,946	)	$	5,386
December 31, 2001
Allowances deducted from accounts receivable
Allowance for doubtful accounts	$	2,758	$	3,786	$	(3,032	)^(a)	$	3,512
Allowance for sales returns and discounts	$	574	$	5,305	$	(5,141	)^(b)	$	738

Total	$	3,332	$	9,091	$	(8,173	)	$	4,250

^(a)	Primarily uncollectible accounts receivables written-off.

^(b)	Sales discounts and returns allowed.

SIGNATURES

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


CARAUSTAR INDUSTRIES, INC.

By:		/s/ Ronald J. Domanico
		Ronald J. Domanico
		Vice President and Chief Financial Officer

Date: January 14, 2005

EXHIBIT INDEX


Exhibit No.		Description

3.01	—	Amended and Restated Articles of Incorporation of the Company (Incorporated by reference — Exhibit 3.01 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646])

3.02	—	Third Amended and Restated Bylaws of the Company (Incorporated by reference — Exhibit 3.02 to Annual Report for 2001 on Form 10-K [SEC File No. 0-20646])

4.01	—	Specimen Common Stock Certificate (Incorporated by reference — Exhibit 4.01 to Registration Statement on Form S-1 [SEC File No. 33-50582])

4.02	—	Articles 3 and 4 of the Company’s Amended and Restated Articles of Incorporation (included in Exhibit 3.01)

4.03	—	Article II of the Company’s Third Amended and Restated Bylaws (included in Exhibit 3.02)

4.04	—	Amended and Restated Rights Agreement, dated as of May 24, 1999, between Caraustar Industries, Inc. and The Bank of New York as Rights Agent (Incorporated by reference Exhibit 10.1 to current report on Form 8-K dated June 1, 1999 [SEC File No. 020646])

4.05	—	Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee, regarding The Company’s 7 3/8% Notes due 2009 (Incorporated by reference — Exhibit 4.05 to report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646])

4.06	—	First Supplemental Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee (Incorporated by reference — Exhibit 4.06 to report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646])

4.07	—	Second Supplemental Indenture, dated as of March 29, 2001, between the Company, the Subsidiary Guarantors and The Bank of New York, as Trustee, regarding the Company’s 7 3/8% Notes due 2009 (Incorporated by reference — Exhibit 4.07 to report on Form 10-K for the year ended December 31, 2000 [SEC File No. 0-20646])

10.01	—	Indenture, dated as of March 29, 2001, between the Company, the Guarantors and The Bank of New York, as Trustee, regarding the Company’s 7 1/4% Senior Notes due 2010 (Incorporated by reference — Exhibit 10.01 to report on Form 10-K for the year ended December 31, 2000 [SEC File No. 0-20646])

10.02	—	Indenture, dated as of March 29, 2001, between the Company, the Guarantors and The Bank of New York, as Trustee, regarding the Company’s 9 7/8% Senior Subordinated Notes due 2011 (Incorporated by reference — Exhibit 10.02 to report on Form 10-K for the year ended December 31, 2000 [SEC File No. 0-20646])

10.03*	—	Employment Agreement, dated December 31, 1990, between the Company and Thomas V. Brown (Incorporated by reference — Exhibit 10.06 to Registration Statement on Form S-1 [SEC File No. 33-50582])

10.04*	—	Employment Agreement, dated February 13, 2002, between the Company and Michael J. Keough (Incorporated by reference – Exhibit 10.26 to report on Form 10-Q for the quarter ended September 30, 2002 [SEC File No. 0-20646])

10.05*	—	Employment Agreement, dated October 1, 2002, between the Company and Ronald J. Domanico (Incorporated by reference – Exhibit 10.27 to report on Form 10-Q for the quarter ended September 30, 2002 [SEC File No. 0-20646])

10.06#*	—	Change in Control Severance Agreement, dated October 1, 2002, between the Company and Ronald J. Domanico (Incorporated by reference – Exhibit 10.30 to report on Form 10-Q for the quarter ended September 30, 2002 [SEC File No. 0-20646])

10.07*	—	Deferred Compensation Plan, together with copies of existing individual deferred compensation agreements (Incorporated by reference — Exhibit 10.08 to Registration Statement on Form S-1 [SEC File No. 33-50582])

10.08*	—	1993 Key Employees’ Share Ownership Plan (Incorporated by reference — Exhibit 10.10 to Registration Statement on Form S-1 [SEC File No. 33-50582])

10.09*	—	Incentive Bonus Plan of the Company (Incorporated by reference — Exhibit 10.10 to report on Form 10-K for the year ended December 31, 1993 [SEC File No. 0-20646])

10.10*	—	1996 Director Equity Plan of the Company (Incorporated by reference — Exhibit 10.12 to report on Form 10-Q for the quarter ended March 31, 1996 [SEC File No. 0-20646])


Exhibit No.		Description

10.11*	—	Amendment No. 1 to the Company’s 1996 Director Equity Plan, dated July 16, 1998 (Incorporated by reference — Exhibit 10.2 to current report on Form 8-K dated June 1, 1999 [SEC File No. 0-20646])

10.12*	—	Second Amended and Restated 1998 Key Employee Incentive Compensation Plan (Incorporated by reference — Exhibit 10.13 to report on Form 10-Q for the quarter ended March 31, 2001 [SEC File No. 0-20646])

10.13*		2003 Long-Term Equity Incentive Plan of the Company (Incorporated by reference —Appendix A to definitive schedule 14-A for the 2003 Annual Meeting of Shareholders filed April 7, 2003 [SEC File No. 0-20646])

10.14	—	Partnership Agreement of Standard Gypsum L.P. (Incorporated by reference — Exhibit 10.21 to report on Form 10-K for the year ended December 31, 2001 [SEC File No. 0-20646])

10.15	—	Operating Agreement of Premier Boxboard Limited LLC (Incorporated by reference — Exhibit 10.22 to report on Form 10-K for the year ended December 31, 2001 [SEC File No. 0-20646])

10.16		Asset Purchase Agreement between Caraustar Industries, Inc. and Smurfit-Stone Container Corporation, dated as of July 22, 2002 (Incorporated by reference – Exhibit 2 to current report on Form 8-K dated October 15, 2002)

10.17		First Amendment to Asset Purchase Agreement between Caraustar Industries, Inc. and Smurfit-Stone Container Corporation, dated as of September 9, 2002 (Incorporated by reference – Exhibit 10.25 to report on Form 10-Q for the quarter ended September 30, 2002 [SEC File No. 0-20646])

10.18	—	Master Lease Agreement, with Riders Nos. 1 through 3 and Equipment Schedules Nos. 1 through 4, dated September 30, 2002, between Caraustar Industries, Inc. and Banc of America Leasing & Capital, LLC (Incorporated by reference – Exhibit 10.29 to report on Form 10-Q for the quarter ended September 30, 2002 [SEC File No. 0-20646])

10.19	—	Credit Agreement, dated as of June 24, 2003, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company identified as guarantors listed therein, and Bank of America, N.A. as the Administrative Agent regarding the Company’s $75.0 million senior credit facility (Incorporated by reference — Exhibit 10.01 to report on Form 10-Q for the quarter ended June 30, 2003 [SEC File No. 0-20646]).

10.20	—	Security Agreement, dated as of June 24, 2003, by and among the Company and certain subsidiaries identified therein, as guarantors, and Bank of America, N.A, as Administrative Agent (Incorporated by reference — Exhibit 10.02 to report on Form 10-Q for the quarter ended June 30, 2003 [SEC File No. 0-20646])

10.21	—	First Amendment to Credit Agreement, dated as of July 8, 2003, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference — Exhibit 10.03 to report on Form 10-Q for the quarter ended June 30, 2003 [SEC File No. 0-20646])

10.22/*	—	Insurance Security Option Plan

12.01**	—	Computation of Ratio of Earnings to Fixed Charges

21.01**	—	Subsidiaries of the Registrant

23.01†	—	Consent of Ernst & Young LLP

23.02†	—	Consent of Deloitte & Touche LLP

31.01†	—	Certification of CEO — Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.02†	—	Certification of CFO — Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.01†	—	Certification of CEO — Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.02†	—	Certification of CFO — Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

†	Filed herewith

*	Management contract or compensatory plan required to be filed under Item 15(c) of Form 10-K and Item 601 of Regulation S-K of the Securities and Exchange Commission.

**	Previously filed

#	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, John R. Foster and William A. Nix, III, except the agreement is dated March 1, 2002, for these individuals.