The past year was very encouraging from a business development standpoint but was a most difficult year from a strictly financial perspective. We absorbed over $32 million in higher raw material costs and lower selling prices in our base businesses and joint ventures. We incurred $13 million in restructuring costs and, in the fourth quarter, paid $8 million in other one-time costs, including a write-off of inventory, associated with the restructuring, and business interruption from the December ice storm in the Carolinas. With all this, it is somewhat surprising that income from operations was only $20.7 million lower than in 2001. This decline was partially offset, however, by a $5.1 million improvement in equity in income of unconsolidated affiliates.

On the other hand, we were able to lower net interest expense by $3.7 million in 2002, mainly by taking advantage of the opportunity to exchange higher-cost fixed rates on our debt for lower-cost floating rates. Cash flow from operating activities, at $63.2 million, was $6 million better than 2001. Despite efforts to offset economic pressures, we reported a net loss for the year that was $3.3 million, or $0.12 per share, greater than last year.

As you read further in this Annual Report, you will see how Caraustar continues to realign itself to better serve its customers and transition itself into a company that will thrive in the new world of turbulent economics. The operative word is "FOCUS." We must continue to focus on all aspects of the business, and paramount in that effort is the focus on leadership. In 2002, we brought on board two executives we believe will form the nucleus of the company's leadership for many years to come.

Mike Keough, our new chief operating officer and the only other member of the board of directors from operating management, came to Caraustar early in March following 27 years in the paperboard packaging industry with a successful history of sales and operating management assignments. In October, Ron Domanico joined Caraustar as our chief financial officer. Ron, well versed in the packaging industry, spent most of his 22-year career with two giants of the food business, Nabisco and Kraft Foods, both here and abroad, in a variety of key financial management positions. In their short time with Caraustar, both men have made a solid contribution to the company, implementing strategic actions to position and transition the company for the future.

Another major focus for Caraustar is the critical business objective of creating an ever-improving safe work environment for all Caraustar employees. Our 2002 Total Case Incident Rate, the primary measure by which OSHA evaluates industry safety performance, was the lowest in our history of keeping OSHA records. This measure improved 17 percent over our 2001 rate and was less than one-third our rate ten years ago. Improved safety performance is more than a business objective at Caraustar – it is a condition of employment for all employees.

To be sure, the company has many obstacles to overcome in a shrinking U.S. market with volatile raw material costs caused by global demand for recovered fiber and energy costs that have escalated significantly over the threat of war in the Middle East. We are responding in numerous ways, however, each with the clear objective of increasing product value and lowering operating and manufacturing costs. In the process, Caraustar has measured its progress by gains in the many markets we serve.

In 2002, Caraustar grew total mill and converting plant volume by 8.8 percent over 2001, while industry volume declined 2.3 percent – an 11-percent relative gain in the markets we serve. Our business growth was distinctive in two ways. First, Caraustar focused on specially designed and engineered products that depend on unique manufacturing capabilities. The thrust of our growth in a depressed market environment was in products and services that are prime strategic targets, either because they are in growing segments of an otherwise shrinking market or because they represent strong strategic growth in our base businesses.

An example of such focus has been the special capabilities of our Sprague, Connecticut mill where a recycled paperboard product is replacing a virgin (tree-based) product for the packaging of frozen foods. Also, due to Sprague's unique characteristics for producing high graphics carton board at light weights and low calipers, we have focused on the manufacture of top sheets for the growing fluted carton and overnight mailer markets – markets that have proven growth potential, in contrast to the declining demand for paperboard packaging in general.

In a similar development, our major investment in new multi-Fourdrinier technology has allowed us to penetrate the gypsum wallboard market with a high strength, lightweight new facing paper that will, in time, revolutionize the gypsum facing paper market in the U.S. Current products for the wallboard paper market have decreased about 10 percent in weight over the last few years, but the facing paper produced at our joint venture mill in Newport, Indiana has the same qualities of strength and appearance at 25 percent lighter weight. The resultant product reduces freight costs, reduces the energy cost of manufacturing wallboard, and lowers the overall weight of the finished product for easier installation – putting Caraustar's facing paper well ahead of the market curve.

Additionally, our growth was enhanced by capitalizing on a one-time acquisition opportunity that added substantially to our position in a market of considerable long-term importance to Caraustar. The acquisition of the Smurfit-Stone industrial packaging operations, a combination of 17 tube and core and custom slitting plants, three solid fiber partition plants and three recycled paperboard mills, will significantly broaden our range of products and capabilities. Caraustar is focused on increasing its position in the businesses represented by this acquisition through expanding into new regions and new markets with innovative products and services. In another sense, it allows the company to rationalize overlapping relationships and drive cost out of the supply chain through reduced overhead and lower freight costs to the customer.

In a business climate where most economic indicators point to continued weakness, at least for the next two or three quarters, an important element of any strategic plan is to combine growth with regular re-evaluation of long-term objectives. In short, that means growth accompanied with prudent restructuring as necessary. In the last three years Caraustar has shuttered four paperboard mills, totaling over 225,000 tons of capacity, closed two carton plants and four tube and core plants, and realigned a third carton plant and a specialty converting operation. The basis for rationalization was a combination of outdated technology and excess capacity. In Caraustar's case the closures did not represent a reduction of total capacity – to the contrary, our paper mill and converting capacity and capabilities have grown over the same time frame. Looking forward, we believe this continued reassessment process will complement our efforts to focus on what is in the best interests of our customers and shareholders.

Today's customers are not only more demanding of quality and service, but they, too, are more focused. They expect and deserve improvement in our products that reduces their cost of operation and gives them a competitive edge in their markets. Caraustar will both drive customers' expectations and demonstrate that we are ahead of the curve. We are clearly and expressly focused on leading our industry into the recovery that surely will follow the current recession, and we are well invested to succeed in that endeavor – safely and profitably.

Thomas V. Brown
President and Chief Executive Officer

Russell Robinson, Caraustar's board chairman since 1995,will be standing for re-election to the board for his last three-year term at the annual shareholders meeting in May. As he approaches the end of his tenure, however, he will be passing the gavel as board chairman. Jim Rogers has agreed to assume the helm succeeding Russ, and there isn't a more qualified and respected board member to fill Russ' big shoes. I could write a lengthy report on Russell Robinson's contribution to our company, to the board, and to me personally. He is the consummate chairman for any board, in any industry, and serves on several others with the respect and admiration befitting his substantial contributions. For Caraustar, however, his presence means more than one might imagine. If you are a relatively new shareholder, you might not know that Russ was instrumental in putting Caraustar together as a single company in 1980. He has been our constant beacon, encouraging the growth and development of the company while providing a clear connection to what we are at our core. Beacon is an apt symbol for what Russ means to Caraustar, since it is the beacon that illuminates the pathway into an unknown future while always, at the other end, securing the business to its origins. We know he will continue to provide the same sage advice and counsel as a board member that he has as chairman. - TVB