Management’s Discussion and Analysis of
Financial Condition and Results of Operations

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

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

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

Restructuring and Other Nonrecurring Costs. In January 2001, we initiated a plan to close our paperboard mill located in Chicago, Illinois and recorded a pretax charge to operations of approximately $4.4 million. The mill was profitable through 1998, but declining sales resulted in losses of approximately $2.6 million and $1.5 million in 1999 and 2000, respectively. We expect the proceeds from the sale of the real estate to more than offset the pretax charge. The $4.4 million charge included a $2.2 million noncash asset impairment write down of fixed assets to estimated net realizable value, a $1.2 million accrual for severance and termination benefits for 16 salaried and 59 hourly employees terminated in connection with this plan and a $989 thousand accrual for other exit costs.

During 2001, we paid $1.2 million in severance and termination benefits and $597 thousand in other exit costs. The remaining other exit costs will be paid by December 31, 2002. As of December 31, 2001, one employee remained to assist in the closing of the mill. We are marketing the property and will complete the exit plan upon the sale of the property, which we anticipate will occur prior to December 31, 2002.

In March 2001, we initiated a plan to consolidate the operations of our Salt Lake City, Utah carton plant into our Denver, Colorado carton plant and recorded a pretax charge to operations of approximately $2.6 million. The $2.6 million charge included a $1.8 million noncash asset impairment write down of fixed assets to estimated net realizable value, a $464 thousand accrual for severance and termination benefits for 5 salaried and 31 hourly employees terminated in connection with this plan and a $422 thousand accrual for other exit costs. All exit costs were paid as of December 31, 2001. As of December 31, 2001, no employees remained at the plant.

In February 2000, we initiated a plan to close our paperboard mill located in Baltimore, Maryland and recorded a pretax charge to operations of approximately $6.9 million. We adopted the plan to close the mill in conjunction with our ongoing efforts to increase manufacturing efficiency and reduce costs in our mill system. The $6.9 million charge included a $5.7 million noncash asset impairment charge to write-down machinery and equipment to estimated net realizable value. The charge also included a $604 thousand accrual for severance and termination benefits for 21 salaried and 83 hourly employees terminated in connection with this plan and a $613 thousand accrual for other exit costs. All exit costs were paid by December 31, 2000. As of December 31, 2001, one employee remained to assist in marketing the land and building. We will complete the exit plan upon the sale of the property, which we anticipate will occur prior to December 31, 2002. The mill closure did not have a material impact on our operations.

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

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

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