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

Operating Income. Operating income for 2001 was $26.7 million, a decrease of $15.2 million, or 36.2% from 2000. Operating income excluding the Sprague reserve reduction, restructuring charges and 2000 acquisitions was $25.1 million for 2001, a decrease of $33.6 million, or 57.2%, from operating income of $58.6 million in 2000, excluding restructuring charges and other nonrecurring costs. This decline was due primarily to lower volume in the tube, core and composite container and paperboard segments, partially attributable to the dispute with Georgia-Pacific, and lower margins in the carton and custom packaging and tube, core and composite container segments. Selling, general and administrative expenses increased by $1.7 million, or 1.1%, in 2001 compared to 2000, but decreased $2.5 million, or 1.7%, excluding acquisitions. This decrease was primarily due to mill closures in the paperboard segment.

Other Income (Expense). Interest expense increased 20.8% to $41.2 million for 2001 from $34.1 million in 2000. This increase was due to higher outstanding debt balances at higher interest rates, partially offset by savings from interest rate swap agreements which effectively converted portions of our fixed rate notes into variable rate obligations. See "Liquidity and Capital Resources" for additional information regarding our debt, interest expense and interest rate swap agreements.

Equity in loss from unconsolidated affiliates was $2.6 million in 2001, down $9.1 million from equity in income of $6.5 million in 2000. This decrease was primarily due to lower operating results for Standard Gypsum, L.P., our gypsum wallboard joint venture with Temple-Inland. The lower results were due primarily to significantly lower selling prices in 2001 compared to 2000 due to excess capacity in that market.

Net Income (Loss). As discussed above, our results for 2001 included restructuring charges recorded in conjunction with the closing of our Chicago, Illinois paperboard mill and the consolidation of operations of our Salt Lake City, Utah carton plant into our Denver, Colorado carton plant. These charges were $7.1 million in the aggregate ($4.4 million, net of tax benefit, or $0.16 per common share on a diluted basis). Also included in the results for 2001 was an extraordinary loss of $4.3 million related to the early extinguishment of debt ($2.7 million, net of tax benefit, or $0.10 per common share on a diluted basis). Partially offsetting these charges was the $7.1 million reduction in reserves related to expiring unfavorable supply contracts at the Sprague paperboard mill ($4.5 million, net of tax provision, or $0.16 per common share on a s). Exclu in 2001 was $11.9 mi .43 net l d other nonrecurring costs of $18.7 million, or $0.71 net income per common share on a diluted basis, in 2000. Including the extraordinary loss, restructuring charges, other nonrecurring costs and the Sprague reserve reduction, net loss was $14.6 million in 2001, or $0.52 net loss per common share on a diluted basis, compared with net income of $8.2 million, or $0.31 net income per common share on a diluted basis, in 2000.

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

Results of Operations 2000 – 1999

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

		Years Ended December 31,
								%
	1999		2000			Change	Change
Production source of paperboard tons sold (in thousands): From paperboard mill production		1,064.9		999.1		(65.8)		–6.2%
Outside purchases		90.6		122.4		31.8		35.1%
Total paperboard tonnage		1,155.5		1,121.5		(34.0)		–2.9%
Tons sold by market (in thousands): Tube, core and composite container volume Paperboard (internal)		203.2		202.9		(0.3)		–0.1%
Outside purchases		18.9		25.9		7.0		37.0%
Tube, core and composite container converted products		222.1		228.8		6.7		3.0%
Unconverted paperboard		41.6		37.6		(4.0)		–9.6%
Tube, core and composite container volume		263.7		266.4		2.7		1.0%
Folding carton volume Paperboard (internal)		65.2		67.9		2.7		4.1%
Outside purchases		58.3		86.8		28.5		48.9%
Folding carton converted products		123.5		154.7		31.2		25.3%
Unconverted paperboard		286.4		270.2		(16.2)		–5.7%
Folding carton volume		409.9		424.9		15.0		3.7%
Gypsum wallboard facing paper volume Unconverted paperboard		265.8		196.1		(69.7)		–26.2%
Outside purchases (for resale)		4.5		0.5		(4.0)		–88.9%
Gypsum wallboard facing paper volume		270.3		196.6		(73.7)		–27.3%
Other specialty products volume Paperboard (internal)		91.6		108.7		17.1		18.7%
Outside purchases		8.9		9.2		0.3		3.4%
Other specialty converted products		100.5		117.9		17.4		17.3%
Unconverted paperboard		111.1		115.7		4.6		4.1%
Other specialty products volume		211.6		233.6		22.0		10.4%
Total paperboard tonnage		1,155.5		1,121.5		(34.0)		–2.9%
Gross paper margins ($/ton): Paperboard mill: Average same-mill net selling price		$413		$441		$28		6.8%
Average same-mill recovered fiber cost		84		101		17		20.2%
Paperboard mill gross paper margin		$329		$340		$11		3.3%
Tube and core: Average net selling price		$730		$786		$56		7.7%
Average paperboard cost		390		441		51		13.1%
Tube and core gross paper margin		$340		$345		$5		1.5%

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