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

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

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

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

Restructuring and Other Nonrecurring Costs. In February 2000, we initiated a plan to close our paperboard mill located in Baltimore, Maryland and recorded a pretax charge to operations of approximately $6.9 million. We adopted the plan to close the mill in conjunction with our ongoing efforts to increase manufacturing efficiency and reduce costs in our mill system. The $6.9 million charge included a $5.7 million noncash asset impairment charge to write-down machinery and equipment to net realizable value. The charge also included a $604 thousand accrual for severance and termination benefits for 21 salaried and 83 hourly employees terminated in connection with this plan and a $613 thousand accrual for other exit costs. All exit costs were paid by December 31, 2000. As of December 31, 2000, 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 closing was the result of a slowdown in gypsum facing paper shipments during the third quarter of 2000 and a contract dispute with Georgia-Pacific. The $8.6 million charge included a $7.0 million noncash asset impairment write-down of fixed assets to net realizable value, a $558 thousand accrual for severance and termination benefits for 19 salaried and 46 hourly employees terminated in connection with this plan, and a $968 thousand accrual for other exit costs. During 2000, we paid $380 thousand in severance and termination benefits and $346 thousand in other exit costs. As of December 31, 2000, two employees remained to collect receivables, process payables and assist in marketing the land and building. We are marketing the land and building 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 of $12.4 million and operating income of $1.2 million for the nine months ended September 30, 2000. It contributed sales of $20.5 million and operating income of $2.1 million for the year ended December 31, 1999.

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

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

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

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

Net Income. As discussed above, our results for 2000 included restructuring and nonrecurring charges recorded in conjunction with the closings of our Baltimore, Maryland and Camden, New Jersey paperboard mills and a nonrecurring charge related to the settlement of a dispute over abandoned property, which were $16.8 million in the aggregate ($10.5 million, net of tax benefit, or $0.40 per common share on a diluted basis). Excluding these charges, net income was $18.7 million, or $0.71 per common share on a diluted basis. Including the restructuring and other nonrecurring costs, net income decreased 80.0% to $8.2 million from $40.9 million in 1999. Diluted net income per common share, including the restructuring and other nonrecurring costs, decreased 81.0% to $0.31 for 2000 from $1.62 in 1999.

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