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

Acquisitions. In February 2000, we acquired all of the outstanding stock of MilPak, Inc. in exchange for 248,132 shares of our common stock valued at $4.7 million and $4.7 million in cash. MilPak operates a facility located in Pine Brook, New Jersey that provides blister packaging, cartoning and labeling, and other contract packaging services.

In September 2000, we acquired all of the outstanding stock of Arrow Paper Products Company in exchange for 342,743 shares of our common stock valued at $5.1 million. Arrow is located in Saginaw, Michigan and operates two tube and core converting facilities that serve customers in the automotive, film, housewares and other specialty tube and core markets.

In October 2000, we acquired 100% of the membership interests in Crane Carton Company, LLC in exchange for 1,659,790 shares of our common stock valued at $19.0 million plus $5.8 million of assumed debt, including industrial development bonds in the aggregate amount of $3.5 million. We issued 16,595 of the shares in 2000 and the balance in 2001. Crane operates a single folding carton manufacturing facility located in suburban Chicago, Illinois.

During the second quarter of 1999, we formed a joint venture with Temple-Inland, Inc. to own and operate Temple-Inland's Newport, Indiana containerboard mill. The joint venture, Premier Boxboard Limited LLC, undertook a 14-month, $82.0 million project to modify the mill to enable it to produce a new, lightweight gypsum facing paper along with other containerboard grades. The mill began operations as modified at the beginning of the third quarter of 2000. Under the joint venture agreement, we contributed $50.0 million to the joint venture during the second quarter of 2000, and Temple-Inland contributed the net assets of the mill and received $50.0 million in notes issued by Premier Boxboard. Each partner has a 50% interest in the joint venture, and we account for our interest in this joint venture under the equity method. Our subsidiary, PBL Inc., manages the day-to-day operations of Premier Boxboard, pursuant to a management agreement with Temple-Inland.

In April 1999, we purchased International Paper Company's Sprague boxboard mill located in Versailles, Connecticut. This acquisition has had a significant impact on our earnings in 2000 and 2001. Sprague incurred operating losses of $17.2 million and $7.2 million in 2000 and 2001, respectively, including the reversal of reserves related to unfavorable supply contracts. Excluding the Sprague reserve reductions in 2000 and 2001, operating losses were $20.1 million and $14.2 million, respectively, an improvement of $6.0 million. The losses were attributable to a combination of unfavorable fixed price contracts, low capacity utilization, high energy costs and higher fiber costs that we were unable to pass through to our customers. Our primary objectives at Sprague have been to improve quality, reduce costs and increase sales volume. We have made significant progress in quality and cost and are beginning to realize the benefits. Based on improvements we have made since the acquisition, we now believe Sprague is competitive in terms of cost and quality, and we expect Sprague's financial performance to improve with increases in sales volume. Although we expect losses at Sprague to continue to decline, in light of current difficult industry conditions, we do not expect Sprague to be profitable until the second half of 2002.

Dividends. We paid cash dividends of $8.9 million in 2001 versus $18.5 million in 2000. In February 2001, we reduced our first quarter dividend from $0.18 to $0.09 per issued and outstanding common share. In June 2001, we reduced our second, third and fourth quarter dividend from $0.09 to $0.03 per issued and outstanding common share. As described below under "Subsequent Events", we have temporarily suspended future payments of quarterly dividends, beginning in the first quarter of 2002. We made these decisions to reduce the quarterly dividends to preserve our financial flexibility in light of difficult industry conditions and due to the limitations on dividend payments in our financial covenants. Although our former debt agreements contained no specific limitations on the payment of dividends, our current debt agreements contain certain limitations on the payment of future dividends. We will need to earn at least $3.2 million in net income before our debt covenants would permit us to resume payment of quarterly dividends.

We intend to continue assessing our ability to pay quarterly dividends in light of difficult industry conditions, our need to preserve financial flexibility and the limitations on dividends included in our financial covenants.

Share Repurchases. We did not purchase any shares of our common stock during 1999, 2000 or 2001 under our common stock purchase plan. We have cumulatively purchased 3,169,000 shares since January 1996. Our board of directors has authorized purchases of up to 831,000 additional shares. However, our 9 7/8% senior subordinated notes and our senior credit facility limit our ability to purchase our common stock.

Inflation

Raw material price changes have had, and continue to have, a material effect on our operations. Energy prices had a material effect on our operations in 2000 and 2001. We do not believe that general economic inflation is a significant determinant of our raw material price increases or that, except as it relates to energy prices, it has a material effect on our operations.

Subsequent Events

In January 2002, we completed a third amendment to our senior credit facility that 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, the first quarter of 2002 from 2.75:1.0 to 2.25:1.0, and the second quarter of 2002 from 2.75:1.0 to 2.50:1.0.

Also in January 2002, we entered into agreements with the PBL and Standard Gypsum lenders that correspond to the amendments made in the third amendment to the senior credit facility, as described above, in order to avoid events of default under those guarantees resulting from a violation of the interest ratio coverage covenants.

In February 2002, we announced that we would suspend future dividend payments on our common stock until our earnings performance exceeds the dividend limitation provision of our senior subordinated notes.

Georgia-Pacific Litigation

On May 9, 2001, we and Georgia-Pacific Corporation jointly announced a tentative settlement regarding the litigation over the terms of the long-term supply contract the parties entered in April 1996. The pending litigation relating to that contract has been previously reported in our annual report on Form 10-K for the year ended December 31, 2000 and in our previous quarterly reports on Form 10-Q. Under the terms of the tentative settlement, we and G-P Gypsum Corporation, a wholly-owned subsidiary of Georgia-Pacific, entered into a new ten-year agreement under which we would supply a minimum of 50,000 tons of gypsum facing paper per year to G-P Gypsum. Implementation of the new agreement, and settlement of the pending litigation over the 1996 agreement, is subject to satisfactory completion of a transition period. The transition period initially was to expire no later than August 6, 2001. As described below, however, the parties have twice agreed to extend the outside termination date of the transition period, most recently to April 1, 2002. During the transition period, we are supplying G-P Gypsum with such facing paper as it requests to enable it to evaluate the paper's compliance with its specifications for quality and end-use suitability. Once G-P Gypsum is satisfied with the paper, it is to notify us that the transition period has ended, and at that time the term of the new agreement, including the annual minimum quantity requirement described above, is to commence. If and when the new agreement commences, the parties will dismiss all pending litigation relating to the 1996 agreement. Under the terms of the tentative settlement, either party may terminate its obligations under the new agreement during the transition period without cause and without liability to the other party.

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