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Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
See "Subsequent Events" (Note 14), which details the third amendment to the senior credit facility. This amendment was completed on January 22, 2002 with an effective date of September 30, 2001. The Company obtained this amendment in order to avoid the occurrence of an event of default under its senior credit facility agreement resulting from a violation of the interest coverage ratio covenant contained in this agreement.

On March 22, 2001, the Company obtained commitments and executed an agreement for the issuance of $285,000,000 of 9 7/8 percent senior subordinated notes due April 1, 2011 and $29,000,000 of 7 1/4 percent senior notes due May 1, 2010. These senior subordinated notes and senior notes were issued at a discount to yield effective interest rates of 10.5 percent and 9.4 percent, respectively. Under the terms of the agreement, the Company received aggregate proceeds, net of issuance costs, of approximately $291,200,000 on March 29, 2001. These proceeds were used to repay borrowings outstanding under the Company's former senior credit facility and its 7.74 percent senior notes. As of December 31, 2000, the Company was not in compliance with certain covenants under its former senior credit facility and its 7.74 percent senior notes that the lenders waived through the first quarter of 2001. In connection with the repayment of the 7.74 percent senior notes, the Company incurred a prepayment penalty of approximately $3,600,000. The Company recorded an extraordinary loss of $2,695,000 which includes the prepayment penalty and unamortized issuance costs of $705,000, net of tax benefit of $1,610,000.
The difference between issue price and principal amount at maturity of the Company's 7 1/4 percent senior and 9 7/8 percent senior subordinated notes will be accreted each year as interest expense in its financial statements. These notes are unsecured, but are guaranteed, on a joint and several basis, by all of the Company's domestic subsidiaries, other than one that is not wholly-owned.

During 1998, the Company registered with the Securities and Exchange Commission a total of $300,000,000 in public debt securities for issuance in one or more series and with such specific terms as to be determined from time to time. On June 1, 1999, the Company issued $200,000,000 in aggregate principal amount of its 7 3/8 percent notes due June 1, 2009. The 7 3/8 percent notes were issued at a discount to yield an effective interest rate of 7.473 percent and pay interest semiannually. The 7 3/8 percent notes are unsecured obligations of the Company.

During the second and third quarters of 2001, the Company entered into four interest rate swap agreements in notional amounts totaling $285,000,000. The agreements, which have payment and expiration dates that correspond to the terms of the note obligations they cover, effectively converted $185,000,000 of the Company's fixed rate 9 7/8 percent senior subordinated notes and $100,000,000 of the Company's fixed rate 7 3/8 percent senior notes into variable rate obligations. The variable rates are based on the three-month LIBOR plus a fixed margin.
The following table identifies the debt instrument hedged, the notional amount, the fixed spread and the three-month LIBOR at December 31, 2001 for each of the Company's interest rate swaps. The December 31, 2001 three-month LIBOR is presented for informational purposes only and does not represent the Company's actual effective rates in place at December 31, 2001.
Debt Instrument Notional
Amount
(000's)		 Fixed
Spread		 LIBOR at
December 31,
2001		 Total
Variable Rate
9 7/8% senior subordinated notes $185,000 4.400% 1.881% 6.281%
7 3/8% senior notes 50,000 2.365 1.881 4.246
7 3/8% senior notes 25,000 1.445 1.881 3.326
7 3/8% senior notes 25,000 1.775 1.881 3.656

In October 2001, the Company unwound its $185,000,000 interest rate swap agreement related to the 9 7/8 percent senior subordinated notes and received $9,093,000 from the bank counter-party. Simultaneously, the Company executed a new swap agreement with a fixed margin that was 85 basis points higher than the original swap agreement. The new swap agreement is the same notional amount, has the same terms and covers the same notes as the original agreement. The $9,093,000 gain will be accreted to interest expense over the life of the notes and will partially offset the increase in interest expense. The Company executed these transactions in order to take advantage of current market conditions.

The Company has assumed no ineffectiveness with respect to its four interest rate swap agreements, as it believes that the conditions for such an assumption are met under the guidelines of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The fair value of the swap agreements of approximately $7,418,000 as of December 31, 2001 has been reflected in other long-term liabilities and long-term debt in the accompanying balance sheet.

6. Commitments and Contingencies

Leases
The Company leases certain buildings, machinery, and transportation equipment under operating lease agreements expiring at various dates through 2022. Certain rental payments for transportation equipment are based on a fixed rate plus an additional amount for mileage. Rental expense on operating leases for the years ended December 31, 2001, 2000 and 1999 is as follows (in thousands):
2001 2000 1999
Minimum rentals $14,312 $13,026 $11,698
Contingent rentals 507 347 377
Total $14,819 $13,373 $12,075
The following is a schedule of future minimum rental payments required under leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2001 (in thousands):
2002 $13,410
2003 9,827
2004 7,207
2005 4,792
2006 4,046
Thereafter 12,642
Total $51,924

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Caraustar Industries, Inc.