10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-20646

CARAUSTAR INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

North Carolina	581388387
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5000 Austell Powder Springs Road, Suite 300 Austell, Georgia	30106
(Address of principal executive offices)	(Zip Code)

(770) 948-3101

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $.10 par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨                        Accelerated filer  x                        Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2006, computed by reference to the closing sale price on such date, was $254,102,202. For purposes of calculating this amount only, all directors and executive officers are treated as affiliates. This determination of affiliate status shall not be deemed conclusive for other purposes. As of March 12, 2007, 29,091,859 shares of Common Stock, $.10 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement pertaining to the 2007 Annual Meeting of Shareholders (“the Proxy Statement”) to be filed pursuant to Regulation 14A are incorporated by reference in Part III of this Form 10-K to the extent stated herein.

TABLE OF CONTENTS

	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	13
Item 2.	Properties	14
Item 3.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	15
	PART II
Item 5.	Market of the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
Item 6.	Selected Financial Data	17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 8.	Financial Statements and Supplementary Data	44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	97
Item 9A.	Controls and Procedures	97
Item 9B.	Other Information	100
	PART III
Item 10.	Directors and Executive Officers and Corporate Governance.	100
Item 11.	Executive Compensation	100
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	101
Item 13.	Certain Relationships and Related Transactions, and Director Independence	101
Item 14.	Principal Accountant Fees and Services	101
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	101

INTRODUCTION

Caraustar Industries, Inc. operated its business through 22 subsidiaries across the United States, Canada and the United Kingdom as of the filing date of this report. As used herein the terms, “we,” “our,” “us” (or similar terms), the “Company” or “Caraustar” includes Caraustar Industries, Inc. and its subsidiaries, except that when used with reference to common shares or other securities described herein and in describing the positions held by management of the Company, the term includes only Caraustar Industries, Inc. Our corporate website is www.caraustar.com. You can access our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those filings, as well as our other filings with the Securities and Exchange Commission (“SEC”), free of charge on our website via hyperlink to a third party database of documents filed electronically with the SEC. These documents are available for access as soon as reasonably practicable after we electronically file these documents with the SEC.

FORWARD-LOOKING INFORMATION

This annual report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains certain “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that represent our expectations, anticipations or beliefs about future events, including our operating results financial condition, liquidity, expenditures, and compliance with legal and regulatory requirements. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially depending on a variety of important factors, including, but not limited to, fluctuations in raw material prices and energy costs, increases in pension and insurance costs, downturns in industrial production, housing and construction and the consumption of durable and nondurable goods, the degree and nature of competition, demand for our products, the degree of success achieved by our new product initiatives, changes in government regulations, the application or interpretation of those regulations or in the systems, personnel, technologies or other resources we devote to compliance with regulations, our ability to complete acquisitions and successfully integrate the operations of acquired businesses, our ability to successfully dispose of our assets held for sale, our ability to serve our substantial indebtedness, unforeseen difficulties with the integration of our accounting and control operations or IT systems. Additional relevant risk factors that could cause actual results to differ materially are discussed in the “Risk Factors” section below and elsewhere in this annual report and in our other reports on Forms 8-K, 10-Q and 10-K we file with the SEC from time to time. With respect to such forward-looking statements, we claim protection under the Private Securities Litigation Reform Act of 1995. Our SEC filings are available from us, and also may be examined at public reference facilities maintained by the Securities and Exchange Commission or, to the extent filed via EDGAR, accessed through the website of the SEC (http://www.sec.gov). We do not undertake any obligation to update any forward-looking statements we make.

PART I

ITEM 1. BUSINESS

Overview

We are a major manufacturer of 100% recycled paperboard and converted paperboard products. We manufacture products primarily from recovered fiber, which is derived from recycled paper. We operate in four business segments:

• Paperboard

• Recovered fiber

• Tube, core and composite container

• Folding carton and custom packaging

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We report certain financial information, including sales, results from operations and assets, by segment in the notes to the consolidated financial statements included in Part II, Item 8 of this annual report.

Operations and Products

Paperboard. Our principal manufacturing activity is the production of uncoated recycled paperboard, however, we do have one manufacturing facility that is used solely for the production of clay-coated recycled paperboard. In this manufacturing process, we reduce recovered fiber to pulp, clean and refine it and then process it into various grades of paperboard for internal consumption by our converting facilities or sale in the following four end-use markets:

• Tube, core and composite containers

• Folding cartons

• Gypsum wallboard facing paper

• Specialty paperboard products

We currently operate a total of 11 paperboard mills, including our 50% owned Premier Boxboard Limited, LLC joint venture (“Premier Boxboard”). These mills are located in the following states: Georgia, Indiana, Iowa, North Carolina, Ohio, South Carolina, Tennessee, Washington and Virginia.

In 2006, approximately 45% of the recycled paperboard sold by our paperboard mills was consumed internally by our converting facilities; the remaining 55% was sold to external customers and represented 27% of our 2006 sales of $989.9 million. Sales of unconverted paperboard to external customers as a percentage of total sales were as follows (excludes sales from the Premier Boxboard joint venture):

	Years Ended December 31,
End-Use Market	2004		2005		2006
Tube, core and composite containers	2	%	2	%	2	%
Folding cartons	12	%	13	%	10	%
Gypsum wallboard facing paper	4	%	3	%	4	%
Specialty paperboard products (1)	11	%	11	%	11	%
	29	%	29	%	27	%

(1) Includes sales of unconverted paperboard and certain specialty converted products.

Three of our paperboard mills operate specialty converting facilities that supply specialty converted and laminated products to the bookbinding, game, printing and furniture industries. We also operate a specialty converting facility that supplies die cut and foam laminated products and manufactures specialty paperboard products.

Recovered Fiber. We operate seven stand-alone recovered fiber recycling and brokerage facilities that collect, sell and broker recovered fiber to external customers and to our own mills. Our recovered fiber recycling and processing facilities sort and bale recovered fiber and then either transfer it to our mills for processing or sell it to third parties. Sales of recovered fiber to external customers accounted for 9%, 9% and 12% of our sales in 2004, 2005 and 2006, respectively.

Tube, Core and Composite Container. Our largest integrated converting operation is the production of tubes and cores. The principal applications of these products are textile cores, paper mill cores, yarn carriers, carpet cores and film, foil and metal cores. Our 31 tube and core converting plants obtain approximately 86% of their paperboard needs from our paperboard mills and the remaining 14% from other manufacturers. Paper tubes are

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designed to provide specific physical strength properties, resistance to moisture and abrasion, and resistance to delamination at extremely high rotational speeds. Because of the relatively high cost of shipping tubes and cores, these facilities generally serve customers within a relatively small geographic area. Accordingly, most of our tube and core converting plants are located close to concentrations of customers.

We continually seek to expand our presence in the markets for more innovative tubes and cores, which require stronger paper grades, higher manufacturing skill and new converting technology. These markets include the yarn carrier and plastic film markets, cores used in certain segments of the paper industry and applications for the construction industry. We believe these markets offer growth potential, as well as potentially higher operating margins.

In addition to tube and core converting facilities, our tube, core and composite container division operates four facilities that produce specialty converted products used in industrial packaging protection applications (edge protectors). Our tube, core and related sales to external customers accounted for 32%, 32% and 31% of our total sales in 2004, 2005 and 2006, respectively.

Our tube, core and composite container segment also operates four facilities that produce composite containers used in the adhesive, sealant, food and food service markets, as well as grease cans, tubes, cartridges and other components. Composite container sales accounted for 5% of our sales to external customers in 2004, 2005 and 2006.

Folding Carton and Custom Packaging. We manufacture folding cartons and rigid set-up boxes at nine plants. During 2006, these plants obtained approximately 41% of their paperboard needs from our paperboard mills and the remaining 59% from other manufacturers. The paperboard purchased from other manufacturers is primarily paperboard grades not manufactured by our mill system. Our folding cartons and rigid set-up boxes are used principally as containers for paper goods, hardware, candy, sporting goods, frozen foods, dry food, film and various other industrial applications, including textile and apparel.

Folding carton and custom packaging sales accounted for 24% of our sales in 2004, 2005 and 2006, respectively.

Sales by Segment. Our consolidated sales for the year ended December 31, 2006 were $989.9 million. Our four business segments accounted for the following percentages of sales for that period:

• Paperboard — 27%

• Recovered fiber — 12%

• Tube, core and composite container — 37%

• Folding carton and custom packaging — 24%

Joint Ventures. We currently operate one joint venture with Temple-Inland, Inc. (“Temple-Inland”), Premier Boxboard, in which we own a 50% interest and manage the day-to-day operations. Premier Boxboard produces a lightweight gypsum facing paper along with containerboard grades. We believe that Premier Boxboard Limited is the lowest cost mill in the industry.

As of January 1, 2006, we had a 50% interest in Standard Gypsum, L.P. (“Standard Gypsum”), another joint venture with Temple-Inland that manufactured gypsum wallboard. Effective January 17, 2006, we sold our 50% interest in Standard Gypsum to Temple-Inland. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources - Off-Balance Sheet Arrangements Joint Venture Financings" and the notes to the consolidated financial statements included in Part II, Item 8 of this annual report.

Raw Materials.

Recovered fiber, derived from recycled paperstock, is the most significant raw material we use in our mill operations. Our paper board mills purchased approximately 96% of their recovered fiber requirements from our

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recovered fiber segment. We obtain the balance from a combination of other sources such as small waste collectors and waste collection businesses. Our recovered fiber segment sorts and bales recovered fiber and then either transfers it to our mills for processing or sell it to third parties. We also obtain recovered fiber from customers of our converting operations and from waste handlers and collectors who deliver loose recovered fiber to our mill sites for direct use without baling. We obtain another portion of our requirements from our small baler program, in which we lease, sell or furnish small baling machines to businesses that bale their own recovered fiber for our periodic collection.

We closely monitor our recovered fiber costs, which can fluctuate significantly and can materially affect our operating results due both to time lags in implementing responsive price increases and uncertainties regarding our ability to fully implement price increases in response to rising recovered fiber and other operating costs. See “Risk Factors — Our business and financial performance may be adversely affected by future increases in raw material and other operating costs.” Our paperboard mills continually pursue operational methods and alternative fiber sources to minimize our recovered fiber costs. One of these initiatives was to consolidate procurement of recovered fiber in order to maximize efficiency and leverage our scale. This initiative was completed during 2006, as mentioned above, and we are now purchasing approximately 96% of our recovered fiber requirements from our recovered fiber segment, as compared to 76% in 2005.

Energy Costs.

Excluding raw materials and labor, energy is our most significant manufacturing cost. We use energy, including electricity, natural gas, fuel oil and coal, to generate steam used in the paper making process and to operate our paperboard machines and our other converting machinery. We purchase energy from local suppliers at market rates. In 2005, the average energy cost in our mill system was approximately $73 per ton and in 2006 it was $74 per ton, a 1.4% increase. Until the last several years, our business had not been significantly affected by fluctuating energy costs, and we historically have not passed energy cost increases through to our customers. Although we have responded to recent energy cost increases by raising our selling prices, our ability to realize the full benefit of these price increases is dependent on, and limited by dynamics such as pricing strategies of our competitors and contractual commitments that affect our ability to raise prices as quickly as our costs increase. For more information about our fluctuating energy costs, see “— Risk Factors — Our operating margins and cash flow may be adversely affected by rising energy costs.”

Product Distribution.

Some of our manufacturing and converting facilities have their own sales staff and maintain direct sales relationships with their customers while other facilities use a centralized sales staff. We also employ divisional and corporate level sales personnel who support and coordinate the sales activities of individual facilities. Divisional and corporate sales personnel also provide sales management, marketing and product development assistance in markets where customers are served by more than one of our facilities. Approximately 160 of our employees are devoted exclusively to sales and customer service activities, although many other employees participate generally in sales efforts. We generally do not sell our products through independent sales representatives. Our advertising is limited to trade publications.

Customers.

We manufacture most of our converted products pursuant to customers’ orders. We do, however, maintain minimal inventory levels of certain products. Our business generally is not dependent on any single customer or upon a small number of customers. We do not believe that the loss of any one customer would have a material adverse effect on our financial condition or results of operations. Sales to external customers located in foreign countries accounted for approximately 6.4%, 7.1% and 6.7% of our sales for 2004, 2005 and 2006, respectively.

Competition.

Although we compete with numerous other manufacturers and converters, our competitive position varies greatly by geographic area and within the various product markets of the recycled paperboard industry. In most

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of our markets, our competitors are capable of supplying products that would meet customer needs. Some of our competitors have greater financial resources than we do. We compete in our markets on the basis of price, quality and service. We believe that it is important in all of our markets to work closely with our customers to develop or adapt products to meet customers’ specialized needs. We also believe that we compete favorably on the basis of all of the above factors.

Tube, core and composite containers. In the southeastern United States, where we historically have marketed our tubes and cores, we believe that we and Sonoco Products Company are the major competitors. On a national level, Sonoco is our largest competitor in the tube and core market. According to industry data, Sonoco had nearly half of the total tube and core market in the United States in 2006. We also compete with several regional companies and numerous small local companies in the tube and core market.

Folding Carton and Custom Packaging. The folding carton and custom packaging market in the United States is served by several large national and regional companies and numerous small local companies. Nationally, none of the major competitors is dominant, although certain competitors may be stronger in particular geographic areas or market niches. In the markets served by our carton plants, the leading competitors are Graphic Packaging Inc., the Rock-Tenn Company and Altivity Packaging.

Gypsum wallboard facing paper. The gypsum wallboard industry is divided into independent gypsum wallboard manufacturers, which either do not produce their own gypsum wallboard facing paper or cannot fill all of their needs internally, and integrated wallboard manufacturers, which supply most of their own gypsum wallboard facing paper requirements internally. We believe that the two largest integrated gypsum wallboard manufacturers, USG Corporation and National Gypsum Company, do not have significant sales of gypsum wallboard facing paper to the independent gypsum wallboard manufacturers. We believe that we have the largest market share of the supply of gypsum wallboard facing paper to independent wallboard manufacturers in North America.

Specialty paperboard products. In our sales of specialty products and in sales of recycled paperboard to other manufacturers for the production of tubes, cores and composite containers, folding cartons and boxes and miscellaneous converted products (other than gypsum wallboard facing paper), we compete with a number of recycled paperboard manufacturers, including the Rock-Tenn Company, Smurfit-Stone Container Corporation and The Newark Group, Inc. We believe that none of our competitors are dominant in any of these markets.

Competitive Position.

Recovered fiber costs were slightly lower on average in 2006 as compared to 2005. Our average cost for recovered fiber per ton of recycled paperboard produced was approximately $103 during 2006, a 2.8% decrease from $106 per ton in 2005. Although no specific information is available about our competitors’ actual recovered fiber costs, we believe that our delivered recovered fiber costs are among the lowest in the recycled paperboard industry. Relative to other competitors, we believe that our lower recovered fiber costs are attributable in part to lower shipping costs resulting from the location of our paperboard mills and recovered fiber facilities near major metropolitan areas that generate substantial supplies of recovered fiber.

Our relatively low recovered fiber costs are also in part attributable to our emphasis on certain recovery methods that enable us to avoid baling operations. We believe that our competitors rely primarily on off-site, company-owned and operated recovered fiber baling operations that collect and bale recovered fiber for shipment and processing at the mill site. We also operate such facilities, and our experience is that the baling operation results in $25-$30 per ton higher recovered fiber costs. We equip most of our paperboard mills to accept unbaled recovered fiber for processing directly into their pulpers. In both 2006 and 2005, unbaled recovered fiber represented approximately 3% of our total recovered fiber purchases. We also use other fiber recovery methods, such as our small baler program, that result in lower recovered fiber costs.

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Environmental Matters.

Our operations are subject to various international, federal, state and local environmental laws and regulations that may be administered by international, federal, state and local agencies. Among other things, these laws and regulations regulate the discharge of materials into the water, air and land, and govern the use and disposal of hazardous substances. We believe that our operations are in substantial compliance with all applicable environmental laws and regulations, except for matters of non-compliance that we believe would not have a material adverse effect on our business or financial position. Where we believe necessary or appropriate, we have initiated response actions or obtained indemnities from predecessor owners.

Our recycled paperboard mills use substantial amounts of water in the papermaking process. Our mills discharge process wastewater pursuant to wastewater discharge permits into local sewer systems or directly into nearby waters. We use only small amounts of hazardous substances, and we believe the concentration of these substances in our wastewater discharge generally is below permitted maximums. From time to time, the imposition of stricter limits on the solids, sulfides, BOD (biological oxygen demand) or metals content of a mill’s wastewater requires us to alter the content of our wastewater. We can effect reductions by, among other things, additional screening of the wastewater, by otherwise changing the flow of process wastewater from the mill or from pretreatment ponds into the sewer system, and by adding chemicals to the wastewater. We also are subject to regulatory requirements related to the disposal of solid wastes and certain air emissions from our facilities. We are not currently aware of any other required expenditures relating to wastewater discharge, solid waste disposal or air emissions that we expect to have a material adverse effect on our business or financial condition, but we are unable to give assurance that we will not incur material expenditures in these areas in the future.

In addition, under certain environmental laws, we can be held strictly liable if hazardous substances are found on real property we have owned, operated or used as a disposal site. In recent years, we have adopted a policy of assessing real property for environmental risks prior to purchase. Although we are aware of issues regarding hazardous substances located at certain owned, operated or off-site facilities, in each case we believe that any possible liabilities will not have a material adverse effect on our business or financial position. See “— Risk Factors — We are subject to many environmental laws and regulations that require significant expenditures for compliance and remediation efforts, and changes in the law could increase those expenses and adversely affect our operations.”

Employees.

As of the filing of this report, the 78 facilities we operate have approximately 4,190 employees, of whom approximately 3,220 are hourly and 970 are salaried. Approximately 1,240 of our hourly employees are represented by labor unions. All principal union contracts expire during the period 2007-2009. Although we consider our relations with our employees to be good, we can give no assurance that we will be able to renegotiate union contracts with terms satisfactory to us. Our union contracts that expire in 2007 cover approximately 239 of our hourly employees.

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Executive Officers.

The names and ages, positions and period of service of each of our Company’s executive officers are set forth below. The term of office for each executive officer expires upon the earlier of the appointment and qualification of a successor or such officer’s death, resignation, retirement, removal or disqualification.

Name and Age	Position	Period of Service as Executive Officer and pre-Executive Officer experience (if an Executive Officer for less than 5 years)
Michael J. Keough (55)	President and Chief Executive Officer; Director	President and CEO since 1/2005; Director since 10/2002; Senior Vice President and Chief Operating Officer 3/2002-2004.
Ronald J. Domanico (48)	Senior Vice President and Chief Financial Officer; Director	Senior Vice President and Chief Financial Officer since 1/2005; Director since 5/2006; Vice President and CFO 10/2002-12/2004; 2000-2002, Executive Vice President and Chief Financial Officer of AHL Services, Inc., a provider of marketing support services; 1997-2000, CFO, Nabisco International, a manufacturer and distributor of packaged foods; 1981-1997, Chief Financial Officer, Kraft, Inc., Northern Europe, a manufacturer and distributor of packaged foods.
William A. Nix, III (55)	Vice President, Treasurer and Chief Accounting Officer	Since 1/2005; 4/2001-2004 Vice President, Treasurer and Controller.
Thomas C. Dawson, Jr. (55)	Vice President, Mill Group	Vice President since 12/2003; employed with Caraustar Mill Group since 1973.
Steven L. Kelchen (49)	Vice President, Converted Products Group	Since 5/2006; 8/2004-2006 Vice President, Caraustar Custom Packaging Group; 2000-2004 Vice President, Regional Manager, Folding Cartons & Labels’ Smurfit Stone Container Corporation, a leading integrated manufacturer of paperboard and paper-based packaging.
Gregory B. Cottrell (49)	Vice President, Recovered Fiber Group	Since 10/2004; employed with Caraustar Recovered Fiber Group since 1994.
John R. Foster (61)	Vice President, Sales and Marketing	Since 9/1996.
Barry A. Smedstad (60)	Vice President, Human Resources and Public Relations	Since 1/1999.

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Website. Our corporate website is www.caraustar.com. There you can access general information about our company, as well as our SEC filings. See “Introduction” above for more information regarding our website.

ITEM 1A. RISK FACTORS

Investors should consider the following risk factors, in addition to the other information presented in this annual report and the other reports and registration statements we file from time to time with the SEC, in evaluating us, our business and an investment in our securities. Any of the following risks, as well as other risks, uncertainties, and possibly inaccurate assumptions underlying our plans and expectations, could result in harm to our business and financial results and cause the value of our securities to decline, which in turn could cause investors to lose all or part of their investment in our Company. Investors are advised that it is impossible to identify or predict all risks that could affect us. Thus, the risks below are not the only ones facing our Company, and additional risks not currently known to us or that we currently deem immaterial also may impair our business.

Our business and financial performance may be adversely affected by future increases in raw material and other operating costs.

Our primary raw material is recycled paper, which is known in our industry as “recovered fiber.” The cost of recovered fiber has, at times, fluctuated greatly because of factors such as shortages or surpluses created by market or industry conditions. Although we have historically raised the selling prices of our products in response to raw material price increases, sometimes raw material prices have increased so quickly or to such levels that we have been unable to pass the price increases through to our customers on a timely basis, which has adversely affected our operating margins. We cannot give assurance that we will be able to pass such price increases through to our customers on a timely basis and maintain our margins in the face of raw material cost fluctuations in the future.

More recently, we have announced price increases on our products to help offset increases in other operating costs as well, such as energy, freight, employee benefits and insurance. Although we seek to realize the full benefit of these announced price increases, our ability to do so is dependent on numerous factors, such as customer acceptance of these increases, pricing strategies of our competitors, and contractual commitments that may limit our ability to raise prices. For all these reasons, we may not be able to realize the full benefits of pricing increases that we announce and work to implement.

Our operating margins and cash flow may be adversely affected by rising energy costs.

Excluding raw materials and labor, energy is our most significant manufacturing cost. Energy consists of electrical purchases and fuel used to generate steam used in the paper making process and to operate our paperboard machines and all of our other converting machinery. Our energy costs in 2006 remained essentially unchanged compared to 2005. In 2005, the average energy cost in our mill system was approximately $73 per ton and in 2006 it was $74 per ton, a 1.4% increase. In 2005, however, we experienced a 28.1% increase in energy costs compared to 2004. Until the last several years, our business had not been significantly affected by fluctuating energy costs, and we historically have not passed energy cost increases through to our customers. Although we have responded to recent energy cost increases by raising our selling prices, our ability to realize the full benefit of these price increases is dependent on, and limited by dynamics such as pricing strategies of our competitors and contractual commitments that affect our ability to raise prices as fast as our costs increase. Consequently, we have not been able to pass through to our customers all of the energy cost increases we have incurred. As a result, our operating margins have been adversely affected. Although we continue to evaluate our energy costs and consider ways to factor energy costs into our pricing, we cannot give assurance that our operating margins and results of operations will not continue to be adversely affected by rising energy costs.

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Our business and financial performance may be adversely affected by downturns in industrial production, housing and construction and the consumption of nondurable and durable goods.

Demand for our products in our four principal end use markets is primarily driven by the following factors:

• Tube, core and composite container — industrial production, construction spending and consumer nondurable consumption

• Folding cartons — consumer nondurable consumption and industrial production

• Gypsum wallboard facing paper — long-term interest rates, single and multifamily construction, repair and remodeling construction and commercial construction

• Specialty paperboard products — consumer nondurable consumption and consumer durable consumption

Downturns in any of these sectors will result in decreased demand for our products. In particular, our business has been adversely affected in recent periods by the general slow-down in industrial demand and housing and construction. These conditions are beyond our ability to control, but have had, and will continue to have, a significant impact on our sales and results of operations.

We are adversely affected by the cycles, conditions and problems inherent in our industry.

Our operating results tend to reflect the general cyclical nature of the business in which we operate. In addition, our industry has suffered from excess capacity. Our industry also is capital intensive, which leads to high fixed costs and generally results in continued production as long as prices are sufficient to cover variable costs. These conditions have contributed to substantial price competition and volatility within our industry. In the event of a recession, demand and prices are likely to drop substantially. Our profitability historically has been more sensitive to price changes than to changes in volume. Future decreases in prices for our products could adversely affect our operating results. These factors, coupled with our substantially leveraged financial position, may adversely affect our ability to respond to competition and to other market conditions or to otherwise take advantage of business opportunities.

Our business may suffer from risks associated with growth and acquisitions.

Historically, we have grown our business, revenues and production capacity to a significant degree through acquisitions. In the current difficult operating climate facing our industry and our financial position, the pace of our acquisition activity, and accordingly, our revenue growth, has slowed significantly as we have focused on conserving cash and maximizing the productivity of our existing facilities. However, we expect to continue to evaluate and pursue acquisition opportunities strategically, subject to available funding and credit flexibility. Growth through acquisition involves risks, many of which may continue to affect us based on previous acquisitions. We cannot give assurance that our acquired businesses will achieve the same levels of revenue, profit or productivity as our existing locations or otherwise perform as we expect.

Acquisitions also involve specific risks. Some of these risks include:

• assumption of unanticipated liabilities and contingencies;

• diversion of management’s attention; and

• possible reduction of our reported earnings because of:

• goodwill and intangible asset impairment;

• increased interest costs;

• issuances of additional securities or incurrence of debt; and

• difficulties in integrating acquired businesses.

As we grow, we can give no assurance that we will be able to:

• use the increased production capacity of any new or improved facilities;

• identify suitable acquisition candidates;

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• complete additional acquisitions; or

• integrate acquired businesses into our operations.

If we cannot raise the necessary capital for, or use our stock to finance acquisitions, expansion plans or other significant corporate opportunities, our growth may be impaired.

As described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources,” our senior credit facility and senior subordinated debt obligations impose limitations on our ability to make acquisitions or other strategic investments. Without additional capital, we may have to curtail any acquisition and expansion plans or forego other significant corporate opportunities that may be vital to our long-term success. If our revenues and cash flow do not meet expectations, then we may lose our ability to borrow money or have to do so on terms that we consider less favorable. Conditions in the capital markets also will affect our ability to borrow, as well as the terms of those borrowings. In addition, our financial performance and the conditions of the capital markets will also affect the value of our common stock, which could make it a less attractive form of consideration in making acquisitions. All of these factors could also make it difficult or impossible for us to expand in the future.

Our substantial indebtedness could adversely affect our cash flow and our ability to fulfill our obligations under our indebtedness.

We have a substantial amount of outstanding indebtedness. See “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and the consolidated financial statements included in Part II, Item 8 of this annual report. Our substantial level of indebtedness, including our senior notes due in 2009, increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on, or other amounts in respect of our indebtedness. We may also obtain additional long-term debt, increasing these risks. Our substantial leverage could have significant consequences to holders of our debt and equity securities. For example, it could:

• make it more difficult for us to satisfy our obligations with respect to our indebtedness, including compliance with financial covenants;

• increase our vulnerability to general, adverse economic and industry conditions;

• limit our ability to obtain additional financing;

• require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, reducing the amount of our cash flow available for other purposes, including capital expenditures and other general corporate purposes;

• require us to sell debt or equity securities, or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;

• restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities;

• limit our flexibility in planning for, or reacting to, changes in our business and our industry;

• place us at a possible competitive disadvantage compared to our competitors that have less debt;

• adversely affect the value of our common stock; and

• affect our viability as a going concern.

We are subject to many environmental laws and regulations that require significant expenditures for compliance and remediation efforts, and changes in the law could increase those expenses and adversely affect our operations.

Compliance with the environmental requirements of international, federal, state and local governments significantly affects our business. Among other things, these requirements regulate the discharge of materials into the water, air and land and govern the use and disposal of hazardous substances. These regulations are complex, and our compliance with them can be affected by a myriad of factors, including rates of production, changes in

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applicable standards or interpretations, human error, equipment malfunction and other factors. From time to time, we have and may continue to find that we have inadvertently failed to meet specific regulations or standards despite our efforts to comply with them. Under environmental laws, we also can be held strictly liable if hazardous substances are found on real property we previously owned, operated or used as a disposal site. Despite our compliance efforts, risk of environmental liability is part of the nature of our business. We maintain and generate hazardous substances at some facilities, and although we do not believe that any related liabilities or remedial costs will be material, we cannot give assurance that environmental liabilities, including compliance and remediation costs, will not have a material adverse effect on our business. In addition, future events may lead to additional compliance or other costs that could have a material adverse effect on our business. Such future events could include changes in, or new interpretations of, existing laws, regulations or enforcement policies, discoveries of past releases, failure of indemnitors to fulfill their obligations, or further investigation of the potential health hazards of certain products or business activities.

Our industry is highly competitive and price fluctuations and volatility could diminish our sales volume and revenues.

The industry in which we operate is highly competitive. Our competitors include other large, vertically integrated paperboard, packaging and gypsum wallboard manufacturing companies, including National Gypsum Company, The Newark Group, Inc., the Rock-Tenn Company, Smurfit-Stone Container Corporation, Altivity Packaging, Sonoco Products Company and USG Corporation, along with numerous smaller paperboard and packaging companies. As a result of product substitution, we also compete indirectly with manufacturers of similar products using other materials. In addition, we face increasing competition from foreign paperboard and packaging producers as a result of the continued migration of U.S. manufacturing offshore to find lower labor cost and the emergence of new, foreign competitors in these countries. We also face competition due to product substitution such as flexible packaging. The industry in which we compete is particularly sensitive to price pressure, as well as other factors, including quality, service, innovation and design, with varying emphasis on these factors depending on the product line. To the extent that one or more of our competitors becomes more successful with respect to any key competitive factors, our ability to attract and retain customers could be materially adversely affected. Some of our competitors are less leveraged than we are and have access to greater resources. These companies may be able to adapt more quickly to new or emerging technologies, respond to changes in customer requirements and withstand industry-wide pricing pressures. If our facilities are not as cost efficient as those of our competitors or if our competitors lower prices, we may need to temporarily or permanently close certain facilities, which could negatively affect our sales volume and revenues.

We have incurred and may incur additional material restructuring charges in the future, and we may not be successful in achieving the cost reductions contemplated by our recent and future restructuring activities.

Restructuring has been a primary component of our management’s strategy to address the decrease in demand resulting from secular trends and generally weak domestic economic conditions. Between 2001 and 2006, restructuring and impairment costs have totaled $228.6 million, of which approximately $194.9 million have been noncash charges. We have also experienced increases in near-term manufacturing and selling, general and administrative costs as a result of transitioning of business within our mill and converting systems to other company facilities. Our restructuring efforts have been directed toward reducing costs through rationalization of manufacturing and converting facilities. However, we can give no assurance that the cost reductions contemplated by our recent and future restructuring activities will be achieved within the expected time frame, or at all. Any delays or failure in delivering products to our customers due to our facilities rationalization may result in order cancellations or termination of customer relationships, all of which could adversely impact our competitive position and would offset any cost savings we might have achieved. Restructurings involve numerous risks, such as the diversion of management and employee attention, disruptions in customer relationships, production and capacity, and execution risks. Although under current market conditions we expect that restructuring charges will continue to decline, we may continue to incur material restructuring charges in the

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future, which may exceed our expectations if market conditions change. The recognition of these restructuring charges can cause our reported financial results for a given period to differ materially from our own expectations and those of investors generally, and can accordingly cause the trading prices of our securities to fluctuate significantly depending on the degree to which investors consider these charges relevant in evaluating our financial results and prospects.

Significant disruptions to our operations may materially and adversely affect our earnings.

We operate approximately 78 mills and converting facilities in the United States and in certain foreign countries. Natural disasters, such as hurricanes, tornadoes, fires, ice storms, wind storms, floods and other weather conditions, unforeseen operating problems and other events beyond our control may adversely affect the operations of our mills and converting facilities, which in turn would materially and adversely affect our earnings. Any losses due to such events may not be covered by our existing insurance policies. In the event that an occurrence of a natural disaster affected multiple locations, this event could materially and adversely affect our earnings.

In addition, a significant percentage of our hourly employees are represented by labor unions, with all principal union contracts expiring between 2007 and 2009. Although we consider our relations with our employees to be good, we cannot provide any assurance that the union contracts will be renewed in a timely manner, on terms acceptable to us, or at all, or that there will not be any work stoppage or other labor disturbance at any of our facilities. Work stoppages or other labor disturbances at one or more of our facilities may cause significant disruptions to our operations at such facilities, which may materially and adversely impact our results of operations.

Our business is subject to changing regulation of corporate governance and public disclosure that have increased both our costs and the risk of noncompliance.

Because our common shares are publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and Nasdaq, have in recent years issued new requirements and regulations, most notably the Sarbanes-Oxley Act of 2002. From time to time, since the adoption of the Sarbanes-Oxley Act of 2002, these authorities have continued to develop additional regulations or interpretations of existing regulations. Our ongoing efforts to comply with these regulations and interpretations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from revenue-generating activities to compliance activities.

Because these new and changed laws, regulations and standards are subject to varying interpretations, their application in practice may continue to evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding compliance matters and impose additional costs on us to revise our disclosure and governance practices accordingly.

The failure to effectively modernize and implement our information systems will adversely affect our operations, and the failure to complete the transition to our new information infrastructure could adversely affect our business.

The success of our business has become increasingly dependent on our ability to integrate computer technology into our operations. Complex computer systems have become indispensable to the timely processing of the volume of transactions generated by our daily operations. Our ability to obtain and service business depends on our ability to convey, internally and externally, accurate and timely information processed on these complex systems. We are in the process of replacing our core systems and reengineering our processes. These systems are very complex and interdependent and are critical to our success. Due to the extensive effort required

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to replace these systems and reengineer our processes, we are at risk for a system failure that could, among other problems, result in service interruptions or the production of incorrect data. Such system, process or programming failures, or the cumulative effect of such failures, including any resulting reliance upon information found to be inaccurate or unreliable, could result in the loss of existing customers, difficulty attracting new customers, problems in determining cost of production and establishing appropriate pricing, regulatory problems, increases in operating expenses and other material adverse consequences or material effects on our business, financial condition and results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

There were no unresolved staff comments as of December 31, 2006.

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ITEM 2. PROPERTIES

Facilities. The following table sets forth certain information concerning our facilities as of the filing of this report. Unless otherwise indicated, we own these facilities.

Type of Facility	Number of Facilities	Locations
PAPERBOARD
Paperboard Mills (1)	10	Austell, GA (Mill #1); Austell, GA (Mill #2); Austell, GA (Sweetwater); Tama, IA; Charlotte, NC; Cincinnati, OH; Taylors, SC; Chattanooga, TN; Richmond, VA; Tacoma, WA
Specialty Converting Plants	4	Austell, GA; Charlotte, NC; Mooresville, NC (leased); Taylors, SC
RECOVERED FIBER
Recovered Fiber Collection and Processing Plants (2)	7	Columbus, GA; Dalton, GA (leased); Doraville, GA; Charlotte, NC; Cleveland, OH; Hardeeville, SC; Texarkana, TX (leased)
TUBE, CORE AND COMPOSITE CONTAINER
Tube and Core Plants	31	Linden, AL; Crossett, AR; McGehee, AR (leased); Phoenix, AZ (leased); Kingston, Ontario, Canada; Scarborough, Ontario, Canada; Cantonment, FL; Palatka, FL; Austell, GA; Cedar Springs, GA; Dalton, GA; Beardstown, IL; Franklin, KY (leased); West Monroe, LA; Saginaw, MI; Corinth, MS; Asheville, NC; Kernersville, NC; Minerva, OH; Toledo, OH; Lancaster, PA (leased); Rock Hill, SC; Taylors, SC; Arlington, TX (leased); Silsbee, TX; Texarkana, TX; Salt Lake City, UT (leased); Franklin, VA; West Point, VA (leased); Weyers Cave, VA (leased); Tacoma, WA (leased)
Composite Container Plants	4	Orrville, OH; Saint Paris, OH (leased); Stevens Point, WI (leased); Covington, GA (leased)
Specialty Converting Plants	4	Austell, GA; Lancaster, PA (leased); Arlington, TX; Tacoma, WA (leased);
Plastics Plants	2	New Smyrna Beach, FL (leased); Union, SC
Special Services and Other Facilities	1	Kernersville, NC (leased)

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Type of Facility	Number of Facilities	Locations
FOLDING CARTON AND CUSTOM PACKAGING
Carton Plants	9	Denver, CO; Versailles, CT; Burlington, NC; Charlotte, NC; Randleman, NC; Grand Rapids, MI; St. Louis, MO; Kingston Springs, TN; Chicago, IL (leased);
Special Services	3	Versailles, CT; Cleveland, OH (leased); Charlotte, NC
JOINT VENTURES
Paperboard Mill	1	Newport, IN (50% interest)
Recovered Fiber Facility	2	Los Angeles, CA (24.5% interest); Pinebrook, NJ (50% interest)

(1) All of our paperboard mills produce uncoated recycled paperboard with the exceptions of our Tama, IA paperboard mill, which produces clay-coated recycled boxboard.

(2) Recovered fiber collection and/or processing also occurs at all of our mill sites, all of our carton plants, and all of our tube and core plants.

ITEM 3. LEGAL PROCEEDINGS

From time to time, claims are asserted against the Company arising out of its operations in the normal course of business. Management does not believe that the Company is currently a party to any litigation that will have a material adverse effect on its financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the Company’s security holders during the quarter ended December 31, 2006.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common shares, $.10 par value (the “Common Shares”), are traded on the Nasdaq Global Market (“Nasdaq”) under the symbol CSAR. As of March 13, 2007, there were approximately 516 shareholders of record and, as of that date, we estimate that there were approximately 1,726 beneficial owners holding stock in nominee or “street” name and approximately 1,071 holders of shares in the Company’s 401(k) plan. The table below sets forth quarterly high and low stock prices during the years 2005 and 2006.

	2005				2006
	High		Low		High		Low
First Quarter	$	17.00	$	12.12	$	12.08	$	8.57
Second Quarter		13.95		8.12		10.75		7.60
Third Quarter		12.38		10.23		9.03		6.63
Fourth Quarter		11.38		8.53		11.00		7.00

The Company suspended dividend payments in 2002 and does not expect to distribute dividends until our cash flow performance improves. As described in Part II, Item 7 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources,” our debt agreements contain certain limitations on the payment of dividends and currently preclude us from doing so.

The following table sets forth all purchases made by or on behalf of the Company or an “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares of the Company’s common stock during each month for 2006.

Period	(a) Total Number of Shares Purchased (1)	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of shares that May Yet Be Purchased Under Plans or Programs
January 1 — January 31, 2006	181	$	8.85	—	—
February 1 — February 28, 2006	—		—	—	—
March 1 — March 31, 2006	—		—	—	—
April 1 — April 30, 2006	—		—	—	—
May 1 — May 31, 2006	—		—	—	—
June 1 — June 30, 2006	—		—	—	—
July 1 — July 31, 2006	—		—	—	—
August 1 — August 31, 2006	—		—	—	—
September 1 — September 30, 2006	—		—	—	—
October 1 — October 31, 2006	—		—	—	—
November 1 — November 30, 2006	—		—	—	—
December 1 — December 31, 2006	—		—	—	—
Total	181	$	8.85	—	—

(1) These shares were surrendered by employees to satisfy the employee’s minimum withholding obligations in connection with the vesting of restricted common stock issued by the Company. The Company does not consider the purchase of shares from employees in this context to be pursuant to a publicly announced plan or program. The table excludes shares withheld from employees in “cashless exercises” to satisfy minimum tax withholding requirements and to pay the exercise price of options.

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ITEM 6. SELECTED FINANCIAL DATA

	Year Ended December 31,
	2006			2005			2004			2003			2002
	(In thousands, except per share data)
Summary of Operations
Sales	$	989,918		$	967,629		$	968,001		$	909,071		$	862,399
Cost of sales		854,382			835,587			816,362			760,253			720,348
Selling, general and administrative expenses		127,491			129,826			128,187			139,906			129,180
Goodwill impairment		—			49,859			—			—			—
Restructuring and impairment costs		37,729			75,599			21,706			14,887			11,292
Gain on sale of real estate		—			—			10,323			—			—
Income (loss) from operations		(29,684	)		(123,242	)		12,069			(5,975	)		1,579
Other (expense) income:
Interest expense		(25,913	)		(41,961	)		(42,160	)		(43,905	)		(38,115	)
Interest income		3,829			2,629			948			1,026			1,652
Write-off of deferred debt costs		—			—			—			(1,812	)		—
Equity in income of unconsolidated affiliates		5,613			37,043			25,251			8,354			2,488
Gain on sale of interest in Standard Gypsum, L.P.		135,247			—			—			—			—
Loss on redemption of senior subordinated notes		(10,272	)		—			—			—			—
Other, net		82			482			(1,046	)		207			130
		108,586			(1,807	)		(17,007	)		(36,130	)		(33,845	)
Income (loss) from continuing operations before income taxes and minority interest		78,902			(125,049	)		(4,938	)		(42,105	)		(32,266	)
Benefit (provision) for income taxes		(27,634	)		29,722			1,414			15,021			11,223
Minority interest in (income) losses		(102	)		273			(184	)		196			235
Income (loss) from continuing operations		51,166			(95,054	)		(3,708	)		(26,888	)		(20,808	)
Income (loss) from discontinued operations before income taxes		(5,781	)		(10,866	)		(391	)		(225	)		4,488
Benefit (provision) for income taxes of discontinued operations		1,947			2,534			120			78			(1,600	)
Income (loss) from discontinued operations		(3,834	)		(8,332	)		(271	)		(147	)		2,888
Net income (loss)	$	47,332		$	(103,386	)	$	(3,979	)	$	(27,035	)	$	(17,920	)
Diluted weighted average shares outstanding		28,607			28,774			28,479			27,993			27,871
Diluted Per Share and Market Data
Income (loss) from continuing operations	$	1.79		$	(3.30	)	$	(0.13	)	$	(0.96	)	$	(0.80	)
Income (loss) from discontinued operations		(.13	)		(0.29	)		(0.01	)		(0.01	)		0.16
Net income (loss)		1.66			(3.59	)		(0.14	)		(0.97	)		(0.64	)
Market price on December 31		8.09			8.69			16.82			13.80			9.48
Shares outstanding, December 31		29,084			28,786			28,753			28,222			27,907
Total Market Value of Common Stock	$	235,290		$	250,150		$	483,625		$	389,464		$	264,558
Balance Sheet and Other Data
Cash and cash equivalents	$	1,022		$	95,152		$	89,756		$	85,551		$	34,314
Property, plant and equipment, net		263,605			255,037			388,134			410,772			443,395
Depreciation and amortization		24,171			28,493			30,089			30,991			54,246
Capital expenditures		38,169			24,272			20,891			20,006			22,542
Total assets		624,275			859,132			959,705			960,255			990,333
Current maturities of long-term debt		5,830			85			80			106			70
Long-term debt, less current maturities		260,092			492,305			506,141			531,001			532,715
Shareholders’ equity		161,586			108,396			217,252			219,877			241,681
Total shareholders’ equity and debt	$	427,508		$	600,786		$	723,473		$	750,984		$	774,466

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

We are a major manufacturer of recycled paperboard and converted paperboard products. We operate in four business segments. The paperboard segment manufactures 100% recycled uncoated and clay-coated paperboard and operates a specialty converting operation. The recovered fiber segment collects and sells recycled paper and brokers recycled paper and other paper rolls. The tube, core and composite container segment produces spiral and convolute-wound tubes, cores and cans. The folding carton and custom packaging segment produces printed and unprinted folding cartons and set-up boxes.

Our business is vertically integrated to a large extent. This means that our converting operations consume a large portion of our own paperboard production, approximately 45% in 2006. The remaining 55% of our paperboard production is sold to external customers in any of the four recycled paperboard end-use markets: tube, core and composite containers; folding cartons; gypsum wallboard facing paper; and specialty paperboard products. These integration statistics do not include volume produced or converted by our 50% owned, unconsolidated joint venture Premier Boxboard. As part of our strategy to optimize our operating efficiency, each of our mills can produce recycled paperboard for more than one end-use market. This allows us to shift production among mills in response to customer or market demands.

More recently, in light of the difficult operating climate we have faced, and in an effort to reduce costs and improve our business mix, capacity deployment and profitability, restructuring activities have become an important element of our strategy. The previous sales of our interest in Standard Gypsum and our corrugated box plant and partition businesses, as well as the recent sale of our two coated recycled paperboard mills and our specialty packaging businesses, are all part of our strategic transformation plan to reduce our debt and better position ourselves to compete and leverage our expertise in our core businesses.

We are a holding company that operates our business through 22 subsidiaries as of the date of this filing. We also own a 50% interest in a joint venture with Temple-Inland. We have two additional joint ventures with unrelated entities in which our investment and share of earnings are immaterial. We account for these interests in our joint ventures under the equity method of accounting. See “— Liquidity and Capital Resources — Off-Balance Sheet Arrangements — Joint Venture Financings” below.

Key Business Indicator and Trends

Historically, demand in our industry has been closely correlated with the domestic economy in general, and with consumer nondurable consumption (packaging segment) and industrial production (tube, core and composite containers segment), specifically. Demand tends to be cyclical in nature, with cycles lasting three to five years depending on gross domestic product, interest rates and other factors. As these demand drivers fluctuate, we typically experience variability in volume, revenue and profitability in our business. From late 1999 through 2002, the recycled paperboard and converted paperboard products industry was in a down cycle. Since 2002 our industry has improved but has not returned to historical levels of demand and capacity utilization. While we believe that future operating results may improve, we cannot ascertain when or to what extent this may occur.

The key operating indicator of our business is paperboard mill operating rates. Mill operating rates are calculated as the ratio of production compared with capacity, assuming a normalized mill schedule of 355 days per year. As paperboard mill operating rates increase, cost per ton of paperboard generally decreases. As these tons are sold, profitability increases since fixed production costs are absorbed by more tons produced. Additionally, higher operating rates generally provide enhanced opportunity to recover material and labor increases through improved pricing. This positively affects paperboard and converted products’ income from operations and cash flow.

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Paperboard mill operating rates are affected by demand and by mill closures. Industry demand decreased from 2000 to 2002 due primarily to a recessionary general economy, the continued migration of U.S. manufacturing offshore to find lower labor cost and product substitution such as the replacement of paperboard carton packaging with plastic standup pouches. The decrease in demand resulted in a decrease in operating rates for us and the industry as a whole. We expect the migration of U.S. manufacturing offshore and product substitution to continue, although at a slower rate, which could continue to negatively affect operating results. We further expect these trends to be somewhat offset by the improving domestic economy, increased market share and our own paperboard mill capacity reductions.

Industry Source: American Forest and Paper Association.

Restructuring has been a primary component of management’s strategy to address the decrease in demand resulting from secular trends, as discussed above, and generally weak domestic economic conditions. Between 2001 and 2006, restructuring and impairment costs have totaled $228.6 million, of which approximately $194.9 million have been noncash charges, see “Results of Operations 2006 — 2005” and “Results of Operations 2005 — 2004.” We have also experienced increases in near-term manufacturing and selling, general and administrative costs as a result of our transitioning of business within our mill and converting systems to other company facilities. Our strategic initiatives are designed to enhance our competitiveness through reduced costs, increase revenue through delivery of differentiated quality products and services to our customers, and promote compliance with recent changes in legal and regulatory requirements. Our restructuring efforts have been directed toward reducing costs through manufacturing and converting facilities rationalization where we believed it was advantageous to do so due to geographic overlap, duplicative capabilities, changes in customer base and other factors. Rationalization of facilities typically results in increased cash outlays and expenses initially, for example, severance costs. Restructuring charges decreased in 2006 versus 2005 and we believe that future earnings and cash flows will be favorably impacted by our continued efforts to reconfigure our business to increase efficiency and better match supply with customer demand.

Recovered fiber, which is derived from recycled paper stock, is our most significant raw material. Historically, the cost of recovered fiber has fluctuated significantly due to market and industry conditions. For example, our average recovered fiber cost per ton of paperboard produced increased from $43 per ton in 1993 to $144 per ton in 1995, an increase of 235%, before dropping to $66 per ton in 1996. Recovered fiber cost per ton averaged approximately $106 and $103 during 2005 and 2006, respectively.

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Excluding raw materials and labor, energy is our most significant manufacturing cost. Energy consists of fuel used to generate steam used in the paper making process and electrical purchases to operate our paperboard machines and all of our converting machinery. In 2004, the average energy cost in our mill system was approximately $57 per ton compared to $73 per ton in 2005, a 28.1% increase. In 2006 energy costs averaged $74 per ton, an increase of 1.4% from 2005. Until the last several years, our business had not been significantly affected by fluctuating energy costs, and we historically have not passed increases in energy costs through to our customers. As the volatility of energy prices has increased dramatically over the last three years, we have not been able to pass through to our customers all of the energy cost increases we have incurred. As a result, our operating margins have been adversely affected. Although we continue to evaluate our energy costs and consider ways to factor energy costs into our pricing, we cannot give assurance that our operating margins and results of operations will not continue to be adversely affected by rising energy costs. See Part I, Item 1, “Risk Factors — Our operating margins may be adversely affected by rising energy costs.”

We raise our selling prices in response to increases in raw material and energy costs. However, we often are unable to pass the full amount of these costs through to our customers on a timely basis due to supply and demand in the industry, and as a result often cannot maintain our operating margins in the face of dramatic cost increases. We experience margin shrinkage during all periods of cost increases due to customary time lags in implementing our price increases. We cannot give assurance that we will be able to recover any future increases in the cost of recovered fiber by raising the prices of our products. Even if we are able to recover future cost increases, our operating margins and results of operations may still be materially and adversely affected by time delays in the implementation of price increases. See Part I, Item 1, “Risk Factors — Our business and financial performance may be adversely affected by future increases in raw material and other operating costs.”

Critical Accounting Policies

Our accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported. The following are critical accounting matters which are both very important to the portrayal of our financial condition and results of operations and require some of management’s most difficult, subjective and complex judgments. The accounting for these matters involves forming estimates based on current facts, circumstances and assumptions which, in management’s judgment, could change in a manner that would materially affect management’s future estimates with respect to such matters and, accordingly, could cause future reported financial conditions and results of operations to differ materially from financial results reported based on management’s current estimates. Changes in these estimates are recorded periodically based on updated information.

Revenue Recognition. We recognize revenue and the related account receivable when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) ownership has transferred to the customer; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (4) is based on management’s judgments regarding the collectibility of our accounts receivable. Generally, we recognize revenue when we ship our manufactured products or when we complete a service and title and risk of loss passes to our customers. Provisions for discounts, returns, allowances, customer rebates and other adjustments which have averaged less than 1% of sales for the years ended December 31, 2004, 2005 and 2006 are provided for in the same period as the related revenues are recorded and are determined based on historical experience or specific customer arrangements.

Accounts Receivable. We perform periodic credit evaluations of our customers and adjust credit limits based upon payment history and the customers’ current credit worthiness, as determined by our review of their current credit information. We monitor collections from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. When we become aware of a customer whose financial viability is questionable, we closely monitor collection of their receivable balance and may require the customer to prepay for future shipments. If a customer enters a

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bankruptcy action, we monitor the progress of that action to determine when and if an additional provision for noncollectibility is warranted. We evaluate the adequacy of the allowance for doubtful accounts on at least a quarterly basis. The allowance for doubtful accounts at December 31, 2004, 2005 and 2006 was $3.1 million, $2.3 million and $2.2 million, respectively, and our provision for uncollectible accounts was $1.8 million, $270 thousand and $1.4 million for the years ending 2004, 2005 and 2006, respectively. The decline in our provision during 2005 primarily resulted from recoveries of previously reserved accounts. While our credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. These estimates may prove to be inaccurate, in which case we may have overstated or understated the reserve required for uncollectible accounts receivable.

Inventory. Inventories are carried at the lower of cost or market. Cost includes raw material (recovered fiber for paperboard products and paperboard for converted products), direct and indirect labor and employee benefits, energy and fuel, depreciation, chemicals, general manufacturing overhead and various other costs of manufacturing. Market, with respect to all inventories, is replacement cost or net realizable value. Management reviews inventory at least quarterly to determine the necessity of write-offs for excess, obsolete or unsaleable inventory. Inventory over six months old is generally deemed unsaleable at first quality prices unless customer arrangements or other special circumstances exist. We reserve for inventory obsolescence and shrinkage based on management’s judgment of future realization. These reviews require management to assess customer and market demand. These estimates may prove to be inaccurate, in which case we may have overstated or understated the write-offs required for excess, obsolete or unsaleable inventory; however, in 2004, 2005 and 2006, these write-offs, other than those related to specific customer bankruptcies, were insignificant.

Goodwill. We test the carrying amount of goodwill at least annually as of the beginning of the fourth quarter and whenever events or circumstances indicate that impairment may have occurred. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. Impairment testing is performed in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” and is based on a discounted cash flow approach to determine the fair value of each reporting unit. The determination of fair value requires significant management judgment including estimating future sales volumes, growth rates of selling prices and costs, changes in working capital, investments in property and equipment and the selection of an appropriate discount rate. We also test the sensitivities of fair value estimates to changes in our growth assumptions of sales volumes, selling prices and costs. If the carrying amount of a reporting unit that contains goodwill exceeds fair value, a possible impairment is indicated. If a possible impairment is indicated, we estimate the implied fair value of goodwill by comparing the carrying amount of the net assets of the unit excluding goodwill to the total fair value of the unit attributed to those net assets. If the carrying amount of goodwill exceeds its implied fair value, an impairment charge is recorded. We also use judgment in assessing whether we should test more frequently for impairment than annually. Factors such as unexpected adverse economic conditions, competition, product changes and other external events may require more frequent assessments.

In December 2005, we recognized certain impairment indicators related to our decision, at that time, to exit the coated recycled paperboard business. As a result, we retested our goodwill as of December 31, 2005 and recorded impairment charges of approximately $10.5 million in our paperboard segment and $39.3 million in our folding carton and custom packaging segment. The goodwill impairment recorded in our folding carton and custom packaging segment resulted from the expected loss of synergies that existed between the coated recycled paperboard business and the folding carton and custom packaging segment resulting from the proposed disposition of the coated recycled paperboard business at that time.

Our most recent annual goodwill impairment test was performed in November 2006 and did not result in any additional goodwill impairment. We believe that our remaining goodwill balance of $127.5 million as of December 31, 2006 is not impaired.

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Impairment of Long-Lived Assets. Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we periodically evaluate long-lived assets, including property, plant and equipment and definite lived intangible assets whenever events or changes in conditions may indicate that the carrying value may not be recoverable. Factors that management considers important that could initiate an impairment review include the following:

• significant operating losses

• recurring operating losses

• significant declines in demand for a product produced by an asset capable of producing only that product

• assets that are idled or held for sale

• assets that are likely to be divested

The impairment review requires management to estimate future undiscounted cash flows associated with an asset or group of assets and sum the estimated future cash flows. If the future undiscounted cash flows is less than the carrying amount of the asset, then we must estimate the fair value of the asset. If the fair value of the asset is below the carrying value, then the difference will be written off. Estimating future cash flows requires management to make judgments regarding future economic conditions, product demand and pricing. Although we believe our estimates are appropriate, significant differences in the actual performance of the asset or group of assets may materially affect our asset values and results of operations.

Impairment charges of $13.1 million, $85.6 million and $28.7 million related to property, plant and equipment were recorded in 2004, 2005 and 2006, respectively. Of these amounts $406 thousand, $11.7 million and $100 thousand were recorded in discontinued operations during 2004, 2005 and 2006, respectively. During 2005 and 2006, respectively, approximately $75.4 million and $16.9 million of the impairments were related to the disposition of the Sprague, Connecticut and Rittman, Ohio coated paperboard mills. The assets impaired include real estate and machinery and equipment related to operations that permanently closed in conjunction with our restructuring activities, discontinued businesses and routine asset disposals. The charges represent the difference between the carrying value of the assets and the estimated fair value. Fair value for assets held for sale as of December 31, 2005 were estimated based on considerations of preliminary indication of values from potential buyers, supported by industry multiples of earnings before interest, taxes and depreciation, discounted cash flows, and broker’s opinions of value for real estate. Real estate held for sale as of December 31, 2006 of $2.5 million is recorded as a component of other current assets.

Self-Insurance. We are self-insured for the majority of our workers’ compensation costs and health care costs, subject to specific retention levels. Consulting actuaries and administrators assist us in determining our liability for self-insured claims. Our self-insured workers’ compensation liability is estimated based on actual claims as established by a third-party administrator, increased by factors that reflect our historical claim development. The “developed” claim, net of amounts paid and discounted to present value, represents the liability that we record in our financial statements. The primary controllable driver of our workers’ compensation liability is the loss development factor that estimates the amount to which one dollar in actual claims incurred will ultimately grow over the life of the claim, which may be several years. A 10.0% increase in the loss development factors utilized for 2006 would have resulted in a $368 thousand increase in workers’ compensation expense and accrued liability at December 31, 2006. Our self-insured health care liability is estimated based on our actual claim experience and multiplied by a time lag factor of 37 days. The lag factor represents an estimate of the number of days based on historical experience that claims have been incurred but not yet reported and, therefore, should be recorded as a liability. A 10.0% increase in the lag factor would have resulted in a $211 thousand increase in our healthcare costs and accrued liability at December 31, 2006. Future actual costs related to self-insured coverages will depend on claims incurred, medical cost trends which have increased in recent years, safety performance, and various other factors related to our employee population, which has decreased in recent years. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our workers’ compensation costs and group health insurance costs.

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Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. We record valuation allowances due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain state net operating losses carried forward and state tax credits, before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could have a material negative impact on our statement of operations and our balance sheet.

At December 31, 2006 and 2005, we had net federal and state deferred tax assets related to net operating losses of $22.2 million and $53.4 million, respectively. At December 31, 2006 and 2005 we established valuation allowances of $15.8 million and $12.0 million for a portion of these deferred tax assets, respectively. For additional information, see Note 12 to our consolidated financial statements included in Part II, Item 8 of this annual report.

Pension and Other Postretirement Benefits. We maintain a noncontributory, defined benefit pension plan (the “Pension Plan”). The Pension Plan provides benefits to be paid to all eligible employees at retirement based primarily on years of service with the Company and compensation rates in effect near retirement. Our policy is to fund benefits attributed to employees’ services to date as well as service expected to be earned in the future. During September 2005, we contributed $13.1 million to the Pension Plan and there were no contributions made in 2004. No contribution was required or made during 2006. Based on our current estimate of future funding requirements, we expect to make contributions between $13.4 million and $16.7 million during 2007.

In September 2004, we announced the suspension of any further pension benefits for certain employees covered by the Pension Plan. The suspension was effective as of December 31, 2004 and froze the accrued pension benefits for employees not subject to a collective bargaining agreement and employees who do not qualify for continued benefits based on years of service and age requirements. The curtailment reduced our December 31, 2004 projected benefit obligation by $3.9 million and increased 2004 pension expense by $97 thousand.

Certain executives participate in a supplemental executive retirement plan (“SERP”), which provides retirement benefits to participants based on average compensation. The SERP was unfunded at December 31, 2006.

The determination of our Pension Plan and SERP benefit obligations and expense is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the weighted average discount rate, the weighted average expected rate of return on plan assets and the weighted average rate of compensation increase. The following table is a summary of the significant assumptions we used to determine our Pension Plan’s projected benefit obligation as of:

	SERP				Pension Plan
	2005		2006		2005		2006
Weighted average discount rate	5.75	%	5.85	%	5.75	%	6.05	%
Weighted average rate of compensation increase	4.00	%	4.00	%	3.00	%	3.00	%

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The following table is a summary of the significant assumptions to determine net periodic pension expense for the years ended:

	SERP						Pension Plan
	2004		2005		2006		2004		2005		2006
Weighted average discount rate	6.25	%	5.75	%	5.75	%	6.25	%	5.75	%	5.75	%
Weighted average expected rate of return on plan assets	N/A		N/A		N/A		9.00	%	8.50	%	8.50	%
Weighted average rate of compensation increase	3.00	%	3.00	%	4.00	%	3.00	%	3.00	%	3.00	%

In developing the weighted average discount rate, we evaluated input from our actuaries, including estimated timing of obligation payments and yields for long-term bonds that received one of the two highest ratings given by a recognized rating agency. The discount rate, determined on this basis, was 6.05% and 5.75% at December 31, 2006 and 2005, respectively. Based on analysis of the rating and maturity of the long-term bonds, the timing of payment obligations and the input from our actuaries, we concluded that a discount rate of 6.05% is appropriate and reflects the yield of a portfolio of high-quality bonds that has the same duration as the plan obligations. Future actual pension expense and benefit obligations will depend on future investment performance, changes in discount rates and various other factors related to populations participating in our pension plans. A 0.25% change in the discount rate would result in a change in the December 31, 2006 projected benefit obligation of approximately $4.2 million and estimated 2006 net pension expense of approximately $503 thousand.

In developing our weighted average expected rate of return on plan assets, we evaluated such criteria as return expectations by asset class and long-term inflation assumptions. Our expected weighted average rate of return is based on an asset allocation assumption of approximately 51% equity, 30% fixed income and 19% investment in a portfolio of hedge funds. We regularly review our asset allocation and periodically rebalance our investments to our targeted allocation when considered appropriate. As a result of this analysis, we concluded that the expected weighted average rate of return of 8.5% for December 31, 2005 should remain the same for December 31, 2006. A 0.25% change in the weighted average expected rate of return would change estimated 2006 net pension expense $300 thousand.

No contribution was required or made in 2006, however, based on our current estimate of future fund requirements, we expect to make contributions between $13.4 million and $16.7 million during 2007. Although no contribution was required in 2005, we contributed $13.1 million in the third quarter of 2005. Primarily as a result of higher investment returns and a lower discount rate, the under-funded status of our Pension Plan and the SERP decreased by approximately $7.6 million in 2006. We believe the change in our mortality assumptions is more representative of the Plan’s participant demographics. While we believe that the assumptions we have used are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our Pension Plan and SERP liability.

We also provide postretirement medical benefits at certain of our subsidiaries. Our net periodic postretirement benefit cost for medical costs was approximately $178 thousand, $503 thousand and $571 thousand for the years ended December 31, 2004, 2005 and 2006, respectively. The accumulated postretirement benefit obligations at December 31, 2005 and 2006 were determined using a weighted average discount rate of 5.65% and 5.90%, respectively. The rate of increase in the costs of covered health care benefits is assumed to be 9.0% in 2007, decreasing to 4.5% by the year 2011. Increasing or decreasing the assumed health care costs trend rate by one percentage point would have increased or decreased the accumulated postretirement benefit obligation as of December 31, 2006 by approximately $624 thousand and $530 thousand, respectively and this would have increased or decreased net periodic postretirement benefit cost by approximately $40 thousand and $34 thousand, respectively, for the year ended December 31, 2006.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158

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requires an employer that is a business entity and sponsors one or more single employer benefit plans to (1) recognize the funded status of the benefit in its statement of financial position, (2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets and obligations as of the employer’s fiscal year-end balance sheet date, and (4) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations. The recognition and disclosure provisions of SFAS No. 158 were effective for our fiscal year ended December 31, 2006. See Note 11 to the consolidated financial statements in Part II, Item 8 of this annual report for the impact of adoption of SFAS No. 158.

Depreciation. Management is required to make estimates regarding useful lives and salvage values of long-lived assets. These estimates can significantly affect depreciation expense and accordingly, both results of operations and the asset values reflected on the balance sheet.

Results of Operations 2005 — 2006

The volume information shown below includes shipments of paperboard products (excluding volume shipped by our unconsolidated joint ventures) combined and presented by end-use market as well as by reporting segments. It is important to note, however, that portions of our sales do not have related paperboard volume, such as sales of recovered fiber and sales of plastic products.

	Years Ended December 31,		Change		% Change
	2005	2006
Paperboard volume by end-use market (tons in thousands):
Tube, core and composite container market
Volume shipped to internal converters	277.1	272.3	(4.8	)	(1.7	)%
Mill volume shipped to external customers	46.7	52.5	5.8		12.4	%
Total	323.8	324.8	1.0		0.3	%
Folding carton market
Volume shipped to internal converters	161.3	156.1	(5.2	)	(3.2	)%
Mill volume shipped to external customers	242.6	190.5	(52.1	)	(21.5	)%
Total	403.9	346.6	(57.3	)	(14.2	)%
Gypsum wallboard facing paper market
Mill volume shipped to external customers	80.2	88.7	8.5		10.6	%
Specialty paperboard products market
Volume shipped to internal converters	86.3	97.7	11.4		13.2	%
Mill volume shipped to external customers	166.9	140.9	(26.0	)	(15.6	)%
Volume related to discontinued operations	16.2	2.4	(13.8	)	(85.2	)%
Total	269.4	241.0	(28.4	)	(10.5	)%
Total paperboard volume	1,077.3	1,001.1	(76.2	)	(7.1	)%
Total paperboard volume excluding discontinued operations	1,061.1	998.7	(62.4	)	(5.9	)%
Paperboard volume by reporting segment (in thousands):
Paperboard	577.8	534.5	(43.3	)	(7.5	)%
Tube, core and composite container market	322.0	308.1	(13.9	)	(4.3	)%
Folding carton and custom packaging	161.3	156.1	(5.2	)	(3.2	)%
Volume related to discontinued operations	16.2	2.4	(13.8	)	(85.2	)%
Total paperboard volume	1,077.3	1,001.1	(76.2	)	(7.1	)%

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Paperboard Volume. Total paperboard volume from continuing operations for the year ended December 31, 2006, decreased 5.9% to 998.7 thousand tons from 1,061.1 thousand tons for the same period in 2005. Tons sold from paperboard mill production decreased 9.2% in 2006. The total volume of paperboard converted was essentially unchanged with only a slight increase of 0.3% for the year ended December 31, 2006.

Total paperboard volume decreased due to a decrease in sales of unconverted paperboard to the folding carton and the specialty paperboard products end-use markets, combined with lower converted volume in the tube, core and composite container and the folding carton and custom packaging segments. These decreases were partially offset by higher sales of unconverted paperboard to the tube, core and composite container and the gypsum wallboard facing paper markets as well as higher sales of converted paperboard to the specialty paperboard market.

Sales. Our consolidated sales for the year ended December 31, 2006, increased by 2.3% to $989.9 million from $967.6 million for the same period in 2005. The following table presents sales by business segment (in thousands):

	Years Ended December 31,				$ Change			% Change
	2005		2006
Paperboard	$	278,655	$	270,015	$	(8,640	)	(3.1	)%
Recovered fiber		86,180		117,336		31,156		36.2	%
Tube, core and composite container		373,766		367,405		(6,361	)	(1.7	)%
Folding carton and custom packaging		229,028		235,162		6,134		2.7	%
Total	$	967,629	$	989,918	$	22,289		2.3	%

Paperboard Segment

Sales for the paperboard segment decreased due to lower volume which accounted for $27.9 million of the decrease and was primarily due to the disposition of our Rittman and Sprague coated paperboard mills. This decrease was partially offset by higher selling prices in our uncoated paperboard operations which accounted for an estimated increase of $19.3 million in sales.

Recovered Fiber Segment

Sales for the recovered fiber segment increased primarily due to higher volume and selling prices. The increased volume was primarily due to increased sales to our 50% owned joint venture, Premier Boxboard, which accounted for approximately $29.3 million of the $31.2 million increase.

Tube, Core and Composite Container Segment

Sales for the tube, core and composite container segment decreased primarily due to lower volume, as a result of soft industry conditions, which accounted for a decrease of $20.8 million. This decrease was partially offset by higher tube, core and composite container selling prices which accounted for an estimated increase of $13.9 million in sales.

Folding Carton and Custom Packaging Segment

Sales for the carton and custom packaging segment increased primarily due to $20.0 million in sales from the Carolina Carton plant which was acquired from Sonoco Products Company on December 31, 2005. This increase in sales was partially offset by lower volume of approximately $14.7 million resulting from closing and consolidating operations and eliminating customers with low margins and high credit risk.

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Cost of Sales. Cost of sales for the year ended December 2006, increased $18.8 million from $835.6 million in 2005 to $854.4 million in 2006. This increase was primarily due to the following factors:

• Higher recovered fiber costs of approximately $20.8 million due to higher volume in the recovered fiber segment.

• Higher freight costs of $5.4 million.

• Higher energy and fuel costs of $6.7 million in the paperboard segment.

• Higher employee labor and benefit costs of $3.9 million in the paperboard segment.

• Higher direct material costs of $4.9 million in the folding carton and custom packaging segment primarily due to higher sales.

• Higher repairs and maintenance expense of $4.3 million in the paperboard segment.

• Higher other manufacturing costs of $4.1 million in the folding carton and custom packaging segment primarily due to accelerated depreciation expenses related to plant closures.

• Higher direct material costs of $2.1 million in the paperboard segment primarily due to higher volume.

• Higher labor costs of $1.4 million in the folding carton and custom packaging segment.

• Accelerated depreciation expense of approximately $1.1 million in the paperboard segment related to a mill closure.

These factors were partially offset by the following improvements:

• Lower direct materials costs, energy and fuel costs, depreciation expense, and other manufacturing costs of approximately $27.6 million in the paperboard segment primarily due to the disposition of the Rittman and Sprague coated paperboard mills in 2006.

• Lower direct material costs of $4.9 million in the tube, core and composite container segment primarily due to lower volume.

• Lower indirect labor costs and employee benefit expenses of $2.8 million in the tube, core and composite container segment primarily due to lower workers compensation expenses and lower group health costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2006, decreased by 1.8% to $127.5 million from $129.8 million for the same period in 2005. This decrease was primarily due to the following factors:

• Elimination of approximately $4.0 million in selling, general and administrative expenses in the paperboard segment due to ceasing manufacturing operations at the Rittman, Ohio mill and the divestiture of the Sprague, Connecticut coated mill.

• Lower expenses in the information technology department of $2.8 million primarily due to lower employee salaries expenses, equipment lease expenses, and outside professional services costs.

These factors were partially offset by the following expenses:

• An expense of $1.2 million related to the settlement of a patent infringement dispute in 2006.

• Higher accounts receivable reserve expense of $1.0 million in the recovered fiber segment.

• A $1.0 million increase in equity-based compensation expense.

• A $900 thousand increase in expenses related to the implementation of an enterprise resource planning software system.

• An expense of $500 thousand for deferred compensation related to the retirement of an officer of the company.

Restructuring and Impairment Costs. For the year ended December 31, 2006, we incurred charges totaling $37.7 million for restructuring and impairment costs. Of this total, approximately $28.6 million was for impairment of assets, $5.7 million for severance and other termination benefits, and $3.4 million for other exit costs. During 2006 we made payments of $4.7 million for severance and other termination benefits and $4.3 million for other exit costs. For the year ended December 31, 2005, we incurred charges totaling $75.6 million for restructuring and impairment costs. Included in this total were $640 thousand in severance and other termination benefit costs, $1.0 million in other exit costs, and $74.0 million of impairment costs related primarily to the disposition of two of our coated recycled paperboard facilities. These restructuring plans are a component of management’s strategy to match supply with market demand, lower costs and streamline

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production capabilities. See Note 15 to our consolidated financial statements in Part II, Item 8 of this annual report for additional information related to these restructuring plans and the associated costs.

Loss From Operations. Loss from operations for the year ended December 31, 2006, was $29.7 million, an improvement of $93.6 million compared with an operating loss of $123.2 million reported for the same period in 2005. The following table presents income (loss) from operations by business segment (in thousands):

	Years Ended December 31,						$ Change			% Change
	2005			2006
Paperboard	$	(70,102	)	$	(10,948	)	$	59,154		(84.4	)%
Recovered fiber		253			4,381			4,128		1631.6	%
Tube, core and composite container		6,700			5,936			(764	)	(11.4	)%
Folding carton and custom packaging		(36,812	)		(4,329	)		32,483		(88.2	)%
Corporate expense		(23,281	)		(24,724	)		(1,443	)	6.2	%
Total	$	(123,242	)	$	(29,684	)	$	(93,558	)	(75.9	)%

Paperboard Segment

Loss from operations improved primarily due to the following factors:

• Lower restructuring costs of $53.8 million.

• Approximately $11.5 million of the improvement was related to the disposition of the Rittman and Sprague coated paperboard mills.

• Higher selling prices in the paperboard segment accounted for $12.0 million.

These factors were partially offset by the following costs in the paperboard segment’s uncoated paperboard group:

• Higher energy and fuel costs of $6.7 million.

• Higher repair and maintenances costs of $4.3 million.

• Higher employee labor and benefit costs of $3.9 million.

• Lower volume reduced income from operation by an estimated $1.8 million.

• Accelerated depreciation expense of approximately $1.1 million related to a mill closure.

Recovered Fiber Segment

Income from operations increased primarily due to higher volume. This improvement, however, was partially offset by $1.0 million of higher accounts receivable reserve expense.

Tube, Core and Composite Container Segment

Income from operations decreased primarily due to the following factors:

• Higher restructuring costs of approximately $3.0 million.

• Lower volume reduced income from operation by an estimated $2.8 million.

• A $1.2 million expense associated with the settlement of a patent infringement dispute in 2006.

• Higher freight costs and repair and maintenance costs of $2.1 million.

These factors were partially offset by higher selling prices which improved income from operations by approximately $8.5 million.

Folding Carton and Custom Packaging Segment

Loss from operations improved primarily due to lower restructuring costs of approximately $36.8 million. This improvement was partially offset by higher accelerated depreciation expense of $3.3 million related to plant closures and a $1.2 million reversal of a reserve in the second quarter of 2005 related to the subsequent collection from a customer that filed Chapter 11 bankruptcy in 2004.

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Discontinued Operations. The loss from discontinued operations for the years ended December 31, 2006 and 2005 was $3.8 million and $8.3 million, respectively. See Note 5 to our consolidated financial statements in Part II, Item 8 of this annual report for additional discussion of discontinued operations.

Other (Expense) Income. Interest expense for the years ended December 31, 2006 and 2005 was approximately $25.9 million and $42.0 million, respectively. The decrease was primarily due to the redemption of our 9 7/8% senior subordinated notes on May 1, 2006. We recorded a $10.3 million loss in the second quarter of 2006 related to this debt redemption. See “—Liquidity and Capital Resources” for additional information regarding our debt, interest expense and interest rate swap agreements.

Gain on Sale of Interest in Standard Gypsum, L.P. On January 17, 2006, we sold our 50% membership interest in Standard Gypsum to Standard Gypsum’s other 50% owner, Temple-Inland. Pursuant to the purchase and sale agreement, Temple-Inland purchased our 50% membership interest for $150 million, which resulted in a gain of approximately $135.2 million.

Equity in Income of Unconsolidated Affiliates. Equity in income from unconsolidated affiliates was $5.6 million for the year December 31, 2006, a decrease of $31.4 million in equity in income from unconsolidated affiliates of $37.0 million in the same period in 2005. This decrease was primarily due to the sale of our interest in Standard Gypsum, a joint venture with Temple-Inland, whereby, effective January 1, 2006, we were no longer entitled to earnings or distributions from Standard Gypsum; this accounted for approximately $28.6 million of the $31.4 million decrease.

Benefit (Provision) for Income Taxes. The effective rate of income tax expense on continuing operations for the year ended December 31, 2006 was 35.0% compared with an income tax benefit of 23.8% for the same period in 2005. The effective rates for both periods are different from the statutory rates due to permanent tax adjustments. In addition, the income tax benefit for the year ended 2005 includes tax expense of $2.0 million related to an increase in the valuation allowance for state net operating losses resulting from a change in Ohio tax law. The 2005 tax benefit was also affected by the write-off of nondeductible goodwill. See Note 12 to our consolidated financial statements in Part II, Item 8 of this annual report for additional discussion of the change in the effective tax rate.

Net Income. Due to the factors discussed above, net income for the year ended December 31, 2006 was $47.3 million, or $1.66 net income per common share, compared to a net loss of $103.4 million, or $3.59 net loss per common share, for the same period in 2005.

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Results of Operations 2004 — 2005

The volume information shown below includes shipments of paperboard products (excluding volume shipped by our unconsolidated joint ventures) combined and presented by end-use market as well as by reporting segments. It is important to note, however, that portions of our sales do not have related paperboard volume, such as sales of recovered fiber and sales of plastic products.

	Years Ended December 31,		Change		% Change
	2004	2005
Paperboard volume by end-use market (tons in thousands):
Tube, core and composite container market
Volume shipped to internal converters	291.9	277.1	(14.8	)	(5.1	)%
Mill volume shipped to external customers	46.9	46.7	(0.2	)	(0.4	)%
Volume related to discontinued operations	0.0	0.0	0.0		0.0	%
Total	338.8	323.8	(15.0	)	(4.4	)%
Folding carton market
Volume shipped to internal converters	168.0	161.3	(6.7	)	(4.0	)%
Mill volume shipped to external customers	238.3	242.6	4.3		1.8	%
Volume related to discontinued operations	0.0	0.0	0.0		0.0	%
Total	406.3	403.9	(2.4	)	(0.6	)%
Gypsum wallboard facing paper market
Mill volume shipped to external customers	101.0	80.2	(20.8	)	(20.6	)%
Specialty paperboard products market
Volume shipped to internal converters	87.9	86.3	(1.6	)	(1.8	)%
Mill volume shipped to external customers	162.6	166.9	4.3		2.6	%
Volume related to discontinued operations	15.6	16.2	0.6		3.8	%
Total	266.1	269.4	3.3		1.2	%
Total paperboard volume	1,112.2	1,077.3	(34.9	)	(3.1	)%
Total paperboard volume excluding discontinued operations	1,096.6	1,061.1	(35.5	)	(3.2	)%
Paperboard volume by reporting segment (in thousands):
Paperboard	591.8	577.8	(14.0	)	(2.4	)%
Tube, core and composite container market	336.8	322.0	(14.8	)	(4.4	)%
Folding carton and custom packaging	168.0	161.3	(6.7	)	(4.0	)%
Volume related to discontinued operations	15.6	16.2	0.6		3.8	%
Total paperboard volume	1,112.2	1,077.3	(34.9	)	(3.1	)%

Paperboard Volume. Total paperboard volume from continuing operations for the year ended December 31, 2005, decreased 3.2% to 1,061.1 thousand tons from 1,096.6 thousand tons for the same period in 2004. Tons sold from paperboard mill production decreased 2.4% in 2005. The total volume of paperboard converted decreased 4.2% for the year ended December 31, 2005.

Total paperboard volume decreased primarily due to a decrease in sales of unconverted paperboard to the gypsum wallboard facing paper market. Lower gypsum wallboard facing paper sales were due to an equipment upgrade at our Sweetwater mill which temporarily decreased production. In addition, certain volume was transferred to our 50%-owned, unconsolidated Premier Boxboard mill. Lower converted sales to the tube, core and composite container, the folding carton, and the specialty paperboard markets also contributed to the decline. These decreases were partially offset by higher sales of unconverted paperboard to the folding carton and the specialty paperboard markets.

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Sales. Our consolidated sales for the year ended December 31, 2005 were essentially unchanged, decreasing by only $372 thousand to $967.6 million from $968.0 million in 2004. The following table presents sales by business segment (in thousands):

	Years Ended December 31,				$ Change			% Change
	2004		2005
Paperboard	$	282,002	$	278,655	$	(3,347	)	(1.2	)%
Recovered fiber		82,373		86,180		3,807		4.6	%
Tube, core and composite container		368,604		373,766		5,162		1.4	%
Folding carton and custom packaging		235,022		229,028		(5,994	)	(2.6	)%
Total	$	968,001	$	967,629	$	(372	)	(0.0	)%

Paperboard Segment

Sales for the paperboard segment decreased primarily due to the following factors:

• Lower sales of approximately $11.1 million due to the June 2004 divestiture of our chemical sales operation combined with the closure of our puzzle operations.

• Lower volume accounted for approximately $6.6 million of the decrease.

These factors were partially offset by higher selling prices which accounted for an estimated $14.5 million increase in sales.

Recovered Fiber Segment

Sales for the recovered fiber segment increased primarily due to higher volume which accounted for approximately $6.5 million of the increase partially offset by lower selling prices which accounted for a $3.8 million decrease in sales.

Tube, Core and Composite Container Segment

Sales for the tube, core and composite container segment increased primarily due to higher tube and core selling prices which accounted for approximately $17.5 million of the increase.

This increase was partially offset by the following factors:

• Lower volume accounted for an approximate $7.7 million decrease in sales.

• Lower volume for forming sales and other products accounted for an approximate $4.9 million decrease in sales.

Folding Carton and Custom Packaging Segment

Sales for the folding carton and custom packaging segment decreased primarily due to a volume decrease of approximately $5.9 million primarily as a result of ending a relationship with a significant customer with low margins and high credit risk.

Cost of Sales. Cost of sales for 2005 increased $19.2 million from $816.4 million in 2004 to $835.6 million in 2005. This increase was primarily due to the following factors:

• Higher freight costs of $8.7 million.

• Higher other manufacturing costs of approximately $8.4 million. These cost increases were primarily driven by the increase in petroleum based products used in various manufacturing processes.

• Higher energy and fuel costs in the paperboard segment of approximately $12.0 million.

• Higher pension and other employee costs of approximately $3.0 million.

• Higher repair and maintenance costs in the paperboard segment of approximately $2.4 million.

• Accelerated depreciation expense of approximately $1.1 million related to the closure of the Palmer carton plant in 2005.

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These factors were partially offset by the following improvements:

• Lower cost of sales of approximately $10.6 million due to the divestiture of our chemical sales operation and the closure of our puzzle operations in 2004.

• Lower cost of sales of approximately $5.4 million driven by lower volume in our carton segment.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.6 million from $128.2 million in 2004 to $129.8 million in 2005. This increase was primarily due to the following factors:

• Higher pension and other employee costs of approximately $4.7 million.

• Higher employee and administrative costs of approximately $2.0 million related to two initiatives: centralization of our accounting and finance operations and an investment in other back office functions in order to reduce professional fees, purchasing and other costs in the long term.

• Higher information technology costs of $1.7 related to compliance with the 2002 Sarbanes-Oxley Act and higher costs associated with the implementation of enterprise resource planning software.

These factors were partially offset by the following improvements:

• Lower professional and consultant fees related to internal control testing and compliance work associated with the Sarbanes-Oxley Act of 2002 and consolidated accounting costs incurred in 2004 of approximately $1.9 million.

• Elimination of approximately $2.3 million in expenses resulting from the divestiture of the paperboard segment’s chemical sales operation in June of 2004 and closure of the puzzle operation in September 2004.

• Elimination of approximately $1.8 million in expenses in the carton segment related to the closure of our Charlotte, North Carolina carton plant in 2004.

• Expense of approximately $1.6 million in 2004 related to the vesting of performance accelerated restricted stock.

Goodwill Impairment. For the year ended December 31, 2005, we recorded a goodwill impairment charge of approximately $49.8 million. Of this amount, approximately $10.5 million was recorded in our paperboard segment and was related to our decision to exit the coated recycled paperboard business. The remaining $39.3 million was recorded in our folding carton and custom packaging segment. The goodwill impairment recorded in our folding carton and custom packaging segment resulted from the loss of synergies that existed between the coated recycled paperboard business and the folding carton and custom packaging segment resulting from the proposed disposition of the coated recycled paperboard business at that time.

Restructuring and Impairment Costs. For the year ended December 31, 2005, we recorded charges totaling $75.6 million for restructuring and impairment costs. Included in this total were $640 thousand in severance and other termination benefit costs, $1.0 million in other exit costs, and $74.0 million of impairment costs related primarily to the disposition of two of our coated recycled paperboard facilities. For the year ended December 31, 2004, we recorded charges totaling $21.7 million for restructuring and impairment costs. Included in this total were $4.6 million in severance and other termination benefit costs, $4.4 million in other exit costs, and $12.7 million in asset impairment charges. Approximately $8.8 million of the $12.7 million in asset impairment charges was related to the permanent closure of our No. 2 coated recycled paperboard machine at our Rittman, Ohio facility. See Note 15 to our consolidated financial statements in Part II, Item 8 of this annual report for additional information related to our restructuring plans and the associated costs.

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Income (loss) from operations. Loss from operations for 2005 was $123.2 million, a decrease of $135.3 million compared with income from operations of $12.1 million in 2004. The following table presents income (loss) from operations by business segment (in thousands):

	Years Ended December 31,						$ Change			% Change
	2004			2005
Paperboard	$	26,581		$	(70,102	)	$	(96,683	)	(363.7	)%
Recovered fiber		3,897			253			(3,644	)	(93.5	)%
Tube, core and composite container		11,318			6,700			(4,618	)	(40.8	)%
Folding carton and custom packaging		(6,519	)		(36,812	)		(30,293	)	(464.7	)%
Corporate expense		(23,208	)		(23,281	)		(73	)	0.3	%
Total	$	12,069		$	(123,242	)	$	(135,311	)	N/A

Paperboard Segment

Income from operations decreased primarily due to the following factors:

• Higher restructuring costs of approximately $81.8 million resulting from the decision to dispose of the Rittman and Sprague coated paperboard operations.

• A gain on sale of real estate of $10.3 million was recorded in July 2004 related to the sale of our Chicago paperboard mill which was permanently closed in January 2001.

• Higher energy and fuel costs of approximately $12.0 million.

• Higher pension and other employee costs of approximately $3.9 million.

• Higher other manufacturing costs of approximately $2.1 million. These cost increases were primarily driven by the increase in petroleum based products used in various manufacturing processes.

• Higher freight costs of approximately $3.4 million.

• Higher repair and maintenance costs of approximately $2.4 million.

• Higher selling and general administrative expenses of approximately $700 thousand.

These factors were partially offset by the following improvements:

• Higher selling prices improved operating results approximately $14.5 million.

• Lower selling, general and administrative expenses of approximately $2.3 million due to divested facilities.

Recovered Fiber Segment

Income from operations decreased primarily due to higher freight costs of approximately $2.2 million and higher other operating costs of approximately $2.2 million. These factors were partially offset by lower restructuring and impairment costs of approximately $400 thousand.

Tube, Core and Composite Container Segment

Income from operations decreased primarily due to the following factors:

• Higher other manufacturing costs accounted for approximately $3.4 million of the decrease. These cost increases were primarily driven by the increase in petroleum based products used in various manufacturing processes.

• Lower tube and core volume accounted for approximately $3.6 million of the decrease.

• Higher pension and other employee costs accounted for approximately $2.7 million of the decrease.

• Lower forming tube and other product sales volume and selling prices accounted for approximately $2.3 million of the decrease.

• Higher freight costs accounted for approximately $2.4 million of the decrease.

These factors were partially offset by the following improvements:

• Higher selling prices, partially offset by higher paperboard costs, increased income from operations by approximately $11.1 million.

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Folding Carton and Custom Packaging Segment

Loss from operations increased primarily due to the following factors:

• Goodwill of approximately $39.3 million was impaired resulting from lost synergies in the carton segment due to our decision to exit the coated recycled paperboard operations.

• Higher direct material costs of approximately $1.2 million. These costs increases were primarily driven by the increase in petroleum based products used in various manufacturing processes.

• Accelerated depreciation expense of $1.1 million related to the closure of our Palmer, MA carton plant in 2005.

These factors were partially offset by the following improvements:

• Lower restructuring costs of approximately $5.0 million.

• Improved operating results due to closing and consolidating operations and related cost reductions of $4.5 million.

• Higher selling prices combined with the disposition of less profitable customers improved operating results by $2.0 million.

Other Income (Expense). Interest expense for the years ended 2005 and 2004 was approximately $42.0 million and $42.2 million, respectively. Interest income increased $1.7 million in 2005 primarily due to higher cash balances.

Equity in income from unconsolidated affiliates was $37.0 million in 2005, an improvement of $11.8 million over 2004. This increase was due to a $7.9 million improvement in operating results for Standard Gypsum. The improved results were due primarily to an increase in selling prices and volume partially offset by higher freight and distribution costs. Premier Boxboard’s results improved $4.1 million in 2005 compared to 2004 primarily due to higher volume and selling prices.

Benefit for income taxes. The effective rate of income tax benefit on continuing operations for the years ended December 31, 2005 and 2004 was 23.8% and 28.6%, respectively. The effective rates for both periods are different from the statutory rates due to permanent tax adjustments. See Note 12 to our consolidated financial statements in Part II, Item 8 of this annual report for additional discussion of the change in the effective tax rate.

Discontinued operations. The loss from discontinued operations for the years ended December 31, 2005 and 2004 was $8.3 million and $271 thousand, respectively. See Note 5 to our consolidated financial statements in Part II, Item 8 of this annual report for additional discussion of discontinued operations.

Net Loss. Due to the factors discussed above, net loss for 2005 was $103.4 million, or $3.59 net loss per common share, compared to net loss of $4.0 million, or $0.14 net loss per common share, in 2004.

Liquidity and Capital Resources

Liquidity Sources and Risks. Our primary sources of liquidity are cash from operations and borrowings under our senior credit facility, described below. Downturns in operations can significantly affect our ability to generate cash. Factors that can affect our operating results and liquidity are discussed further in this annual report under “Risk Factors” in Part I, Item 1A. At December 31, 2006 we had $1.0 million of cash on hand and $38.8 million borrowing availability under our senior credit facility. We believe that our cash on hand together with our borrowing availability under our senior credit facility will be sufficient to meet our cash requirements for the next 12 months. However, it is likely that we will refinance our $200.0 million outstanding senior notes due in June 2009. We are evaluating various refinancing alternatives. If we are unable to generate cash at projected levels, our ability to generate cash sufficient to meet our long-term requirements is uncertain. Some of the factors that could affect our future ability to generate cash from operations are as follows:

• A contraction in domestic demand for recycled paperboard and related packaging products similar to what our industry experienced in 2000, 2001 and 2002.

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• Increased market acceptance of alternative products, such as flexible packaging and plastics that have replaced or can replace certain of our packaging products.

• Continued export of domestic industrial manufacturing operations.

• Continued increase in fuel and energy costs.

• Market acceptance of price increases and energy surcharges in response to rising operating costs.

• Significant unforeseen adverse conditions in our industry or the markets we serve.

The occurrence, continuation or exacerbation of these conditions could require us to seek additional funds from external sources in order to meet our liquidity requirements. In such event, our ability to obtain additional funds would depend on the various business and credit market conditions prevailing at the time, which are difficult to predict and many of which are out of our control. Our ability to secure additional funds could also be materially adversely affected by our substantial indebtedness. Additional risks related to our substantial indebtedness are discussed in Part I, Item 1A of this annual report under “Risk Factors — Our substantial indebtedness could adversely affect our cash flow and our ability to fulfill our obligations under our indebtedness.”

The availability of liquidity from our senior credit facility is primarily affected by our collateral base and our continued compliance with the terms of the senior credit facility, including the payment of interest and compliance with various covenants and financial maintenance tests. We were in compliance with the covenants under our senior credit facility during 2006. Absent a deterioration of the U.S. economy as a whole or the specific sectors on which our business depends (see Part I, Item 1A, “Risk Factors — Our business and financial performance may be adversely affected by downturns in industrial production, housing and construction and the consumption of nondurable and durable goods”),we believe we will be in compliance with our covenants under the senior credit agreement for the next 12 months.

Borrowings. At December 31, 2005 and December 31, 2006, total debt (consisting of current maturities of debt and long-term debt, as reported on our condensed consolidated balance sheets) was as follows (in thousands):

	December 31, 2005		December 31, 2006
Senior credit facility-revolver	$	—	$	5,000
Senior credit facility-term loan		—		31,111
9 7/8% senior subordinated notes		257,500		—
7 3/8% senior notes		189,750		189,750
7 1/4% senior notes		29,000		29,000
Other notes payable (1)		4,955		8,200
Realized interest rate swap gains (2)		11,185		2,861
Total debt	$	492,390	$	265,922

(1) At December 31, 2005, industrial bonds of $4.7 million (the Sprague bonds) were included in current liabilities of discontinued operations and, therefore, are not reflected in the above schedule for the period ended December 31, 2005. In accordance with the Sprague sale agreement, which was executed in the third quarter of 2006, the Sprague bonds were retained by the Company and, therefore, have been included in the above schedule as of December 31, 2006.

(2) Consists of realized interest rate swap gains less the original issuance discounts and accumulated discount amortization related to the senior and senior subordinated notes.

As of December 31, 2005, our senior credit facility provided for a revolving line of credit of $75.0 million and was secured primarily by a first priority security interest in our accounts receivable and inventory. The facility included a subfacility of $50.0 million for letters of credit, the usage of which reduced availability under the facility. As of December 31, 2005, no borrowings were outstanding under the facility; however, an aggregate

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of $37.5 million in letter of credit obligations were outstanding. Availability under this facility at December 31, 2005 was limited to $37.5 million after taking into consideration the outstanding letter of credit obligations.

As of December 31, 2005, borrowings under the facility bore an interest at a rate equal to, at our option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the facility) plus a margin of between (0.25%) and 0.25% or (2) the adjusted London Interbank Offered Rate (“LIBOR”) plus a margin of between 1.50% and 2.00%, with the applicable margin to be set based on our levels of available cash. The undrawn portion of the facility was subject to a facility fee at an annual rate of 0.375%. Outstanding letters of credit were subject to an annual fee equal to the applicable margin for LIBOR based loans. At December 31, 2005, the applicable interest margin for Base Rate borrowings was (0.25%) and the applicable interest margin for LIBOR based borrowings was 1.50%.

On March 30, 2006, we amended our senior credit facility by entering into an Amended and Restated Credit Agreement. The agreement provides for a $145.0 million senior secured credit facility (the “Senior Credit Facility”) consisting of a $110.0 million five-year revolver and a $35.0 million five-year term loan. The five-year revolver was reduced from $110.0 million to $100.0 million in October 2006. The Senior Credit Facility is secured by substantially all of our assets and our domestic subsidiaries other than real property, including accounts receivable, general intangibles, inventory and equipment. Our domestic subsidiaries are parties to the Senior Credit Facility either as co-borrowers with us or as guarantors. At December 31, 2006 we had $31.1 million outstanding under the five-year term loan and $5.0 million outstanding under the revolver.

The revolver matures on the fifth anniversary of closing and includes a sublimit of $25.0 million for letters of credit. Borrowing availability under the revolver is determined by reference to a borrowing base, defined as specified percentages of eligible accounts receivable and inventory and reduced by usage of the revolver, including outstanding letters of credit, and any reserves. Aggregate availability under the revolver was $38.8 million at December 31, 2006. The term loan was drawn in full at closing and is required to be repaid in monthly installments based on a level six-year amortization schedule, with all remaining outstanding principal due on the fifth anniversary of closing.

Outstanding principal of the term loan initially bears interest at a rate equal to, at our option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the Senior Credit Facility) plus 0.25%, or (2) the adjusted one, two, three or six-month LIBOR rate plus 1.75%. Outstanding principal under the revolver initially bears interest at a rate equal to, at our option, either (1) the base rate or (2) the adjusted one, two, three or six-month LIBOR rate plus 1.50%. Pricing under the Senior Credit Facility is determined by reference to a pricing grid based on average daily availability under the revolver for the immediately prior fiscal quarter. Under the pricing grid, the applicable margins for the term loan range from 0.0% to 0.75% for base rate loans and from 1.50% to 2.25% for LIBOR loans, and the applicable margins for the revolver will range from 0.0% to 0.5% for base rate loans and from 1.25% to 2.00% for LIBOR loans. The undrawn portion of the revolver is subject to an unused line fee calculated at an annual rate of 0.25%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for LIBOR loans under the revolver as in effect from time to time, plus a fronting fee on the undrawn amount thereof at an annual rate of 0.125%.

The Senior Credit Facility contains covenants that restrict, among other things, our and our subsidiaries’ ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, enter into sale and leaseback transactions or change the nature of our business. The Senior Credit Facility also contains a fixed charge coverage ratio covenant, which applies only in the event borrowing availability falls below $20.0 million at any time or below $25.0 million for five consecutive business days. The Senior Credit Facility contains events of default including, but not limited to, nonpayment of principal or interest, violation of covenants, breaches of representations and warranties, cross-default to other indebtedness, bankruptcy and other insolvency events, material judgments, certain ERISA events, actual or asserted invalidity of loan documentation and certain changes of control of the Company.

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On June 1, 1999, we issued $200.0 million in aggregate principal amount of 7 ³/8% senior notes due June 1, 2009. The 7 ³/8% senior notes were issued at a discount to yield an effective interest rate of 7.47% and pay interest semiannually. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 7 ³/8% senior notes is 6.3%. The 7 ³/8% Senior notes are unsecured obligations. As of December 31, 2006, we have purchased an aggregate of $10.3 million of these notes in the open market.

On March 29, 2001, we issued $285.0 million of 9 ⁷/8% senior subordinated notes due April 1, 2011 and $29.0 million of 7 ¹/4% 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% and 9.4%, respectively. The publicly traded senior subordinated notes were, and the senior notes are, unsecured but guaranteed, on a joint and several basis, by all but one of the Company’s wholly-owned domestic subsidiaries.

During 2004 and 2005, we purchased $20.0 million and $7.5 million, respectively, of senior subordinated and senior notes in the open market. On May 1, 2006, we redeemed our outstanding 9⁷/8% senior subordinated notes in full at a price of $105.25 for each $100 of outstanding principal amount of the notes plus $2.1 million of accrued and unpaid interest from April 1, 2006 to May 1, 2006. At the time of redemption, the aggregate outstanding principal amount of the notes was $257.5 million, and the total redemption price (including accrued and unpaid interest and redemption premium) was $273.1 million. We used proceeds from borrowings at closing under the Senior Credit Facility, together with available cash, to fund the redemption. The redemption resulted in a $10.3 million loss, which was recognized in May of 2006.

We have certain obligations and commitments to make future payments under contracts, such as long-term debt and lease agreements. See “— Contractual Obligations” below and the notes to the consolidated financial statements, which detail these future obligations and commitments.

Interest Rate Swap Agreements. Historically, we have used interest rate swaps to effectively convert our fixed rate debt obligations into variable rate obligations. This strategy has been employed in order to effect an optimal balance between fixed rate and variable rate obligations since, historically, variable rate debt obligations are lower cost than fixed rate debt. During 2004 and 2005 we entered into several interest rates swaps and then unwound those swaps opportunistically for a gain. These gains provided cash to us upon unwinding and lowered our interest expense over the remaining duration of the related debt obligation. During 2006 we did not enter into any interest rate swap agreements.

Off-Balance Sheet Arrangements — Joint Venture Financings. On January 17, 2006 we completed the sale of our 50% interest in our joint venture Standard Gypsum to the joint venture’s other 50% partner, Temple- Inland, for $150.0 million in cash and eliminated our guaranty and letter of credit support obligations with respect to Standard Gypsum’s debt. As a result of this sale, we no longer have any support obligation with respect to our half of Standard Gypsum’s debt, which was $28.1 million as of December 31, 2005, and we ceased to be entitled to any distributions from Standard Gypsum for all periods subsequent to January 1, 2006. We provided certain environmental indemnification not to exceed $5.0 million for any claims related to events that occurred prior to the formation of the Standard Gypsum joint venture on April 1, 1996. This indemnification will terminate January 17, 2011. We did not record a liability related to this indemnification since the probability of an asserted claim was considered remote.

As of December 31, 2006 we owned a 50% interest in one joint venture, Premier Boxboard LLC, with Temple-Inland. Because we account for the interest in this joint venture under the equity method of accounting, the indebtedness of the joint venture is not reflected in the liabilities included on our consolidated balance sheets. Premier Boxboard is a low-cost recycled paperboard mill that produces a lightweight gypsum facing paper along with containerboard grades. See Note 6 to our consolidated financial statements in Part II, Item 8 of this annual report for summarized financial information for this joint venture.

Funding for Premier Boxboard is generated by its internal cash flow and any cash contributions that we and our joint venture partner are required to make. Premier Boxboard generated sufficient cash flow in 2006 to

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distribute $8.0 million to us and $8.0 million to our joint venture partner. Based on the 2006 cash flows and expected future cash flows, we do not expect Premier Boxboard to require external funding in the foreseeable future. However, if Premier Boxboard were to require additional funding, our liquidity could be adversely affected. In addition, if we and our joint venture partner were unable to adequately satisfy Premier Boxboard’s funding requirements, its operations, and accordingly, our interest in it, could be adversely affected.

In addition, a substantial portion of the assets of Premier Boxboard are pledged as security for $50.0 million in outstanding principal amount of senior notes under which Premier Boxboard is the obligor. These notes are guaranteed by Temple-Inland, but are not guaranteed by us. In the event of a default under these notes, the holders would also have recourse to the assets of Premier Boxboard that are pledged to secure these notes. Thus, any resulting default under these notes could result in the assets of Premier Boxboard being utilized to satisfy creditor claims, which would have a material adverse effect on the financial condition and operations of Premier Boxboard and, accordingly, our interest in Premier Boxboard. As of December 31, 2006, Premier Boxboard was in compliance with its debt covenants.

Additional contingencies relating to our Premier Boxboard joint venture that could affect our liquidity include possible additional capital contributions and buy-sell triggers which, under certain circumstances, give us and our joint venture partner either the right, or the obligation, to purchase the other’s interest or to sell an interest to the other. We are required, to the extent necessary, to make additional capital contributions to enable the joint venture to meet existing obligations. Under the Premier Boxboard joint venture agreement, in general, mutual buy-sell rights are triggered upon the occurrence of involuntary transfers, and in the event of change of control, actual or imminent, of Temple-Inland or its subsidiaries or in the event of a deadlock, as defined in the joint venture agreement. The buy-sell provisions are structured such that we are contemplated to be the purchaser in the event of any voluntary transfer of membership interest.

We generally consider our relationship with Temple-Inland to be good with respect to our Premier Boxboard joint venture. However, as described above, we could be required to fund Premier Boxboard’s operations with additional cash contributions to the extent it is unable to fund operations with internally generated cash. We cannot give assurance that material liquidity events will not arise with respect to our joint venture, and the occurrence of any such events could materially and adversely affect our liquidity and financial condition.

Contractual Obligations. The following table summarizes our contractual obligations as of December 31, 2006, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-term debt obligations 1	$	263,061	$	5,830	$	201,417	$	47,614	$	8,200
Interest payment obligations		55,370		19,447		30,315		2,907		2,701
Capital lease obligations		635		544		91		—		—
Operating lease obligations		35,299		11,744		13,292		6,050		4,213
Purchase obligations		2,028		1,576		452		—		—
Other long-term liabilities 2		4		4		—		—		—
Total	$	356,397	$	39,145	$	245,567	$	56,571	$	15,114

¹ The long-term debt obligation included in this table represents the principal amount to be paid in future periods. The amounts reported on our consolidated balance sheet include realized interest rate swap gains and the mark-to-market value of interest rate swaps. See note 7 to our consolidated financial statements in Part II, Item 8 of this report.

² Other long-term liabilities exclude future pension liabilities, other postretirement benefit liabilities and deferred compensation benefit liabilities.

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For the purposes of this table, purchase obligations included in the table above are agreements for purchase of goods or services that are enforceable and legally binding on Caraustar and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions. However, this table does not include the aggregate amount of routine purchase orders outstanding as of December 31, 2006.

Operating Cash Flows. Cash used in operations was $3.1 million for the year ended December 31, 2006, compared with cash provided by operations of $23.9 million in 2005. The decrease was primarily due to a $31.5 million reduction in distributions from our unconsolidated affiliates (of which $26.5 million is attributable to the sale of our interest in the Standard Gypsum joint venture) and a $6.9 million reduction related to changes in our operating assets and liabilities. These reductions, however, were partially offset by a $13.1 million pension contribution made in September 2005.

Capital Expenditures. Capital expenditures were $38.2 million for the year ended December 31, 2006, compared with $24.3 million in 2005. The increase from prior years was primarily due to the implementation of an enterprise resource planning software system, the upgrade of a machine component at one of our paperboard mills, and the installation of a new printing press at one of our carton facilities. Aggregate capital expenditures of approximately $25.0 million are anticipated for 2007.

Acquisition. In December 2005, we acquired a folding carton plant in Charlotte, North Carolina from the Sonoco Products Company for $11.1 million. We believe that this acquisition is in line with our long-term strategy and will provide value to our folding carton and custom packaging segment in the Charlotte area.

Divestitures. In December 2005, we completed the sale of our Maryland based Hunt Valley corrugated operations to Green Bay Packaging, Inc. for $16.8 million. This facility was sold since it was our only corrugated manufacturing plant and had incurred significant losses. For the year ended December 31, 2005, we recorded a $3.3 million loss on disposal which was recorded in the results of discontinued operations.

In February 2006, we completed the sale of our partition business to RTS Packaging LLC, a joint venture between the Rock-Tenn Company and the Sonoco Products Company, for approximately $6.0 million. For the year ended December 31, 2005, we recorded a $1.9 million impairment loss associated with this divestiture which was recorded in discontinued operations.

In April 2006, we entered into an agreement to sell the assets of Sprague Paperboard, Inc. located in Versailles, Connecticut to Cascades Inc. for $14.5 million. The sale was completed in July 2006. We also entered into an agreement granting Cascades Inc. an option to buy components of the coating equipment and the customer list of our Rittman, Ohio coated paperboard mill for $500 thousand. Cascades Inc. exercised its option in August 2006 and, as a result, we ceased our coated recycled paperboard production at the Rittman, Ohio location, which resulted in a $1.8 million charge for severance benefits during 2006. For the year ended December 31, 2006, we also recorded an additional $12.2 million asset impairment as a result of this transaction.

During the fourth quarter of 2006, we concluded the sale of our Specialty Packaging Division. The division was sold to several buyers for an aggregate purchase price of $5.1 million. We recorded a loss of approximately $10.9 million associated with this divestiture which was recorded as restructuring and impairment costs of discontinued operations. Approximately $8.1 million of the loss was recorded in 2005 and $2.7 million was recorded in 2006.

Dividends. In February 2002, we announced that we would suspend future dividend payments on our common stock until our earnings performance and cash flow improve. Our debt agreements contain certain limitations on the payment of dividends and currently preclude us from doing so.

39

Inflation

Raw material and energy cost changes have had, and continue to have, a material negative effect on our operations. We do not believe that general economic inflation is a significant determinant of our raw material and energy cost increases or that it has a material effect on our operations.

Subsequent Events

On January 10, 2007, we announced the closure of our Lafayette paperboard mill located in Lafayette, Indiana. We expect to incur approximately $10.0 million in costs associated with this closure. Of this amount, approximately $6.9 million was recorded in 2006 and are non-cash costs associated primarily with asset impairment charges. The remaining $3.1 million are cash costs consisting primarily of severance and other closure costs.

Also on January 10, 2007, we announced the closures of four facilities in our tube, core, and composite container segment. The facilities are located in Amarillo, Texas; Vacaville, California; Grand Rapids, Michigan and Leyland, United Kingdom. We expect to incur approximately $2.6 million in costs associated with these closures. Of this amount, approximately $1.2 million will be non-cash costs associated primarily with asset impairment charges. The remaining $1.4 million will be cash costs consisting primarily of severance and other employee related costs and costs associated with relocating equipment.

New Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board issued Statement No. 151, “Inventory Costs” (“SFAS No. 151”). SFAS No. 151 amends Accounting Research Bulletin No. 43, chapter 4, “Inventory Pricing.” It states that abnormal amounts of idle facility expense, freight costs, handling costs and wasted materials (spoilage) should be recognized as current period charges. In addition, this statement requires that the allocation of overhead costs be based upon normal capacity for the production facilities and that any overhead costs not allocated due to lower production be recognized as current period charges and not capitalized in inventory. We adopted SFAS No. 151 January 1, 2006. The adoption of SFAS No. 151 did not have a material impact on our Statement of Operations or Statement of Financial Position.

In December 2004, the Financial Accounting Standards Board issued Statement No. 123(R), “Share-Based Payment” (SFAS 123R) which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (FAS 123). SFAS 123R supersedes APB 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” The approach in SFAS 123R is generally similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the earnings statements based on their fair values. Pro forma disclosures are no longer an alternative.

We adopted SFAS 123R as of January 1, 2006 using the modified prospective method. Under this transition method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. As permitted by SFAS 123, through December 31, 2005 we accounted for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally have not recognized compensation costs for employee stock options. Pretax compensation expense of approximately $660 thousand was recorded in 2006 resulting from adoption of this standard.

SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow as previously required. This requirement will reduce net operating cash flows and increase net financing cash flows. This provision of the standard did not impact operating cash flows in 2006.

40

In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)”. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, financial statement classification, tax-related interest and penalties, and additional disclosure requirements. We are required to adopt this interpretation effective January 1, 2007. We are currently in the process of evaluating the impact of this interpretation on our financial statements. Any necessary transition adjustments will not affect net income in the period of adoption and will be reported as a change in accounting principle in the consolidated financial statements. We are currently evaluating the potential impact of this interpretation and can not yet estimate the impact.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary “correcting” adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings only if material under the dual method. SAB 108 is effective for fiscal years ending on or after November 15, 2006. SAB 108 did not impact our financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for the fiscal years beginning after November 15, 2007; therefore, we anticipate adopting this standard as of January 1, 2008. We have not determined the effect, if any; the adoption of this statement will have on our financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires employers to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other post-retirement benefit plans. SFAS No. 158 requires prospective application; thus, the recognition and disclosure requirements are effective for our fiscal year ending December 31, 2006. See Note 11 to the consolidated financial statements in Part II, Item 8 of this annual report for the impact of adoption of SFAS No. 158.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This pronouncement permits entities to use the fair value method to measure certain financial assets and liabilities by electing an irrevocable option to use the fair value method at specified election dates. After election of the option, subsequent changes in fair value would result in the recognition of unrealized gains or losses as period costs during the period the change occurred. SFAS No. 159 becomes effective as of the beginning of the first fiscal year that begins after November 15, 2007, with early adoption permitted. However, entities may not retroactively apply the provisions of SFAS No. 159 to fiscal years preceding the date of adoption. We are currently evaluating the impact that SFAS No. 159 will have on our financial position and results of operations.

41

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 2006, we had outstanding borrowings of approximately $263.1 million. In June of 1999, we issued $200.0 million of 7 ³/8% senior notes at a discount to yield an effective interest rate of 7.47%. After taking into account realized gains from unwinding various interest rates swap agreements, the current effective interest rate is 6.3%. The 7 ³/8% senior notes pay interest semiannually, and are unsecured obligations. In March of 2001, we issued $285.0 million of 9 ⁷/8% senior subordinated notes and $29.0 million of 7 ¹/4% senior notes. These notes were issued at a discount to yield effective interest rates of 10.5% and 9.4%, respectively.

On May 1, 2006, we redeemed our outstanding 9 ⁷/8% senior subordinated notes in full at a price of $105.25 for each $100 of outstanding principal amount of the notes plus $2.1 million of accrued and unpaid interest from April 1, 2006 to May 1, 2006. At the time of redemption, the aggregate outstanding principal amount of the notes was $257.5 million, and the total redemption price (including accrued and unpaid interest and redemption premium) was $273.1 million. We used proceeds from borrowings under the Senior Credit Facility, together with available cash, to fund the redemption. The redemption resulted in a $10.3 million loss, which was recognized during the three months ended June 30, 2006.

On March 30, 2006, the Company amended its senior credit facility by entering into an Amended and Restated Credit Agreement. The agreement provides for a $145.0 million Senior Credit Facility consisting of a $110.0 million five-year revolver and a $35.0 million five-year term loan. The five-year revolver was reduced from $110.0 million to $100.0 million in October 2006. The Senior Credit Facility is secured by substantially all assets of the Company and its domestic subsidiaries other than real property, including accounts receivable, general intangibles, inventory and equipment. The Company’s domestic subsidiaries are parties to the Senior Credit Facility either as co-borrowers with the Company or as guarantors. At December 31, 2006, the Company had $31.1 million outstanding under the five-year term loan and $5.0 million outstanding under the revolver.

The revolver matures on the fifth anniversary of closing and includes a sublimit of $25.0 million for letters of credit. Borrowing availability under the revolver is determined by reference to a borrowing base, defined as specified percentages of eligible accounts receivable and inventory and reduced by usage of the revolver (including outstanding letters of credit) and any reserves. Aggregate availability under the revolver was $38.8 million at December 31, 2006. The term loan was drawn in full at closing and is required to be repaid in monthly installments based on a level six-year amortization schedule, with all remaining outstanding principal due on the fifth anniversary of closing.

Outstanding principal of the term loan initially bears interest at a rate equal to, at the Company’s option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the Senior Credit Facility) plus 0.25%, or (2) the adjusted one, two, three or six-month LIBOR rate plus 1.75%. Outstanding principal under the revolver initially bears interest at a rate equal to, at the Company’s option, either (1) the base rate or (2) the adjusted one, two, three or six-month LIBOR rate plus 1.50%. Pricing under the Senior Credit Facility will be determined by reference to a pricing grid based on average daily availability under the revolver for the immediately prior fiscal quarter. Under the pricing grid, the applicable margins for the term loan will range from 0.0% to 0.75% for base rate loans and from 1.50% to 2.25% for LIBOR loans, and the applicable margins for the revolver will range from 0.0% to 0.5% for base rate loans and from 1.25% to 2.00% for LIBOR loans. The undrawn portion of the revolver is subject to an unused line fee calculated at an annual rate of 0.25%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for LIBOR loans under the revolver as in effect from time to time, plus a fronting fee on the undrawn amount thereof at an annual rate of 0.125%. The weighted average rates in effect for the three months ended December 31, 2006 were 8.05% and 7.39% for outstanding revolver and term loan borrowings, respectively.

The Company did not enter in to any interest rate swap agreements during 2006.

Our senior management establishes parameters, which are approved by the Board of Directors, for our financial risk. We do not utilize derivatives for speculative purposes.

42

The table below provides information about our debt obligations and principal cash flows and related interest rates by expected maturity dates.

	Contractual Maturity Dates
	2007 to 2011			Thereafter	Total
	(In thousands)
Debt Obligations
7 3/8% Senior Notes (1)	$	189,750		—	$	189,750
Average interest rate		7.375	%	—		7.375	%
7 1/4% Senior Notes (1)	$	29,000		—	$	29,000
Average interest rate		7.25	%	—		7.25	%
Senior Credit Facility — Term Loan (1)	$	31,111		—	$	31,111
Average interest rate		7.23	%	—		7.23	%
Senior Credit Facility — Revolver (1)	$	5,000		—	$	5,000
Average interest rate		7.04	%	—		7.04	%

(1) See notes to our consolidated financial statements included in Part II, Item 8.

43

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	December 31,
	2006			2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,022		$	95,152
Receivables, net of allowances for doubtful accounts, returns, and discounts of $3,062 and $3,393 at December 31, 2006 and 2005, respectively		85,577			91,061
Inventories		75,041			70,959
Refundable income taxes		172			56
Current deferred tax assets		9,272			40,259
Other current assets		8,354			21,613
Investment in unconsolidated affiliate		—			13,212
Assets held for sale		—			76,665
Total current assets		179,438			408,977
PROPERTY, PLANT AND EQUIPMENT:
Land		10,316			7,931
Buildings and improvements		93,275			97,536
Machinery and equipment		436,705			424,503
Furniture and fixtures		29,975			15,071
		570,271			545,041
Less accumulated depreciation		(306,666	)		(290,004	)
Property, plant and equipment, net		263,605			255,037
GOODWILL		127,574			129,275
INVESTMENT IN UNCONSOLIDATED AFFILIATES		41,574			44,037
OTHER ASSETS		12,084			21,806
	$	624,275		$	859,132
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of debt	$	5,830		$	85
Accounts payable		65,033			78,015
Accrued interest		1,482			7,976
Accrued compensation		10,127			9,146
Capital lease obligations		544			542
Other accrued liabilities		27,458			34,711
Liabilities of assets held for sale		—			31,373
Total current liabilities		110,474			161,848
LONG-TERM DEBT, LESS CURRENT MATURITIES		260,092			492,305
LONG-TERM CAPITAL LEASE OBLIGATIONS		91			561
DEFERRED INCOME TAXES		43,315			48,699
PENSION LIABILITY		38,854			41,877
OTHER LIABILITIES		9,863			5,446
COMMITMENTS AND CONTINGENCIES (NOTE 8)
SHAREHOLDERS’ EQUITY:
Preferred stock, $.10 par value; 5,000,000 shares authorized, no shares issued		—			—
Common stock, $.10 par value; 60,000,000 shares authorized; 29,084,246 and 28,785,519 shares issued and outstanding at December 31, 2006 and 2005, respectively		2,909			2,879
Additional paid-in capital		191,411			192,673
Unearned compensation		—			(3,442	)
Retained deficit		(7,502	)		(54,834	)
Accumulated other comprehensive (loss) income:
Minimum pension liability adjustment		—			(29,796	)
Unrecognized pension and other benefit liabilities		(26,791	)		—
Foreign currency translation		1,559			916
Total accumulated other comprehensive loss		(25,232	)		(28,880	)
Total Shareholders’ Equity		161,586			108,396
	$	624,275		$	859,132

The accompanying notes are an integral part of these consolidated financial statements.

44

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	For the Years Ended December 31,
	2006			2005			2004
SALES	$	989,918		$	967,629		$	968,001
COST OF SALES		854,382			835,587			816,362
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		127,491			129,826			128,187
GOODWILL IMPAIRMENT		—			49,859			—
RESTRUCTURING AND IMPAIRMENT COSTS		37,729			75,599			21,706
GAIN ON SALE OF REAL ESTATE		—			—			10,323
Income (loss) from operations		(29,684	)		(123,242	)		12,069
OTHER (EXPENSE) INCOME:
Interest expense		(25,913	)		(41,961	)		(42,160	)
Interest income		3,829			2,629			948
Equity in income of unconsolidated affiliates		5,613			37,043			25,251
Gain on sale of interest in Standard Gypsum, L.P.		135,247			—			—
Loss on redemption of senior subordinated notes.		(10,272	)		—			—
Other, net		82			482			(1,046	)
		108,586			(1,807	)		(17,007	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST		78,902			(125,049	)		(4,938	)
BENEFIT (PROVISION) FOR INCOME TAXES		(27,634	)		29,722			1,414
MINORITY INTEREST IN LOSS (INCOME)		(102	)		273			(184	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		51,166			(95,054	)		(3,708	)
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES		(5,781	)		(10,866	)		(391	)
BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS		1,947			2,534			120
LOSS FROM DISCONTINUED OPERATIONS		(3,834	)		(8,332	)		(271	)
NET INCOME (LOSS)	$	47,332		$	(103,386	)	$	(3,979	)
OTHER COMPREHENSIVE INCOME (LOSS):
Minimum pension liability adjustment	$	9,213		$	(7,175	)	$	(3,377	)
Foreign currency translation adjustment		95			39			275
COMPREHENSIVE INCOME (LOSS)	$	56,640		$	(110,522	)	$	(7,081	)
BASIC INCOME (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS	$	1.79		$	(3.30	)		(0.13	)
DISCONTINUED OPERATIONS	$	(0.13	)	$	(0.29	)	$	(0.01	)
NET INCOME (LOSS)	$	1.66		$	(3.59	)	$	(0.14	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING		28,575			28,774			28,479
DILUTED INCOME (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS	$	1.79		$	(3.30	)	$	(0.13	)
DISCONTINUING OPERATIONS	$	(0.13	)	$	(0.29	)	$	(0.01	)
NET INCOME (LOSS)	$	1.66		$	(3.59	)	$	(0.14	)
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING		28,607			28,774			28,479

The accompanying notes are an integral part of these consolidated financial statements.

45

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2006, 2005 and 2004

(In thousands, except share data)

	Common Stock					Additional Paid-In Capital			Unearned Compensation			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
	Shares		Amount
BALANCE, December 31, 2003	28,222,205		$	2,822		$	185,031		$	(1,865	)	$	52,531		$	(18,642	)	$	219,877
Net loss	—			—			—			—			(3,979	)		—			(3,979	)
Issuance of common stock under 1998 stock purchase plan	338,488			33			2,684			(86	)		—			—			2,631
Forfeiture of common stock under 1998 stock purchase plan	(6,396	)		(1	)		(78	)		15			—			—			(64	)
Issuance of common stock under long-term equity incentive plan	265,602			27			4,358			(4,270	)		—			—			115
Forfeiture of common stock under long-term equity incentive plan	(72,039	)		(7	)		(1,115	)		—			—			—			(1,122	)
Issuance of common stock under director equity plan	5,530			1			63			—			—			—			64
Amortization of unearned compensation expense	—			—			960			1,872			—			—			2,832
Minimum pension liability adjustment, net of taxes of $1,992	—			—			—			—			—			(3,377	)		(3,377	)
Foreign currency translation adjustment	—			—			—			—			—			275			275
BALANCE, December 31, 2004	28,753,390			2,875			191,903			(4,334	)		48,552			(21,744	)		217,252
Net loss	—			—			—			—			(103,386	)		—			(103,386	)
Issuance of common stock under 1998 stock purchase plan	23,252			2			196			4			—			—			202
Forfeiture of common stock under 1998 stock purchase plan	(2,639	)		—			(31	)		—			—			—			(31	)
Issuance of common stock under long-term equity incentive plan	21,366			3			240			(78	)		—			—			165
Forfeiture of common stock under long-term equity incentive plan	(9,850	)		(1	)		(162	)		162			—			—			(1	)
Amortization of unearned compensation expense	—			—			527			804			—			—			1,331
Minimum pension liability adjustment, net of taxes of $4,365	—			—			—			—			—			(7,175	)		(7,175	)
Foreign currency translation adjustment	—			—			—			—			—			39			39
BALANCE, December 31, 2005	28,785,519			2,879			192,673			(3,442	)		(54,834	)		(28,880	)		108,396
Net income	—			—			—			—			47,332			—			47,332
Adjustment to adopt SFAS No. 123(R) (Note 10)	—			—			(3,442	)		3,442			—			—			—
Issuance of common stock under 1998 stock purchase plan	8,787			1			67			—			—			—			68
Forfeiture of common stock under 1998 stock purchase plan	(1,523	)		—			—			—			—			—			—
Issuance of common stock under long-term equity incentive plan	315,169			31			363			—			—			—			394
Forfeiture of common stock under long-term equity incentive plan	(23,706	)		(2	)		(45	)		—			—			—			(47	)
Amortization of stock-based compensation expense	—			—			1,795			—			—			—			1,795
Pension liability adjustment, net of taxes of $3,565 (Note 11)	—			—			—			—			—			9,213			9,213
Adjustment to adopt SFAS No. 158, net of taxes of $3,805	—			—			—			—			—			(6,208	)		(6,208	)
Foreign currency translation adjustment	—			—			—			—			—			95			95
Disposal of foreign subsidiary	—			—			—			—			—			548			548
BALANCE, December 31, 2006	29,084,246		$	2,909		$	191,411		$	—		$	(7,502	)	$	(25,232	)	$	161,586

The accompanying notes are an integral part of these consolidated financial statements.

46

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For the Years Ended December 31,
	2006			2005			2004
OPERATING ACTIVITIES:
Net income (loss)	$	47,332		$	(103,386	)	$	(3,979	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		24,171			28,493			30,089
Equity-based compensation expense		1,795			811			1,610
Loss (gain) on redemption of debt		10,272			(212	)		931
Goodwill impairment		—			49,856			—
Restructuring and impairment costs		28,678			85,594			13,079
Deferred income taxes		23,702			(32,951	)		(2,256	)
Gain on sale of interest in Standard Gypsum, L.P.		(135,247	)		—			—
Gain on sale of real estate.		—			—			(10,323	)
Loss on sale of assets held for sale		4,862			—			—
Equity in income of unconsolidated affiliates		(5,613	)		(37,043	)		(25,251	)
Distributions from unconsolidated affiliates		5,080			34,175			20,250
Changes in operating assets and liabilities, net of acquisitions:
Receivables		14,685			(8,917	)		(8,752	)
Inventories		495			5,661			(1,436	)
Other assets and liabilities		5,940			(1,316	)		(731	)
Accounts payable		(21,474	)		8,529			9,877
Accrued liabilities		(7,676	)		(5,728	)		13,932
Income taxes		(116	)		353			(159	)
Net cash provided by (used in) operating activities		(3,114	)		23,919			36,881
INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(38,169	)		(24,272	)		(20,891	)
Proceeds from disposal of property, plant and equipment		3,554			18,542			13,872
Proceeds from sale of assets held for sale		26,336			—			—
Acquisition of businesses, net of cash acquired		(11,059	)		—			—
Changes in restricted cash		14,841			(11,164	)		(3,656	)
Net proceeds from sale of interest in Standard Gypsum, L.P.		148,460			—			—
Return of investment in unconsolidated affiliates		2,920			5,325			—
Investment in unconsolidated affiliates		—			(40	)		(160	)
Net cash provided by (used in) investing activities		146,883			(11,609	)		(10,835	)
FINANCING ACTIVITIES:
Proceeds from senior credit facility – revolver		74,027			—			—
Repayments for senior credit facility – revolver		(69,027	)		—			—
Proceeds from senior credit facility – term loan		35,000			—			—
Repayments of short and long-term debt		(276,363	)		(7,468	)		(24,951	)
Deferred debt costs		(1,139	)		—			—
Payments of capital lease obligations		(504	)		(508	)		—
Proceeds from swap agreement unwinds		—			826			385
Issuances of stock, net of forfeitures		107			236			2,725
Net cash used in financing activities		(237,899	)		(6,914	)		(21,841	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(94,130	)		5,396			4,205
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		95,152			89,756			85,551
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	1,022		$	95,152		$	89,756
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest	$	34,643		$	46,164		$	42,750
Income tax payments	$	2,520		$	778		$	1,293
Property acquired under capital leases	$	36		$	1,532			—
Short-term payable for acquisition	$	—		$	11,000			—

The accompanying notes are an integral part of these consolidated financial statements.

47

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

1. Nature of Business and Summary of Significant Accounting Policies

Nature of Business

Caraustar Industries, Inc. (the “Parent Company”) and subsidiaries (collectively, the “Company”) are engaged in manufacturing, converting, and marketing of paperboard and related products.

Consolidation

The consolidated financial statements include the accounts of the Parent Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Reclassifications

The Company reclassified the results of operations of the coated recycled paperboard business from discontinued operations to continuing operation during 2006 for all periods presented. This business was reported as discontinued operations in the 2005 financial statements. See Note 5 for additional discussion regarding this decision.

Cash and Cash Equivalents

The Company considers cash on deposit and investments with an original maturity of three months or less to be cash equivalents. The Company records outstanding checks, to the extent there is no right of offset against other cash accounts, as a component of accounts payable rather than as a reduction of cash and cash equivalents. The total outstanding check balance reported as a component of accounts payable at December 31, 2006 and 2005 was $10.7 million and $24.5 million, respectively.

Restricted Cash

Restricted cash as of December 31, 2006 and December 31, 2005 was approximately $3.8 million and $18.7 million, respectively, and is recorded in other assets. Restricted cash are funds deposited in escrow accounts as collateral support for workers’ compensation insurance. In addition to the workers’ compensation collateral at December 31, 2005, approximately $11.0 million was held in escrow to effect a like-kind tax exchange for the sale of the Company’s Hunt Valley corrugated facility and the acquisition of a carton facility located in Charlotte, North Carolina. The $11.0 million held in escrow was disbursed to acquire the Charlotte carton plant from the Sonoco Products Company on January 3, 2006.

Inventories

Inventories are carried at the lower of cost or market. The costs included in inventory include raw materials (recovered fiber for paperboard products and paperboard for converted products), direct and indirect labor and employee benefits, energy and fuel, depreciation, chemicals, general manufacturing overhead and various other costs of manufacturing. General and administrative costs are not included in inventory costs.

Market, with respect to all inventories, is replacement cost or net realizable value. The Company reviews inventory at least quarterly to determine the necessity of write-offs for excess, obsolete or unsaleable inventory. The Company estimates reserves for inventory obsolescence and shrinkage based on management’s judgment of future realization. These reviews require management to assess customer and market demand. All inventories are valued using the first-in, first-out method.

48

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

Inventories at December 31, 2006 and 2005 were as follows (in thousands):

	2006		2005
Raw materials and supplies	$	35,682	$	38,555
Finished goods and work in process		39,359		32,404
Total inventory	$	75,041	$	70,959

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Expenditures for repairs and maintenance not considered to substantially lengthen the asset lives or increase capacity or efficiency are charged to expense as incurred.

Depreciation is computed using the straight-line method over the following estimated useful lives:

Buildings and improvements	10-45 years
Furniture and fixtures	5-10 years
Machinery and equipment:
Small tools	1 year
Computer software	3 years
Small machinery and vehicles	4-8 years
Production equipment	20-25 years

Depreciation expense was $24.3 million, $28.5 million, and $29.6 million for the years ended December 2006, 2005 and 2004, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant management judgment is required in determining: the credit worthiness of customers and collectibility of accounts receivable; excess, obsolete or unsaleable inventory reserves; the potential impairment of long-lived assets, goodwill and intangibles; the accounting for income taxes; the liability for self-insured claims; and the Company’s obligation and expense for pension and other postretirement benefits. Actual results could differ from the Company’s estimates and the differences could be significant.

Revenue Recognition

The Company recognizes revenue and the related account receivable when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) ownership has transferred to the customer; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (4) is based on management’s judgments regarding the collectibility of the Company’s accounts receivable. Generally, the Company recognizes revenue when it ships its manufactured products or when it completes a service and title and risk of loss passes to its customers. Provisions for discounts, returns, allowances, customer rebates, and other adjustments are provided for in the same period as the related revenues are recorded.

49

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

Shipping Costs

The costs of delivering finished goods to the Company’s customers are recorded as a component of cost of sales. Those costs include the amounts paid to a third party to deliver the finished goods or the Company’s cost of using its own delivery trucks and drivers. Any freight costs billed to and paid by a customer are included in revenue.

Self-Insurance

The Company is self-insured for the majority of its workers’ compensation costs and health care costs, subject to specific retention levels. Consulting actuaries and administrators assist the Company in determining its liability for self-insured claims. The Company’s self-insured workers’ compensation liability is estimated based on actual claims as established by a third party administrator, increased by factors that reflect the Company’s historical claim development. The “developed” claim, net of amounts paid and a present value factor, represents the liability that the Company records in its financial statements. The Company’s self-insured health care liability is estimated based on its actual claim experience and multiplied by a time lag factor. The lag factor represents an estimate of claims that have been incurred and should be recorded as a liability, but have not been reported to the Company.

Foreign Currency Translation

The financial statements of the Company’s non-U.S. subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation.” Assets and liabilities of the non-U.S. subsidiaries are translated at current rates of exchange. The resulting translation adjustments were recorded in accumulated other comprehensive loss. Income and expense items were translated at the average exchange rate for the year. Gains and losses were reported in the net loss and were not material in any year.

Goodwill

The Company accounts for goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement requires the Company to perform a goodwill impairment test at least annually. The Company’s most recent annual impairment test was performed as of November 1, 2006 and did not result in an impairment. In December 2005, however, the Company recognized certain impairment indicators related to the Company’s decision at that time to exit the coated recycled paperboard business. As a result, the Company retested its goodwill as of December 31, 2005 and recorded a goodwill impairment charge of $49.8 million at December 31, 2005. Of this amount, approximately $10.5 million was recorded in the Company’s paperboard segment and the remaining $39.3 million was recorded in its folding carton and custom packaging segment. The goodwill impairment recorded in the folding carton and custom packaging segment resulted from the loss of synergies that existed between the Company’s coated recycled paperboard business and its folding carton and custom packaging segment. The folding carton and custom packaging segment lost some of these synergies following the disposition of a portion of the coated recycled paperboard business.

Impairment of Long-Lived Assets

Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company periodically evaluates long-lived assets, including property, plant and equipment and definite lived

50

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

intangible assets whenever events or changes in conditions may indicate that the carrying value may not be recoverable. Factors that management considers important that could initiate an impairment review include the following:

• significant operating losses;

• recurring operating losses;

• significant declines in demand for a product produced by an asset capable of producing only that product;

• assets that are idled or held for sale;

• assets that are likely to be divested.

The impairment review requires the Company to estimate future undiscounted cash flows associated with an asset or group of assets and sum the estimated future cash flows. If the future undiscounted cash flows are less than the carrying amount of the asset, the Company must estimate the fair value of the asset. If the fair value of the asset is below the carrying value, then the difference is written-off. Estimating future cash flows requires the Company to make judgments regarding future economic conditions, product demand and pricing. Although the Company believes its estimates are appropriate, significant differences in the actual performance of the asset or group of assets may materially affect the Company’s asset values and results of operations.

Impairment charges of $28.7 million, $85.6 million and $13.1 million related to property plant and equipment were recorded in 2006, 2005 and 2004, respectively. Of these amounts $100 thousand, $11.7 million and $406 thousand were recorded in discontinued operations during 2006, 2005 and 2004, respectively. During 2006 and 2005, respectively, approximately $16.9 million and $75.4 million of the impairments were related to the disposition of the Sprague, Connecticut and Rittman, Ohio coated paperboard mills. The assets impaired include real estate and machinery and equipment related to operations that permanently closed in conjunction with our restructuring activities, discontinued businesses and other disposals. The charges represent the difference between the carrying value of the assets and the estimated fair value. Fair value for assets held for sale as of December 31, 2005 was estimated based on considerations of preliminary indication of values from potential buyers, supported by industry multiples of earnings before interest, taxes and depreciation, and discounted cash flows for businesses in operation and broker’s opinions of value for real estate. Real estate held for sale as of December 31, 2006 of $2.5 million is recorded as a component of other current assets. Fair value for real estate held for sale at December 31, 2006 was estimated based on broker’s opinions of value.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. In accordance with SFAS No. 109, deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Income tax (expense) benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

Under SFAS No. 109, a valuation allowance is required when it is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income.

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

Income (Loss) Per Common Share

The Company computes basic and diluted earnings or loss per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic income or loss per share excludes dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution that could occur if convertible securities were converted into common stock, or other contracts to issue common stock resulted in the issuance of common stock. Since the Company reported net losses for the years ended December 31, 2005 and 2004, the impact of all stock options was antidilutive and excluded from diluted loss per share calculation.

Recently Issued Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board issued Statement No. 151, “Inventory Costs” (“SFAS No. 151”). SFAS No. 151 amends Accounting Research Bulletin No. 43, chapter 4, “Inventory Pricing.” It states that abnormal amounts of idle facility expense, freight costs, handling costs and wasted materials (spoilage) should be recognized as current period charges. In addition, this statement requires that the allocation of overhead costs be based upon normal capacity for the production facilities and that any overhead costs not allocated due to lower production be recognized as current period charges and not capitalized in inventory. The Company adopted SFAS 151 on January 1, 2006. The adoption of SFAS No. 151 did not have a material impact on the Company’s Statement of Operations or Statement of financial position.

In December 2004, the Financial Accounting Standards Board issued Statement No. 123(R), “Share-Based Payment” (SFAS 123R) which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (FAS 123). SFAS 123R supersedes APB 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” The approach in SFAS 123R is generally similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the earnings statements based on their fair values. Pro forma disclosures are no longer an alternative.

The Company adopted SFAS 123R as of January 1, 2006 using the modified prospective method. Under this transition method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. As permitted by SFAS 123, through December 31, 2005 the Company accounted for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally have not recognized compensation costs for employee stock options. Pretax compensation expense of approximately $660 thousand for stock options was recorded in 2006 resulting from the adoption of this standard.

SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow as previously required. This requirement could reduce net operating cash flows and increase net financing cash flows. This provision of the standard had an immaterial impact on operating cash flows in 2006.

In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)”. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for tax positions taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, financial statement classification, tax-related interest and penalties, and

52

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

additional disclosure requirements. The Company is required to adopt this interpretation effective January 1, 2007. The Company is currently in the process of evaluating the impact of this standard on its financial statements. Any necessary transition adjustments will not affect net income in the period of adoption and will be reported as a change in accounting principle in the consolidated financial statements. The Company is currently evaluating the potential impact of this interpretation and can not yet estimate the impact.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary “correcting” adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings only if material under the dual method. SAB 108 is effective for fiscal years ending on or after November 15, 2006. SAB 108 did not have an impact on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for the fiscal years beginning after November 15, 2007; therefore, the Company anticipates adopting this standard as of January 1, 2008. The Company has not determined the effect, if any, the adoption of this statement will have on its financial position or results of operations.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires employers to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other post-retirement benefit plans. SFAS No. 158 requires prospective application; thus, the recognition and disclosure requirements are effective for the Company’s fiscal year ending December 31, 2006. See Note 11 for the impact of adopting SFAS No. 158.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This pronouncement permits entities to use the fair value method to measure certain financial assets and liabilities by electing an irrevocable option to use the fair value method at specified election dates. After election of the option, subsequent changes in fair value would result in the recognition of unrealized gains or losses as period costs during the period the change occurred. SFAS No. 159 becomes effective as of the beginning of the first fiscal year that begins after November 15, 2007, with early adoption permitted. However, entities may not retroactively apply the provisions of SFAS No. 159 to fiscal years preceding the date of adoption. The Company is currently evaluating the impact that SFAS No. 159 will have on its financial position and results of operations.

53

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

2. Shareholders’ Equity

Preferred Stock

The Company has authorized 5.0 million shares of $0.10 par value preferred stock. The preferred stock is issuable in one or more series and with such designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the board of directors of the Company. The board of directors is authorized by the Company’s articles of incorporation to determine the voting, dividend, redemption and liquidation preferences pertaining to each such series. No shares of preferred stock have been issued by the Company.

3. Acquisition and Divestitures

Carolina Carton Plant — Acquisition

In December 2005, the Company acquired a folding carton plant in Charlotte, North Carolina from the Sonoco Products Company for approximately $11.1 million. Ownership and risk of loss was transferred to the Company as of December 31, 2005 and the purchase price was paid January 3, 2006. The Company believes that this acquisition is in line with its long-term strategy and will fit well in the Company’s folding carton and custom packaging segment’s operations. The Company allocated $3.2 million of the purchase price to current assets, $8.8 million to fixed assets and $900 thousand to current liabilities. There was no goodwill or other intangible asset associated with this acquisition.

The Carolina Carton acquisition was accounted for by applying the provisions of SFAS No. 141 “Business Combination.” The Company’s estimated fair values of acquired assets were in excess of the purchase price. The excess fair value was allocated to property, plant and equipment. The financial statements include the operating results of the acquired business for the period after the date of acquisition.

Hunt Valley Corrugated Plant — Divestiture

In December 2005, the Company completed the sale of its corrugated box plant located in Hunt Valley, Maryland to Green Bay Packaging, Inc. for $16.8 million, of which $15.1 million was received on December 30, 2005. Of the total purchase price, $11.0 million was held in escrow in order to effect a like-kind tax exchange for the acquisition of Carolina Carton. This $11.0 million was classified as restricted cash as of December 31, 2005. The remaining $1.7 million of the purchase price was received in January 2006 upon final calculations of working capital. Since this facility was the only corrugated operation within the folding carton and custom packaging segment, and has clearly distinguishable cash flows operationally and for financial reporting purposes, its results are reported as a component of discontinued operations. The Company recorded a $3.3 million impairment loss at December 31, 2005 associated with this divestiture which was recorded in discontinued operations.

Partition Business — Divestiture

On February 27, 2006, the Company completed the sale of its partition business to RTS Packaging LLC, a joint venture between the Rock-Tenn Company and the Sonoco Products Company, for approximately $6.0 million. During 2006, the Company recorded a $1.9 million loss associated with this divestiture in discontinued operations.

Rittman and Sprague Coated Assets — Divestiture

On April 21, 2006 the Company entered into an agreement to sell the assets of Sprague Paperboard, Inc. located in Versailles, Connecticut to Cascades Inc. for $14.5 million. This sale was completed on July 19, 2006.

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

The Company also entered into an agreement granting Cascades Inc. an option to buy the coating equipment and the customer list of the Rittman, Ohio coated paperboard mill for $500 thousand. Cascades Inc. exercised its option on August 2, 2006. Upon Cascades Inc.’s exercise of its option, the Company ceased its coated recycled paperboard production at the Rittman, Ohio location. The Company recorded asset impairment charges of $16.9 million and $75.4 million in 2006 and 2005, respectively, as a result of these transactions.

These mills generated sales of $52.1 million, $ 80.1 million and $ 73.0 million and losses from operations of $ 22.3 million, $101.8 million and $24.2 million during the years ended December 31, 2006, 2005 and 2004, respectively. These losses included restructuring and impairment costs of $16.9 million, $84.9 million and $9.1 million during the years ended December 31, 2006, 2005 and 2004, respectively.

Specialty Packaging Division — Divestiture

The Company concluded the sale of the Specialty Packaging Division in December 2006. The division was sold to several buyers for an aggregate purchase price of $5.1 million. The Company recorded a loss of approximately $10.8 million associated with this divestiture which was recorded in restructuring and impairment costs of discontinued operations. Approximately $8.1 million of the loss was recorded in 2005 and $2.7 million was recorded in 2006.

4. Goodwill and Other Intangible Assets

Goodwill

The following is a summary of the changes in the carrying amount of goodwill, by segment, for the years ended December 31, 2004, 2005 and 2006 (in thousands):

	Paperboard			Recovered Fiber		Carton and Custom Packaging			Tube, Core and Composite Containers			Total
Balance as of December 31, 2004	$	78,911		$	3,777	$	43,340		$	57,102		$	183,130
Goodwill impairment		(10,515	)		—		(39,344	)		—			(49,859	)
Disposal of Hunt Valley corrugated plant		—			—		(3,996	)		—			(3,996	)
Balance as of December 31, 2005		68,396			3,777		—			57,102			129,275
Disposal of partition operations		—			—		—			(1,701	)		(1,701	)
Balance as of December 31, 2006	$	68,396		$	3,777		—		$	55,401		$	127,574

In December 2005, due to the Company’s expected disposal of the coated recycled paperboard business, the Company recognized a goodwill impairment of $10.5 million in the paperboard segment and $39.3 million in the carton and custom packaging segment. Also in December 2005, the Company recognized a $4.0 million disposal of goodwill in the folding carton and custom packaging segment related to the divesture of the Hunt Valley corrugated plant; this impairment was recorded in discontinued operations. In February 2006, the Company recognized a $1.7 million disposal of goodwill in the tube, core, and composite container segment related to the divesture of the segment’s partition operations. This impairment was also recorded in discontinued operations.

Intangible Assets

As of December 31, 2006 and 2005, the Company had an intangible asset of $5.5 million (net of $2.5 million of accumulated amortization) and $6.7 million (net of $1.9 million of accumulated amortization) respectively, which is classified with other assets. Amortization expense for the years ended December 31, 2006,

55

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

2005 and 2004 was $521 thousand, $568 thousand and $568 thousand, respectively. The intangible asset is associated with the acquisition of certain assets of the Smurfit Industrial Packaging Group, which was completed in 2002, and is attributable to the acquired customer relationships. This intangible asset is being amortized over 15 years. Scheduled amortization of the intangible asset for the next five years is as follows (in thousands):

2007	$	511
2008		511
2009		511
2010		511
2011		511
Five year total	$	2,555

5. Discontinued Operations and Assets Held for Sale

Discontinued Operations

On December 30, 2005, management and an authorized committee of the Board of Directors approved the exit of the Company’s coated recycled paperboard business, the specialty packaging division and the partition operations. The coated recycled paperboard business is a component of the paperboard segment and consisted of three paperboard mills located in Rittman, Ohio; Versailles, Connecticut; and Tama, Iowa. The specialty packaging division was a component of the folding carton and custom packaging segment and, at such time, consisted of five facilities located in Robersonville, North Carolina; Bucyrus, Ohio; Strasburg, Ohio; Clifton, New Jersey and Pine Brook, New Jersey. The partition operations were a component of the tube, core and composite container segment and consisted of three facilities located in Litchfield, Illinois; Frenchtown, New Jersey and Covington, Georgia. The Company initially made the decision to exit these businesses due to recurring losses, poor strategic fit with the Company’s other assets and the long-term prospects for the businesses.

As discussed in Note 3 above, the Company sold its Hunt Valley Corrugated operation in December 2005. This operation was the only corrugated operation within the folding carton and custom packaging segment and was a component of that segment. Also, as discussed in Note 3, the Company completed the sale of its partition business in February 2006, it sold the Sprague mill and coating components of the Rittman mill in July and August 2006, respectively, and concluded the sale of its Specialty Packaging Division during December 2006.

In its 2005 financial statements, the Company included the results of operations of the coated recycled paperboard business, the specialty packaging division, the partition operations and the Hunt Valley corrugated operation as discontinued operations in the consolidated statements of operations for all periods presented.

In December 2006, the Company announced the retention of its Tama, Iowa coated recycled paperboard mill. The Company exited the balance of its coated recycled paperboard business earlier this year and, as discussed in Note 3 above, Tama had been held for sale as part of that group. The decision to retain the Tama mill was due to the significant improvements in both the performance and profitability of the mill throughout 2006. As a result of the decision to retain the Tama mill, the results of the operations for the Tama mill and the Company’s two other coated recycled paperboard mills, Sprague, CT and Rittman, OH, were reclassified from discontinued operations to continuing operations for all periods presented in the consolidated statements of operations. The Company recorded a $770 thousand depreciation charge in December 2006 to recognize depreciation expense for the period the Tama mill was classified as held for sale. The Company sold the Sprague mill and the coating components of the Rittman mill in July and August of 2006, respectively.

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

For all periods presented in the accompanying consolidated statements of operations, discontinued operations include the results of operations and losses associated with the divestitures of the specialty packaging division, the partition operations and the Hunt Valley corrugated division.

Operating Results Data

The following table shows the results of discontinued operations for the three years ended December 31, 2006, 2005 and 2004:

	For the Years Ended December 31,
	2006			2005			2004
Sales	$	29,196		$	101,161		$	92,274
Cost of sales		26,448			90,276			84,006
Selling, general and administrative expenses		3,415			10,093			8,258
Restructuring and other impairment costs		5,114			11,136			406
Loss from operations		(5,781	)		(10,344	)		(396	)
Other (income) expense, net		0			(522	)		5
Loss from operations before benefit from income taxes		(5,781	)		(10,866	)		(391	)
Benefit for income taxes		1,947			2,534			120
Loss from discontinued operations	$	(3,834	)	$	(8,332	)	$	(271	)

During 2006, the Company recorded pre-tax impairment charges of approximately $5.1 million in the results of discontinued operations. Of this amount, approximately $2.9 million was impairment related to the property, plant and equipment of the special packaging division, and $1.9 million was related to the property, plant and equipment of the Company’s partition business. In December 2005, the Company recorded pre-tax impairment charges of approximately $11.1 million in the results of discontinued operations. Of this amount, approximately $8.1 million was related to the property, plant and equipment associated with the Company’s specialty packaging division, and approximately $3.0 million was related to restructuring and impairment charges associated with the sale of the Company’s Hunt Valley corrugated facility.

Assets Held for Sale and Related Liabilities — Discontinued Operations

The assets classified as held for sale at December 31, 2005 are summarized below (in thousands):

Accounts receivable	$	19,251
Inventory		12,167
Property, plant and equipment		43,621
Other assets		1,626
Assets of discontinued operations held for sale	$	76,665
Accounts payable	$	16,228
Accrued compensation		1,687
Notes payable		4,700
Other liabilities		8,758
Liabilities of discontinued operations	$	31,373

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

At December 31, 2006, there were no assets held for sale related to discontinued operations. In 2006, all previously discontinued operations were sold with the exception of the Tama, Iowa mill which was reclassified to property, plant and equipment.

6. Equity Interest in Unconsolidated Affiliates

Standard Gypsum

From April 1, 1996 to January 17, 2006, the Company owned a 50% interest in a limited partnership, Standard Gypsum. Standard Gypsum owns two gypsum wallboard manufacturing facilities. One facility is located in McQueeney, Texas and the other is in Cumberland City, Tennessee. During such time Standard Gypsum was operated as a joint venture and was managed by Temple-Inland, Inc., (“Temple Inland”) which also owned 50% of the joint venture. The Company accounted for its interest in Standard Gypsum under the equity method of accounting. The Company’s equity interest in the earnings of Standard Gypsum for the years ended December 31, 2005, and 2004 was $28.6 million and $20.6 million, respectively. The Company received distributions based on its equity interest in Standard Gypsum of $26.5 million and $19.3 million in 2005 and 2004, respectively.

During 1999, Standard Gypsum received financing from two industrial revenue bond issuances by Stewart County, Tennessee, totaling $56.2 million, in order to complete the financing for the construction of the Cumberland City, Tennessee facility. Standard Gypsum was the obligor under reimbursement agreements pursuant to which direct-pay letters of credit in the aggregate amount of approximately $56.2 million were originally issued for its account in support of the outstanding industrial revenue bond obligations. Standard Gypsum replaced these letters of credit in October 2003 with new direct-pay letters of credit in the aggregate amount of $57.4 million, issued by a replacement lender.

In October 2004, Standard Gypsum redeemed these industrial revenue bonds in full with the proceeds of drawings on the direct-pay letters of credit in the aggregate amount of $57.4 million. These letters of credit were required to be repaid in full by October 21, 2005. The Company’s obligation with respect to the reimbursement of these letters of credit drawings were supported by a letter of credit in the face amount of $28.7 million, issued in favor of the Standard Gypsum lender. This letter of credit was issued under the Company’s senior credit facility and expired on October 24, 2005.

On September 22, 2005 Standard Gypsum refinanced its outstanding letter of credit reimbursement obligations with borrowings under a new term loan in the principal amount of $56.2 million, from a replacement lender. The term loan matures in full one year from the agreement date. The Company was severally obligated for 50% of Standard Gypsum’s obligations for principal, interest, fees and other amounts with respect to the term loan. The other Standard Gypsum partner, Temple-Inland, had guaranteed 50% of Standard Gypsum’s obligations. As of September 2005, the outstanding principal balance under the term loan totaled $56.2 million, for one half of which the Company is obligated ($28.1 million). The Company’s obligation with respect to the Standard Gypsum term loan was supported by a letter of credit in the face amount of $29.5 million, issued in favor of the Standard Gypsum lender. This letter of credit was issued under the Company’s senior credit facility and would have expired in October 2006. In connection with the term loan the Company amended its senior credit facility effective September 20, 2005 to permit the issuance of this letter of credit.

As of December 31, 2005, the outstanding letters of credit totaled approximately $59.0 million for one-half of which the Company was obligated (approximately $29.5 million). If either joint venture partner had defaulted under its support arrangements, the Company’s total obligation would have been $29.5 million at December 31, 2005 and 2004, respectively. Based on the cash flows generated by Standard Gypsum, the Company assigned no carrying value to the debt obligation guarantee.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

The Company also obtained an amendment, dated as of December 27, 2005 and effective as of January 17, 2006, to its $75 million senior revolving Credit Agreement, dated as of June 24, 2003, with Bank of America, N.A. as Administrative Agent, to permit the sale transaction to Temple-Inland. The $29.5 million letter of credit was terminated as of January 25, 2006 since the Company was no longer obligated to guarantee one half of Standard Gypsum’s $56.2 million in debt obligations.

On January 17, 2006 the Company sold its 50% ownership interest in Standard Gypsum to Standard Gypsum’s other 50% owner, Temple-Inland. Pursuant to the purchase and sale agreement, Temple-Inland purchased the Company’s 50% ownership interest for $150 million, which resulted in a gain of approximately $135.2 million. Temple-Inland also assumed all of Standard Gypsum’s $56.2 million in debt obligations and other liabilities. As a result of this transaction, the Company ceased to be entitled to further distributions from Standard Gypsum for all periods subsequent to January 1, 2006; and all of the rights and obligations as a partner in Standard Gypsum pursuant to the Partnership Agreement for Standard Gypsum dated December 31, 2000, ceased. The Company received a final cash distribution of $2.1 million in the first quarter of 2006, which was included in the calculation of the gain on sale. The Company limited its retained environmental indemnifications such that its liability can not exceed $5.0 million for any claims related to events that occurred prior to the formation of the Standard Gypsum joint venture on April 1, 1996. This indemnification will terminate on January 17, 2011. The Company did not record a liability related to this indemnification since the probability of an asserted claim was considered remote.

Summarized financial information for Standard Gypsum at December 31, 2005, and for the fiscal years ended December 31, 2005, and January 1, 2005, respectively, is as follows (in thousands):

	2005
Current assets	$	33,353
Noncurrent assets		62,016
Current liabilities		12,873
Current debt		56,200
Long-term debt		—
Long-term liabilities		—
Net assets		26,296

	2005		2004
Sales	$	197,131	$	153,714
Gross profit		71,995		52,594
Operating income		60,580		44,126
Net income		57,164		41,210

Note: Standard Gypsum’s fiscal year-end is the Saturday closest to December 31.

Premier Boxboard

During 1999, the Company formed a joint venture with Temple-Inland to own and operate a paperboard mill located in Newport, Indiana. Under the joint venture agreement, the Company contributed $50.0 million to the joint venture, Premier Boxboard Limited and Temple-Inland contributed the net assets of the mill valued at approximately $100.0 million, and received $50.0 million in notes issued by Premier Boxboard. Upon formation, Premier Boxboard undertook an $82.0 million project to modify the mill to enable it to produce a new lightweight gypsum facing paper along with other containerboard grades. Premier Boxboard is operated as a joint

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

venture managed by the Company. The modified mill began operations on June 27, 2000. The Company and Temple-Inland each have a 50% interest in the joint venture, which is being accounted for under the equity method of accounting. Funding for Premier Boxboard is generated by its internal cash flow and any cash contributions that the Company and its joint venture partner are required to make.

The Company received $8.0 million, $13.0 million and $1.0 million in cash distributions in 2006, 2005 and 2004, respectively. The Company’s equity interest in the earnings of Premier Boxboard for 2006, 2005 and 2004 was approximately $5.6 million, $8.4 million and $4.3 million in earnings, respectively.

In addition to the general default risks discussed above with respect to the joint ventures, a substantial portion of the assets of Premier Boxboard are pledged as security for $50.0 million in outstanding principal amount of senior notes under which Premier Boxboard is the obligor. These notes are guaranteed by Temple-Inland, but are not guaranteed by the Company. In the event of default under these notes, the holders would also have recourse to the assets of Premier Boxboard that are pledged to secure these notes. Thus, any resulting default under these notes could result in the assets of Premier Boxboard being utilized to satisfy creditor claims, which would have a material adverse effect on the financial condition and operations of Premier Boxboard and, accordingly, the Company’s interest in Premier Boxboard. As of December 31, 2006, Premier Boxboard was in compliance with its debt covenants.

Summarized financial information for Premier Boxboard at December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004, respectively, is as follows (in thousands):

	2006		2005
Current assets	$	15,254	$	15,562
Noncurrent assets		128,561		135,497
Current liabilities		10,552		12,607
Long-term liabilities		605		693
Long-term debt		50,000		50,000
Net assets		82,658		87,759

	2006		2005		2004
Sales	$	118,495	$	122,063	$	109,371
Gross profit		32,560		36,436		28,007
Operating income		15,035		20,909		12,949
Net income		11,049		16,873		8,654

Additional contingencies relating to the Premier Boxboard joint venture that could affect liquidity include possible additional capital contributions and buy-sell triggers which, under certain circumstances, give the Company and the joint venture partner either the right, or the obligation, to purchase the other’s interest or to sell an interest to the other. The Company is required, to the extent necessary, to make additional capital contributions to enable the joint venture to meet existing obligations. Under the Premier Boxboard joint venture agreement, in general, mutual buy-sell rights are triggered upon the occurrence of involuntary transfers, and in the event of change of control, actual or imminent, of Temple-Inland or its subsidiaries or in the event of a deadlock, as defined in the joint venture agreement. The buy-sell provisions are structured such that the Company is contemplated to be the purchaser in the event of any voluntary transfer of membership interest.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

7. Senior Credit Facility and Long-Term Debt

At December 31, 2006 and 2005, total long-term debt consisted of the following (in thousands):

	2006			2005
Senior credit facility	$	36,111		$	—
9 7/8% senior subordinated notes		—			257,500
7 3/8% senior notes		189,750			189,750
7 1/4% senior notes		29,000			29,000
Other notes payable (1)		8,200			4,955
Realized interest rate swap gains (2)		2,861			11,185
Total debt		265,922			492,390
Less current maturities		(5,830	)		(85	)
Total long-term debt	$	260,092		$	492,305

(1) At December 31, 2005, industrial revenue bonds (the Sprague bonds) of $4.7 million are included in liabilities of assets held for sale and are not reflected in the schedule above. In accordance with the Sprague sales agreement, which was executed during 2006, the Sprague bonds were retained by the Company and, therefore, have been included in the schedule above as of December 31, 2006.

(2) Net of original issuance discounts and accumulated discount amortization. As described below under “Interest Rate Swap Agreements”, realized gains resulting from unwinding interest rate swaps are recorded as a component of debt and will be accreted as a reduction to interest expense over the remaining term of the debt.

The carrying value of total debt outstanding at December 31, 2006 maturing during the next five years and thereafter is as follows (in thousands):

2007	$	5,830
2008		5,833
2009		200,201
2010		33,077
2011		12,781
Thereafter		8,200
Total debt	$	265,922

Senior Credit Facility

As of December 31, 2005 the Company’s senior credit facility provided for a revolving line of credit of $75.0 million and was secured primarily by a first priority security interest in the Company’s accounts receivable and inventory. The facility included a subfacility of $50.0 million for letters of credit, the usage of which reduced availability under the facility. As of December 31, 2005, no borrowings were outstanding under the facility; however, an aggregate of $37.5 million in letter of credit obligations were outstanding. Availability under this facility at December 31, 2005 was limited to $37.5 million after taking into consideration the outstanding letter of credit obligations. The facility’s maturity date was in June 2006.

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

As of December 31, 2005, borrowings under the facility bore an interest at a rate equal to, at the Company’s option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the facility) plus a margin of between (0.25%) and 0.25% or (2) the adjusted London Interbank Offered Rate (“LIBOR”) plus a margin of between 1.50% and 2.00%, with the applicable margin to be set based on the Company’s levels of available cash. The undrawn portion of the facility was subject to a facility fee at an annual rate of 0.375%. Outstanding letters of credit were subject to an annual fee equal to the applicable margin for LIBOR based loans. At December 31, 2005, the applicable interest margin for Base Rate borrowings was (0.25%) and the applicable interest margin for LIBOR based borrowings was 1.50%.

On March 30, 2006, the Company amended its senior credit facility by entering into an Amended and Restated Credit Agreement. The agreement provides for a $145.0 million senior secured credit facility (the “Senior Credit Facility”) consisting of a $110.0 million five-year revolver and a $35.0 million five-year term loan. The five-year revolver was reduced from $110.0 million to $100.0 million in October 2006. The Senior Credit Facility is secured by substantially all assets of the Company and its domestic subsidiaries other than real property, including accounts receivable, general intangibles, inventory and equipment. The Company’s domestic subsidiaries are parties to the Senior Credit Facility either as co-borrowers with the Company or as guarantors. At December 31, 2006 the Company had $31.1 million outstanding under the five-year term loan and $5.0 million outstanding under the revolver.

The revolver matures on the fifth anniversary of closing and includes a sublimit of $25.0 million for letters of credit. Borrowing availability under the revolver is determined by reference to a borrowing base, defined as specified percentages of eligible accounts receivable and inventory and reduced by usage of the revolver, including outstanding letters of credit, and any reserves. Aggregate availability under the revolver was $38.8 million at December 31, 2006. The term loan was drawn in full at closing and is required to be repaid in monthly installments based on a level six-year amortization schedule, with all remaining outstanding principal due on the fifth anniversary of closing.

Outstanding principal of the term loan initially bears interest at a rate equal to, at the Company’s option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the Senior Credit Facility) plus 0.25%, or (2) the adjusted one, two, three or six-month LIBOR rate plus 1.75%. Outstanding principal under the revolver initially bears interest at a rate equal to, at the Company’s option, either (1) the base rate or (2) the adjusted one, two, three or six-month LIBOR rate plus 1.50%. Beginning with reference to the fiscal quarter ending September 30, 2006, pricing under the Senior Credit Facility will be determined by reference to a pricing grid based on average daily availability under the revolver for the immediately prior fiscal quarter. Under the pricing grid, the applicable margins for the term loan will range from 0.0% to 0.75% for base rate loans and from 1.50% to 2.25% for LIBOR loans, and the applicable margins for the revolver will range from 0.0% to 0.5% for base rate loans and from 1.25% to 2.00% for LIBOR loans. The undrawn portion of the revolver is subject to an unused line fee calculated at an annual rate of 0.25%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for LIBOR loans under the revolver as in effect from time to time, plus a fronting fee on the undrawn amount thereof at an annual rate of 0.125%. The weighted average rates in effect as of December 31, 2006 were 8.05% and 7.39% for outstanding revolver and term loan borrowings, respectively.

The Senior Credit Facility contains covenants that restrict, among other things, the ability of the Company and its subsidiaries to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, enter into sale and leaseback transactions or change the nature of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

their business. The Senior Credit Facility also contains a fixed charge coverage ratio covenant, which applies only in the event borrowing availability falls below $20.0 million at any time or below $25.0 million for five consecutive business days. The Senior Credit Facility contains events of default including, but not limited to, nonpayment of principal or interest, violation of covenants, breaches of representations and warranties, cross-default to other indebtedness, bankruptcy and other insolvency events, material judgments, certain ERISA events, actual or asserted invalidity of loan documentation and certain changes of control of the Company. The Company was in compliance with the Senior Credit Facility covenants as of December 31, 2006.

Senior and Senior Subordinated Notes

On June 1, 1999, the Company issued $200.0 million in aggregate principal amount of 7 ³/8% senior notes due June 1, 2009. The 7 ³/8% senior notes were issued at a discount to yield an effective interest rate of 7.47% and pay interest semiannually. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 7 ³/8% senior notes is 6.3%. The 7 ³/8% senior notes are unsecured obligations of the Company. As of December 31, 2006, the Company has purchased an aggregate of $10.3 million of these notes in the open market.

On March 29, 2001, the Company issued $285.0 million of 9 ⁷/8% senior subordinated notes due April 1, 2011 and $29.0 million of 7 ¹/4% 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% and 9.4%, respectively. The publicly traded senior subordinated notes were, and the senior notes are, unsecured but guaranteed, on a joint and several basis, by all but one of the Company’s wholly-owned domestic subsidiaries. The senior subordinated notes included a redemption provision which allowed the Company to redeem all or part of the outstanding notes at 105.25% on April 1, 2006 or later.

During 2004 and 2005, the Company purchased $20.0 million and $7.5 million, respectively, of senior subordinated and senior notes in the open market. On May 1, 2006, the Company redeemed its outstanding 9 ⁷/8% senior subordinated notes in full at a price of $105.25 for each $100 of outstanding principal amount of the notes plus $2.1 million of accrued and unpaid interest from April 1, 2006 to May 1, 2006. At the time of redemption, the aggregate outstanding principal amount of the notes was $257.5 million, and the total redemption price (including accrued and unpaid interest and redemption premium) was $273.1 million. The Company used proceeds from borrowings at closing under the Senior Credit Facility, together with available cash, to fund the redemption. The redemption resulted in a $10.3 million loss, which was recognized in May of 2006.

Interest Rate Swap Agreements

During 2004 and 2005, the Company entered into multiple interest rate swap agreements which had payment and expiration dates that corresponded to the terms of the note obligations they covered. These agreements effectively converted the Company’s fixed rate 9 ⁷/8% senior subordinated notes and the 7 ³/8% senior notes into variable rate obligations. These agreements were subsequently unwound and generated cash proceeds to the Company of $826 thousand in 2005 and $385 thousand in 2004. These gains were recorded as a component of debt and lowered interest expense over the remaining duration of the related debt obligation.

Under the provisions of SFAS No. 133, the Company designated and accounted for its interest rate swap agreements as fair value hedges. The Company has assumed no ineffectiveness with regard to these agreements as they qualified for the short-cut method of accounting for fair value hedges of debt obligations, as prescribed by SFAS No. 133. The Company has no interest rate swaps or related liabilities at December 31, 2006 or 2005.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

8. 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 contingent amount for mileage. Rental expense on operating leases for the years ended December 31, 2006, 2005 and 2004 is as follows (in thousands):

	2006		2005		2004
Minimum rentals	$	14,589	$	16,056	$	19,374
Contingent rentals		660		1,073		348
Total	$	15,249	$	17,129	$	19,722

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, 2006 (in thousands):

2007	$	11,744
2008		8,086
2009		5,205
2010		3,286
2011		2,764
Thereafter		4,213
Total	$	35,298

Litigation

The Company is involved in certain litigation arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial condition or results of operations or cash flows.

9. Income (Loss) Per Common Share

The following is a reconciliation of the numerators and denominators of the basic and diluted loss per share computations for net loss (in thousands, except per share information):

	For the Years Ended December 31,
	2006		2005			2004
Income (loss) from continuing operations	$	51,166	$	(95,054	)	$	(3,708	)
Weighted average number of common shares outstanding-basic		28,575		28,774			28,479
Common share equivalents		32		—			—
Weighted average number of common shares outstanding-diluted		28,607		28,774			28,479
Income (loss) per common share-basic	$	1.79	$	(3.30	)	$	(0.13	)
Income (loss) per common share-diluted	$	1.79	$	(3.30	)	$	(0.13	)

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

Since the years ended 2005 and 2004 were net losses, the impact of the dilutive effect of stock options, if any, was not added to the weighted average shares. The number of options not included in the computation of diluted weighted average shares because they were antidilutive were 1,364,350, 1,113,187 and 1,167,233 for the years ended 2006, 2005 and 2004, respectively.

10. Stock-Based Compensation

Director Equity Plan

The Company’s Board of Directors participate in a director equity plan. Under the plan, directors who are not employees or former employees of the Company (“Eligible Directors”) are paid a portion of their fees in the Company’s common stock. Additionally, each Eligible Director is granted options each year to purchase one thousand shares of the Company’s common stock at an option price equal to the fair market value at the date of grant. These options are immediately exercisable and expire ten years following the grant. A maximum of 100 thousand shares of common stock may be granted under this plan. During 2004, approximately 5 thousand shares of common stock were issued under this plan. Additionally during 2004, options to purchase approximately 7 thousand shares of common stock were issued under the plan. After the grant in July of 2004, there were no remaining authorized shares of common stock that could be issued under this plan which effectively terminated the plan. In May 2005, the Directors began participating in the Company’s Long-Term Equity Incentive Plan.

Incentive Stock Option and Bonus Plans

During 1992, the Company’s board of directors and shareholders approved a qualified incentive stock option and bonus plan (the “1993 Plan”), which became effective January 1, 1993 and terminated December 31, 1997. Under the provisions of the 1993 Plan, selected members of management received one share of common stock (“bonus share”) for each two shares purchased at market value. In addition, the 1993 Plan provided for the issuance of options at prices not less than market value at the date of grant. The options and bonus shares awarded under the 1993 Plan were subject to four-year and five-year respective vesting periods. The options expire after eight years. The Company’s board of directors authorized 1.4 million common shares for grant under the 1993 Plan. No compensation expense was recorded in 2006, 2005, or 2004 related to this plan.

During 1998, the Company’s board of directors and shareholders approved a qualified incentive stock option and bonus plan (the “1998 Plan”), which became effective March 10, 1998. Under the provisions of the 1998 Plan, selected members of management could receive the right to acquire one share of nonvested stock contingent upon the direct purchase of two shares of unrestricted common stock at market value. In addition, the 1998 Plan provided for the issuance of both traditional and performance stock options at market price and 120% of market price, respectively. Nonvested stock and options awarded under the 1998 Plan are subject to five-year vesting periods and the options expire after ten years. The Company’s board of directors authorized 3.8 million common shares for grant under the 1998 Plan. The plan expired in 2003 and, therefore, no more options will be granted under this plan. The Company issued no shares of nonvested stock in 2006 and 2005 and issued eight thousand shares in 2004. The Company recorded approximately $45 thousand, $22 thousand, and $55 thousand of compensation expense related to nonvested stock under this plan during 2006, 2005 and 2004, respectively.

Long-Term Equity Incentive Plan

In May 2003, the Company’s board of directors and shareholders approved a long-term equity incentive plan, which became effective May 7, 2003. Under the provisions of the plan, participating key employees are rewarded, in the form of common share purchase options, nonvested performance accelerated restricted shares (“PARS”), or a combination of both, for improving the Company’s financial performance in a manner that is consistent with the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

creation of increased shareholder value. All options awarded under the plan will have an exercise price not less than 100% of the fair market value of a share of common stock on the date of grant. Options will have a vesting schedule of up to five years and expire after ten years. The PARS issued by the Company will vest seven years from the date of grant unless vesting is accelerated when the price of Caraustar stock meets a specific target price and trades at this price or higher for twenty consecutive trading days. The Company’s board of directors authorized and shareholders approved an aggregate of 4.0 million common shares for issuance under this plan. The Company’s policy for issuing shares upon an exercise of options is to issue new shares.

In May 2005, the shareholders approved an amendment to allow the Company’s directors to participate in the long-term equity incentive plan. Under this plan, each non-employee director of the Company is granted 3,000 options annually.

During the year ended December 31, 2006, 2005 and 2004, the Company granted 250 thousand options, 32 thousand options and 254 thousand options. The weighted average grant-date fair value for options granted during years ended December 31, 2006, 2005 and 2004 was $5.81, $5.85 and $8.86, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004 was $3 thousand, $8 thousand and $3.1 million, respectively. The Company recorded approximately $660 thousand of compensation expense for stock options for the year ended December 31, 2006. As of December 31, 2006, there was $0.7 million of total unrecognized compensation costs related to nonvested stock options. This cost is expected to be recognized over a period of 5.2 years. The Company amortizes this cost using the straight line method.

During the year ended December 31, 2006, 2005 and 2004, the Company issued nonvested stock of 282 thousand, 2 thousand and 255 thousand. The weighted average grant-date fair value for nonvested stock granted during years ended December 31, 2006, 2005 and 2004 was $10.09, $13.38 and $17.37, respectively. The total fair value of nonvested stock vested during the years ended December 31, 2006, 2005 and 2004 was approximately $8 thousand, $181 thousand and $1.6 million. The Company recorded approximately $1.1 million, $0.8 million and $1.6 of compensation expense during the twelve months ended December 31, 2006, 2005, and 2004, respectively. As of December 31, 2006, there was $4.7 million of total unrecognized compensation cost related to nonvested stock. The unrecognized cost is expected to be expensed over a weighted-average period of 5.6 years unless specific stock price targets are achieved, at which time the PARS will vest and be expensed during the period the targets are achieved.

Total compensation expense for nonvested stock and stock options for the twelve months ended December 31, 2006, 2005 and 2004 included in the Company’s results from operations was $1.8 million, $811 thousand and $1.6 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

The following table summarizes the stock option activity during the twelve months ended December 31, 2006:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Life (In Years)	Aggregate Intrinsic Value (1) (in thousands)
Outstanding at December 31, 2005	1,618,959		$	17.51
Granted	249,550			10.30
Forfeited or expired	(153,297	)		20.09
Exercised	(13,500	)		7.87
Outstanding at December 31, 2006	1,701,712		$	16.30	5.2	$	97
Vested and expected to vest as of December 31, 2006	1,671,228		$	16.42	5.1	$	97
Options exercisable as of December 31, 2006	1,430,876		$	17.47	4.5	$	97

(1) These amounts represent the difference between the exercise price and $8.09, the closing price of Caraustar stock on December 29, 2006 (the closing price closest to the last day of the quarter) as reported on the Nasdaq Stock Market, for all the in-the-money options outstanding.

A summary of the status of Caraustar’s nonvested PARS as of December 31, 2006 and changes during the twelve months ended December 31, 2006, is presented below:

	Shares		Weighted- Average Grant- Date Fair Value
Nonvested at December 31, 2005	238,294		$	16.95
Granted	281,550			10.09
Vested	(500	)		17.05
Forfeited or expired	(29,350	)		13.61
Nonvested at December 31, 2006	489,994		$	13.21

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

Results for the years ended December 31, 2005 and 2004 have not been restated to reflect compensation expense for employee stock options. Had compensation expense for employee stock options been determined based on the fair value at the grant date consistent with SFAS 123, the Company’s net income and earnings per share amounts for the years ended December 31, 2005 and 2004 would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):

	2005			2004
Net loss:
As reported	$	(103,386	)	(3,979	)
Share-based employee compensation cost, net of related tax effects, included in net loss, as reported		527		1,047
Share-based employee compensation cost, net of related tax effects, under SFAS 123		(2,346	)	(2,253	)
Pro forma net loss, under SFAS 123	$	(105,205	)	(5,185	)
Net loss available to common stockholders per share, as reported:
Basic	$	(3.59	)	(0.14	)
Diluted	$	(3.59	)	(0.14	)
Pro forma net loss per share, under SFAS 123:
Basic	$	(3.66	)	(0.18	)
Diluted	$	(3.66	)	(0.18	)

The fair market value of the stock options at the date of the grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2006	2005	2004
Risk-free interest rate	4.65%	4.34% — 4.49%	3.88% — 4.31%
Expected dividend yield	0%	0%	0%
Expected option lives	8 years	8 years	8-10 years
Expected volatility	44%	41 — 43%	40%

The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. Expected volatility and expected life are based on the Company’s historical experience. Expected dividend yield was not considered in the option pricing formula since the Company’s debt agreements contain certain limitations on the payment of dividends and currently preclude the Company from doing so. As required by SFAS 123R, the Company will adjust the estimated forfeiture rate based upon actual experience.

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

11. Pension Plan and Other Postretirement Benefits

Adoption of SFAS No. 158

Effective December 31, 2006, the Company adopted SFAS No. 158 which requires the Company’s Consolidated Balance Sheet reflect the funded status of the defined benefit pension plan (the “Pension Plan”), the Supplemental Executive Retirement Plan (“SERP”) and Other Postretirement Benefits plans. The funded status of the plans is measured as the difference between the plan assets at fair value and the projected benefit obligation. The impact of adopting SFAS No. 158 on individual line items in the consolidated balance sheet as of December 31, 2006 is shown below:

	Before Adoption of SFAS No. 158			Adjustments			After Adoption of SFAS No. 158
Other assets (long-term)	$	14,438		$	(2,354	)	$	12,084
Total assets		626,629			(2,354	)		624,275
Other accrued liabilities		26,698			760			27,458
Total current liabilities		109,714			760			110,474
Deferred income taxes		47,120			(3,805	)		43,315
Pension liability		34,588			4,266			38,854
Other liabilities (long-term)		7,231			2,632			9,863
Accumulated other comprehensive loss		(20,583	)		(6,208	)		(26,791	)
Total liabilities and shareholders' equity		626,629			(2,354	)		624,275

Pension Plan and Supplemental Executive Retirement Plan

Substantially all of the Company’s employees hired prior to December 31, 2004 participate in a noncontributory defined benefit Pension Plan. The Pension Plan calls for benefits to be paid to all eligible employees at retirement based primarily on years of service with the Company and compensation rates in effect near retirement. The Pension Plan’s assets consist of shares held in collective investment funds. The Company’s policy is to fund benefits attributed to employees’ service to date as well as service expected to be earned in the future. The Company made no contributions to the Pension Plan in 2006, a $13.1 million contribution in 2005 and no contributions in 2004. Based on estimates at December 31, 2006, the Company will make contributions between $13.4 million and $16.7 million during calendar year 2007.

In September 2004, the Company announced the suspension of any further pension benefits for certain employees covered by the defined benefit pension plan. The suspension was effective December 31, 2004 and froze the accrued pension benefits for employees not subject to a collective bargaining agreement and employees that do not qualify for continued benefits based on years of service and age requirements. The impact of the curtailment on the Company’s pension liability and 2004 pension expense was a reduction in the projected benefit obligation of $3.9 million and an increase in expense of approximately $97 thousand.

Certain executives participate in a SERP which provides retirement benefits to participants based on average compensation and years of credited service. Certain executives were given credited service for prior industry services. The SERP is unfunded at December 31, 2006 and 2005. The Company made contributions of $420 thousand in 2006 and no contributions in 2005 and 2004. The Company expects to make contributions of $278 thousand in 2007.

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

Pension expense for the Pension Plan and the SERP includes the following components for the years ended December 31, 2006, 2005 and 2004 (in thousands):

	SERP						Pension Plan
	2006		2005		2004		2006			2005			2004
Service cost of benefits earned	$	330	$	280	$	205	$	2,666		$	3,060		$	5,728
Interest cost on projected benefit obligation		521		423		336		6,973			6,764			5,699
Settlement and curtailment		—		—		—		108			684			96
Expected return on plan assets		—		—		—		(7,171	)		(6,412	)		(6,380	)
Amortization of prior service cost		83		83		2		311			394			354
Amortization of net loss		139		49		38		4,398			4,568			3,017
Amortization of transition obligation		114		114		114		—			—			—
Net pension expense	$	1,187	$	949	$	695	$	7,285		$	9,058		$	8,514

Total net pension expense for 2007 is estimated to be $1.2 million for the SERP and $4.6 million for the Pension Plan. The following amounts in accumulated other comprehensive income are expected to be recognized as components of the 2007 net pension expense:

	SERP		Pension Plan
Estimated actuarial loss	$	107	$	2,673
Prior service cost		87		277
Transition obligation		114		—

Below is a summary of benefits for the Pension and SERP plans that the Company expects to pay over the next ten years (in thousands):

Years	SERP		Pension Plan
2007	$	278	$	5,084
2008	$	278	$	5,423
2009	$	278	$	6,000
2010	$	278	$	6,469
2011	$	512	$	6,871
2012-2016	$	4,333	$	43,360

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

The table below presents various obligation, plan asset and financial statement information for the Pension Plan and the SERP as of the Company’s measurement date, December 31, 2006 and 2005 (in thousands):

	SERP						Pension Plan
	2006			2005			2006			2005
Change in benefit obligation:
Projected benefit obligation at end of prior year	$	9,096		$	6,319		$	124,473		$	102,712
Service cost		330			280			2,666			3,060
Interest cost		521			424			6,973			6,765
Actuarial (Gain) loss		42			1,096			(6,165	)		16,238
Curtailment		—			—			(83	)		—
Plan amendments		55			977			356			894
Benefits paid		(420	)		—			(5,713	)		(5,196	)
Projected benefit obligation at end of year	$	9,624		$	9,096		$	122,507		$	124,473
Change in plan assets:
Fair value of plan assets at end of prior year	$	—		$	—		$	86,858		$	72,096
Actual return on plan assets		—			—			11,869			6,858
Employer contributions		420			—			—			13,100
Benefits paid		(420	)		—			(5,713	)		(5,196	)
Fair value of plan assets at end of year	$	—		$	—		$	93,014		$	86,858
Funded status of the plans:
Ending funded status	$	(9,624	)	$	(9,096	)	$	(29,493	)	$	(37,615	)
Unrecognized transition obligation		N/A			683			N/A			—
Unrecognized prior service cost		N/A			931			N/A			1,513
Unrecognized net actuarial loss		N/A			2,323			N/A			49,865
Net amount recognized	$	(9,624	)	$	(5,159	)	$	(29,493	)	$	13,763
Amounts recognized in the balance sheet:
Accrued benefit liability	$	(9,624	)	$	(6,368	)	$	(29,493	)	$	(35,509	)
Intangible asset		N/A			1,209			N/A			1,513
Deferred tax asset		N/A			—			N/A			18,081
Accumulated other comprehensive loss		N/A			—			N/A			29,678
Net amount recognized	$	(9,624	)	$	(5,159	)	$	(29,493	)	$	13,763
Plans with accumulated benefit obligations in excess of plan assets:
Projected benefit obligation	$	9,624		$	9,096		$	122,507		$	124,473
Accumulated benefit obligation		6,762			6,368			120,765			122,367
Plan assets		—			—			93,014			86,858
Amounts in accumulated other comprehensive loss net of tax:
Transition obligation	$	353					$	—
Prior service cost		559						900
Net actuarial loss		1,381						21,469
Total	$	2,293					$	22,369

71

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

As of December 31, 2005, in accordance with SFAS No. 87, the Company recorded an additional minimum pension liability related to its Pension Plan and SERP plan representing the excess of unfunded accumulated benefit obligations over previously recorded pension liabilities. The Company’s additional minimum liability for its Pension Plan was $49.3 million at December 31, 2005. The December 31, 2005 additional minimum liability was offset by an intangible asset of $1.5 million which represented the unrecognized prior service cost. The additional minimum liability for the SERP totaled $1.2 million at December 31, 2005. The December 31, 2005 additional liability for the SERP was offset by an intangible asset of $1.2 million.

The determination of the Company’s pension expense and benefit obligation is dependent on its selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the weighted average discount rate, the weighted average expected rate of return on plan assets and the weighted average rate of compensation increase. The following table is a summary of the significant assumptions used to determine the projected benefit obligations as of December 31, 2006 and 2005:

	SERP				Pension Plan
	2006		2005		2006		2005
Weighted average discount rate	5.85	%	5.75	%	6.05	%	5.75	%
Weighted average rate of compensation increase	4.00	%	4.00	%	3.00	%	3.00	%

The following table is a summary of the significant assumptions to determine net periodic pension expense for the years ended December 31, 2006, 2005 and 2004:

	SERP						Pension Plan
	2006		2005		2004		2006		2005		2004
Weighted average discount rate	5.75	%	5.75	%	6.25	%	5.75	%	5.75	%	6.25	%
Weighted average expected rate of return on plan assets	N/A		N/A		N/A		8.50	%	8.50	%	9.00	%
Weighted average rate of compensation increase	4.00	%	3.00	%	3.00	%	3.00	%	3.00	%	3.00	%

In developing the weighted average discount rate, the Company evaluated input from its actuaries, including estimated timing of obligation payments and yields for long-term bonds that received one of the two highest ratings given by a recognized rating agency. The discount rate, determined on this basis was 6.05% and 5.75% at December 31, 2006 and December 31, 2005. Based on analysis of the rating and maturity of the long-term bonds, the timing of payment obligations and the input from the Company’s actuaries, the Company concluded that a discount rate of 6.05% is appropriate and reflects the yield of a portfolio of high-quality bonds that has the same duration as the plan obligations. Future actual pension expense and benefit obligations will depend on future investment performance, changes in future discount rates and various other factors related current and former participating employees in the Company’s pension plans. A 0.25% change in the discount rate would result in a change in the December 31, 2006, projected benefit obligation of approximately $4.2 million and would change estimated 2007 net pension expense by approximately $503 thousand.

In developing the Company’s weighted average expected rate of return on plan assets, the Company evaluated such criteria as return expectations by asset class, historical returns by asset class and long-term inflation assumptions. The Company’s expected weighted average rate of return was based on an asset allocation assumption of 51% equity, 30% fixed income and a 19% investment in a portfolio of hedge funds. The Company regularly reviews its asset allocation and periodically rebalances its investments to its targeted allocation when considered appropriate. The Company concluded that the expected weighted average rate of return of 8.5% for the years ended December 31, 2006 and 2005 is appropriate. Subsequent to December 31, 2006, the Company changed its asset allocation by reducing its allocation in the hedge fund portfolio and increased its allocation to fixed income and equity investments. This change in asset allocation will result in a lower expected rate of return of 8.0% for 2007 and future years.

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

A 0.25% change in the weighted average expected rate of return would change estimated 2007 net pension expense by $300 thousand.

The Company’s pension plan weighted-average asset allocations as of December 31, 2006 and 2005, respectively, were as follows:

	2006		2005
Large capitalization U.S. equity	29	%	31	%
Small capitalization U.S. equity	10	%	10	%
International equity	13	%	13	%
Total equity	52	%	54	%
Portfolio of hedge funds	18	%	21	%
Short term fixed	5	%	—
Fixed income (intermediate-term maturities)	25	%	25	%
Total fixed income	30	%	25	%

The Company’s investment policy includes the following objectives:

• Provide a long-term investment return greater than the actuarial assumptions.

• Maximize investment return commensurate with appropriate levels of risk.

• Comply with the Employee Retirement Income Security Act of 1974 (ERISA) by investing the funds in a manner consistent with ERISA’s fiduciary standards.

The Company’s policy is to allocate Pension Plan funds based on percentages for each major asset category as follows:

Large capitalization U.S. equity	30	%
Small capitalization U.S. equity	10	%
International equity	15	%
Total equity	55	%
Portfolio of hedge funds	20	%
Short-term fixed	5	%
Fixed income (intermediate-term maturities)	20	%
Total fixed income	25	%

The Company’s actual investment allocation at December 31, 2006 approximates the policy above.

Other Postretirement Benefits

The Company provides postretirement medical benefits to retired employees of certain of its subsidiaries. The Company accounts for these postretirement medical benefits in accordance with SFAS No. 106, “Employer’s Accounting for Postretirement Benefits Other than Pensions” and SFAS No. 158.

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

Net periodic postretirement benefit cost for the years ended December 31, 2006, 2005 and 2004 included the following components (in thousands):

	2006		2005		2004
Service cost of benefits earned	$	33	$	37	$	24
Interest cost on accumulated postretirement benefit obligation		354		359		311
Amortization		184		107		(157	)
Net periodic postretirement benefit cost	$	571	$	503	$	178

Postretirement benefits totaling $151 thousand, $407 thousand and $578 thousand were paid during 2006, 2005 and 2004, respectively. Contributions of $503 thousand are estimated for 2007.

Below is a summary of post retirement benefits that the Company expects to pay over the next ten years (in thousands):

Years	Post Retirement Benefits
2007	$	503
2008	$	507
2009	$	528
2010	$	533
2011	$	516
2012-2016	$	2,400

The accrued postretirement benefit cost as of December 31, 2006 and 2005 consists of the following (in thousands):

	2006			2005
Change in benefit obligation:
Projected benefit obligation at end of prior year	$	6,317		$	5,753
Service cost		33			37
Interest cost		354			359
Actuarial (gain) loss		(129	)		626
Amendments		(153	)		(51	)
Benefits paid		(151	)		(407	)
Projected benefit obligation at end of year	$	6,271		$	6,317
Funded status	$	(6,271	)	$	(6,317	)
Unrecognized prior service cost		N/A			(905	)
Unrecognized net actuarial loss		N/A			4,492
Net amount recognized in balance sheet	$	(6,271	)	$	(2,730	)
Amounts in accumulated other comprehensive loss:
Prior service cost	$	(518	)
Net actuarial loss		2,453
Total	$	1,935

The accumulated postretirement benefit obligations at December 31, 2006 and 2005 were determined using a weighted average discount rate of 5.90% and 5.65%, respectively. The rate of increase in the costs of covered

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

health care benefits is assumed to be 9.0% in 2007 decreasing to 4.5% by the year 2011. Increasing or decreasing the assumed health care costs trend rate by one percentage point would have increased or decreased the accumulated postretirement benefit obligation as of December 31, 2006 by approximately $624 thousand and $530, respectively, and this would have increased or decreased net periodic postretirement benefit cost by approximately $40 thousand and $34 thousand, respectively, for the year ended December 31, 2006.

401(k) Retirement Savings Plan

The Company sponsors and maintains a 401(k) retirement savings plan that permits participants to make contributions by salary deductions pursuant to Section 401(k) of the Internal Revenue Code. During 2004, the Company matched 50% of contributions up to a maximum of 6% of compensation as defined by the 401(k) Plan. During 2005 and 2006, the 401(k) plan matched 100% of contributions up to 3% of an employee’s salary and 50% of all contributions that are greater than 3% of the employee’s salary but less than or equal to 5% of an employee’s salary. In addition and pursuant to the Company’s defined contribution plan effective January 1, 2005, the Company will make an additional contribution to all non-union employees 401(k) accounts based upon the employee’s years of service ranging from 1% for employees with less than 5 years of service up to 4% for employees with 25 or more years of service. During the years ended December 31, 2006, 2005, and 2004, the Company recorded matching expense of approximately $5.4 million, $5.7 million, and $3.8 million, respectively, related to the 401(k) Plan.

12. Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires the use of the liability method of accounting for deferred income taxes.

The (benefit) provision for income taxes for the years ended December 31, 2006, 2005 and 2004 consisted of the following (in thousands):

	2006		2005			2004
Current:
Federal	$	1,600	$	—		$	598
State		226		695			124
Foreign		159		—			—
		1,985		695			722
Deferred		23,702		(32,951	)		(2,256	)
	$	25,687	$	(32,256	)	$	(1,534	)

Income tax expense (benefit) is included in accompanying consolidated statement of operations as follows:

	2006			2005			2004
Continuing Operations:
Current federal and state	$	2,175		$	695		$	722
Deferred federal and state		25,459			(30,417	)		(2,136	)
Tax expense (benefit)		27,634			(29,722	)		(1,414	)
Discontinuing Operations:
Current federal and state		(190	)		—			—
Deferred federal and state		(1,757	)		(2,534	)		(120	)
Tax expense (benefit)		(1,947	)		(2,534	)		(120	)
Total income tax expense (benefit)	$	25,687		$	(32,256	)	$	(1,534	)

75

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

The effective tax rate on income (loss) from continuing operations before taxes differs from the U.S. statutory rate. The following summary reconciles taxes at the U.S. statutory rate with the effective rates:

	2006		2005		2004
Federal	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	(0.7	)%	(1.4	)%	(2.5	)%
Non-deductible impaired goodwill	0.0	%	(9.5	)%	0.0	%
Other	0.7	%	(0.3	)%	(3.9	)%
Effective tax rate	35.0	%	23.8	%	28.6	%

Significant components of the Company’s deferred income tax assets and liabilities as of December 31, 2006 and 2005 are summarized as follows (in thousands):

	2006			2005
Deferred income tax assets:
Deferred employee benefits	$	240		$	324
Postretirement benefits other than pension		3,835			1,486
Post employment benefits		14,666			15,701
Accounts receivable		890			679
Insurance		2,423			3,344
Tax loss carryforwards and credits		25,132			54,813
Inventories		1,703			2,121
Other		2,478			3,078
Total deferred income tax assets		51,367			81,546
Deferred income tax liabilities:
Depreciation and amortization		(68,260	)		(74,008	)
Losses on contractual sales commitments		—			(2,554	)
Total deferred income tax liabilities		(68,260	)		(76,562	)
Valuation allowance		(17,150	)		(13,424	)
Net deferred tax liability	$	(34,043	)	$	(8,440	)
Amounts recognized in balance sheet:
Current deferred tax assets	$	9,272		$	40,259
Deferred income taxes		(43,315	)		(48,699	)
Net deferred tax liability	$	(34,043	)	$	(8,440	)

The tax effect of the Company’s federal net operating loss carry forward was $1.5 million and $35.8 million at December 31, 2006 and December 31, 2005, respectively. The Company utilized $34.3 million of federal net operating loss carryforward during 2006. The tax effect of the Company’s state net operating loss carry forward was $20.7 million and $17.6 million at December 31, 2006 and 2005, respectively, and these losses will expire in varying amounts between 2007 and 2026. The Company has a valuation allowance related to state losses of $15.8 million at December 31, 2006, which increased by $3.8 million from $12.0 million at December 31, 2005, for estimated future impairment related to the state net operating losses. The Company also has state tax credit carryforwards of approximately $1.3 million and $1.4 million at December 31, 2006 and 2005, respectively, which will expire in varying amounts between 2007 and 2020. The Company has a valuation allowance related to

76

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

state tax credits of $1.3 million and $1.4 million at December 31, 2006 and 2005, respectively, for estimated future impairment related to the state tax credit carryforwards. Liabilities of $1.4 million and $1.1 million were recorded at December 31, 2006 and 2005 related to certain tax contingencies. The liabilities were recorded for state and federal tax positions for which a negative outcome is expected.

13. Quarterly Financial Data (Unaudited)

The following table sets forth certain quarterly financial data for the periods indicated (in thousands, except per share data):

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
2006
Sales	$	263,881		$	262,673		$	248,262		$	215,102
Cost of sales		226,551			224,184			213,803			189,844
Income (loss) from continuing operations before income taxes and minority interest		125,963			(24,136	)		(4,701	)		(18,224	)
Loss from discontinued operations before income taxes		(1,411	)		(72	)		(1,961	)		(2,337	)
Net income (loss)		80,652			(15,756	)		(5,072	)		(12,492	)
Diluted income (loss) per common share	$	2.79		$	(0.54	)	$	(0.17	)	$	(0.43	)
2005
Sales	$	246,433		$	242,769		$	239,701		$	238,726
Cost of sales		209,474			206,351			209,713			210,049
(Loss) income from continuing operations before income taxes and minority interest		460			3,647			(1,125	)		(128,031	)
(Loss) income from discontinued operations before income taxes		432			67			1,320			(12,685	)
Net (loss) income		454			114			45			(103,999	)
Diluted (loss) income per common share	$	0.02		$	0.00		$	0.00		$	(3.61	)

14. Segment Information

The Company operates principally in four business segments organized by products. The paperboard segment consists of facilities that manufacture 100% recycled uncoated paperboard and one facility that manufactures clay-coated recycled paperboard. The recovered fiber segment consists of facilities that collect and sell recycled paper and broker recycled paper and other paper rolls. The tube, core, and composite container segment is principally made up of facilities that produce spiral and convolute-wound tubes, cores, and composite cans. The folding carton and custom packaging segment consists of facilities that produce printed and unprinted folding cartons and set-up boxes. Intersegment sales are recorded at prices which approximate market prices. Sales to external customers located in foreign countries accounted for approximately 6.7%, 7.1% and 6.4% of the Company’s sales for 2006, 2005 and 2004, respectively.

Operating results include all costs and expenses directly related to the segment involved. Corporate expenses include corporate, general, administrative and unallocated information systems expenses.

Identifiable assets are accumulated by facility within each business segment. Corporate assets consist primarily of cash and cash equivalents; deferred tax assets; property, plant and equipment; and investments in unconsolidated affiliates.

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

The following table presents certain business segment information as of and for the years ended December 31, 2006, 2005 and 2004 (in thousands):

	2006			2005			2004
Sales (aggregate):
Paperboard	$	433,795		$	465,701		$	468,193
Recovered fiber		204,336			168,759			147,398
Tube, core and composite container		372,548			378,885			373,531
Folding carton and custom packaging		236,111			229,868			236,204
Total	$	1,246,790		$	1,243,213		$	1,225,326
Sales (intersegment):
Paperboard	$	163,780		$	187,046		$	186,191
Recovered fiber		87,000			82,579			65,025
Tube, core and composite container		5,143			5,119			4,927
Folding carton and custom packaging		949			840			1,182
Total	$	256,872		$	275,584		$	257,325
Sales (external customers):
Paperboard	$	270,015		$	278,655		$	282,002
Recovered fiber		117,336			86,180			82,373
Tube, core and composite container		367,405			373,766			368,604
Folding carton and custom packaging		235,162			229,028			235,022
Total	$	989,918		$	967,629		$	968,001
Income (loss) from operations:
Paperboard (A)	$	(10,948	)	$	(70,102	)	$	26,581
Recovered fiber (B)		4,381			253			3,897
Tube, core and composite container (C)		5,936			6,700			11,318
Folding carton and custom packaging (D)		(4,329	)		(36,812	)		(6,519	)
		(4,960	)		(99,961	)		35,277
Corporate expense (E)		(24,724	)		(23,281	)		(23,208	)
Income (loss) from operations		(29,684	)		(123,242	)		12,069
Interest expense		(25,913	)		(41,961	)		(42,160	)
Interest income		3,829			2,629			948
Equity in income of unconsolidated affiliates		5,613			37,043			25,251
Gain on sale of interest in Standard Gypsum, L.P.		135,247			—			—
Loss on redemption of senior subordinated notes		(10,272	)		—			—
Other, net		82			482			(1,046	)
Income (loss) before income taxes and minority interest		78,902			(125,049	)		(4,938	)
Provision (benefit) for income taxes		(27,634	)		29,722			1,414
Minority interest in (income) losses		(102	)		273			(184	)
Income (loss) from continuing operations	$	51,166		$	(95,054	)	$	(3,708	)
Identifiable assets:
Paperboard	$	138,176		$	122,250		$	253,118
Recovered fiber		25,585			24,969			24,472
Tube, core and composite container		123,222			137,190			147,830

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

	2006		2005		2004
Folding carton and custom packaging		129,112		134,372		165,605
Corporate		208,180		363,686		368,126
Discontinued operations		—		76,665		—
Total	$	624,275	$	859,132	$	959,151
Depreciation and amortization:
Paperboard	$	8,024	$	12,861	$	14,735
Recovered fiber		773		728		765
Tube, core and composite container		5,435		5,361		5,429
Folding carton and custom packaging		9,053		6,738		6,188
Corporate		886		2,094		1,465
Discontinued operations		—		711		1,507
Total	$	24,171	$	28,493	$	30,089
Purchases of property, plant and equipment, excluding acquisitions of businesses:
Paperboard	$	14,880	$	11,945	$	9,184
Recovered fiber		878		911		511
Tube, core and composite container		1,546		3,387		5,254
Folding carton and custom packaging		7,350		2,693		2,771
Corporate		13,216		4,743		2,070
Discontinued operations		299		593		1,101
Total	$	38,169	$	24,272	$	20,891

(A) Results for 2006, 2005 and 2004 include charges to operations for restructuring and impairment costs of $29.5 million, $83.3 million and $1.5 million, respectively, related to closing and consolidating operations and impairment of fixed assets in the paperboard segment. Results for 2004 also include a $10.3 million gain on sale of real estate.

(B) Results for 2006, 2005 and 2004 include charges and (reversals of charges) to operations for restructuring and impairment costs of ($39) thousand, $20 thousand and $414 thousand, respectively, related to closing and consolidating operations and impairment of fixed assets in the recovered fiber segment.

(C) Results for 2006, 2005 and 2004 include charges to operations for restructuring and impairment costs of $4.3 million, $1.3 million and $1.1 million, respectively, related to closing and consolidating operations and impairment of fixed assets in the tube, core and composite container segment.

(D) Results for 2006, 2005 and 2004 include charges to operations for restructuring and impairment costs of $4.0 million, $40.8 million and $6.5 million, respectively, related to closing and consolidating operations and impairment of fixed assets in the folding carton and custom packaging segment. Results for 2005 also include a charge of $39.4 million for the impairment of goodwill.

(E) Results for 2006, 2005 and 2004 include charges to operations of $8 thousand, $25 thousand and $1.9 million related to the centralization of the accounting and finance operations.

15. Restructuring and Impairment Costs

2006 Restructuring Initiatives

In January 2006, the Company announced the permanent closure of its Birmingham carton plant located in Birmingham, Alabama. For the year ended December 31, 2006, the Company recorded charges of $211 thousand for severance and other termination benefits and charges of $231 thousand for other exit costs. The Company

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December 31, 2006, 2005 and 2004

made payments for severance and other termination benefits of $211 thousand and payments for other exit costs of $175 thousand, leaving an accrual balance of $56 thousand related to a lease. To facilitate the transition of customers to other facilities, the Birmingham carton plant ceased operations at the end of the second quarter of 2006. The Company expects to incur an additional $10 thousand of other exit costs related to the closure of this facility and will complete this plan by the end of 2007 upon satisfaction of the lease obligation.

In April 2006, the Company announced the permanent closure of its Danville tube plant located in Danville, Virginia. Most of the customers of the Danville tube plant were transitioned to the Company’s other tube plants. For the year ended December 31, 2006, the Company recorded $843 thousand of severance and other termination benefits and $86 thousand of other exit costs. The Company made payments for severance and other termination benefits of $843 thousand and $86 thousand for other exit costs. There was no accrual balance as of December 31, 2006. The Company expects to incur an additional $56 thousand of other exit costs related to the closure of this facility. This plan will be completed upon sale of the location’s real estate, which the Company is currently marketing.

In May 2006, the Company announced the permanent closure of its Mentor carton plant located in Mentor, Ohio. Most of the customers of the Mentor carton plant were transitioned to the Company’s other carton operations. For the year ended December 31, 2006, the Company recorded $817 thousand of severance and other termination benefits and $1.1 million of other exit costs and $50 thousand of impairment related to fix assets. The Company made payments for severance and other termination benefits of $817 thousand and payments of $1.0 million for other exit costs, leaving and accrual balance of $25 thousand for other exit costs. With the sale of the real estate in the fourth quarter of 2006, this plan is complete with the exception of paying for 2 remaining leased assets and the Company does not expect to incur any additional charges related to this plan.

In 2006, the Company recorded an impairment charge of $1.3 million related to a tube and core facility located in Mexico City, Mexico, which the Company disposed of during the third quarter of 2006.

In August 2006, the Company ceased production of coated recycled paperboard at its Rittman, Ohio facility. The Company recorded and paid $1.8 million of severance and other termination benefits and $1.6 million of other exit costs; there was no accrual balance as of December 31, 2006. The Company expects to incur an additional $2.3 million of other exit costs. This plan will be complete upon the sale the location’s real estate, which the Company is currently marketing.

In August 2006, the Company announced a plan to restructure certain functions within its tube, core and composite container segment. The restructuring will allow the Company to streamline sales and marketing efforts, consolidate and outsource certain engineering costs and close duplicative administrative facilities. During the year ended December 31, 2006, the Company recorded $894 thousand of severance and other termination benefits and $216 thousand of other exit costs. The Company made payments for severance and other termination benefits of $242 thousand and other exits costs of $216 thousand. The Company expects to incur an additional $75 thousand of other exit costs. The Company settled a real estate lease in December 2006, the Company expects no further charges related to this plan and this plan is complete.

In October 2006, the Company announced the permanent closure of its Reading paperboard mill, located in Sinking Springs, Pennsylvania. The production volume, most of which was sold internally, were transitioned to the Company’s other paperboard operations during the fourth quarter of 2006. During the year ended December 31, 2006, the Company recorded $417 thousand of severance and other termination benefits and $110 thousand of other exit costs. The Company paid $172 thousand for severance and other termination benefits and

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December 31, 2006, 2005 and 2004

$110 thousand for other exit costs, leaving an accrual balance of $245 thousand for severance and other termination benefits. The Company expects to incur additional charges of $100 thousand of other exit costs. This plan will be completed upon sale of the location’s real estate, which the Company is currently marketing.

In November 2006, the Company announced the permanent closure of its York, Pennsylvania carton facility. The Company is currently transitioning this facility’s customers to other carton facilities and expects to cease operations during the first quarter of 2007. During the year ended December 31, 2006, the Company recorded $205 thousand of severance and other termination benefits and paid $8 thousand of severance and other termination benefits leaving an accrual balance of $197 thousand as of December 31, 2006. The Company expects to incur and additional $310 thousand of severance and other termination benefits and $380 thousand of other exit costs. This plan will be complete upon sale of the location’s real estate, which the Company is currently marketing.

In December 2006, the Company announced the permanent closure of its Vacaville, California tube and core facility. The Company is currently transitioning this facility’s customers to other facilities and will cease operations during the first quarter of 2007. During the year ended December 31, 2006, the Company recorded $28 thousand of severance and other termination benefits. The Company expects to incur an additional $32 thousand of severance and other termination benefits and $268 thousand of other exit costs. This plan will be complete upon the settlement of a lease obligation.

In December 2006, the Company announced the permanent closure of its Grand Rapids, Michigan tube and core facility. The Company is currently transitioning this facility’s customers to other facilities and will cease operations during the second quarter of 2007. During the year ended December 31, 2006, the Company recorded and paid $59 thousand of severance and other termination benefits. The Company expects to incur an additional $100 thousand of severance and other termination benefits and $15 thousand of other exit costs. The plan will be complete upon the settlement of lease obligations.

Also included in the 2006 restructuring and other impairment costs was a net loss of $3.3 million for other disposals of production machinery and equipment.

2005 Restructuring Initiatives

In June 2005, the Company announced the permanent closure of its Palmer carton plant located in Thorndike, Massachusetts. During the year ended December 31, 2005, the Company recorded a $427 thousand charge for severance and other termination benefits and a $186 thousand charge for other exit costs. The Company paid $360 thousand for severance and other termination benefits and $165 thousand for other exit costs, leaving accruals for severance and other termination benefits and other exit costs of $67 thousand and $21 thousand, respectively. During the year ended December 31, 2006, the Company paid $67 thousand of severance and other exit costs, recorded $320 thousand of other exit costs and paid $341 thousand related to other exit costs. There was no accrual balance as of December 31, 2006. Substantially all of Palmer carton’s production was transferred to the Company’s other carton operations. As of December 31, 2006, this restructuring plan was substantially complete except for the sale of property, which the Company expects to complete in the second quarter of 2007.

In September 2005, the Company announced the permanent closure of its Mobile, Alabama tube and core facility. During the year ended December 31, 2005, the Company recorded a $235 thousand charge for severance and other termination benefits and a $734 thousand charge for other exit costs, which includes a $716 thousand charge for an ongoing lease. The Company paid $120 thousand for severance and other termination benefits and $18 thousand for other exit costs, leaving accruals for severance and other termination benefits and other exit costs

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December 31, 2006, 2005 and 2004

of $115 thousand and $716 thousand, respectively. During the year ended December 31, 2006, the Company reversed an accrual related to severance and other exit costs of $72 thousand and paid $43 thousand of severance and other termination benefits. Also during the year ended December 31, 2006, the Company reversed an accrual related to other exit costs of $540, recorded $14 thousand of other exit costs and paid $190 thousand related to other exit costs. During the year ended December 31, 2006 the Company settled its real estate lease obligation. Substantially all of Mobile’s production was transferred to the Company’s other tube and core operations. As of December 31, 2006, this restructuring plan was complete and no additional charges are expected.

In October 2005, the Company announced the permanent closure of its DeQuincy, Louisiana tube and core facility. During the year ended December 31, 2005, the Company recorded a $95 thousand charge for severance and other termination benefits and a $44 thousand charge for other exit costs. The Company paid $18 thousand of severance and other termination benefits and $44 thousand of other exit costs, leaving an accrual for severance and other termination benefits of $77 thousand at December 31, 2005. During the year ended December 31, 2006, the Company recorded $45 thousand of severance and other termination benefits, paid $122 thousand of severance and other termination benefits and recorded and paid $69 thousand of other exit costs. Substantially all of DeQuincy’s production was transferred to the Company’s other tube and core operations. As of December 31, 2006, there was no accrual balance. The Company expects to incur approximately $92 thousand of other exit costs. This restructuring plan is essentially complete pending the sale of real estate, which the Company is currently marketing.

In December 2005, the Company decided to exit the Company’s coated recycled paperboard and the specialty packaging business. As a result of exiting these two lines of business, the Company recorded impairment to goodwill of $49.9 million and impairment to the coated recycled paperboard business fixed assets of $74.4 million in 2005. During the year ended December 31, 2006, the Company recorded additional impairment of $16.9 million related to the Company’s coated recycled paperboard business and decided to retain its Tama, Iowa coated recycled paperboard facility.

Also included in the 2005 restructuring and other impairment costs was a net reversal of $487 thousand loss for other disposals of production machinery and equipment.

2004 Restructuring Initiatives

In January 2004, the Company announced the permanent closure of the Cedartown paperboard mill located in Cedartown, Georgia. During the year ended December 31, 2004, the Company recorded a $500 thousand impairment charge for assets, a $188 thousand charge for severance and other termination benefits and a $621 thousand charge for other exit costs. All of these costs were paid during 2004 and no accrual remained as of December 31, 2004. As of December 31, 2004, there were no employees remaining at the mill. Substantially all of Cedartown’s paperboard production was transferred to the Company’s other paperboard mills. As of December 31, 2006, the exit plan for Cedartown was complete except for the sale of the property, which the Company is currently marketing.

In January 2004, the Company initiated a plan to centralize the accounting and finance operations to the Company’s headquarters located in Austell, Georgia. This plan was initiated to enhance the accounting control environment and reduce costs. During the year ended December 31, 2004, the Company recorded a charge of approximately $1.7 million for other exit costs related to consulting fees and relocation expenses and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

$199 thousand for severance and other termination benefits in connection with this plan. Severance and other termination benefit costs of $74 thousand were paid and all other exit costs were paid during the period. An accrued liability of $125 thousand remained related to severance and other termination benefits as of December 31, 2004. During the year ended December 31, 2005, the Company reversed an accrual related to severance and other termination benefits for $17 thousand, paid $108 thousand of severance and other termination benefits and incurred and paid $43 thousand of other exit costs. This plan was completed in 2005 and no additional charges are expected.

In June 2004, the Company announced the permanent closure of its Charlotte, North Carolina carton facility. During the year ended December 31, 2004, the Company recorded $499 thousand of severance and other termination benefits and $381 thousand of other exit costs and paid $286 thousand of severance and other termination benefits and $381 thousand of other exit costs, leaving an accrual of $213 thousand for severance and other termination benefits. During the year ended December 31, 2005, the Company paid $204 thousand of severance and other termination benefits and incurred and paid $345 thousand of other exit costs, leaving and accrual balance of $9 thousand for severance and other termination benefits. Also during 2005, the Company sold the real estate related to this facility and reduced restructuring and impairment costs by $432 thousand. During the year ended December 31, 2006, the Company paid $9 thousand of severance and other termination benefits and recorded and paid $6 thousand of other exit costs. Substantially all of Charlotte Carton’s production was transferred to the Company’s other carton facilities. As of December 31, 2006, this plan was complete and no additional charges are expected.

In June 2004, the Company announced the permanent closure of its Georgetown, Kentucky plastics plant. During the year ended December 31, 2004, the Company recorded $141 thousand of severance and other termination benefits and $163 thousand of other exit costs and paid $61 thousand of severance and other termination benefits and $163 thousand of other exit costs, leaving an accrual of $80 thousand for severance and other termination benefits. During the year ended 2005, the Company reversed an accrual related to severance and other termination benefits for $46 thousand, paid $34 thousand of severance and other termination benefits and incurred, and paid $49 thousand of other exit costs and an impairment charge of $16 thousand. As of December 31, 2005, the accrual balance was zero. During the year December 31, 2006, the Company recorded and paid $28 thousand of other exit costs. Substantially all of Georgetown’s production was transferred to the Company’s plastics manufacturing facility in Union, South Carolina. The Company expects to incur approximately $20 thousand of other exit costs. As of December 31, 2006, this plan was complete except for the sale of the property, which the Company is currently marketing.

In August 2004, the Company announced the permanent closure of its puzzle manufacturing operations component of its specialty converting plant in Mooresville, North Carolina. During the year ended December 31, 2004, the Company recorded $166 thousand of severance and other termination benefits and $407 thousand of other exit costs and paid $104 thousand of severance and other termination benefits and $58 thousand of other exit costs, leaving an accrual of $62 thousand for severance and other termination benefits and an accrual of $349 thousand for other exit costs. During the year ended December 31, 2005, the Company paid $62 thousand of severance and other termination benefits, paid $114 thousand of other exit costs and reversed $105 thousand of other exit costs related to a $130 thousand lease liability that was settled during 2006. As of December 31, 2006, this plan was complete and no additional charges are expected.

In November 2004, the Company initiated a plan to reorganize the management structure of the Custom Packaging Group. During the year ended December 31, 2004, the Company recorded a charge of approximately $765 thousand for severance and other termination benefits in connection with this plan. Severance and other

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

termination benefits of $164 thousand were paid during the year ended December 31, 2004, leaving an accrual of $601 thousand related to severance and other termination benefits. During the year ended December 31, 2005 the Company reversed an accrual $47 thousand and paid $554 thousand of severance and other termination benefits. There was no accrual balance at December 31, 2006, this plan was complete and no additional charges are expected.

In December 2004, the Company announced the permanent closure of the No. 2 paper machine, which was idled in March 2003, at the Company’s Rittman, Ohio paperboard mill. During the year ended December 31, 2004, the Company incurred a charge of approximately $8.8 million for impairment of assets in connection with this plan. This plan was completed in December 2004 and no additional charges are expected.

Also included in the 2004 restructuring and other impairment costs was a net loss of $2.1 million for other disposals of production machinery and equipment.

Previous Restructuring Initiatives

In connection with a restructuring plan that was initiated prior to January 1, 2004, the Company recorded $154 thousand of impairment related to real estate, $458 thousand of severance and other termination benefits and recorded $266 thousand of other exit costs. The Company paid $331 thousand of severance and other termination benefits and $227 thousand of other exit costs. The remaining accrual balance for this initiative is $2.2 million. The Company expects to incur an additional $212 thousand of other exit costs. This plan is essentially complete except for settlement of a pension liability and sale of real estate, which the Company is currently marketing.

The following is a summary of restructuring and other costs and the restructuring liability for the years ended December 31, 2006, 2005 and 2004 (in thousands):

	Asset Impairment Charges and Loss on Disposals		Severance and Other Termination Benefits Costs			Other Exit Costs			Restructuring Liability Total			Total (1)
Liability balance, December 31, 2003			$	302		$	4,230		$	4,532
2004 costs	$	12,673		4,589			4,444			9,033		$	21,706
Expenditures and adjustment				(1,175	)		(5,924	)		(7,099	)
Liability balance, December 31, 2004			$	3,716		$	2,750		$	6,466
2005 costs	$	73,928		640			1,031			1,671		$	75,599
Expenditures				(2,093	)		(2,914	)		(5,007	)
Liability balance, December 31, 2005			$	2,263		$	867		$	3,130
2006 costs	$	28,563		5,682			3,484			9,166		$	37,729
Expenditures				(4,699	)		(4,270	)		(8,969	)
Liability balance, December 31, 2006			$	3,246		$	81		$	3,327

⁽¹⁾ Asset impairment charges and loss on disposals, severance and other termination benefit costs and other exit costs are aggregated and reported as restructuring and impairment costs on the Statements of Operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

The following tables summarize restructuring activities by segment for those plans initiated during 2006, 2005, and 2004, which were accounted for under SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (in thousands).

2003 Restructuring Initiatives:	Cost in 2003		Cost in 2004		Cost in 2005			Cost in 2006		Estimated Cost to Complete Initiatives as of December 31, 2006		Total Estimated Cost of the Initiatives as of December 31, 2006
Mill Segment	$	4,433	$	23	$	—		$	—	$	—	$	4,456
Recovered Fiber Segment		609		414		(59	)		—		—		964
Carton and Custom Packaging Segment		6,712		3,992		381			839		212		12,136
	$	11,754	$	4,429	$	322		$	839	$	212	$	17,556

2004 Restructuring Initiatives:	Cost in 2004		Cost in 2005			Cost in 2006		Estimated Cost to Complete Initiatives as of December 31, 2006		Total Estimated Cost of the Initiatives as of December 31, 2006
Mill Segment	$	10,647	$	(105	)	$	—	$	—	$	10,542
Carton and Custom Packaging Segment		1,645		(133	)		6		—		1,518
Tube, Core and Composite Container Segment		529		(8	)		28		18		567
Corporate		1,944		26			—		—		1,970
	$	14,765	$	(220	)	$	34	$	18	$	14,597

2005 Restructuring Initiatives:	Cost in 2005		Cost in 2006			Estimated Cost to Complete Initiatives as of December 31, 2006		Total Estimated Cost  of the Initiatives as of December 31, 2006
Mill Segment	$	—	$	—		$	—	$	—
Tube, Core and Composite Container Segment		1,108		(485	)		70		693
Carton and Custom Packaging Segment		613		321			—		934
	$	1,721	$	(164	)	$	70	$	1,627

2006 Restructuring Initiatives:	Cost in 2006		Estimated Cost to Complete Initiatives as of December 31, 2006		Total Estimated Cost  of the Initiatives as of December 31, 2006
Mill Segment	$	27,798	$	3,800	$	31,598
Tube, Core and Composite Container Segment		2,459		586		3,045
Carton and Custom Packaging Segment		3,512		700		4,212
	$	33,769	$	5,086	$	38,855

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2006, 2005 and 2004

16. Disclosures About Fair Value of Financial Instruments

The following table sets forth the fair values and carrying amounts of the Company’s significant financial instruments as of December 31, 2006 where the carrying amount differs from the fair value. The carrying amount of cash and cash equivalents, short-term debt and long-term variable-rate debt approximates fair value. The fair value of long-term debt is based on quoted market prices (in thousands).

	Fair Value		Carrying Amount
7 1/4% senior notes		26,861		27,243
7 3/8% senior notes		182,872		194,368
	$	209,733	$	221,611

17. Related Party Transactions

A former director and former Chairman of the Board of Directors is a shareholder in the firm of Robinson, Bradshaw & Hinson, P.A., the Company’s former principal outside legal counsel which performed services for the company during the last three years. The amounts of fees paid were $282 thousand, $777 thousand, and $993 thousand for the years ended December 31, 2006, 2005 and 2004, respectively.

A director of the Company’s Board of Directors is also the President and Chief Executive Officer of Printpack, Inc., a customer of the Company. The Company sold tubes and cores to Printpack, Inc. in the amounts of $5.5 million, $5.0 million and $4.4 million for the years ended December 31, 2006, 2005 and 2004, respectively. The accounts receivable due from Printpack, Inc. as of December 31, 2006, 2005, and 2004 were $380 thousand, $302 thousand and $165 thousand, respectively. The accounts payable at December 31, 2006 and 2005 were $1 thousand and $61 thousand, respectively. There was no accounts payable outstanding at December 31, 2004.

The Company sold recovered fiber in the amounts of $38.4 million, $8.9 million and $2.1 million for the years ended December 31, 2006, 2005 and 2004, respectively, to Premier Boxboard, a 50%-owned joint venture. Accounts receivable due from Premier Boxboard were $4.5 million, $5.4 million and $150 thousand as of December 31, 2006, 2005 and 2004, respectively. The Company purchased paperboard totaling $3.0 million, $3.0 million and $4.3 million for the years ended December 31, 2006, 2005 and 2004, respectively, from Premier Boxboard. Payables due to Premier Boxboard were $493 thousand, $210 thousand and $700 thousand as of December 31, 2006, 2005 and 2004, respectively. During 2006, 2005 and 2004, Premier Boxboard paid marketing fees to Caraustar of approximately $2.4 million, $2.8 million, and $2.1 million, respectively.

The Company performs certain treasury functions on behalf of Premier Boxboard. As a result, the Company had a receivable due from Premier Boxboard of $1.7 million, $1.4 million, and $1.7 million as of December 31, 2006, 2005 and 2004, respectively.

18. Subsequent Event

On January 10, 2007, the Company announced the closure of its Lafayette paperboard mill located in Lafayette, IN. As a result of this announcement, an impairment charge of $6.9 million was recorded as of December 31, 2006. In addition to the impairment charge, the Company expects to incur approximately $3.1 million in severance and other closure costs during 2007.

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December 31, 2006, 2005 and 2004

Also on January 10, 2007, the Company announced the closures of four facilities in its Tube, Core, and Composite Container segment. The facilities are located in Amarillo, TX; Vacaville, CA; Grand Rapids, MI and Leyland, U.K. The Company expects to incur approximately $2.6 million in costs associated with these closures. Of this amount, approximately $1.2 million will be non-cash costs associated primarily with asset impairment charges. The remaining $1.4 million will be cash costs consisting primarily of severance and other employee related costs and costs associated with relocating equipment.

19. Guarantor Condensed Consolidating Financial Statements

These condensed consolidating financial statements reflect Caraustar Industries, Inc. and its Subsidiary Guarantors, which consist of all but one of the Company’s wholly-owned subsidiaries other than foreign subsidiaries. These nonguarantor subsidiaries are herein referred to as “Nonguarantor Subsidiaries.” Separate financial statements of the Subsidiary Guarantors are not presented because the subsidiary guarantees are joint and several and full and unconditional and the Company believes that the condensed consolidating financial statements presented are more meaningful in understanding the financial position of the Subsidiary Guarantors.

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING BALANCE SHEETS

(In thousands)

	As of December 31, 2006
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	154		$	88		$	780		$	—		$	1,022
Intercompany funding		(161,221	)		173,562			(12,341	)		—			—
Receivables, net of allowances		—			81,763			3,814			—			85,577
Intercompany accounts receivable		—			8			111			(119	)		—
Inventories		—			72,327			2,714			—			75,041
Refundable income taxes		172			—			—			—			172
Current deferred tax assets		9,272			—			—			—			9,272
Other current assets		4,154			3,588			612			—			8,354
Total current assets		(147,469	)		331,336			(4,310	)		(119	)		179,438
PROPERTY, PLANT AND EQUIPMENT		31,897			514,532			23,842			—			570,271
Less accumulated depreciation		(12,564	)		(280,086	)		(14,016	)		—			(306,666	)
Property, plant and equipment, net		19,333			234,446			9,826			—			263,605
GOODWILL		—			124,072			3,502			—			127,574
INVESTMENT IN CONSOLIDATED SUBSIDIARIES		600,902			—			—			(600,902	)		—
INVESTMENT IN UNCONSOLIDATED AFFILIATES		41,574			—			—			—			41,574
OTHER ASSETS		5,478			6,544			62			—			12,084
	$	519,818		$	696,398		$	9,080		$	(601,021	)	$	624,275
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of debt	$	5,830		$	—		$	—		$	—		$	5,830
Accounts payable		13,231			49,236			2,566			—			65,033
Intercompany accounts payable		—			111			8			(119	)		—
Accrued interest		1,415			67			—			—			1,482
Accrued compensation		1,415			8,581			131			—			10,127
Capital lease obligations		517			27			—			—			544
Other accrued liabilities		11,661			15,179			618			—			27,458
Total current liabilities		34,069			73,201			3,323			(119	)		110,474
LONG-TERM DEBT, less current maturities		251,892			8,200			—			—			260,092
LONG-TERM CAPITAL LEASE OBLIGATIONS		45			46			—			—			91
DEFERRED INCOME TAXES		30,118			11,697			1,500			—			43,315
PENSION LIABILITY		38,854			—			—			—			38,854
OTHER LIABILITIES		3,254			6,609			—			—			9,863
SHAREHOLDERS’ EQUITY:
Common stock		2,909			772			497			(1,269	)		2,909
Additional paid-in capital		191,411			550,830			8,339			(559,169	)		191,411
Retained (deficit) earnings		(7,502	)		45,043			(6,138	)		(38,905	)		(7,502	)
Accumulated other comprehensive (loss) income		(25,232	)		—			1,559			(1,559	)		(25,232	)
Total Shareholders’ Equity		161,586			596,645			4,257			(600,902	)		161,586
	$	519,818		$	696,398		$	9,080		$	(601,021	)	$	624,275

88

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING BALANCE SHEETS

(In thousands)

	As of December 31, 2005
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	93,998		$	63		$	1,091		$	—		$	95,152
Intercompany funding		(123,246	)		136,057			(12,811	)		—			—
Receivables, net of allowances		—			86,098			4,963			—			91,061
Intercompany accounts receivable		—			285			389			(674	)		—
Inventories		—			66,936			4,023			—			70,959
Refundable income taxes		56			—			—			—			56
Current deferred tax assets		40,259			—			—			—			40,259
Other current assets		18,723			2,716			174			—			21,613
Investment in unconsolidated affiliate		13,212			—			—			—			13,212
Assets held for sale		—			76,665			—			—			76,665
Total current assets		43,002			368,820			(2,171	)		(674	)		408,977
PROPERTY, PLANT AND EQUIPMENT		20,310			498,441			26,290			—			545,041
Less accumulated depreciation		(10,968	)		(265,036	)		(14,000	)		—			(290,004	)
Property, plant and equipment, net		9,342			233,405			12,290			—			255,037
GOODWILL		—			125,773			3,502			—			129,275
INVESTMENT IN CONSOLIDATED SUBSIDIARIES		608,968			—			—			(608,968	)		—
INVESTMENT IN UNCONSOLIDATED AFFILIATES		44,037			—			—			—			44,037
OTHER ASSETS		15,192			6,592			22			—			21,806
	$	720,541		$	734,590		$	13,643		$	(609,642	)	$	859,132
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of debt	$	85		$	—		$	—		$	—		$	85
Accounts payable		26,368			46,033			5,614			—			78,015
Intercompany accounts payable		—			389			285			(674	)		—
Accrued interest		7,976			—			—			—			7,976
Accrued compensation		1,657			7,274			215			—			9,146
Capital lease obligations		527			15			—			—			542
Other accrued liabilities		8,055			26,129			527			—			34,711
Liabilities of assets held for sale		—			31,373			—			—			31,373
Total current liabilities		44,668			111,213			6,641			(674	)		161,848
LONG-TERM DEBT, less current maturities		488,805			3,500			—			—			492,305
LONG-TERM CAPITAL LEASE OBLIGATIONS		520			41			—			—			561
DEFERRED INCOME TAXES		35,056			12,165			1,478			—			48,699
PENSION LIABILITY		41,877			—			—			—			41,877
OTHER LIABILITIES		1,219			4,227			—			—			5,446
SHAREHOLDERS’ EQUITY:
Common stock		2,879			772			523			(1,295	)		2,879
Additional paid-in capital		192,673			550,619			9,167			(559,786	)		192,673
Unearned compensation		(3,442	)		—			—			—			(3,442	)
Retained (deficit) earnings		(54,834	)		52,053			(5,082	)		(46,971	)		(54,834	)
Accumulated other comprehensive (loss) income		(28,880	)		—			916			(916	)		(28,880	)
Total Shareholders’ Equity		108,396			603,444			5,524			(608,968	)		108,396
	$	720,541		$	734,590		$	13,643		$	(609,642	)	$	859,132

89

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)

	For the Year Ended December 31, 2006
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
SALES	$	—		$	1,214,966		$	42,265		$	(267,313	)	$	989,918
COST OF SALES		—			1,083,800			37,895			(267,313	)		854,382
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		25,752			97,970			3,769			—			127,491
RESTRUCTURING AND IMPAIRMENT COSTS		—			36,466			1,263			—			37,729
Loss from operations		(25,752	)		(3,270	)		(662	)		—			(29,684	)
OTHER (EXPENSE) INCOME:
Interest expense		(25,503	)		(406	)		(4	)		—			(25,913	)
Interest income		3,828			1			—			—			3,829
Equity in income of consolidated affiliates		(8,066	)		—			—			8,066			—
Equity in income of unconsolidated affiliates		5,613			—			—			—			5,613
Gain on sale of interest in Standard Gypsum, L.P.		135,247			—			—			—			135,247
Loss on redemption of senior subordinated notes		(10,272	)		—			—			—			(10,272	)
Other, net		(129	)		499			(390	)		102			82
		100,718			94			(394	)		8,168			108,586
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS		74,966			(3,176	)		(1,056	)		8,168			78,902
PROVISION FOR INCOME TAXES		(27,634	)		—			—			—			(27,634	)
MINORITY INTEREST IN INCOME		—			—			—			(102	)		(102	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		47,332			(3,176	)		(1,056	)		8,066			51,166
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES		—			(5,781	)		—			—			(5,781	)
BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS		—			1,947			—			—			1,947
LOSS FROM DISCONTINUED OPERATIONS		—			(3,834	)		—			—			(3,834	)
NET INCOME (LOSS)	$	47,332		$	(7,010	)	$	(1,056	)	$	8,066		$	47,332

90

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)

	For the Year Ended December 31, 2005
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
SALES	$	—		$	1,218,901		$	42,994		$	(294,266	)	$	967,629
COST OF SALES		—			1,089,794			40,059			(294,266	)		835,587
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		23,256			101,318			5,252			—			129,826
GOODWILL IMPAIRMENT		—			49,859			—			—			49,859
RESTRUCTURING AND IMPAIRMENT COSTS		27			75,493			79			—			75,599
GAIN ON SALE OF REAL ESTATE		—			—			—			—			—
Loss from operations		(23,283	)		(97,563	)		(2,396	)		—			(123,242	)
OTHER (EXPENSE) INCOME:
Interest expense		(41,592	)		(367	)		(2	)		—			(41,961	)
Interest income		2,628			1			—			—			2,629
Equity in income of consolidated affiliates		(108,389	)		—			—			108,389			—
Equity in income of unconsolidated affiliates		37,043			—			—			—			37,043
Other, net		212			395			(125	)		—			482
		(110,098	)		29			(127	)		108,389			(1,807	)
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX AND MINORITY INTEREST		(133,381	)		(97,534	)		(2,523	)		108,389			(125,049	)
BENEFIT FOR INCOME TAXES		29,722			—			—			—			29,722
MINORITY INTEREST IN INCOME		—			—			—			273			273
LOSS FROM CONTINUING OPERATIONS		(103,659	)		(97,534	)		(2,523	)		108,662			(95,054	)
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS		—			(10,866	)		—			—			(10,866	)
BENEFIT FOR INCOME TAXES OF DISCONTINUED OPERATIONS		—			2,534			—			—			2,534
LOSS FROM DISCONTINUED OPERATIONS		—			(8,332	)		—			—			(8,332	)
NET LOSS	$	(103,659	)	$	(105,866	)	$	(2,523	)	$	108,662		$	(103,386	)

91

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENTS OF OPERATIONS

(In thousands)

	For the Year Ended December 31, 2004
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated
SALES	$	—		$	1,204,391		$	38,900		$	(275,290	)	$	968,001
COST OF SALES		—			1,056,935			34,717			(275,290	)		816,362
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		21,488			102,075			4,624			—			128,187
RESTRUCTURING AND IMPAIRMENT		1,945			19,761			—			—			21,706
GAIN ON SALE OF REAL ESTATE		—			10,323			—			—			10,323
(Loss) income from operations		(23,433	)		35,943			(441	)		—			12,069
OTHER (EXPENSE) INCOME:
Interest expense		(41,831	)		(324	)		(404	)		399			(42,160	)
Interest income		1,346			1			—			(399	)		948
Equity in income of consolidated affiliates		34,655			—			—			(34,655	)		—
Equity in income of unconsolidated affiliates		25,251			—			—			—			25,251
Other, net		(1,197	)		406			(255	)		—			(1,046	)
		18,224			83			(659	)		(34,655	)		(17,007	)
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS		(5,209	)		36,026			(1,100	)		(34,655	)		(4,938	)
BENEFIT (PROVISION) FOR INCOME TAXES		1,414			—			—			—			1,414
MINORITY INTEREST IN LOSSES		—			—			—			(184	)		(184	)
(LOSS) INCOME FROM CONTINUING OPERATIONS		(3,795	)		36,026			(1,100	)		(34,839	)		(3,708	)
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS		—			(391	)		—			—			(391	)
BENEFIT FROM INCOME TAXES OF DISCONTINUED OPERATIONS		—			120			—			—			120
LOSS FROM DISCONTINUED OPERATIONS		—			(271	)		—			—			(271	)
NET LOSS	$	(3,795	)	$	35,755		$	(1,100	)	$	(34,839	)	$	(3,979	)

92

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENTS OF CASH FLOWS

(In thousands)

	For the Year Ended December 31, 2006
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	475		$	(3,423	)	$	(166	)	$	—	$	(3,114	)
Investing activities:
Purchases of property, plant and equipment		(11,601	)		(26,539	)		(29	)		—		(38,169	)
Proceeds from disposal of property, plant and equipment		—			3,670			(116	)		—		3,554
Proceeds from sale of assets held for sale		—			26,336			—			—		26,336
Acquisition of businesses, net of cash acquired		(11,059	)		—			—			—		(11,059	)
Changes in restricted cash		14,841			—			—			—		14,841
Net proceeds from sale of interest in Standard Gypsum, L.P.		148,460			—			—			—		148,460
Return of investment in unconsolidated affiliates		2,920			—			—			—		2,920
Net cash provided by (used in) investing activities		143,561			3,467			(145	)		—		146,883
Financing activities:
Proceeds from senior credit facility —revolver		74,027			—			—			—		74,027
Repayments for senior credit facility — revolver		(69,027	)		—			—			—		(69,027	)
Proceeds from senior credit facility — term loan		35,000			—			—			—		35,000
Repayments of short and long-term debt		(276,363	)		—			—			—		(276,363	)
Deferred debt costs		(1,139	)		—			—			—		(1,139	)
Payments of capital lease obligations		(485	)		(19	)		—			—		(504	)
Issuances of stock, net of forfeitures		107			—			—			—		107
Net cash used in financing activities		(237,880	)		(19	)		—			—		(237,899	)
Net (decrease) increase in cash and cash equivalents		(93,844	)		25			(311	)		—		(94,130	)
Cash and cash equivalents at beginning of year		93,998			63			1,091			—		95,152
Cash and cash equivalents at end of year	$	154		$	88		$	780		$	—	$	1,022

93

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENTS OF CASH FLOWS

(In thousands)

	For the Year Ended December 31, 2005
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	22,527		$	314		$	1,078		$	—	$	23,919
Investing activities:
Purchases of property, plant and equipment		(4,743	)		(18,909	)		(620	)		—		(24,272	)
Proceeds from disposal of property, plant and equipment		—			18,542			—			—		18,542
Changes in restricted cash		(11,164	)		—			—			—		(11,164	)
Return of investment in unconsolidated affiliates		5,325			—			—			—		5,325
Investment in unconsolidated affiliates		(40	)		—			—			—		(40	)
Net cash used in investing activities		(10,622	)		(367	)		(620	)		—		(11,609	)
Financing activities:
Repayments of short and long-term debt		(7,468	)		—			—			—		(7,468	)
Payments of capital lease obligations		(499	)		(9	)		—			—		(508	)
Proceeds from swap agreement unwinds		826			—			—			—		826
Issuances of stock, net of forfeitures		236			—			—			—		236
Net cash used in financing activities		(6,905	)		(9	)		—			—		(6,914	)
Net increase (decrease) in cash and cash equivalents		5,000			(62	)		458			—		5,396
Cash and cash equivalents at the beginning of the year		88,998			125			633			—		89,756
Cash and cash equivalents at the end of the year	$	93,998		$	63		$	1,091		$	—	$	95,152

94

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

CONSOLIDATING STATEMENTS OF CASH FLOWS

(In thousands)

	For the Year Ended December 31, 2004
	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	32,405		$	4,521		$	(45	)	$	—	$	36,881
Investing activities:
Purchases of property, plant and equipment		(2,070	)		(18,118	)		(703	)		—		(20,891	)
Proceeds from disposal of property, plant and equipment		—			13,739			133			—		13,872
Changes in restricted cash		(3,656	)		—			—			—		(3,656	)
Investment in unconsolidated affiliates		(160	)		—			—			—		(160	)
Net cash used in investing activities		(5,886	)		(4,379	)		(570	)		—		(10,835	)
Financing activities:
Repayments of short and long-term debt		(24,934	)		(17	)		—			—		(24,951	)
Proceeds from swap agreement unwind		385			—			—			—		385
Issuances of stock, net of forfeitures		2,725			—			—			—		2,725
Net cash used in financing activities		(21,824	)		(17	)		—			—		(21,841	)
Net increase (decrease) in cash and cash equivalents		4,695			125			(615	)		—		4,205
Cash and cash equivalents at the beginning of the period		84,303			—			1,248			—		85,551
Cash and cash equivalents at the end of the period	$	88,998		$	125		$	633		$	—	$	89,756

95

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Caraustar Industries, Inc.

Austell, Georgia

We have audited the accompanying consolidated balance sheets of Caraustar Industries, Inc. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Caraustar Industries, Inc. and subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, on January 1, 2006 and the recognition and related disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, on December 31, 2006.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

March 16, 2007

96

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Changes in Internal Control Over Financial Reporting

There was no material change to our internal control over financial reporting during the fourth quarter of 2006 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2006. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2006, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company’s reports that it files or submits under the Securities Exchange Act of 1934.

The following is our Independent Registered Public Accounting Firm’s and management’s reports on internal control over financial reporting:

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Caraustar Industries, Inc.

Austell, Georgia

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Caraustar Industries, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in

97

accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2006 of the Company and our report dated March 15, 2007 expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the Company’s adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, on January 1, 2006, and the recognition and related disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, on December 31, 2006.

/s/    Deloitte & Touche LLP

Atlanta, Georgia

March 16, 2007

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements in conformity with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, management has determined that as of December 31, 2006, our internal control over financial reporting is effective based on those criteria.

Our Independent Registered Public Accounting Firm, Deloitte & Touche LLP, has audited management’s assessment of the effectiveness of internal control over financial reporting, as stated in their report which appears herein.

March 15, 2007

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ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information contained under the captions “Election of Directors” and “Governance of the Company” “Section 16(a) Beneficial Ownership Reporting Compliance” in the proxy statement to be filed with the SEC in connection with the Company’s 2007 annual meeting of stockholders (the “Proxy Statement”) is incorporated herein by reference in response to this Item 10.

The Board of Directors has determined that, Daniel P. Casey and Eric R. Zarnikow are “audit committee financial experts,” as that term is defined in SEC regulations. Specifically, the Board determined that each of Mr. Casey, by virtue of his background and experience as the retired chief financial officer of Gaylord Container Corporation, and Mr. Zarnikow by virtue of his senior financial management experience with The ServiceMaster Company and other businesses, has the following attributes:

• an understanding of generally accepted accounting principles and financial statements;

• the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;

• experience in preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements, or experience actively supervising persons engaged in such activities;

• an understanding of internal control over financial reporting; and

• an understanding of audit committee functions.

The Board of Directors has also determined that Mr. Casey and Mr. Zarnikow are “independent directors” within the meaning of Nasdaq rules.

The Company has a code of ethics that governs the conduct of the Company’s directors and all salaried employees, including the Chief Executive Officer, the Chief Financial Officer and the Principal Accounting Officer. This code, which we call “Standards of Business Conduct,” is posted on our corporate website at www.caraustar.com, and we intend to post on our website any substantive changes to the code and any waivers granted under it to the specified officers. The Company also has a code of ethics, called “Standards of Business Conduct,” that governs the conduct of the Company’s hourly employees. The Standards of Business Conduct for hourly employees are similar to those for salaried employees, with modifications that we believe appropriately reflect the hourly employees’ different employment circumstances. These Standards are also posted on our website.

ITEM 11. EXECUTIVE COMPENSATION

Information contained under the caption “Executive Compensation” in the Proxy Statement is incorporated herein by reference in response to this Item 11. The item captioned “Executive Compensation — Compensation Committee Report” shall be deemed to be “furnished” in this annual report on 10-K and not “filed,” in accordance with the rules of the SEC.

100

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK HOLDER MATTERS

Information contained under the captions “Equity Compensation Plan Information” and “Share Ownership” in the Proxy Statement is incorporated by reference herein in response to this Item 12.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information appearing under the caption “Certain Relationships and Related Transactions, and Director Independence” in the Proxy Statement is incorporated by reference in response to this Item 13.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information appearing under the caption “Approval of Independent Public Accountants” in the Proxy Statement is incorporated herein in response to this Item 14.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

a. Documents filed as part of this annual report

(1) The following financial statements of the Company and Report of Independent Registered Public Accounting Firm are included in Part II, Item 8 above.

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2006 and 2005

Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Financial Statements of Premier Boxboard LLC, together with the Report of Independent Registered Public Accounting Firm thereon, is filed as Exhibit 99.01 and is incorporated by reference into Part II, Item 8.

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, or the required information is included elsewhere in the financial statements.

b. The Exhibits to this report on Form 10-K are listed in the accompanying Exhibit Index.

c. Schedule II — Valuation and Qualifying Accounts and Reserves

101

SCHEDULE II

CARAUSTAR INDUSTRIES, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

For the Years Ended December 31, 2006, 2005 and 2004

(In Thousands)

			Additions		Deductions
	Balance at Beginning of Year		Charged to Costs and Expenses		Write-offs and Deduct- ions Allowed			Balance at End of Year
December 31, 2006
Allowances deducted from accounts receivable
Allowance for doubtful accounts	$	2,272	$	1,474	$	(1,543	)(a)	$	2,203
Allowance for sales returns and discounts		1,121		4,151		(4,413	)(b)		859
Total	$	3,393	$	5,625	$	(5,956	)	$	3,062
December 31, 2005
Allowances deducted from accounts receivable
Allowance for doubtful accounts	$	3,147	$	270	$	(1,145	)(a)	$	2,272
Allowance for sales returns and discounts		1,271		6,670		(6,820	)(b)		1,121
Total	$	4,418	$	6,940	$	(7,965	)	$	3,393
December 31, 2004
Allowances deducted from accounts receivable
Allowance for doubtful accounts	$	4,235	$	1,847	$	(2,935	)(a)	$	3,147
Allowance for sales returns and discounts		1,067		5,121		(4,917	)(b)		1,271
Total	$	5,302	$	6,968	$	(7,852	)	$	4,418

(a) Primarily uncollectible accounts receivables written-off.

(b) Sales discounts and returns allowed.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CARAUSTAR INDUSTRIES, INC.
By:	/S/    RONALD J. DOMANICO
	Ronald J. Domanico
	Senior Vice President and Chief Financial Officer; Director
Date: March 15, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated on.

Signature

/S/    MICHAEL J. KEOUGH        

Michael J. Keough,

President and Chief Executive Officer

(Principal Executive Officer); Director

Date: March 15, 2007

/S/    RONALD J. DOMANICO        

Ronald J. Domanico,

Senior Vice President and Chief Financial Officer

(Principal Financial Officer); Director

Date: March 15, 2007

/S/    WILLIAM A. NIX, III        

William A. Nix, III,

Vice President, Treasurer and Controller

(Principal Accounting Officer)

Date: March 15, 2007

/S/    JAMES E. ROGERS        

James E. Rogers,

Chairman of the Board

Date: March 15, 2007

/S/    L. CELESTE BOTTORFF        

L. Celeste Bottorff,

Director

Date: March 15, 2007

/S/    DANIEL P. CASEY        

Daniel P. Casey,

Director

Date: March 15, 2007

103

Signature

Robert J. Clanin,

Director

Date:

/S/    CHARLES GREINER, JR.        

Charles Greiner, Jr.,

Director

Date: March 15, 2007

John T. Heald, Jr.

Director

Date:

/S/    DENNIS M. LOVE        

Dennis M. Love,

Director

Date: March 15, 2007

/S/    ERIC R. ZARNIKOW        

Eric R. Zarnikow,

Director

Date: March 15, 2007

104

EXHIBIT INDEX

Exhibit No.		Description
3.01	—	Amended and Restated Articles of Incorporation of the Company (Incorporated by reference — Exhibit 3.01 to Annual Report for 1992 on Form 10-K [SEC File No. 0-20646])
3.02	—	Third Amended and Restated Bylaws of the Company (Incorporated by reference — Exhibit 3.02 to Annual Report for 2001 on Form 10-K [SEC File No. 0-20646])
4.01	—	Specimen Common Stock Certificate (Incorporated by reference — Exhibit 4.01 to Registration Statement on Form S-1 [SEC File No. 33-50582])
4.02	—	Articles 3 and 4 of the Company’s Amended and Restated Articles of Incorporation (included in Exhibit 3.01)
4.03	—	Article II of the Company’s Third Amended and Restated Bylaws (included in Exhibit 3.02)
4.04	—	Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee, regarding The Company’s 7 3/8% Notes due 2009 (Incorporated by reference —Exhibit 4.05 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646])
4.05	—	First Supplemental Indenture, dated as of June 1, 1999, between Caraustar Industries, Inc. and The Bank of New York, as Trustee (Incorporated by reference — Exhibit 4.06 to Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 [SEC File No. 0-20646])
4.06	—	Second Supplemental Indenture, dated as of March 29, 2001, between the Company, the Subsidiary Guarantors and The Bank of New York, as Trustee, regarding the Company’s 7 3/8% Notes due 2009 (Incorporated by reference — Exhibit 4.07 to Annual Report for 2000 on Form 10-K [SEC File No. 0-20646])
4.07	—	Indenture, dated as of March 29, 2001, between the Company, the Guarantors and The Bank of New York, as Trustee, regarding the Company’s 9 7/8% Senior Subordinated Notes due 2011 (Incorporated by reference — Exhibit 10.02 to Annual Report for 2000 on Form 10-K [SEC File No. 0-20646])
10.01	—	Indenture, dated as of March 29, 2001, between the Company, the Guarantors and The Bank of New York, as Trustee, regarding the Company’s 7 1/4% Senior Notes due 2010 (Incorporated by reference — Exhibit 10.01 to Annual Report for 2000 on Form 10-K [SEC File No. 0-20646])
10.02*	—	Consulting Agreement, dated as of August 5, 2005, between the Company and Thomas V. Brown (Incorporated by reference — Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 [SEC File No. 0-20646])
10.03*	—	Amended and Restated Employment Agreement, dated July 15, 2004, between the Company and Michael J. Keough (Incorporated by reference — Exhibit 10.01 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 [SEC File No. 0-20646])
10.04*	—	Employment Agreement, dated October 1, 2002, between the Company and Ronald J. Domanico (Incorporated by reference – Exhibit 10.27 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 [SEC File No. 0-20646])
10.05†*%	—	Form of Amendment to Terms of Employment, dated December 29, 2006, between the Company and the officers of the Company
10.06*#	—	Form of Change in Control Severance Agreement, dated November 7, 2005, between the Company and the officers of the Company (Incorporated by reference – Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 [SEC File No. 0-20646])

105

Exhibit No.		Description
10.07†*±	—	Form of Amended and Restated Change in Control Severance Agreement, dated December 29, 2006, between the Company and the officers of the Company
10.08*	—	Deferred Compensation Plan, together with copies of existing individual deferred compensation agreements (Incorporated by reference — Exhibit 10.08 to Registration Statement on Form S-1 [SEC File No. 33-50582])
10.09*	—	Senior Manager Incentive Compensation Plan for 2005 (Incorporated by reference — Exhibit 10.07 to Annual Report for 2005 on Form 10-K [SEC File No. 0-20646])
10.10*	—	Senior Manager Incentive Compensation Plan for 2006 (Incorporated by reference — Exhibit 10.08 to Annual Report for 2005 on Form 10-K [SEC File No. 0-20646])
10.11*	—	1996 Director Equity Plan of the Company (Incorporated by reference — Exhibit 10.12 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 [SEC File No. 0-20646])
10.12*	—	Amendment No. 1 to the Company’s 1996 Director Equity Plan, dated July 16, 1998 (Incorporated by reference — Exhibit 10.2 to Current Report on Form 8-K dated June 1, 1999 [SEC File No. 0-20646])
10.13*	—	Second Amended and Restated 1998 Key Employee Incentive Compensation Plan (Incorporated by reference — Exhibit 10.13 to Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 [SEC File No. 0-20646])
10.14*	—	2003 Long-Term Equity Incentive Plan of the Company (Incorporated by reference —Appendix A to Definitive Schedule 14-A for the 2003 Annual Meeting of Shareholders filed April 7, 2003 [SEC File No. 0-20646])
10.15*	—	First Amendment to 2003 Long-Term Equity Incentive Plan of the Company (Incorporated by reference — Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 [SEC File No. 0-20646])
10.16	—	Operating Agreement of Premier Boxboard Limited LLC (Incorporated by reference — Exhibit 10.22 to Annual Report for 2001 on Form 10-K [SEC File No. 0-20646])
10.17	—	Asset Purchase Agreement between Caraustar Industries, Inc. and Smurfit-Stone Container Corporation, dated as of July 22, 2002 (Incorporated by reference — Exhibit 2 to Current Report on Form 8-K dated October 15, 2002)
10.18	—	First Amendment to Asset Purchase Agreement between Caraustar Industries, Inc. and Smurfit-Stone Container Corporation, dated as of September 9, 2002 (Incorporated by reference — Exhibit 10.25 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 [SEC File No. 0-20646])
10.19	—	Master Lease Agreement, with Riders Nos. 1 through 3 and Equipment Schedules Nos. 1 through 4, dated September 30, 2002, between Caraustar Industries, Inc. and Banc of America Leasing & Capital, LLC (Incorporated by reference — Exhibit 10.29 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 [SEC File No. 0-20646])
10.20	—	Credit Agreement, dated as of June 24, 2003, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company identified as guarantors listed therein, and Bank of America, N.A. as the Administrative Agent regarding the Company’s $75.0 million senior credit facility (Incorporated by reference — Exhibit 10.01 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 [SEC File No. 0-20646]).
10.21	—	Security Agreement, dated as of June 24, 2003, by and among the Company and certain subsidiaries identified therein, as guarantors, and Bank of America, N.A, as Administrative Agent (Incorporated by reference — Exhibit 10.02 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 [SEC File No. 0-20646])

106

Exhibit No.		Description
10.22	—	First Amendment to Credit Agreement, dated as of July 8, 2003, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference — Exhibit 10.03 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 [SEC File No. 0-20646])
10.23	—	Second Amendment to Credit Agreement, dated as of December 22, 2003, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference — Exhibit 10.21 to Annual Report for 2005 on Form 10-K [SEC File No. 0-20646])
10.24	—	Third Amendment to Credit Agreement, dated as of August 3, 2004, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference — Exhibit 10.22 to Annual Report for 2005 on Form 10-K [SEC File No. 0-20646])
10.25	—	Fourth Amendment to Credit Agreement, dated as of October 25, 2004, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference — Exhibit 10.03 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 [SEC File No. 0-20646])
10.26	—	Fifth Amendment to Credit Agreement, dated as of March 29, 2005, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference — Exhibit 10.01 to Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 [SEC File No. 0-20646])
10.27	—	Sixth Amendment to Credit Agreement, dated as of September 20, 2005, by and among the Company and certain subsidiaries identified therein, as borrower, certain subsidiaries of the Company identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent (Incorporated by reference — Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 [SEC File No. 0-20646])
10.28**	—	Seventh Amendment to Credit Agreement, dated as of December 27, 2005, by and among the Company and certain subsidiaries identified therein, as borrower, identified as guarantors listed therein, and Bank of America, N.A., as Administrative Agent. (Incorporated by reference — Exhibit 10.26 to Annual Report for 2005 on Form 10-K [SEC File No. 0-20646])
10.29*	—	Insurance Security Option Plan (Incorporated by reference — Exhibit 10.22 to Annual Report for 2003 on Form 10-K [SEC File No. 0-20646])
10.30†*	—	Caraustar Industries, Inc. Amended and Restated Restoration Plan, dated as of December 29, 2006
10.31*	—	Director Compensation Arrangements (Incorporated by reference — Exhibit 10.1 to Current Report on Form 8-K filed with SEC on March 1, 2005)
10.32	—	Agreement for Purchase and Sale of Partnership Interests in Standard Gypsum, L.P., dated as of January 17, 2006, by and among the Company, TIN Inc., f/k/a Temple-Inland Forest Products Corporation, Temple Gypsum Company, Gypsum MGC, Inc., and McQueeney Gypsum Company, LLC (Incorporated by reference — Exhibit 10.32 to Annual Report for 2005 on Form 10-K [SEC File No. 0-20646])
12.01†	—	Computation of Ratio of Earnings to Fixed Charges
21.01†	—	Subsidiaries of the Registrant

107

Exhibit No.		Description
23.01†	—	Consent of Deloitte & Touche LLP with respect to the consolidated financial statements of the Company
23.02†	—	Consent of Deloitte & Touche LLP with respect to the financial statements of Premier Boxboard Limited LLC
31.01†	—	Certification of CEO — Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02†	—	Certification of CFO — Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01†	—	Certification of CEO — Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.02†	—	Certification of CFO — Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.01†	—	Financial Statements of Premier Boxboard Limited LLC

† Filed herewith.

* Management contract or compensatory plan required to be filed under Item 15(c) of Form 10-K and Item 601 of Regulation S-K of the Securities and Exchange Commission.

# This Exhibit is substantially identical to Change in Control Severance Agreements for the following individuals: William A. Nix, III, Jimmy A. Russell, Thomas C. Dawson, John R. Foster, Gregory B. Cottrell and Barry A. Smedstad.

% This Exhibit is substantially identical to the Amendments to Terms of Employment for the following individuals: Michael J. Keough, Ronald J. Domanico, and Steven L. Kelchen.

** A request for confidential treatment with respect to this exhibit has been submitted to the SEC, and the information for which confidential treatment has been requested has been redacted from this exhibit. A complete copy of this document, including the information that has been redacted from the exhibit, is being separately filed with the SEC.

± This Exhibit is substantially identical to the Amended and Restated Change In Control Severance Agreements for the following individuals: Michael J. Keough and Steven L. Kelchen.

108

EX-10.05

Exhibit 10.05

CARAUSTAR INDUSTRIES, INC.

FORM AMENDMENT TO TERMS OF EMPLOYMENT

This Agreement entered into as of the date below amends that certain letter employment agreement between (Employee Name) (“Executive”) and Caraustar Industries, Inc, (the “Company”) dated as of October 1, 2002 (the “Letter Agreement”) to comply with Section 409A of the Internal Revenue Code of 1986, as amended, and applicable Treasury or Internal Revenue Service guidance issued thereunder.

1.

Paragraph (a) of the section of the Letter Agreement entitled Severance Benefits is amended in its entirety to read as follows:

(a)(i) On the thirtieth (30^th) day following the date the Executive “separates from service” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, and applicable Treasury or Internal Revenue Service guidance issued thereunder (“Section 409A”), or if such day is not a business day, on the first business day that is at least thirty (30) days following the date of his separation from service, a lump sum cash amount equal to twelve (12) months of your then-current base salary.

(ii) Additionally, for twelve (12) months following your separation from service (the “Continuation Period”), if you are eligible for and elect continued health coverage for yourself or for yourself and your qualified dependents under a group health plan of the Company or an affiliate provided to satisfy the requirements of Section 4980B of the Code (“COBRA Coverage”), the Company will reimburse you for the actual premium charged to you for such COBRA Coverage for you and each of your dependents who is a “qualified beneficiary” within the meaning of Section 4980B of the Code. Such reimbursements (which shall be taxable income to you) shall be paid to you directly or to the applicable group health plan, as determined by the Company, on or as soon as practicable after each due date for such COBRA Coverage premium. All such reimbursement payments shall be completed on or before December 31 of the second calendar year following the calendar year that includes your separation from service.

(iii) For the Continuation Period, the Company, at the Company’s sole expense, shall provide you with life insurance, long-term disability and accidental death and dismemberment insurance benefits that are substantially the same as the long-term disability and accidental death and dismemberment insurance benefits that were provided to you and your dependents immediately before your separation from service.

(iv) Notwithstanding any contrary provision, if the payment is scheduled to be made at the time that the stock of the Company is publicly traded on an established securities market or otherwise and you are a “specified employee” as defined below, then no

amount shall be paid to you under Subsection (a)(i) before the six-month anniversary of your separation from service (or, if earlier, the date of your death) and any amounts that would have been paid prior to the six-month anniversary of your separation from service shall be accumulated and distributed (together with interest at the applicable federal rate as defined in Section 1274(d) of the Internal Revenue Code) upon the six-month anniversary of your separation from service, or if such date is not a business day, on the first business day that follows such six-month anniversary; provided, however, if you die before the six-month anniversary of your separation from service, the payment will be made on the first business day following the date the Company has notice of your death. You will be a “specified employee” on any date in the applicable period, if you are employed by the Company or any affiliate of the Company that would be consider a single employer with the Company under Section 414(a) or (b) of the Internal Revenue Code of 1986, as amended, (the “Code”) and you were a “key employee” within the meaning of Section 416(i) of the Code (without regard to paragraph (5) thereof) at any time during the 12-month period ending on the identification date. For the period beginning January 1, 2005 and ending March 30, 2006, the identification date is December 31, 2004. Thereafter, the applicable period is each 12-month period beginning on April 1, 2006 and each subsequent April 1 and the identification date for each such period is the immediately preceding December 31. For example, for the period beginning April 1, 2006, the identification date is December 31, 2005. Specified employees shall be determined in accordance with Section 409A.

2.

Any compensation paid under the Letter Agreement, as amended by this Agreement, is intended to satisfy the requirements of Section 409A or be exempt from Section 409A and this Agreement shall be interpreted to effectuate that intent.

3.

The effective date of this Agreement is January 1, 2005 or, if later, the effective date of the Prior Agreement.

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer of the Company and Executive has executed this Agreement as of the day and year first above written.

CARAUSTAR INDUSTRIES, INC.
By:	/s/ Michael J. Keough
	Michael J. Keough	(Employee Name)
Its:	President and CEO
Dated: December 29, 2006		Dated:

EX-10.07

Exhibit 10.07

AMENDED AND RESTATED CHANGE IN CONTROL SEVERANCE AGREEMENT

THIS AMENDED AND RESTATED CHANGE IN CONTROL SEVERANCE AGREEMENT (this “Agreement”) is entered into as of the _29th day of _December, 2006 by and between Caraustar Industries, Inc., a North Carolina corporation (the “Company”) and (Employee Name) (“Executive”).

Background Statement

The Company considers the establishment and maintenance of a sound and vital management team to be essential to protecting and enhancing the best interests of the Company and its shareholders. In addition, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may arise, and that such possibility may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. The Board (as defined in Section l(a)) has therefore determined that it is in the best interests of the Company and its shareholders to secure Executive’s continued services and to ensure Executive’s continued dedication to his duties in the event of any threat or occurrence of a Change in Control (as defined in Section l(c)) of the Company, and has authorized the Company to enter into this Agreement. This Agreement amends, restates and replaces the Change in Control Agreement by and between the Company and Executive dated November 7, 2005 as amended, (the “Prior Agreement”) for the purpose of complying with Section 409A of the Internal Revenue Code of 1986, as amended, and applicable Treasury or Internal Revenue Service guidance issued thereunder (“Section 409A”). The effective date of this Agreement is January 1, 2005 or, if later, the effective date of the Prior Agreement. Any compensation paid under this Agreement is intended to satisfy the requirements of Section 409A or be exempt from Section 409A and this Agreement shall be interpreted to effectuate that intent.

Statement of Agreement

NOW, THEREFORE, the Company and Executive hereby agree as follows:

1. Definitions. As used in this Agreement, the following terms shall have the respective meanings set forth below:

(a) “Board” means the Board of Directors of the Company.

(b) “Cause” means (i) the willful and continued failure of Executive substantially to perform his duties with the Company (other than any such failure resulting from Executive’s incapacity due to physical or mental illness or any such failure subsequent to Executive being delivered a notice of termination without Cause by the Company or delivering a notice of termination for Good Reason to the Company) after the Board delivers to Executive a written demand for substantial performance that specifically identifies the manner in which the Board believes that Executive has not substantially performed Executive’s duties, (ii) the commission of an act by Executive constituting dishonesty or fraud against the Company, (iii) Executive’s conviction of or entering of a guilty or no contest plea with respect to a felony, (iv) habitual absenteeism, chronic alcoholism or any other form of substance abuse by Executive, or (v) the commission of an act by

Executive involving gross negligence or moral turpitude that brings the Company or any of its affiliates into public disrepute or disgrace or causes material harm to the customer relations, operations or business prospects of the Company or any of its affiliates. For purposes of this Section l(b), no act or failure to act by Executive shall be considered “willful.”

(c) unless done or omitted to be done by Executive in bad faith and without reasonable belief that such act or failure to act was in the best interests of the Company or its affiliates. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, the advice of counsel for the Company or the instructions of the Company’s chief executive officer or another senior officer of the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. Cause shall not exist unless and until (x) there has been a meeting of the Board, held after reasonable notice to Executive, at which Executive, together with counsel, is afforded a reasonable opportunity to be heard and (y) the Company has delivered to Executive a copy of a resolution, duly adopted by three quarters (3/4) of the entire Board (excluding Executive if Executive is a Board member) at or after such meeting, finding that an event described in one of clauses (i) through (v) has occurred and specifying the particulars thereof.

(d) “Change in Control” means the occurrence of any one of the following events:

(i) individuals who, on the date hereof, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election or nomination for election was approved by a vote of at least two thirds (2/3) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director;

(ii) any “person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”) and in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”): provided, however, that such event shall not be deemed to be a Change in Control by virtue of any acquisition of Company Voting Securities (A) by the Company or any Subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in Section l(c)(iii)), (E) pursuant to any acquisition by Executive or any group of persons including Executive (or any entity controlled by Executive or by any group of persons including Executive); or (F) pursuant to or in connection with a transaction (other than a Business Combination) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approve a resolution providing expressly that such transaction does not constitute a Change in Control under this Section l(c)(ii);

(iii) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company’s shareholders, whether for such transaction or for an issuance of securities in or in connection with the transaction (a “Business Combination”), unless immediately following such Business Combination (A) more than 50% of the total voting power of the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”) or, if there is no Parent Corporation, the corporation resulting from such Business Combination (the “Surviving Corporation”), is represented by Company Voting Securities that were outstanding immediately prior to

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such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan or related trust sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 25% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination that satisfies all of the criteria specified in clauses (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”): or

(iv) the Company acts upon a plan of complete liquidation or dissolution of the Company approved by the shareholders of the Company or effects a sale of all or substantially all of the Company’s assets approved by the shareholders of the Company.

Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 25% of the Company Voting Securities as a result of an acquisition or a series of acquisitions of Company Voting Securities by the Company that reduces the number of Company Voting Securities outstanding; however, if such person thereafter becomes the beneficial owner of additional Company Voting Securities that increase the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then be deemed to occur.

(e) “Date of Termination” means, subject to Section 1(1), (i) the effective date on which Executive’s employment by the Company terminates as specified in a prior written notice by the Company or Executive, as the case may be, to the other, delivered pursuant to Section 9 or (ii) if Executive’s employment by the Company terminates by reason of death or Disability, the date of death or Disability of Executive.

(f) “Disability” means termination of Executive’s employment by the Company due to Executive’s absence from Executive’s duties with the Company on a full-time basis for at least 180 consecutive days as a result of Executive’s incapacity due to physical or mental illness.

(g) “Good Reason” means the occurrence of any of the following events, without Executive’s express written consent, after a Change in Control:

(i) any change in the duties or responsibilities (including reporting responsibilities) of Executive that is materially and adversely inconsistent with Executive’s position(s), duties, responsibilities or status with the Company immediately prior to such Change in Control (including any material and adverse diminution of such duties or responsibilities), or a material and adverse change in Executive’s titles or offices with the Company as in effect immediately prior to such Change in Control;

(ii) a reduction by the Company in Executive’s rate of annual base salary as in effect immediately prior to such Change in Control or as it may be increased from time to time thereafter, except for any reduction as part of across-the-board salary reductions similarly affecting all management personnel of the Company;

(iii) any requirement of the Company that Executive be based anywhere more than 50 miles from the office where Executive is located at the time of the Change in Control;

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(iv) any purported termination of Executive’s employment that is not effectuated pursuant to Section 9(b) (and that therefore will not constitute a termination hereunder); or

(v) the failure of the Company to obtain any assumption (and, if applicable, guarantee) agreement from the Surviving Corporation (and the Parent Corporation) required by Section 8(b).

An action taken in good faith and remedied by the Company within thirty days after receipt of notice thereof given by Executive shall not constitute Good Reason. Executive’s right to payment pursuant to Section 4(a) upon termination of employment for Good Reason shall not be affected by Executive’s incapacities due to mental or physical illness, nor shall Executive’s continued employment constitute consent to, or a waiver of rights with respect to, any event or condition constituting Good Reason except that no event shall constitute Good Reason unless Executive provides notice of termination of employment within 90 days following Executive’s knowledge of the occurrence thereof.

(h) “Qualifying Termination” means a termination of Executive’s employment (i) by the Company other than for Cause or on account of death, Disability or Retirement or (ii) by Executive for Good Reason.

(i) “Retirement” means Executive’s mandatory retirement (not including any mandatory early retirement) in accordance with the Company’s retirement policy generally applicable to its salaried employees as in effect immediately prior to the Change in Control, or in accordance with any retirement arrangement established with respect to Executive with Executive’s written consent.

(j) “Specified Employee” means on any date in the applicable period, any employee of the Company or any affiliate of the Company that would be considered a single employer with the Company under Section 414(a) or (b) of the Internal Revenue Code of 1986, as amended, (the “Code”) who was a “key employee” within the meaning of Section 416(i) of the Code (without regard to paragraph (5) thereof) at any time during the 12-month period ending on the identification date. For the period beginning January 1, 2005 and ending March 30, 2006, the identification date is December 31, 2004. Thereafter, the applicable period is each 12-month period beginning on April 1, 2006 and each subsequent April 1 and the identification date for each such period is the immediately preceding December 31. For example, for the period beginning April 1, 2006, the identification date is December 31, 2005. Specified Employees shall be determined in accordance with Section 409A.

(k) “Subsidiary” means any corporation or other entity of which the Company has a direct or indirect ownership interest in 50% or more of the total combined voting power of the hen outstanding securities or interests entitled to vote generally in the election of directors or of which the Company has the right to receive 50% or more of the distribution of profits or 50% of the assets upon liquidation or dissolution.

(1) “Termination Period” means the period of time beginning with a Change in Control and ending on the second anniversary of such Change in Control. Notwithstanding anything in this Agreement to the contrary, if (i) Executive’s employment is terminated prior to a Change in Control under circumstances that would have constituted a Qualifying Termination if they had occurred following a Change in Control, (ii) Executive reasonably demonstrates that such termination (or the Good Reason event for which Executive gives notice of termination) was at the request of a third party who had indicated an intention or taken steps reasonably calculated to effect a Change in Control, and (iii) a Change in Control involving such third party (or a party competing with such third party to effectuate a Change in Control) does occur, then a Change of Control shall be deemed to have occurred on the date immediately prior to the date of such termination of employment or event constituting Good Reason for all purposes of this Agreement. For purposes of determining the timing of payments and benefits to Executive under Section 4 and the required notice period under Section 9(b), the date of the actual Change in Control shall be treated as Executive’s Date of Termination under any of the circumstances described in clauses (i) through (iii) above.

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2. Covenants of the Executive.

(a) In the event of a tender or exchange offer, proxy contest, or the execution of any agreement that, if consummated, would constitute a Change in Control, Executive agrees not to voluntarily leave the employ of the Company, other than as a result of Disability, Retirement or an event that would constitute Good Reason if a Change in Control had occurred, until the Change Control occurs, or if earlier, such tender or exchange offer, proxy contest, or agreement is terminated or abandoned.

(b) As a condition precedent to and in consideration of Executive’s receipt of the payments and benefits set forth in this Agreement, Executive agrees to adhere to the terms and conditions set forth in the Executive’s confidentiality and non-competition agreement with the Company.

3. Term of Agreement. This Agreement shall be effective on the date hereof and shall continue in effect until the Company shall have given one year’s written notice of cancellation; provided that, notwithstanding the delivery of any such notice, this Agreement shall continue in effect for a period of two years after a Change in Control if such Change in Control occurs prior to the effective date of such cancellation. Notwithstanding anything in this Section 3 to the contrary, this Agreement shall terminate, except as provided in Section 1(l), if Executive or the Company terminates Executive’s employment prior to a Change in Control.

4. Payments Upon Termination of Employment.

(a) Qualifying Termination. If the employment of Executive terminates pursuant to a Qualifying Termination during the Termination Period, then the Company shall provide to Executive:

(i) On the tenth day following the Date of Termination, or if such date is not a business day, on the first business day that is at least ten days, following the Date of Termination, a lump-sum cash amount equal to the sum of (A) the pro rata share of any of Executive’s base salary earned, but not yet paid, through the Date of Termination and any bonus amounts that have become payable, to the extent not theretofore paid or deferred, plus (B) and any accrued vacation pay, in each case to the extent not theretofore paid;

(ii) On the thirtieth day following the Date of Termination, or if such day is not a business day, on the first business day that is at least ten days following the Date of Termination, a cash amount for projected payments to the Executive under the Company’s incentive programs, equal to the average annual incentive bonus actually paid in the prior two years;

(iii) On the thirtieth day following the Date of Termination, or if such day is not a business day, on the first business day that is at least thirty days following the Date of Termination, a lump sum cash amount equal to the lesser of (A) product of (1) 2 multiplied by (2) Executive’s annual rate of base salary as in effect immediately prior to the Date of Termination, and (B) the product of (1) 2.99 multiplied by (2) Executive’s “Base Amount,” as defined in Section 280G(b)(3) of the Code.

(iv) For eighteen months following the Date of Termination, if Executive is eligible for and elects continued health coverage for Executive or for Executive and Executive’s qualified dependents under a group health plan of the Company or an affiliate provided to satisfy the requirements of Section 4980B of the Code (“COBRA Coverage”), the Company will reimburse the Executive for the actual premium charged to Executive for such COBRA Coverage for Executive and each of Executive’s dependents who is a “qualified beneficiary” within the meaning of Section 4980B of the Code. Such reimbursements

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(which shall be taxable income to Executive) shall be paid to Executive directly or to the applicable group health plan, as determined by the Company, on or as soon as practicable after each due date for such COBRA Coverage premium. Such reimbursements shall be made on or before December 31 of the second calendar year following the calendar year that includes the Date of Termination.

(v) For two years following the Date of Termination, the “Company, at the Company’s sole expense, shall provide the Executive with life insurance, long-term disability and accidental death and dismemberment insurance benefits that are substantially the same as the long-term disability and accidental death and dismemberment insurance benefits that were provided to Executive and Executive’s dependents immediately before the Qualifying Termination, except that the health and welfare benefits to which the Executive is entitled under Subsection (iv) and this Subsection (v) will be subject to the Executive’s compliance with the Executive’s confidentiality and non-competition agreement and will be reduced to the extent that comparable health and welfare benefits are received by the Executive from an employer other than the Company during the two year period following the Date of Termination. The fact that the cost of the participation by the Executive, or the Executive’s dependents or beneficiaries, in any health or welfare benefit plan was paid indirectly by the Company, as a reimbursement or a credit to the Executive, before the Qualifying Termination does not mean that the corresponding health and welfare benefits were not “provided to the Executive” by the Company for purposes of this Subsection (v). As used in this subsection, health and welfare benefits shall include: all life insurance, disability insurance, accidental death and dismemberment insurance and health care (medical, dental and prescription drug) coverage.

(vi) In the second and third calendar years following the Date of Termination, the Company shall make a lump sum cash payment to Executive sufficient to pay in full any federal, state and local income tax and social security or other employment tax on the reimbursements made with respect to Executive pursuant to Subsection (iv) in the immediately preceding calendar year and any additional taxes on such payment such that the net effect to Executive is as if the reimbursements made under Subsection (iv) were made on a tax-free basis.

(b) Non-Qualifying Termination. If during the Termination Period the employment of Executive terminates other than by reason of a Qualifying Termination, then the Company shall pay to Executive, on the thirtieth day following the Date of Termination, or if such day is not a business day, on the first business day that is at least thirty days following the Date of Termination, the lump-sum cash amount described in Section 4(a)(i). The Company may make such additional payments, and provide such additional benefits, to Executive as the Company and Executive may agree in writing.

(c) Payments to Specified Employees. Notwithstanding any contrary provision, if the payment is scheduled to be made at the time that the stock of the Company is publicly traded on an established securities market or otherwise and the Executive is a Specified Employee, then no amount shall be paid to the Executive under Subsection (a)(i)-(iii) before the six-month anniversary of the Date of Termination (or, if earlier, the date of death of the Executive) and any amounts that would have been paid prior to the six-month anniversary of the Executive’s Date of Termination shall be accumulated and distributed (together with interest at the applicable federal rate as defined in Section 1274(d) of the Code) upon the six-month anniversary of the Date of Termination, or if such date is not a business day, on the first business day that follows such six- month anniversary; provided, however, if the Executive dies before the six-month anniversary of the Date of Termination, the payment will be made on the first business day following the date the Company has notice of such Executive’s death.

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5. Limitation on Payments by the Company.

(a) In the event that any payment or benefit received or to be received by the Executive pursuant to the terms of this Agreement or in connection with or contingent upon a Qualifying Termination pursuant to any other agreement, plan or arrangement with the company or any of its subsidiaries (“Other Payments” and, together with the contract Payments, the “Payments”) would be subject to the Excise Tax imposed by section 4999 of the Code, then the Company shall make a payment to the Executive (the “Gross-Up Payment”) such that the net amount of Payments retained by the Executive shall be equal to the amount the Executive would have retained if none of such Payments were subject to the Excise Tax. In particular, the Gross-Up Payment shall be equal to the Excise Tax on the Payment, any interest penalties, or additions to tax payable by the Executive by reason of Executive’s filing income tax returns and making tax payments in a manner consistent with an opinion of tax counsel selected by the Company and reasonably acceptable to the Executive (“Tax Counsel”), and any federal, state and local income tax and Excise Tax upon the payments by the Company to you provided for this Section 5. Such Gross-Up Payment shall be made in a lump sum in the calendar year following the calendar year that includes the Date of Termination. Notwithstanding the foregoing provisions of this Section 5(a), in the event the amount of Payment subject to the Excise Tax exceeds the product (“Parachute Payment Limit”) of 2.99 and the Executive’s applicable “Base Amount” (as such term is defined for purposes of Section 4999 of the Code) by less than ten percent (10%) of the Executive’s annual base salary, (the “Safe Harbor Cap”) the Executive shall be treated as having waived such rights with respect to Payments designated by the Executive to the extent required such that the aggregate amount of Payments subject to the Excise Tax is less than the Parachute Payment Limit.

(b) Upon a Change in Control, the independent public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the “Accounting Firm”) shall determine whether the Payments would be subject to the Excise Tax absent reduction pursuant to Section 5(a) and, if so, shall determine the Safe Harbor Cap; provided, however, that in the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company may appoint another nationally recognized public accounting firm to make such determinations (which accounting firm shall then be referred to as the Accounting Firm). If amounts payable pursuant to Section 4 are reduced to the Safe Harbor Cap, the Accounting Firm shall provide a reasonable opinion to Executive that Executive is not required to report any Excise Tax on Executive’s federal income tax return. All fees, costs and expenses (including without limitation the costs of retaining experts) of the Accounting Firm shall be borne by the Company. Determinations by the Accounting Firm hereunder shall be binding upon the Company and Executive except as provided in Section 5(c) below.

(c) If it is established, pursuant to a final determination of a court or an Internal Revenue Service (“IRS”) proceeding that has been finally and conclusively resolved, that any amount has been paid to Executive by the Company pursuant to this Agreement in excess of the Safe Harbor Cap, such excess amount shall be deemed for all purposes to be a loan to Executive made on the date Executive received such amount, and Executive shall repay such amount to the Company on demand, together with interest thereon at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of Executive’s receipt thereof until the date of such repayment. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Accounting Firm’s determinations pursuant to Section 5(b), it is possible that an amount will not have been paid by the Company hereunder that should have been paid in accordance with Sections 4 and 5(a). In the event that the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return), the IRS or any court determines that this has occurred, the Company shall pay such amount to Executive in a lump sum in the second calendar year following the calendar year that includes the Date of Termination, together with interest thereon at the applicable federal rate from the date such amount would have been paid to Executive until the date of payment.

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6. Withholding Taxes. The Company may withhold from all payments due to Executive (or his beneficiary or estate) hereunder all taxes that, by applicable federal, state, local or other law, the Company is required to withhold therefrom.

7. Scope of Agreement. Nothing in this Agreement shall be deemed to entitle Executive to continued employment with the Company or its Subsidiaries, and if Executive’s employment with the Company shall terminate prior to a Change in Control, Executive shall have no further rights under this Agreement (except as otherwise provided hereunder); provided, however, that any termination of Executive’s employment during the Termination Period shall be subject to all of the provisions of this Agreement.

8. Successors; Binding Agreement.

(a) This Agreement shall not be terminated by any Business Combination. In the event of any Business Combination, the provisions of this Agreement shall be binding upon the Surviving Corporation, and such Surviving Corporation shall be treated as the Company hereunder.

(b) The Company agrees that in connection with any Business Combination, it shall cause the Surviving Corporation unconditionally to assume (and any Parent Corporation of the Surviving Corporation to guaranty), by written instrument delivered to Executive (or his beneficiary or estate), all obligations of the Company hereunder. Failure of the Company to obtain such assumption and guaranty, prior to the effectiveness of any such Business Combination that constitutes a Change in Control, shall be a breach of this Agreement and shall constitute Good Reason hereunder.

(c) This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive dies while any amounts would be payable to Executive hereunder had he continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by Executive to receive such amounts or, if no person is so appointed, to Executive’s estate.

9. Notice.

(a) For purposes of this Agreement, all notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or five days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed as follows:

If to Executive:	(Employee Name)
	(Employee Address)
If to the Company:	Caraustar Industries, Inc.
	P.O. Box 115
	5000 Austell Powder Springs Road
	Austell, Georgia 30106
	Attention: Chief Executive Officer

or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

(b) If Executive’s employment is terminated during the Termination Period for any reason other than death, the Company or Executive, as applicable, shall provide to the other written notice of Executive’s Date of Termination. Such notice shall (i) set forth in reasonable detail the facts and circumstances on which such termination is based, (ii) indicate whether such termination is for

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Cause, Good Reason or Disability or is other than for Cause, and (iii) specify the Date of Termination, which shall be not less than 15 nor more than 60 days after the giving of such notice except as specified in Section l(e) with respect to Disability or unless, pursuant to Section 1(l), fewer than 15 days remain before the date of the actual Change in Control. The failure by Executive or the Company to set forth in such notice any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company hereunder or preclude Executive or the Company from asserting such fact or circumstance in enforcing Executive’s or the Company’s rights hereunder.

10. Full Settlement: Resolution of Disputes. The Company’s obligation to make any payments provided for in this Agreement and otherwise to perform its obligations hereunder shall be in lieu and in full settlement of all other severance payments to Executive under any other severance or employment agreement between Executive and the Company and any severance plan of the Company. In no event shall Executive be obligated to seek other employment or take other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement, and such amounts shall not be reduced as a result of Executive’s obtaining other employment.

11. Employment with Subsidiaries. Employment with the Company for purposes of this Agreement shall include employment with any Subsidiary.

12. Survival. The respective obligations and benefits afforded to the Company and Executive as provided in Sections 4 (to the extent that payments or benefits are owed as a result of a termination of employment that occurs during the term of this Agreement), 5 (to the extent that Payments are made to Executive as a result of a Change in Control that occurs during the term of this Agreement), 6, 8(c) and 10 shall survive the termination of this Agreement.

13. GOVERNING LAW: VALIDITY. THE INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAWS. THE INVALIDITY OR UNENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS AGREEMENT, WHICH OTHER PROVISIONS SHALL REMAIN IN FULL FORCE AND EFFECT.

14. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument.

15. Miscellaneous. No provision of this Agreement may be modified or waived unless such modification or waiver is agreed to in writing and signed by Executive and by a duly authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Failure by Executive or the Company to insist upon strict compliance with any provision of this Agreement or to assert any right Executive or the Company may have hereunder, including without limitation the right of Executive to terminate employment for Good Reason, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. Except as otherwise specifically provided herein, the rights of, and benefits payable to, Executive, his estate or his beneficiaries pursuant to this Agreement are in addition to any rights of, or benefits payable to, Executive, his estate or his beneficiaries under any other employee benefit plan or compensation program of the Company.

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer of the Company and Executive has executed this Agreement as of the day and year first above written.

CARAUSTAR INDUSTRIES, INC.
By:	/s/ Michael J. Keough
	Michael J. Keough
Its:	President and CEO	(Employee Name)
Dated: December 29, 2006		Dated:

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EX-10.30

Exhibit 10.30

CARAUSTAR INDUSTRIES, INC.

RESTORATION PLAN

This Plan, as established by Caraustar Industries, Inc. effective as of November 22, 1996, and as thereafter amended on February 7, 2002, August 11, 2005, October 13, 2005, November 7, 2005, and is further amended and restated December 29, 2006, retroactively effective to the 1st day of January 2005 for the primary purpose of complying with Section 409A of the Internal Revenue Code of 1986, as amended, and applicable Treasury or Internal Revenue Code guidance issued there under.

This document applies to persons separating from service after December 31, 2004.

ARTICLE 1 – PURPOSE OF PLAN

Section 1.1 Purpose: The purpose of this Plan is to provide supplemental retirement benefits to certain named Caraustar Industries, Inc. Executives. The benefits to be provided under this Plan are intended to supplement other retirement benefits provided by the Company through plans qualified under Section 401(a) of the Internal Revenue Code of 1986, nonqualified plans, and the federal Social Security system of the United States.

Section 1.2 Design: The Plan is designed to provide supplemental retirement benefits as described in Section 3.4 and is intended to be an unfunded plan providing deferred compensation for a select group of highly compensated or management employees.

ARTICLE 2 – DEFINITIONS

Section 2.1 Average Annual Compensation: The average of the Executive’s annual Compensation over the five (5) consecutive calendar years during the ten (10) most recent calendar years (including the calendar year in which the Executive’s Payment Event occurs) which produces the highest average, or, if the Executive has less than five (5) consecutive years of service, the average of the Executive’s annual Compensation for his or her full calendar years of Service.

Section 2.2 Beneficiary: The Spouse of the Executive as of his Payment Event. If the Spouse predeceases the Executive or the Executive has no Spouse, the beneficiary is the person designated by the Executive to be the beneficiary in such event, or the Executive’s estate if no person has been designated by the Executive as the beneficiary.

Section 2.3 Board: The Board of Directors of Caraustar Industries, Inc.

Section 2.4 Calculation Date: With respect to any Executive, the date on which his Payment Event occurs.

Section 2.5 Change-In-Control: means the occurrence of any one of the following events provided such event also constitutes a “change in control” within the meaning of Section 409A:

(a) individuals who, on the date hereof, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election or nomination for election was approved by a vote of at least two thirds ( ²/3) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director;

(b) any “person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”) and in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided, however, that such event shall not be deemed to be a Change in Control by virtue of any acquisition of Company Voting Securities (A) by the Company or any Subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in Section 2.5(c)), (E) pursuant to any acquisition by an Executive or any group of persons including Executive (or any entity controlled by an Executive or by any group of persons including Executive); or (F) pursuant to or in connection with a transaction (other than a Business Combination) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approve a resolution providing expressly that such transaction does not constitute a Change in Control under this Section 2.5(b);

(c) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company’s shareholders, whether for such transaction or for an issuance of securities in or in connection with the transaction (a “Business Combination”), unless immediately following such Business Combination (A) more than 50% of the total voting power of the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities

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eligible to elect directors of the Surviving Corporation (the “Parent Corporation”) or, if there is no Parent Corporation, the corporation resulting from such Business Combination (the “Surviving Corporation”), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan or related trust sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 25% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination that satisfies all of the criteria specified in clauses (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

(d) the Company acts upon a plan of complete liquidation or dissolution of the Company approved by the shareholders of the Company or effects a sale of all or substantially all of the Company’s assets approved by the shareholders of the Company.

Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 25% of the Company Voting Securities as a result of an acquisition or a series of acquisitions of Company Voting Securities by the Company that reduces the number of Company Voting Securities outstanding; however, if such person thereafter becomes the beneficial owner of additional Company Voting Securities that increase the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then be deemed to occur.

Section 2.6 Code: The Internal Revenue Code of 1986, as amended, or as it may be amended from time to time.

Section 2.7 Company: Caraustar Industries, Inc.

Section 2.8 Compensation: Wages as defined in Section 3401(a) of the Code for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or

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location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2)), reduced by all of the following items (even if includible in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation, and welfare benefits. Compensation shall also include any amount which is contributed by the Company pursuant to a salary reduction agreement and which is not includible in the Executive’s gross income under Sections 125, 402(a)(8), 402(h), or 403(b) of the Code.

Section 2.9 Compensation and Employee Benefits Committee: The Compensation and Employee Benefits Committee as established by the Board.

Section 2.10 Covered Compensation: For the Executive, the amount determined for the calendar year in which he attains or will attain his Social Security Retirement Age using the Covered Compensation Table in Internal Revenue Service Revenue Ruling 93-20 (or any successor table as updated and issued by the Internal Revenue Service from time to time) as in effect for the calendar year in which his employment with the Employer terminates. No increase in Covered Compensation shall decrease the Executive’s amount of benefits under this Plan after his Calculation Date.

Section 2.11 Early Retirement Adjustment Factor:

Age Benefit Begins	Factor	Age Benefit Begins	Factor
64	.9231	59	.6538
63	.8462	58	.6154
62	.7692	57	.5769
61	.7308	56	.5292
60	.6923	55	.4862

The Early Retirement Adjustment Factors are interpolated for retirement at an age in between whole ages.

Section 2.12 Early Retirement Age: The age of the Executive on the first date upon which the Executive both has attained age fifty-five (55) and has completed ten (10) or more years of Vesting Service as defined in the Retirement Plan.

Section 2.13 Employee: A participant in the Caraustar Industries, Inc. Retirement Plan or in the Caraustar Industries, Inc. Employees’ Savings Plan.

Section 2.14 Executive: A participant in the Plan as appointed by the Chief Executive Officer, upon receiving approval from the Compensation and Employee Benefits Committee.

Section 2.15 Final Average Compensation: The average annual Compensation for the three (3) consecutive calendar years in which the Executive was employed by the

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Company immediately preceding his Payment Event excluding the calendar year in which his Payment Event occurs, or, if the Executive’s entire period of service with the Employer is less than three (3) consecutive calendar years, the average of this annual Compensation for his full calendar years of Service. For purposes of this Section, Compensation for any year in excess of the taxable wage base in effect at the beginning of such year shall not be taken into account.

Section 2.16 Hour of Service: Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Company as an Employee during any period of employment.

Section 2.17 Normal Retirement Age: Age sixty-five (65).

Section 2.18 Normal Retirement Date: The first day of the month coincident with or next following the date the Executive attains his Normal Retirement Age.

Section 2.19 Payment Event: With respect to any Executive, the first to occur of his Retirement Date, death, the date he Separates from Service as a result of a Total and Permanent Disability, or a Change-In-Control.

Section 2.20 Plan: The “Caraustar Industries, Inc. Restoration Plan”, as set forth herein or in any amendment hereto.

Section 2.21 Plan Administrator: The individual or committee appointed pursuant to Article 7 of the Retirement Plan, who shall have the same powers and those duties with respect to the Plan as those described in Article 7 of the Retirement Plan. The Plan Administrator is the named fiduciary for purposes of the Employee Retirement Income Security Act of 1974 as amended.

Section 2.22 Plan Year: The calendar year.

Section 2.23 Retirement Benefit: The Accrued Benefit determined in Section 3.1 multiplied by the Early Retirement Adjustment Factor if the Retirement Date precedes the Normal Retirement Date.

Section 2.24 Retirement Date: The first day of the month coincident with or next following the date the Executive attains his Early Retirement Age or Normal Retirement Age and actually terminates employment with the Company.

Section 2.25 Retirement Plan: The Caraustar Industries, Inc. Retirement Plan for the Employees of Caraustar Industries, Inc., as amended from time to time.

Section 2.26 Section 409A: Section 409A of the Code and applicable Treasury or Internal Revenue Service guidance issued thereunder.

Section 2.27 Service: An Employee shall be credited with one (1) year of Service for each Plan Year during which he completes one thousand (1,000) or more Hours of Service with the Company. An Employee shall also be credited with Service

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solely for purposes of determining his Accrued Benefit under Section 3.1 (but not for purposes of vesting under Section 3.4) for employment with an employer other than the Company provided the Chief Executive Officer makes a qualifying recommendation and such recommendation is endorsed by the Board’s Compensation and Employee Benefits Committee.

Section 2.28 Separation from Service: A “separation from service” within the meaning of Section 409A.

Section 2.29 Specified Employee: An Executive or a former Executive shall be a specified employee if on any date in the applicable period, he is an employee of the Company or any affiliate of the Company that would be consider a single employer with the Company under Section 414(a) or (b) of the Internal Revenue Code of 1986, as amended, (the “Code”) who was a “key employee” within the meaning of Section 416(i) of the Code (without regard to paragraph (5) thereof) at any time during the 12-month period ending on the identification date. For the period beginning January 1, 2005 and ending March 30, 2006, the identification date is December 31, 2004. Thereafter, the applicable period is each 12-month period beginning on April 1, 2006 and each subsequent April 1 and the identification date for each such period is the immediately preceding December 31. For example, for the period beginning April 1, 2006, the identification date is December 31, 2005. Specified Employees shall be determined in accordance with Section 409A.

Section 2.30 Spouse: The individual to whom the Executive is legally married as of the earlier of the Executive reaching his Retirement Date, suffering a Total and Permanent Disability (as defined in Article 1 of the Retirement Plan and in accordance with a determination made by the Social Security Administration), death, or upon the Change-In-Control of the Company.

Section 2.31 Total and Permanent Disability: The event shall have the meaning specified in Article 1 of the Retirement Plan, but limited to Social Security Administration approved disability.

ARTICLE 3 – BENEFITS

Section 3.1 Accrued Benefit: The Accrued Benefit is an annual amount payable in the form of a Life Annuity, calculated as of the Executive’s Calculation Date, equal to the product of (a) times (b) minus (c) where:

(a) Is 1.35% of Average Annual Compensation times years of Service projected to Normal Retirement Date, offset by .65% of Final Average Compensation up to Covered Compensation times years of Service projected to Normal Retirement Date, and

(b) Is a fraction where the numerator is years of Service as of the Calculation Date and the denominator is the greater of years of Service as of the Calculation Date or years of Service projected to Normal Retirement Date, and

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(c) Is the Executive’s accrued benefit under the Retirement Plan as of the Calculation Date, the accrued benefit under any Company paid deferred compensation arrangements as of the Calculation Date other than the Caraustar Industries, Inc. Employees’ Savings Plan (the Caraustar 401(k) Plan), and/or any other accrued benefit payable through another employer’s qualified defined benefit plan as of the Calculation Date by which the Executive has obtained additional years of Service. Notwithstanding the above, the Executive’s accrued benefit is also reduced by the actuarial equivalent of a hypothetical benefit account based on accumulating the Executive’s service-weighted retirement contributions under the Caraustar’s 401(k) Plan with interest using for each calendar year the 10-year Treasury Bond constant maturity rate, monthly average yield for the December preceding such year. Actuarial equivalence for this purpose will be on the same basis used for the optional forms of payment herein. If a benefit of another employer is offset hereunder and is not in the form of a Life Annuity payable at age 65, Caraustar’s actuary shall determine the equivalent Life Annuity at age 65 for the purpose of determining the offset amount.

Section 3.2 Forms of Benefit Payment and Election Requirements:

(a) Normal Form of Payment: Unless otherwise elected, the form of benefit payment for a Retirement Payment under Section 3.4(a)(1) or Disability Payment under Section 3.4(a)(2) shall be a 5-year Certain Annuity. The 5-Year Certain Annuity is equal to the actuarial equivalent of the Retirement Benefit. The benefits under a 5-Year Certain annuity are payable in 60 monthly installments to the Executive while the Executive is alive and continuing to the Beneficiary for the balance of the 60 payments remaining after the death of the Executive. The amount benefit under this Normal Form of Payment and the rules for payments after the death of the Executive or the Executive’s Beneficiary will be determined in the same manner as described below for a 10-Year Certain Annuity.

The normal form of payment for a Death Payment shall be a Life Annuity. The normal form of Payment for a Change-In-Control Payment shall be a lump sum.

(b) Optional Forms: In lieu of the Normal Form, the Executive may elect to receive his Retirement payment under Section 3.4(a)(1) in any of the following optional forms of payment. The Disability Payment under Section 3.4(a)(2) shall be paid in the same form of payment elected for the Retirement Payment. The optional forms of payment are:

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(1) 10-Year Certain Annuity: The 10-Year Certain Annuity is the actuarial equivalent benefit of the Retirement Benefit. The 10-Year Certain Annuity is payable in 120 monthly installments to the Executive while the Executive is alive and continuing to the Executive’s Beneficiary for the balance of the 120 payments remaining after the death of the Executive. Such actuarial equivalent shall be determined using the mortality table prescribed in Rev. Rul. 2001-62 and the interest rate most recently used as of the benefit commencement date (or the date that would be the benefit commencement date except for Plan Section 3.4(b)) to discount this Plan’s liabilities for FAS 87 purposes.

If the Beneficiary who is receipt of monthly payments by reason of the Executive’s death, dies before a total of 120 payments have been paid to the Executive and the Beneficiary, then the present value of the remaining payments (determined using the interest rate most recently used to discount this Plan’s liabilities for FAS 87 purposes) will be paid to the Beneficiary’s estate. If the Executive’s named Beneficiary predeceases the Executive, and the Executive dies before a total of 120 monthly payments have been made to the Executive, the present value of the remaining payments (determined using the interest rate most recently used to discount this Plan’s liabilities for FAS 87 purposes) will be paid to the Executive’s estate.

(2) Life Annuity: Equal to the Retirement Benefit payable monthly for the life of the Executive.

(3) Joint and 50% Survivor Annuity: Equal to the actuarial equivalent of the Retirement Benefit (using the mortality table prescribed in Rev. Rul. 2001-62 and the interest rate most recently used to discount this Plan’s liabilities for FAS 87 purposes) payable monthly for the life of the Executive with a survivor annuity of half of such amount continuing for the life of the Spouse following the death of the Executive.

(4) Joint and 100% Survivor Annuity Survivor Annuity: Equal to the actuarial equivalent of the Retirement Benefit (using the mortality table prescribed in Rev. Rul. 2001-62 and the interest rate most recently used to discount this Plan’s liabilities for FAS 87 purposes) payable monthly for the life of the Executive with a survivor annuity equal to the amount that the Executive was receiving with such amount continuing for the life of the Spouse following the death of Executive.

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(c) If the Executive elects a Joint and 50% Survivor Annuity and the Executive’s Spouse dies prior to the Executive’s commencement of benefits, his benefit automatically will be paid in a Life Annuity.

(d) Executive’s benefit will commence on his Retirement Date. Notwithstanding the above, the Executive may elect as provided in paragraph (e) below to have his benefits commence on his Normal Retirement Date. In such case the Executive’s benefit will be computed without adjustment for early retirement.

(e) The Executive’s election as to form of payment and the time of payment must be made in writing no later than 30 days after first becoming eligible to participate in this Plan.

Notwithstanding the above, an Executive who was participating in the Plan before January 1, 2005, may make a new election during 2005 or 2006, except that the Executive cannot make an election in 2006 that would either cause payments to be made to him in 2006 or postpone any payments that would otherwise be due to him in 2006 to 2007 or later.

An Executive who has made an election under this paragraph (e) may change such election as long as change is made not later than the last day permitted for making such election.

(f) No Change in Election Permitted After Deadline for Elections: Except as otherwise provided in paragraph (e), once an Executive makes an election, such election may not be changed.

Section 3.3 Forfeiture of Benefit: If the Executive engages in any acts or omissions constituting dishonesty, intentional breach of fiduciary obligation or intentional wrongdoing, in each case that results in substantial harm to the business or property of the Company, he shall forfeit and be ineligible to receive any benefits under this Plan, and any benefits paid to such Executive (or Beneficiary) can be recovered by the Company. The recovery of any benefits paid to such Executive shall not preclude the Company from taking any other actions against the Executive.

Section 3.4 Benefit Payments:

(a) If a Payment Event occurs with respect to the Executive while he is employed with the Company, then he (or his Beneficiary) shall be entitled to receive benefits as follows:

(1) Retirement Payment: In the event that an Executive Separates from Service on or after his Early Retirement Age or Normal Retirement Age, the Executive will be paid a Retirement Benefit payable as of the Executive’s Retirement Date or, if so elected, his Normal Retirement Date, adjusted according to the form of

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payment elected by the Executive. If benefits are payable before the Executive’s Normal Retirement Age, such benefits shall be reduced for early commencement by multiplying the accrued benefit by the Early Retirement Adjustment Factors based on the Executive’s age on the date of commencement.

(2) Disability Payment: In the event that an Executive Separates from Service as a result of a Total and Permanent Disability and such disability occurs prior to the Executive’s Early or Normal Retirement Date, a Retirement Benefit will be payable as of the first day of the month coincident with or next following the second anniversary of the date the Executive Separates from Service; provided, however, that an Executive may elect at least one year in advance of the second anniversary of the date he Separates from Service to defer receipt of such benefit until the first day of the month coincident with or next following the later of the seventh anniversary of the date the Executive Separates from Service or his Normal Retirement Age, but such election to defer receipt of benefits shall not be effective for twelve (12) months after the date such election is made. The form of payment shall be the same form of payment that is applicable for a Retirement Payment.

If disability benefits are payable before the Executive’s Normal Retirement Age, such benefits shall be reduced for early commencement by multiplying the accrued benefit by the Early Retirement Adjustment Factors based on the Executive’s age on the date of commencement. If the Disability Payment commences before age 55, then the benefit shall be further reduced by 1/360th for each month that the Executive’s age on date of commencement precedes age 55.

If a disabled Executive recovers from disability before his Normal or Early Retirement Age, then any disability benefits he is receiving shall cease.

(3) Death Payment: In the event that the Executive dies before his or her Retirement Date, has five (5) or more years of Service, and has been married for at least one year prior to his death, the Spouse shall receive a Life Annuity the monthly benefit under which is equal to 50% of the monthly amount that would have been payable to the Executive under the Joint and 50% Survivor Annuity form and such amount shall be payable as of the first day of the month coincident with or next following the later of the Executive’s death or the date on which the Executive would have reached age 55. If the Spouse benefits commence before the Executive’s Normal Retirement Date, they will be reduced according to the Early Retirement Adjustment Factor based on the Executive’s age (or age the Executive would have been had he survived) on the date of benefit commencement.

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If the Executive dies on or after his Retirement date and before his benefits commence, the benefits will be paid according to the form of payment applicable to the Executive.

(4) Change-In-Control: Except as provided in Section 3.3, in the event that there is a Change-In-Control of the Company, the Executive shall become fully vested and receive an immediate lump-sum distribution on the date that is thirty (30) days after the Change in Control or, if such date is not a business day, on the immediately following business day, and the Plan shall terminate after each such Executive has been paid. The lump sum distribution shall be equal to the greater of (i) the present value of the Retirement Benefit payable in a Life Annuity calculated as of the Payment Event, or (ii) the present value of the Accrued Benefit deferred to Normal Retirement Age; with such present values being determined using the actuarial equivalent definition for lump sum payments in the Retirement Plan, including the mortality table and interest rate specified therein.

(b) Delay for Specified Employees: Notwithstanding the above provisions of this Section 3.4, if the Executive is a Specified Employee at the time of the Payment Event, the commencement of his Retirement Payments or Disability Payments shall be delayed for a period of six months following the Executive’s date of Separation from Service. After the passage of this six-month period, the first payment thereafter shall include any payments that were missed during the six-month delay plus interest at the same interest rate used to determine an optional form of payment under this Plan as of the date of the Executive’s Separation from Service. Should the Executive die during the six-month period, any death payments under this Plan are not subject to the six-month delay rule of this paragraph.

(c) No Hardship: No hardship withdrawals shall be permitted from this Plan.

Section 3.5 Mental or Legal Incompetence: The Company, in its sole discretion, may make distribution to the guardian or other legal representative of the Executive or Beneficiary, if the Executive or Beneficiary is determined by a court of proper jurisdiction to be mentally or legally incompetent to receive such benefit distribution. Any such distribution shall be in full and complete satisfaction of any and all claims whatsoever by or on behalf of such Executive under this Plan against the Company, the Plan Administrator, any member of the Board, other Executives or officers of the Company, other employees, shareholders and any other person acting on behalf of them.

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ARTICLE 4 – MISCELLANEOUS

Section 4.1 Amendment or Termination: The Chief Executive Officer, upon receiving approval from the Compensation and Employee Benefits Committee, shall have the right to amend this Plan from time to time and to terminate this Plan at any time; provided, however, no such action shall reduce the Accrued Benefit, as of the date of such action, of any Executive whose benefits hereunder are vested, or defer the time for paying such benefits under Section 3.4.

Section 4.2 Company Liability: Nothing in this Plan shall be construed to limit in any way the right of the Company to terminate the employment of the Executive at any time; or to be evidence of any agreement or understanding, express or implied, that the Company or any affiliate company will employ the Executive in any particular position or at any particular rate or remuneration or for any particular period of time.

Section 4.3 Indemnification: The Company shall indemnify and hold harmless the Administrator, any member thereof and any employee who may act on behalf of the Company in the administration of this Plan from and against any liability, loss, cost or expense (including reasonable attorney’s fees) incurred at any time as a result of or in connection with any claims, demands, actions or causes of action of the Executive, any person claiming through or under any of them, or any other person, party or authority claiming to have an interest in this Plan or standing to act for any persons or groups having an interest in this Plan, for or on account of, any of the acts or omissions (or alleged acts or omissions) of the Administrator, any member thereof or any such employee, except to the extent resulting from such person’s willful misconduct.

Section 4.4 Tax Effects: The Company makes no warranties or representations with regard to the tax effects or results of this Plan. The Executive participating under this Plan shall be deemed to have relied upon his own tax advisors with regard to such effects.

Section 4.5 No Assignment; Binding Effect: Neither the Executive nor Beneficiary shall have the right to alienate, assign, commute or otherwise encumber his benefit for any purpose whatsoever, and any attempt to do so shall be disregarded completely as null and void. The provisions of this Plan shall be binding on the Executive and on each person who claims a benefit under him and on the Company.

Section 4.6 Self-Interest: The Executive shall not have any right to vote or decide upon any matter related directly or indirectly to him or any right to claim any benefit under this Plan.

Section 4.7 Claims Procedures: The claims procedures shall be the same as under the Retirement Plan.

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Section 4.8 Construction: This Plan shall be construed in accordance with the laws of the State of Georgia. The headings and subheadings in this Plan have been inserted for convenience of reference only and are to be ignored in construction of the provisions of this Plan. In the construction of this Plan, the masculine shall include the feminine and the singular the plural wherever appropriate.

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IN WITNESS WHEREOF, the Company has caused its duly authorized officers to execute and seal this Plan as of this 29^th day of December, 2006.

PLAN SPONSOR:
CARAUSTAR INDUSTRIES, INC.
By:	/s/ Barry A. Smedstad
Title:	Vice President, Human Resource

(CORPORATE SEAL)
Attest:	/s/ Marinan R. Mays
Title:	Corporate Director Benefits

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APPENDIX A

(The following provisions are applicable only to Thomas V. Brown and will supersede any respective provisions in the main document unless otherwise specified in this Appendix A. Any other provisions in the main document that have not been superseded by this Appendix A Shall also apply to Mr. Brown.)

Section 2.4 Calculation Date: June 1, 2005.

Section 2.22 Retirement Date: July 1, 2005.

Section 2.23 Retirement Plan: The Caraustar Industries, Inc. Retirement Plan for Employees of Caraustar Industries, Inc. or the Smurfit Stone Pension Plan as amended from time to time.

Section 2.24 Service: A period of employment beginning on December 7, 1962 and ending on the Employee’s Severance from Service.

Section 2.24.1 Social Security Benefit: The annual old-age or disability insurance benefit of an Employee under Title II of the Social Security Act as in effect on the date he retires or otherwise terminates employment to which the Employee is or, upon proper application, would be entitled at his Normal Retirement Age, disregarding the effect on actual entitlement of any earnings of the Employee (generally known as the “retirement test”). The Social Security Benefit shall be computed on the assumption that the Employee will receive no income after termination of employment, or Normal Retirement Age, if earlier, which would be treated as wages for purposes of the Social Security Act.

Section 3.1 Accrued Benefit: The Accrued Benefit is an annual amount of $309,338.16, expressed as a single life annuity, calculated as of the Executive’s Calculation Date, equal to the product of (A) times (B) minus (C) below, but not less than the Accrued Benefit determined under Section 3.1 of the main document.

(A) is 1.5% of Average Annual Compensation offset by 1.5% of the Social Security Benefit, and

(B) is years of Service (including a fraction for completed months) as of the Calculation Date, and

(C) is the Accrued Benefit under all Retirement Plans as of the Calculation Date and the accrued benefit under any Company paid deferred Compensation arrangements as of the Calculation Date.

Section 3.3 Benefit Payments:

(a) If a Payment Event occurs with respect to an Executive while an Executive is employed with the Company, and if such Executive’s benefits hereunder are vested, then the Executive will receive his benefits

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under a Fifty Percent (50%) Joint and Survivor Annuity, paid in monthly payments, with the initial annual amount being 90% of the Executive’s Accrued Benefit, and with a 10-year guaranteed period (meaning that if the Executive dies less than 10 years after the commencement of the annuity payments, the Executive’s spouse or alternate Beneficiary will nevertheless receive the initial annual amount of the annuity [ninety percent (90%) of the Accrued Benefit]).

(b) Notwithstanding the above provisions of this Section 3.4, if the Executive is a Specified Employee at the time of the Payment Event, commencement of his Retirement Payments shall be delayed until January 1, 2006.

(c) On or after January 1, 2006, subject to the provisions of Section 3.2, the Executive shall receive an initial payment of $162,402.52, which amount includes the aggregate of the prior six months of deferred payments since Mr. Brown’s June 1, 2005 retirement, including interest thereon at the interest rate most recently used to discount plan liabilities for FAS 87 purposes, and his regularly scheduled monthly payment of $23,200.36.

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EX-12.01

Exhibit 12.01

CARAUSTAR INDUSTRIES, INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(IN THOUSANDS, EXCEPT RATIOS)

	2002			2003			2004			2005			2006
EARNINGS:
Income (Loss) from continuing operations before income from equity investees, income taxes and minority interest	$	(34,754	)	$	(50,459	)	$	(30,189	)	$	(162,092	)	$	73,289
Distributed income of equity investees		10,655			6,150			20,250			39,500			8,000
Fixed charges		47,245			54,288			51,912			51,481			33,808
Earnings	$	23,146		$	9,979		$	41,973		$	(71,111	)	$	115,097
FIXED CHARGES:
Interest expense	$	39,938		$	47,227		$	46,214		$	46,768		$	29,184
Amortization of debt issuance costs		1,534			(214	)		(876	)		(997	)		(1,161	)
Estimate of the interest cost within rental expense		5,773			7,275			6,574			5,710			5,083
Capitalized interest expense		—			—			—			—			702
Fixed charges	$	47,245		$	54,288		$	51,912		$	51,481		$	33,808
Ratio of earnings to fixed charges (1)	$	.49			.18			.81			N/A			3.4

(1) The 2005, 2004, 2003 and 2002 earnings were inadequate to cover fixed charges. The cover deficiency was $123.0 million, $9.9 million, $44.3 million, and $24.1 million, respectively.

EX-21.01

Exhibit 21.01

SUBSIDIARIES* OF CARAUSTAR INDUSTRIES, INC.

NAME	STATE OF INCORPORATION	TRADE, D/B/A Names
Austell Holding Company, LLC	Georgia
Camden Paperboard Corporation	New Jersey
Caraustar, G.P. (a general partnership)	South Carolina
Caraustar Custom Packaging Group, Inc.	Delaware
Caraustar Custom Packaging Group (Maryland), Inc.	Maryland
Caraustar Design Tubes, Inc.	Canada
Caraustar Industrial Canada, Inc.	Canada
Caraustar Industrial & Consumer Products Group, Inc.	Delaware
Caraustar Industrial & Consumer Products Group, Ltd.	Leyland, Lancaster,
	United Kingdom
Caraustar Mill Group, Inc.	Ohio
Caraustar Recovered Fiber Group, Inc.	Delaware
Chicago Paperboard Corporation	Illinois
Caraustar Canada, Inc.	Canada
Federal Transport, Inc.	Ohio
Gypsum MGC, Inc.	Delaware
Halifax Paper Board Company, Inc.	North Carolina
McQueeney Gypsum Company	Delaware
McQueeney Gypsum Company, LLC	Delaware
Paragon Plastics, Inc.	South Carolina
PBL Inc.	Delaware	**
RECCMG, LLC.	Georgia
Sprague Paperboard, Inc.	Connecticut

* Each subsidiary is wholly-owned (directly or, indirectly) by Caraustar Industries, Inc. unless otherwise indicated.

** Does business in Indiana as PBL Indiana Inc.

EX-23.01

Exhibit 23.01

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 33-53726, 333-02948, 333-57965, 333-37168, 333-106062, and 333-106064 on Form S-8, 333-65555, 333-66943, and 333-122084 on Form S-3, and 333-31618 on Form S-4, of our report dated March 16, 2007 relating to the consolidated financial statements and financial statement schedule of Caraustar Industries, Inc. and subsidiaries (the “Company”) (which report on the consolidated financial statements expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption by the Company of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, on January 1, 2006 and the related recognition and related disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, on December 31, 2006), and our report dated March 16, 2007 related to management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2006.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

March 16, 2007

EX-23.02

Exhibit 23.02

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 33-53726, 333-02948, 333-57965, 333-37168, 333-106062, and 333-106064 on Form S-8, 333-65555, 333-66943, and 333-122084 on Form S-3, and 333-31618 on Form S-4, of our report dated March 15, 2007 relating to the financial statements of Premier Boxboard Limited, LLC (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption by Premier Boxboard Limited LLC of the recognition and related disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, on December 31, 2006), appearing in this Annual Report on Form 10-K of Caraustar Industries, Inc. and subsidiaries for the year ended December 31, 2006.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

March 16, 2007

EX-31.01

Exhibit 31.01

CERTIFICATION OF CEO — PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14(a)/15d-14(a),

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. Keough, President and Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Caraustar Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Caraustar Industries, Inc. as of, and for, the periods presented in this report;

4. Caraustar Industries, Inc.’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for Caraustar Industries, Inc. and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Caraustar Industries, Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of Caraustar Industries, Inc.’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

d) Disclosed in this report any change in Caraustar Industries, Inc.’s internal control over financial reporting that occurred during Caraustar’s fiscal quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, Caraustar’s internal control over financial reporting;

5. Caraustar Industries, Inc.’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Caraustar’s auditors and the audit committee of Caraustar’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Caraustar’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in Caraustar’s internal control over financial reporting.

By:	/s/ Michael J. Keough
	President and Chief Executive Officer

Date: March 15, 2007

EX-31.02

Exhibit 31.02

CERTIFICATION OF CFO — PURSUANT TO

SECURITIES EXCHANGE ACT RULE 13a-14(a)/15D-14(a),

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ronald J. Domanico, Senior Vice President and Chief Financial Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Caraustar Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Caraustar Industries, Inc. as of, and for, the periods presented in this report;

4. Caraustar Industries, Inc.’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for Caraustar Industries, Inc. and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Caraustar Industries, Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of Caraustar Industries, Inc.’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

d) Disclosed in this report any change in Caraustar Industries, Inc.’s internal control over financial reporting that occurred during Caraustar’s fiscal quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, Caraustar’s internal control over financial reporting;

5. Caraustar Industries, Inc.’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Caraustar’s auditors and the audit committee of Caraustar’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Caraustar’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in Caraustar Industries, Inc.’s internal control over financial reporting.

By:	/s/ Ronald J. Domanico
	Senior Vice President and Chief Financial Officer

Date: March 15, 2007

EX-32.01

Exhibit 32.01

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Caraustar Industries, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: March 15, 2007
	/s/ Michael J. Keough
	Michael J. Keough, President and Chief Executive Officer

EX-32.02

Exhibit 32.02

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Caraustar Industries, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: March 15, 2007
	/s/ Ronald J. Domanico
	Ronald J. Domanico, Senior Vice President and Chief Financial Officer

EX-99.01

Exhibit 99.01

Premier Boxboard

Limited LLC

Financial Statements as of December 31,

2006 and 2005, and for the Three Years

Ended December 31, 2006, and

Report of Independent Registered Public

Accounting Firm

PREMIER BOXBOARD LIMITED LLC

TABLE OF CONTENTS

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	1
FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006 AND 2005, AND FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004:
Balance Sheets	2
Statements of Operations	3
Statements of Members’ Equity	4
Statements of Cash Flows	5
Notes to Financial Statements	6–13

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Members of

Premier Boxboard Limited LLC:

We have audited the accompanying balance sheets of Premier Boxboard Limited LLC (the “Company”) as of December 31, 2006 and 2005, and the related statements of operations, members’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 4 to the financial statements, the Company adopted the recognition and related disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R) on December 31, 2006.

/s/    Deloitte & Touche LLP

Atlanta, Georgia

March 15, 2007

PREMIER BOXBOARD LIMITED LLC

BALANCE SHEETS

AS OF DECEMBER 31, 2006 AND 2005

	2006			2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	7,732,215		$	2,452,745
Accounts receivable, net of allowance for doubtful accounts of $129,961 and $173,826, respectively		1,851,182			4,608,704
Related-party receivables		986,458			3,880,111
Inventories		4,683,537			4,619,968
Total current assets		15,253,392			15,561,528
PROPERTY, PLANT, AND EQUIPMENT—At cost:
Land		2,257,924			2,257,924
Buildings and improvements		30,469,089			30,456,607
Machinery and equipment		162,714,176			160,660,909
Furniture and fixtures		463,606			549,136
Construction in progress		839,289			1,557,906
		196,744,084			195,482,482
Less accumulated depreciation		(69,566,709	)		(61,780,013	)
Property, plant, and equipment—net		127,177,375			133,702,469
OTHER ASSETS		1,383,558			1,795,226
TOTAL	$	143,814,325		$	151,059,223
LIABILITIES AND MEMBERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,984,112		$	2,222,992
Related-party payables		4,856,899			4,593,152
Accrued expenses		3,710,761			5,790,795
Total current liabilities		10,551,772			12,606,939
LONG-TERM DEBT		50,000,000			50,000,000
OTHER LONG-TERM LIABILITIES		604,733			693,032
COMMITMENTS AND CONTINGENCIES
MEMBERS’ EQUITY		82,657,820			87,759,252
TOTAL	$	143,814,325		$	151,059,223

See notes to financial statements.

- 2 -

PREMIER BOXBOARD LIMITED LLC

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004

	2006		2005		2004
SALES	$	118,494,987	$	122,062,760	$	109,370,530
COST OF SALES		85,934,548		85,626,473		81,363,811
GROSS PROFIT		32,560,439		36,436,287		28,006,719
FREIGHT AND DISTRIBUTION COSTS		6,047,537		4,225,312		5,454,922
SELLING, GENERAL, AND ADMINISTRATIVE		11,477,490		11,301,905		9,602,547
INCOME FROM OPERATIONS		15,035,412		20,909,070		12,949,250
INTEREST EXPENSE		4,220,000		4,219,365		4,328,352
OTHER INCOME—Net		233,968		183,791		33,348
NET INCOME	$	11,049,380	$	16,873,496	$	8,654,246

See notes to financial statements.

- 3 -

PREMIER BOXBOARD LIMITED LLC

STATEMENTS OF MEMBERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004

	Caraustar Industries, Inc.			Inland Paperboard and Packaging, Inc.			Total
MEMBERS’ EQUITY—December 31, 2003	$	45,164,341		$	45,164,341		$	90,328,682
Net income		4,327,123			4,327,123			8,654,246
Minimum pension liability adjustment		(48,669	)		(48,669	)		(97,338	)
Comprehensive income								8,556,908
Contributions from members		10,000			10,000			20,000
Distributions		(1,000,000	)		(1,000,000	)		(2,000,000	)
MEMBERS’ EQUITY—December 31, 2004		48,452,795			48,452,795			96,905,590
Net income		8,436,748			8,436,748			16,873,496
Minimum pension liability adjustment		(9,917	)		(9,917	)		(19,834	)
Comprehensive income								16,853,662
Distributions		(13,000,000	)		(13,000,000	)		(26,000,000	)
MEMBERS’ EQUITY—December 31, 2005		43,879,626			43,879,626			87,759,252
Net income		5,524,690			5,524,690			11,049,380
Minimum pension liability adjustment		74,572			74,572			149,144
Comprehensive income								11,198,524
Adjustment to adopt SFAS No. 158 (Note 4)		(149,978	)		(149,978	)		(299,956	)
Distributions		(8,000,000	)		(8,000,000	)		(16,000,000	)
MEMBERS’ EQUITY—December 31, 2006	$	41,328,910		$	41,328,910		$	82,657,820

Note: The balance of accumulated other comprehensive loss at December 31, 2006 and 2005, was $384,891 and $234,079, respectively, and consist solely of unrecognized pension costs.

See notes to financial statements.

- 4 -

PREMIER BOXBOARD LIMITED LLC

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004

	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,049,380		$	16,873,496		$	8,654,246
Adjustments to reconcile net income to net cash provided by operating activities:
(Recovery)provision for allowances and discounts		(43,865	)		88,551			(19,028	)
Depreciation, accretion and amortization		8,161,089			8,195,071			8,300,511
Losses on disposal of property, plant and equipment—net		76,730
Changes in operating assets and liabilities:
Accounts receivable		2,801,387			339,585			(3,387,920	)
Related-party receivables		2,893,653			1,978,262			1,037,028
Inventories		(63,569	)		1,482,849			(1,848,447	)
Other assets		193,912			(117,432	)		16,507
Accounts payable		(238,880	)		(5,352,539	)		780,427
Related-party payables		263,747			2,360,128			815,634
Accrued expenses		(2,663,564	)		1,689,202			357,078
Other long-term liabilities		(216,053	)		(4,807	)		(23,936	)
Net cash provided by operating activities		22,213,967			27,532,366			14,682,100
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash					(621,402	)
Purchases of property, plant, and equipment		(934,497	)		(2,305,348	)		(4,095,880	)
Net cash used in investing activities		(934,497	)		(2,926,750	)		(4,095,880	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from members								20,000
Distributions		(16,000,000	)		(26,000,000	)		(2,000,000	)
Repayments of borrowings under line of credit								(10,000,000	)
Net cash used in financing activities		(16,000,000	)		(26,000,000	)		(11,980,000	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		5,279,470			(1,394,384	)		(1,393,780	)
CASH AND CASH EQUIVALENTS—Beginning of year		2,452,745			3,847,129			5,240,909
CASH AND CASH EQUIVALENTS—End of year	$	7,732,215		$	2,452,745		$	3,847,129
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	4,220,000		$	4,219,365		$	4,219,365
Purchases of property, plant, and equipment on account	$	560,472		$	234,267		$	—

See notes to financial statements.

- 5 -

PREMIER BOXBOARD LIMITED LLC

NOTES TO FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004

1. BUSINESS DESCRIPTION AND FORMATION

Premier Boxboard Limited LLC (“Premier” or the “Company”) was formed during 1999 by Caraustar Industries, Inc. (“Caraustar”) and Inland Paperboard and Packaging, Inc. (“IPP”) a wholly owned subsidiary of Temple Inland Corporation (“Temple-Inland”). The Company is operated as a joint venture of Caraustar with a 50% ownership and, until December 2004, of IPP with a 50% ownership interest. In December 2004, 0.01% of interest in Premier was issued to Temple Inland Premier Holding Company which reduced IPP’s ownership to 49.99%. On December 31, 2004, IPP was merged into Temple-Inland Forest Products Corporation (“Temple FPC”) and then Temple FPC and Gaylord Container Corporation were merged under the name of TIN Inc. (“TIN”). In connection with these mergers, an Assignment of Limited Liability Company Interest was entered into by IPP, as assignor, TIN, as assignee, and Premier, under which the 49.99% membership interest of IPP in Premier was assigned to and assumed by TIN. The result was Temple-Inland now has a 50% ownership in Premier through two subsidiaries. The Company’s operations are managed by Caraustar. Under the joint venture agreement, Caraustar contributed $50,000,000 to the joint venture and IPP contributed the physical and intangible assets of a paper mill located in Indiana with a fair value of $100,000,000, subject to a $50,000,000 loan assumed by Premier. Additionally, each member contributed certain inventory and operating assets aggregating approximately $1,200,000. Each member’s contribution was made on June 27, 2000 (the “Initial Contribution”), at which time Premier began operations.

Premier manufactures and distributes containerboard and lightweight gypsum facing paper.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents—All investments purchased with an original maturity of three months or less are considered to be cash equivalents.

Restricted Cash—The Company had $621,401 in restricted cash set aside for the purpose of settling an asset retirement obligation at December 31, 2006 and 2005 (see Note 6). The restricted cash is included in other assets at December 31, 2006 and 2005.

Inventories—Inventories are stated at the lower of cost or market on an average cost basis. Cost includes materials, labor, and overhead.

Inventories consisted of the following at December 31, 2006 and 2005:

	2006		2005
Raw materials	$	2,342,799	$	2,300,704
Finished goods		2,340,738		2,319,264
	$	4,683,537	$	4,619,968

- 6 -

Property, Plant, and Equipment—Property, plant, and equipment, which were contributed at the Initial Contribution, are stated at the estimated fair value based on the provisions of Emerging Issues Task Force (“EITF”) 98-4, Accounting by a Joint Venture for Business Received at Its Formation. Additions of property, plant and equipment subsequent to the Initial Contribution are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense was $7,943,333, $7,977,312, and $8,059,067 for the years ended December 31, 2006, 2005, and 2004, respectively. Expenditures for maintenance and repairs are expensed as incurred, while major additions and improvements are capitalized.

The estimated lives used in determining depreciation are as follows:

Buildings and improvements	40 years
Machinery and equipment	3–20 years
Furniture and fixtures	5 years

Other Assets—In connection with the formation of Premier, intangible assets of $2,000,000 were recorded and are being amortized over 10 years. Amortization expense totaled $217,759 for the years ended December 31, 2006, 2005, and 2004. Accumulated amortization totaled $1,237,844, $1,020,086, and $802,327 at December 31, 2006, 2005, and 2004, respectively. Expected amortization expense through 2009 is $217,759 and then $108,879 for 2010.

Income Taxes—The earnings and losses of Premier are included in the respective tax returns of the members, and accordingly, no provision for income taxes is included in the accompanying financial statements.

Members’ Equity—Under the terms of the membership agreement, income and distributions of the Company are allocated to the members based on their respective ownership interests.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition—Revenues are recognized upon passage of title which occurs at the time the product is delivered to the customer, the price is fixed and determinable and collectibility is reasonably assured.

Amounts billed to customers for shipping and handling are included in sales and the related costs thereof are included in freight and distribution costs.

Long-Lived Assets—The Company reviews its long-lived assets for impairment wherever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the undiscounted future cash flows estimated to be generated by the asset are not sufficient to recover the unamortized balances of the asset.

3. NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value

- 7 -

measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of the statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No.157 are effective for the years beginning after November 15, 2007; therefore, we anticipate adopting this standard as of January 1, 2008. The Company has not determined the effect, if any; the adoption of this statement will have on our financial position or results of operations.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Postretirement Plans, (“SFAS No. 158”), which requires employers to recognize a net liability or asset and an offsetting adjustment to other comprehensive income to report the funded status of defined benefit pension and other post-retirement benefit plans. SFAS No. 158 requires an employer to initially apply the requirement to recognize the funded status of a benefit plan as of the end of the employer’s fiscal year ending after June 15, 2007. At December 31, 2006 the Company early adopted the provisions of SFAS No. 158 (see Note 4).

In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on our financial position or results of operations.

4. PENSION AND PROFIT-SHARING PLANS

Effective December 31, 2006, the Company adopted the provisions of SFAS No. 158, which requires that the Company’s Balance Sheet reflect funded status of defined benefit pension plan (the “Pension Plan”). The funded status is measured as the difference between the plan assets at fair value and the projected benefit obligation. The impact of adopting SFAS No. 158 on individual line items in the balance sheet as of December 31, 2006 is shown below:

Balance Sheet Caption	Balances Before Adoption of Statement 158		Adjustments			Balances After Adoption of Statement 158
Other assets (long term)	$	1,560,371	$	(176,813	)	$	1,383,558
Total Assets	$	143,991,138	$	(176,813	)	$	143,814,325
Other long-term liabilities	$	481,590	$	123,143		$	604,733
Members’ Equity		82,957,776		(299,956	)		82,657,820
Total Liabilities and Members’ Equity	$	143,991,138	$	(176,813	)	$	143,814,325

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Components of net periodic pension costs for the years ended December 31 included the following:

	2006			2005			2004
Service cost	$	307,482		$	295,368		$	220,453
Interest cost		95,066			76,837			53,306
Expected return on plan assets		(111,806	)		(72,602	)		(47,530	)
Amortization of prior service cost		17,099			17,099			8,337
Recognized actuarial loss		14,963			18,980			13,189
Net periodic pension cost	$	322,804		$	335,682		$	247,755

A reconciliation of the changes in the plans’ benefit obligations and fair value of assets over the two-year period ending December 31, 2006, and a statement of the funded status at December 31 for these years for the Company’s pension plan is as follows:

Change in benefit obligation:
Net benefit obligation—beginning of year	$	1,686,910		$	1,210,966
Service cost		307,482			295,368
Interest cost		95,066			76,837
Amendments					117,147
Actuarial (gain )loss		(141,470	)		22,573
Benefits paid		(16,091	)		(35,981	)
Net benefit obligation—end of year	$	1,931,897		$	1,686,910
Change in plan assets:
Fair value of plan assets—beginning of year	$	1,144,051		$	677,029
Actual return on plan assets		139,430			43,540
Employer contributions		336,769			459,463
Benefits paid		(16,091	)		(35,981	)
Fair value of plan assets—end of year	$	1,604,159		$	1,144,051
Funded status:
Funded status	$	(327,738	)	$	(542,859	)
Unrecognized actuarial loss		N/A			392,135
Unrecognized prior service cost		N/A			193,912
Amount recognized at December 31	$	(327,738	)	$	43,188

Amounts recognized in the balance sheets as of December 31 were as follows:

	2006			2005
Other long-term liabilities	$	(327,738	)	$	—
Accrued benefit liability					(384,803	)
Intangible assets					193,912
Accumulated other comprehensive loss					234,079
Net amounts recognized	$	(327,738	)	$	43,188

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Amounts recognized in accumulated other comprehensive income as of December 31, 2006 were as follows:

Unrecognized actuarial loss	$	208,078
Unrecognized prior service cost		176,813
Total recognized in other comprehensive income	$	384,891

The accumulated benefit obligation for all defined benefit pension plans was $1,808,704 and $1,528,854 at December 31, 2006, and 2005, respectively.

Information for pension plans with an accumulated benefit obligation in excess of plan assets:

	2006		2005
Projected Benefit Obligation	$	1,931,897	$	1,686,910
Accumulated Benefit Obligation		1,808,754		1,528,854
Fair Value of Plan Assets		1,604,159		1,144,051

The minimum liability concept, including recognition of an intangible asset, has been eliminated under SFAS No. 158 effective December 31, 2006. Prior to the adoption of SFAS 158, a minimum liability adjustment was recognized in Accumulated Other Comprehensive Income to the extent there was an unfunded accumulated benefit obligation that had not been recognized in the balance sheet. Minimum pension liabilities of $149,144 were recognized in Accumulated other comprehensive income (loss) as of December 31, 2006, prior to the adoption of SFAS No. 158, representing an adjustment for the change in the additional minimum liability for the year ended December 31, 2006. This minimum pension liability was subsequently eliminated upon the adoption of SFAS No.158 at December 31, 2006. At December 31, 2005 the cumulative minimum pension liability of $386,907 was offset by an intangible asset of $193,912.

Weighted-average assumptions used to determine benefit obligations at December 31,

	2006		2005
Discount rate	6.10	%	5.80	%
Rate of compensation increase	3.25		3.25

Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2006 and 2005:

	2006		2005
Discount rate	5.80	%	5.75	%
Expected return on plan assets	8.50		8.50
Rate of compensation increase	3.25		3.00

It is the Company’s policy to adjust, on an annual basis, the discount rate used to determine the projected benefit obligation to approximate rates on high-quality, long-term obligations.

The Company expects to contribute $421,297 to its pension plan in 2007.

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The estimated benefits payable for the future ten years are as follows:

2007	$	32,111
2008		39,084
2009		43,394
2010		52,781
2011		64,663
2012–2016		728,920

The Company has a 401(k) plan which provides for voluntary contributions by employees not to exceed 25% of their gross salaries and wages or $15,000, whichever is lower. The Company matches 100% of the first 3% and 50% of the next 2% of each employee’s contribution. The amounts incurred for the Company’s matching contributions totaled $334,346 and $343,356 in 2006 and 2005, respectively.

5. LONG-TERM DEBT

On June 27, 2000, the Company assumed $50,000,000 of obligations of TIN under senior notes, which bear an interest rate of 8.44% per annum and are due on June 1, 2010. A substantial portion of Company’s assets are pledged as security for the notes. These notes are guaranteed by Temple-Inland.

The Company was required, under the above loan agreement, to maintain certain financial ratio levels as well as other nonfinancial covenants. Additionally, as part of the member guarantee of the revolving credit facility, TIN was required to meet certain covenants on behalf of the Company. At December 31, 2006, TIN was in compliance with these certain covenants, as amended.

On July 30, 1999, the Company entered into a revolving credit agreement with a financial institution, which provided for borrowings of up to $75,000,000. On December 18, 2000, the Company entered into an Amended and Restated Revolving Credit Agreement (the “Agreement”) with the same financial institution, which reduced the total available borrowings to a maximum of $40,000,000. Caraustar and TIN each guaranteed one-half of the borrowings. On March 28, 2003, the Agreement was amended to reduce the maximum available borrowings to $20,285,094. Further, any amounts repaid could not be reborrowed and the maximum available borrowings were automatically reduced by the amount of any principal repayments. The termination date was initially revised to January 5, 2004, and on December 22, 2003, the Agreement was amended to extend the termination date to January 5, 2005. Borrowings under the agreement were due at that date; however, the financial institution agreed to continue to provide the letter of credit subfacility in the amount of $614,285, which is secured by a back to back letter of credit from Caraustar in the amount of $307,142 and by a guaranty for a like amount from TIN. The Company had an undrawn letter of credit in the amount of $614,285 at December 31, 2004. The Agreement and the letter of credit was terminated in 2005.

6. ASSET RETIREMENT OBLIGATIONS

The Company accounts for its asset retirement obligation related to a landfill in accordance with SFAS 143, Accounting for Asset Retirement Obligations. Under this pronouncement, an asset retirement obligation resulting from the legal obligation associated with the retirement of a long-lived asset that results from acquisition, construction and/or the normal operation of a long-lived asset is recorded as a liability and a corresponding asset (as part of the related asset’s carrying amount) and is allocated to expense over the asset’s useful life. The fair value of the liability for an asset retirement obligation is recorded as the present value of the retirement obligation, discounted at a credit adjusted risk free rate, in the period in which it is incurred if a reasonable estimate of fair value can be made.

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The Company operated a landfill in Newport, Indiana used to dispose of refuse resulting from the paperboard manufacturing process. This landfill was first permitted in 1985 and was closed during 2005, with on-going closure costs expected to be incurred through December 31, 2033. The permit to use the landfill by Premier constitutes a legal obligation to incur costs to retire such landfill, including capping and closing costs at the culmination of the landfill use, as well as on-going costs related to periodic inspection reports, ground water monitoring, methane control and maintenance of the final cover.

The Company calculated an estimate of the fair value of these closure costs as of June 1985, the date the legal obligation was incurred. Upon adoption, the Company recorded a liability for the asset retirement obligation adjusted for cumulative accretion to January 1, 2003. Each year accretion expense is recorded based on the credit adjusted risk free rate used to calculate the present value of the liability at January 1, 2003. The following table represents a rollforward of the liability, a component of other long-term liabilities, related to the retirement of the landfill from adoption of SFAS No. 143 on January 1, 2003 to December 31, 2006:

BALANCE—December 31, 2003	$	289,135
2004 Accretion expense		22,802
BALANCE—December 31, 2004		311,937
2005 Accretion expense		23,055
2005 Post-closure costs payments		(28,862	)
BALANCE—December 31, 2005		306,130
2006 Accretion expense		17,497
2006 Post-closure costs payments		(48,737	)
BALANCE—December 31, 2006	$	274,890

As of December 31, 2006, the Company has restricted cash of $621,402 on deposit for purposes of settling this asset retirement obligation as required by the Indiana Department of Environmental Management.

7. RELATED-PARTY TRANSACTIONS

For the years ended December 31, 2006, 2005 and 2004, TIN purchased approximately $59,553,000, $44,754,000, and $49,955,000, respectively, of the Company’s production. During 2006, 2005 and 2004, Premier paid marketing fees to TIN of approximately $997,657, $734,000, and $1,038,000, respectively. Such fees are included as a component of selling, general, and administrative expenses for each of the three years in the period ended December 31, 2006.

For the years ended December 31, 2006, 2005 and 2004, Caraustar purchased, approximately $2,992,000, $2,964,000, and $4,245,000, respectively, of the Company’s production. For the years ended December 31, 2006, 2005 and 2004 the Company purchased, at market prices, approximately $38,368,000, $8,857,000, and $2,030,000, respectively, of goods from Caraustar.

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For the years ended December 31, 2006, 2005 and 2004 Standard Gypsum, Inc., a 50% owned joint venture of Caraustar and Temple-Inland, purchased, at net prices, approximately $3,191,000, $16,299,000, and $10,740,000, respectively, of the Company’s products.

Caraustar has a marketing agreement with Premier as the exclusive marketing agent for all non-containerboard products produced by Premier. Caraustar and Temple-Inland, have the right to market containerboard products (in addition to its exclusive marketing agreement with Caraustar for non-containerboard products), produced by Premier. During 2006, 2005 and 2004, Premier paid total marketing fees to Caraustar of approximately $2,407,000, $2,824,000, and $2,113,000, respectively. Such fees are included as a component of selling, general, and administrative expenses for each of the three years in the period ended December 31, 2006.

Premier has a management agreement with Caraustar, employing Caraustar as exclusive manager of Premier’s operations. Under the terms of the agreement, Premier incurred and paid Caraustar $500,000 for management services for each of the years ended December 31, 2006, 2005 and 2004. Such fees are included as a component of selling, general, and administrative expenses for each of the three years in the period ended December 31, 2006.

Each of the above agreements expires on the date Caraustar or TIN, or any subsidiary or affiliate of Caraustar or TIN, ceases to own a membership interest in Premier.

8. COMMITMENTS AND CONTINGENCIES

Insurance—The Company is self-insured for the majority of its workers’ compensation costs and group health insurance costs, subject to specific retention levels. Consulting actuaries and administrators assist the Company in determining its liability for self-insured claims and such liabilities are not discounted.

Operating Leases—The Company leases certain of its equipment under noncancelable lease agreements. Minimum lease payments under noncancelable leases for years subsequent to December 31, 2006, are as follows:

2007	$	244,171
2008		45,767
2009		34,677
2010		3,697

There are no noncancelable leases after 2010. Total rental expense incurred during 2006, 2005, and 2004 was $244,171, $286,634, and $234,430 respectively.

Legal Matters—The Company is subject to certain lawsuits and claims incidental to its business. In the opinion of management, based on its examination of such matters and discussions with counsel, the ultimate resolution of pending or threatened litigation, claims, and assessments will have no material adverse effect upon the Company’s financial position, liquidity, or results of operations.

9. SIGNIFICANT CUSTOMERS

During 2006, 2005, and 2004 a single customer accounted for sales of $41,068,000, $47,632,000, and $43,328,000, respectively. There were no other customers who individually accounted for more than 10% of total sales (excluding IPP and Caraustar, discussed in Note 7).

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