CARAUSTAR INDUSTRIES INC, 10-K405, 1999-03-29

CARAUSTAR INDUSTRIES INC
10-K405, 1999-03-29
PAPERBOARD MILLS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
---------------------

<TABLE>
<C> <S>
(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, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>

COMMISSION FILE NUMBER 0-20646

CARAUSTAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
NORTH CAROLINA 581388387
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
3100 WASHINGTON STREET
AUSTELL, GEORGIA 30106
(Address of principal executive
offices) (Zip Code)
</TABLE>

(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 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. [X]

The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 1, 1999, computed by reference to the closing sale price
on such date, was $629,764,032. As of the same date, 24,699,941 shares of Common
Stock, $.10 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant's definitive Proxy Statement pertaining to the 1999 Annual
Meeting of Shareholders ("the Proxy Statement") and filed pursuant to Regulation
14A is incorporated herein by reference into Part III.
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INTRODUCTION

Caraustar Industries, Inc. operates its business through 40 subsidiaries
across the United States and in Mexico and the United Kingdom. As used herein,
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.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

General. The Company, a major manufacturer of 100 percent recycled paperboard
and converted paperboard products, was incorporated in North Carolina in 1980
through the consolidation of six corporations in the recycled paperboard
industry previously related by common ownership and administration. The Company
operates 85 facilities in the United States, Mexico and the United Kingdom and
manufactures its products primarily from recovered fiber, which is derived from
recycled paperstock. Additionally, the Company has an equity interest as the
non-operating partner in a gypsum wallboard manufacturing plant, a specialty
paperboard converting plant and two tube plants. The operations of these
facilities are managed by the respective operating partners.

The Company operates principally in three business segments: paperboard;
tubes, cores and composite containers; and carton and custom packaging. Net
sales, operating income, identifiable assets, depreciation and amortization and
capital expenditures are reported by segment in Note 12 to the consolidated
financial statements as part of Item 8 of this report.

Operations and Products

Paperboard. The Company's principal manufacturing activity is the production of
uncoated and claycoated recycled paperboard. In this manufacturing process,
paperstock is reduced to pulp, cleaned and refined and then processed into
various grades of paperboard for internal consumption or sale to four end-use
markets: (1) tubes, cores and composite containers; (2) folding cartons; (3)
gypsum wallboard facing paper; and (4) miscellaneous other specialty and
converted products. The Company operates a total of 15 paperboard mills in the
following states: North Carolina, South Carolina, Georgia, Maryland, Virginia,
New Jersey, Illinois, Iowa, Ohio, Tennessee, Pennsylvania and New York.

Caraustar continually maintains and improves its paperboard mills. During
the past five years, the Company spent an average of $33.3 million annually for
capital expenditures, which sums were used primarily to expand and upgrade its
paperboard production and converting capacity, primarily by acquiring and
maintaining state-of-the-art machinery and technology. The Company intends to
continue to upgrade its existing facilities with modern, cost-efficient and
productive equipment. The Company's strategic plan includes a capital
expenditure program that anticipates annual expenditures of approximately $38.0
million in 1999 at its existing facilities.

In 1998, approximately 36% of the recycled paperboard sold by the Company's
paperboard mills was consumed internally by the Company's converting facilities;
the other 64% was sold to external customers. Sales of unconverted paperboard to
external customers as a percent of total sales by end-use market was as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
END-USE MARKET 1998 1997 1996
-------------- ----- ----- -----
<S> <C> <C> <C>
Tube, core and composite container.......................... 2.2% 2.2% 2.3%
Folding cartons............................................. 11.5% 14.3% 10.6%
Gypsum wallboard............................................ 13.2% 14.8% 15.9%
Other specialty*............................................ 10.3% 11.2% 12.2%
</TABLE>

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* Includes sales of unconverted paperboard and certain specialty converted
products.

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Three of the Company's paperboard mills also operate specialty converting
facilities, supplying other specialty converted and laminated products to the
bookbinding, game, puzzleboard, printing and furniture industries.

Each of the Company's paperboard mills and most of its converting plants
have onsite paperstock recovery facilities that collect and bale recycled
paperstock. The Company also operates 10 stand-alone paperstock recycling and
brokerage facilities. Sales of paperstock to external customers accounted for
4.5%, 3.9% and 2.7% of total sales in 1998, 1997 and 1996, respectively.

Tube, Core and Composite Container. The Company's largest converting operation
is the production of tubes and cores. The principal applications of these
products are: cloth cores, paper mill cores, yarn carriers, carpet cores and
film, foil and metal cores. Paper tubes are designed to provide specific
physical strength properties, resistance to moisture and abrasion, and
resistance to delamination at extremely high rotational speeds. The Company's 32
tube and core converting plants are primarily operated by the Company's Star
Paper Tube, Inc. subsidiary (two are joint ventures). These plants obtain most
of their recycled paperboard from the Company's paperboard mills. Because of the
relatively high cost of shipping tubes and cores, tube and core converting
facilities generally serve customers within a relatively small geographic area.
Accordingly, most of the Company's tube and core converting plants are located
in close proximity to concentrations of customers.

The Company is seeking to expand its presence in the markets for more
sophisticated tubes and cores, which require stronger paper grades, higher skill
and new converting technology. These markets include the yarn carrier and
plastic film markets, as well as the market for cores used in certain segments
of the paper industry. The Company believes these markets offer significant
growth potential, as well as potentially higher operating margins.

In addition to tube and core converting facilities, Star Paper Tube also
operates three facilities which produce specialty converted products used in
industrial packaging protection applications (edge protectors). The Company's
tube, core and related sales to external customers accounted for 26.3%, 27.8%
and 30.9% of total sales to external customers in 1998, 1997 and 1996,
respectively.

The Company's Federal Packaging Corporation subsidiary produces composite
containers used in the adhesive, sealant, food and food service markets, as well
as grease cans, tubes, cartridges and other components. Federal Packaging has
two composite container plants located in Saint Paris and Orrville, Ohio.
Federal Packaging also has a transportation operation in Ohio. Composite
container sales accounted for 4.8%, 5.4% and 5.9% of total sales to external
customers in 1998, 1997 and 1996, respectively.

The Company also manufactures injection-molded and extruded plastic
products, including plastic cores for the textile industry, plastic cores for
the film, paper and other industries, and other specialized products. These
plastic products are, to a large extent, complementary to the Company's tube and
core products. The Company has an 80% equity interest in a plant in Union, South
Carolina that produces such plastic products. Certain of this plant's customers
also purchase the Company's tubes and cores. This plant currently has five
plastic extrusion lines and 24 injection-molding machines, using the latest
available process control technology. The Company also produces injection-molded
plastic parts at a facility in Georgetown, Kentucky, which are primarily used as
components in the manufacture of its composite containers. Plastic cartridges
are also produced in a new facility located in New Smyrna Beach, Florida.
Composite extruded products with a wide variety of end-uses are produced in a
Lancaster, South Carolina, facility from recycled waste thermoplastics. Plastic
product and related sales to external customers accounted for 3.0%, 2.9% and
2.9% of the Company's total sales in 1998, 1997 and 1996, respectively.

Carton and Custom Packaging. The Company produces folding cartons and rigid
set-up boxes at 11 carton plants -- four in North Carolina and one each in
Alabama, Connecticut, Massachusetts, Maryland, Ohio, Pennsylvania and Tennessee.
Chesapeake Fiber Packaging, acquired in March 1998, also produces specialty-
corrugated products. These plants obtain approximately 57% of their paperboard
needs from the Company's paperboard mills and the remaining 43% from other
manufacturers. The Company's boxes and cartons are

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used principally as containers for hosiery, hardware, candy, sports related
items, cosmetics, dry food, film and various other industrial applications,
including textile and apparel applications.

The Company operates four specialty packaging facilities, two in Ohio and
one each in New Jersey and North Carolina. These facilities perform contract
manufacturing and custom contract packaging for a variety of consumer product
companies. The Company also operates a North Carolina facility which procures
packaging and engineering services.

Carton and custom packaging sales accounted for 24.2%, 17.5% and 16.6% of
the Company's total sales to external customers in 1998, 1997 and 1996,
respectively.

Acquisitions. Since its incorporation, the Company has grown in part as the
result of a number of acquisitions, and the Company intends to continue to
evaluate and complete acquisitions as part of its strategy to focus on and
expand in its primary markets. During 1998, the Company acquired all of the
outstanding common stock of Chesapeake Paperboard Company and its wholly owned
subsidiary, Chesapeake Fiber Packaging Corporation ("Chesapeake"). Chesapeake
Paperboard Company, located in Baltimore, Maryland, produces recycled paperboard
used primarily in the folding carton and other specialty markets. Chesapeake
Fiber Packaging Corporation, located in Hunt Valley, Maryland, manufactures
folding cartons and specialty-corrugated products. Also in 1998, the Company
acquired all of the outstanding common stock of Etowah Recycling, Inc.
("Etowah"). Etowah operates two recovered fiber facilities located in Canton,
Georgia, and Hardeeville, South Carolina. Additionally in 1998, the Company
acquired Tenneco Packaging, Inc.'s ("TPI") 20% percent interest in the CPI
partnership. The CPI partnership had operated as a joint venture of the Company
and TPI since July 1996. As a result of this transaction, the Company now owns
100 percent of CPI's operations, which include clay-coated recycled paperboard
mills, located in Rittman, Ohio and Tama, Iowa and recovered fiber recycling and
brokerage operations in Rittman and Cleveland, Ohio. In late 1998, the Company
acquired all of the outstanding stock of Boxall, Inc. ("Boxall"). Boxall
operates a folding carton manufacturing facility in Birmingham, Alabama.

Product Distribution. Each of the Company's manufacturing and converting
facilities has its own sales staff and maintains direct sales relationships with
its customers. The Company also employs 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 the Company's facilities. Approximately
130 of the Company's employees are devoted exclusively to sales and customer
service activities, although many other employees participate generally in sales
efforts. The Company generally does not sell its products through independent
sales representatives. The Company's advertising is limited to trade
publications.

Customers. The Company manufactures most of its converted products pursuant to
customers' orders. The Company does, however, maintain minimal inventory levels
of certain products. The Company's business is not dependent on any single
customer or upon a small number of major customers. The Company does not believe
that the loss of any one customer would have a material adverse effect on its
financial condition or results of operations.

Raw materials. Recovered fiber, derived from recycled paperstock, is the only
significant raw material used in the Company's mill operations. The Company
purchases approximately 66% of its paperstock requirements from independent
sources, such as major retail stores, distribution centers and manufacturing
plants. The balance is obtained from a combination of other sources. Some
paperstock is collected from small collectors and waste collection businesses.
This paperstock is sorted and baled by one of the Company's paperstock recycling
and processing facilities and then either transferred to the Company's mills for
processing or sold to third parties. Paperstock is also obtained from customers
of the Company's converting operations and from waste handlers and collectors
who deliver loose paperstock to the Company's mill sites for direct use without
baling. Another portion of the Company's requirements is obtained from its small
baler program, in which the Company leases, sells or furnishes small baling
machines to businesses that bale their own paperstock for periodic collection by
the Company.

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The Company closely monitors its recovered fiber costs and intends to
further increase its unbaled paperstock purchases as a percentage of its total
recovered fiber needs and increase its reliance on purchases from customers and
the small baler program.

Competition. Although the Company competes with numerous other manufacturers
and converters, the Company's competitive position varies greatly by geographic
area and within the various product markets of the recycled paperboard industry.
In most of its markets, the Company's competitors are capable of supplying
products that would meet customer needs. Some of the Company's competitors have
greater financial resources than the Company. The Company competes in its
markets on the basis of price, quality and service. The Company believes that it
is important in all of its markets that suppliers work closely with their
customers to develop or adapt products to meet customers' specialized needs. The
Company also believes that it competes favorably on the basis of all of the
above factors.

In the southeastern United States, where the Company historically has
marketed its tubes and cores, the Company believes that it and Sonoco Products
Company are the major competitors. On a national level, Sonoco is the dominant
competitor in the tube and core market. According to industry data, Sonoco had
more than 50% of the total United States market in 1998. Several regional
companies and numerous small local companies also compete in the tube and core
market.

The folding carton and set-up box 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 dominant in particular geographic areas or market
niches. In the markets served by the Company's carton and box plants, the
dominant competitor is Rock-Tenn Company.

In its sales of miscellaneous specialty and converted 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), the Company
competes with a number of recycled paperboard manufacturers, including Sonoco,
Rock-Tenn, Jefferson Smurfit Corporation and The Newark Group, Inc. The Company
believes that none of its competitors is dominant in any of these markets.

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 all of their own gypsum wallboard facing paper
requirements internally. The Company believes 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. The Company believes it has the largest market
share of the supply of gypsum wallboard facing paper to independent wallboard
manufacturers in North America.

The Company also competes in the gypsum wallboard industry through its
joint venture with Temple-Inland Forest Products Corporation, formerly Standard
Gypsum Corporation. Standard competes with larger integrated wallboard
manufacturers such as USG Corporation and National Gypsum, who have greater
financial resources and superior marketing strength due to their greater number
of locations and national presence. Standard competes primarily on the basis of
product quality, dependability and timeliness of delivery and price.

Recovered fiber costs were somewhat lower on average in 1998 compared to
1997. The company's average cost for recovered fiber per ton of recycled
paperboard produced was approximately $71 during 1998, which was down 13% from
$82 per ton in 1997. While no specific information is available about
competitors' actual recovered fiber costs, the Company believes that its
delivered recovered fiber costs are among the lowest in the recycled paperboard
industry. Relative to other competitors, the Company believes that its lower
recovered fiber costs are attributable in part to lower shipping costs resulting
from the location of the Company's paperboard mills and paperstock facilities
near major metropolitan areas that generate substantial supplies of paperstock.
Many of the paperboard mills operated by the Company's principal competitors are

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located away from major metropolitan areas, and the Company believes, based on
its knowledge of freight rates, that theses competitors incur higher freight
costs associated with their fiber recovery efforts, adding to their total cost
of delivered recovered fiber.

The Company's relatively low recovered fiber costs are also attributable to
its emphasis on certain recovery methods that enable the Company to avoid baling
operations. The Company believes that its competitors rely primarily on
off-site, company-owned and-operated paperstock baling operations that collect
and bale paperstock for shipment and processing at the mill site. The Company
also operates such facilities, and its experience is that the baling operation
results in $25-$30 per ton higher recovered fiber costs. The Company equips most
of its paperboard mills to accept unbaled paperstock for processing directly
into its pulpers. In 1998 and 1997, unbaled paperstock represented approximately
13% and 12%, respectively, of the Company's total recovered fiber purchases. The
Company also uses other fiber recovery methods -- its small baler program and
its recovery of paperstock from customers -- that result in lower recovered
fiber costs.

Environmental Matters. The Company's operations are subject to various federal,
state and local environmental laws and regulations. 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. These laws are
administered by federal, state and local agencies. Except as set forth below,
the Company believes that its operations are in substantial compliance with all
applicable environmental laws and regulations, except for violations which the
Company believes would not have a material adverse effect on the Company's
business or financial position.

The Company's recycled paperboard mills use substantial amounts of water in
the papermaking process. The Company's mills discharge process effluent into
local sewer systems pursuant to waste water discharge permits. The Company uses
only small amounts of hazardous substances, and the Company believes the
concentration of these substances in the Company's 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 the Company to alter the content
of its wastewater. Such reductions can be effected by additional screening of
the wastewater, by other changes to the flow of process effluent from the mill
or from pretreatment ponds into the sewer system, and by chemical additives. The
Company also is subject to regulatory requirements related to the disposal of
its solid wastes and the air emissions from its facilities. The Company is not
currently aware of any required expenditures relating to wastewater discharge,
solid waste disposal or air emissions that it expects to have a material adverse
effect on the business or financial condition of the Company, but there can be
no assurance that expenditures required in these areas will not have such a
material adverse effect.

In addition, under certain environmental laws, the Company can be held
strictly liable if hazardous substances are found on real property owned or
operated by the Company or used by the Company as a disposal site. In recent
years, the Company has adopted a policy of assessing real property for
environmental risks prior to purchase. The Company is aware of issues regarding
hazardous substances at certain facilities, but in each case the Company
believes that any possible liabilities will not have a material adverse effect
on its business or financial position.

Employees. As of December 31, 1998, the Company had approximately 5,063
employees, of whom 3,992 are hourly and 1,071 are salaried. Hourly employees at
the Chicago, Cincinnati, Chattanooga, Chesapeake, Buffalo, Reading, Richmond,
Rittman and Tama paperboard mills, two Federal Packaging Corporation plants,
Chesapeake Fiber Packaging, Cleveland Paperstock, General Packaging Services,
two Oak Tree Packaging plants, The Garber Company and two Star Paper Tube plants
(approximately 1,914 employees) are represented by labor unions. All principal
union contracts expire during the period 1999-2003. The Company considers its
relations with its employees to be excellent.

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Executive Officers. The names and ages, positions and period of service of each
of the 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.

<TABLE>
<CAPTION>
PERIOD OF SERVICE AS EXECUTIVE OFFICER AND
PRE-EXECUTIVE OFFICER EXPERIENCE (IF AN
NAME AND AGE POSITION EXECUTIVE OFFICER FOR LESS THAN 5 YEARS)
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<S> <C> <C>
Thomas V. Brown(58)........... President and Chief Executive President since 1/91; CEO since 10/91;
Officer; Director Director since 4/91
Edward G. Schmitt(53)......... Vice President, Mills Since 4/97; President of the Company's
Midwest Mill Division, 1991-97
H. Lee Thrash, III(48)........ Vice President, Planning and Vice President and CFO since 1986;
Development; Chief Financial Director since 1987
Officer; Director
Jimmy A. Russell(51).......... Vice President, Tubes, Cores, Vice President since 4/93; CEO of Star
Composite Containers and Paper Tube, Inc. since 1/93
Specialty Products
James L. Walden(53)........... Vice President, Carton and Since 2/93
Custom Packaging
Barry A. Smedstad(52)......... Vice President, Human Since 1/99; 1997-98, Vice President, Human
Resources and Public Relations Resources, BoxUSA, a manufacturer of
corrugated shipping containers; 1996-97,
Director of Human Resources, Northeast
Region, Baxter Healthcare Corporation, a
diversified healthcare products and
technology manufacturer; 1985-96,
Director, Labor & Employee Relations,
Federal Paper Board Company, Inc., a
paper manufacturer.
John R. Foster(53)............ Vice President, Sales and Since 9/96; 1995-96, Chief Operating
Marketing Officer, Pace International LP, a
chemical company; 1991-95, President and
General Manager, Eagle-Gypsum, Products,
a gypsum wallboard manufacturer.
</TABLE>

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ITEM 2. PROPERTIES

Facilities. The following table sets forth certain information concerning the
Company's facilities. Unless otherwise indicated, such facilities are owned by
the Company:

<TABLE>
<CAPTION>
TYPE OF FACILITY AND LOCATION PRODUCTION CAPABILITIES
----------------------------- -----------------------
<S> <C>

PAPERBOARD

Paperboard Mills (1)
Austell, GA (Mill #1)........................ Uncoated, folding and set-up boxboard, white
lined and colored paperboard, specialty
grades, including specialty laminates, game
board/puzzle board and bookbinding board.
Austell, GA (Mill #2)........................ Tube and core board and other specialty
grades.
Austell, GA (Sweetwater)..................... Gypsum wallboard facing paper, tube and core
board, and folding boxboard.
Tama, IA..................................... Clay-coated boxboard and specialty grades.
Chicago, IL.................................. Tube and can, folding and set-up boxboard.
Baltimore, MD................................ Uncoated folding and set-up boxboard, white
lined and colored paperboard and specialty
laminates.
Charlotte, NC................................ Uncoated, folding and set-up boxboard, white
lined and colored paperboard, specialty
grades, including specialty laminates, game
board/puzzle board and bookbinding board.
Camden, NJ................................... Gypsum wallboard facing paper and folding
boxboard.
Buffalo, NY.................................. Gypsum wallboard facing paper, tube and core
board, and folding carton grades.
Cincinnati, OH............................... Tube, can and drum, folding and set-up
boxboard and gypsum wallboard facing paper.
Rittman, OH.................................. Clay-coated boxboard and gypsum wallboard
facing paper.
Reading, PA.................................. Folding and set-up carton boxboard, white
lined and special colored paperboard.
Greenville, SC............................... Uncoated, folding and set-up boxboard, white
lined and colored paperboard, specialty
grades, including specialty laminates, game
board/puzzle board, bookbinding board and
tube and core board.
Chattanooga, TN.............................. Uncoated folding and set-up boxboard, white
lined and colored paperboard, specialty
grades, including specialty laminates, game
board/puzzle board, bookbinding board and
tube, core and can board.
Richmond, VA................................. Folding and set-up carton boxboard and tube
and core board.
Specialty Converting Plants
Austell, GA.................................. Laminated paperboard and specialty
conversion.
Charlotte, NC................................ Laminated paperboard and specialty
conversion.
Taylors, SC.................................. Laminated paperboard and specialty
conversion.
</TABLE>

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<TABLE>
<CAPTION>
TYPE OF FACILITY AND LOCATION PRODUCTION CAPABILITIES
----------------------------- -----------------------
<S> <C>
Paperstock Collection and Processing Plants
(2)
Austell, GA.................................. Recovered fiber brokerage sales.
Canton, GA (leased).......................... Recovered fiber and recovered fiber brokerage
sales.
Columbus, GA................................. Recovered fiber.
Dalton, GA................................... Recovered fiber.
Doraville, GA................................ Recovered fiber.
Macon, GA (leased)........................... Recovered fiber.
Charlotte, NC................................ Recovered fiber.
Cleveland, OH................................ Recovered fiber.
Rittman, OH.................................. Recovered fiber brokerage sales.
Hardeeville, SC.............................. Recovered fiber.

TUBE, CORE AND COMPOSITE CONTAINER
Tube and Core Plants
Linden, AL................................... Spiral-wound tubes.
Mobile, AL (leased).......................... Spiral-wound tubes.
McGehee, AR (leased)......................... Core pre-cutting/capping.
Phoenix, AZ (leased)......................... Spiral-wound tubes.
Cantonment, FL............................... Spiral-wound tubes.
Palatka, FL.................................. Spiral-wound tubes.
Austell, GA.................................. Spiral- and convolute- wound tubes.
Cedar Springs, GA............................ Spiral-wound tubes and yarn carriers.
Dalton, GA................................... Spiral- and convolute- wound tubes and yarn
carriers.
West Monroe, LA.............................. Spiral-wound tubes.
Zachary, LA (leased)......................... Pre-cutting/capping.
Mexico City, Mexico (leased)................. Spiral-wound tubes.
Corinth, MS.................................. Spiral-wound tubes.
Kernersville, NC............................. Spiral-wound tubes and yarn carriers.
Minerva, OH.................................. Spiral-wound and forming tubes.
Perrysburg, OH............................... Spiral-wound tubes.
Lancaster, PA (leased)....................... Spiral-wound tubes.
Rock Hill, SC................................ Spiral- and convolute- wound tubes.
Rock Hill, SC (leased)....................... Ground and polished tubes.
Taylors, SC.................................. Spiral-wound tubes and yarn carriers.
Ware Shoals, SC (leased)..................... Spiral-wound and forming tubes.
Amarillo, TX (leased)........................ Yarn carriers.
Arlington, TX................................ Spiral-wound tubes.
Silsbee, TX.................................. Spiral-wound tubes.
Texarkana, TX................................ Spiral-wound tubes.
Leland, Lancaster, United Kingdom............ Spiral-wound and forming tubes.
Salt Lake City, UT (leased).................. Spiral-wound tubes.
Altavista, VA (leased)....................... Spiral-wound tubes and yarn carriers.
Danville, VA................................. Spiral - and convolute- wound tubes and yarn
carriers.
Franklin, VA................................. Spiral-wound tubes.
Composite Container Plants
Orrville, OH................................. Composite cans, tubes and containers.
Saint Paris, OH.............................. Composite cans, tubes and containers.
</TABLE>

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<TABLE>
<CAPTION>
TYPE OF FACILITY AND LOCATION PRODUCTION CAPABILITIES
----------------------------- -----------------------
<S> <C>
Specialty Converting Plants
Austell, GA.................................. Edge protectors.
Lancaster, PA................................ Edge protectors.
Arlington, TX................................ Edge protectors.
Plastics Plants
New Smyrna Beach, FL (leased)................ Plastic cartridges.
Georgetown, KY............................... Injection molded parts for composite
containers.
Lancaster, SC (leased)....................... Composite extrusion products for packaging
and industrial use.
Union, SC.................................... Injection molded cones and tubes, extruded
plastic cores.
Special Services and Other Facilities
Saint Paris, OH.............................. Transportation.
Kernersville, NC (leased).................... Adhesives.

CARTON AND CUSTOM PACKAGING
Carton Plants
Versailles, CT............................... Printed and unprinted folding cartons.
Thorndike, MA................................ Printed and unprinted folding cartons.
Hunt Valley, MD.............................. Printed and unprinted folding cartons and
specialty corrugated products.
Archdale, NC................................. Printed and unprinted folding and set-up
cartons.
Burlington, NC............................... Printed and unprinted folding and set-up
cartons and vinyl lids.
Charlotte, NC................................ Specialty folding and set-up cartons.
Randleman, NC................................ Printed and unprinted folding and set-up
cartons.
Ashland, OH.................................. Printed and unprinted folding cartons.
York, PA..................................... Printed and unprinted folding cartons.
Kingston Springs, TN......................... Printed and unprinted folding cartons.
Birmingham, AL (leased)...................... Printed and unprinted folding cartons.
Contract Packaging and Contract
Manufacturing Plants
Clifton, NJ.................................. Contract packaging.
Robersonville, NC............................ Contract manufacturing and contract
packaging.
Bucyrus, OH.................................. Contract manufacturing and contract
packaging.
Strasburg, OH................................ Contract manufacturing and contract
packaging.
Special Services and Other Facilities
Charlotte, NC................................ Packaging and engineering procurement
services.
</TABLE>

9
<PAGE> 11

<TABLE>
<CAPTION>
TYPE OF FACILITY AND LOCATION PRODUCTION CAPABILITIES
----------------------------- -----------------------
<S> <C>
JOINT VENTURES
Gypsum Products (50% Interest)
Fredericksburg, TX (partially leased)........ Gypsum rock quarry.
McQueeney, TX................................ Gypsum wallboard.
Cumberland, TN (under construction).......... Gypsum (synthetic) wallboard.
Specialty Converting Plant (33% Interest)
Mooresville, NC.............................. Specialty converted and foam laminated
paperboard products.
Tube and Core Plants (50% Interest)
Tacoma, WA................................... Spiral-wound tubes.
Scarborough, ON, Canada...................... Spiral- and convolute- wound tubes.
</TABLE>

- ---------------

(1) All of the Company's paperboard mills produce uncoated recycled paperboard
with the exceptions of its Rittman, OH and Tama, IA paperboard mills, which
produce clay-coated boxboard.
(2) Paperstock collection and/or processing also occurs at each of the Company's
mill sites and all of the carton plants and 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 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 the Company's security holders during
the fourth fiscal quarter ended December 31, 1998.

10
<PAGE> 12

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since October 1, 1992, the Company's common shares, $.10 par value (the
"Common Shares") have traded on the National Association of Securities Dealers,
Inc. NASDAQ National Market System ("NASDAQ") under the symbol CSAR. As of
February 19, 1999, there were approximately 600 shareholders of record and, as
of that date, the Company estimates that there were approximately 4,500
beneficial owners holding stock in nominee or "street" name.

The table below sets forth high and low stock prices during the years 1998
and 1997.

<TABLE>
<CAPTION>
1997 HIGH LOW DIVIDEND
- ---- ---- --- --------
<S> <C> <C> <C>
First Quarter............ 36 22 $0.14
Second Quarter........... 35 23 3/8 $0.14
Third Quarter............ 37 1/8 29 1/2 $0.14
Fourth Quarter........... 38 1/8 31 $0.16
</TABLE>

<TABLE>
<CAPTION>
1998 HIGH LOW DIVIDEND
- ---- ---- --- --------
<S> <C> <C> <C>
First Quarter............ 35 7/8 30 1/4 $0.16
Second Quarter........... 35 1/4 28 1/8 $0.16
Third Quarter............ 30 5/8 21 1/4 $0.16
Fourth Quarter........... 28 5/8 21 1/4 $0.18
</TABLE>

The Company did not pay dividends on its Common Shares from the time of the
Company's recapitalization in 1986 until after its initial public offering of
Common Shares in October 1992. The Company paid dividends of $0.16 per share
during each of the first three quarters of 1998 and $0.18 per share during the
fourth quarter of 1998. The Company intends to continue paying quarterly
dividends at the same rate as the fourth quarter 1998 dividend, although any
decision to pay dividends in the future will be made by the Company's Board of
Directors after taking into account various factors, including the Company's net
income, current and anticipated cash needs and any other factors deemed relevant
by the Board of Directors. The Company's credit agreements with its lenders
permit the payment of dividends, subject to certain restrictions contained
therein. The Company does not believe that such restrictions, however, will
materially limit the Company's ability to pay future dividends at the same rate
as the 1998 fourth quarter dividend.

11
<PAGE> 13

ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
COMPOUND
GROWTH RATE YEAR ENDED DECEMBER 31,
------------------ ----------------------------------------------------
5 YEARS 10 YEARS 1998 1997 1996 1995 1994
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND GROWTH RATES)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Sales................... $774,312 $696,093 $629,674 $569,455 $455,808
Freight................. 37,454 27,955 26,979 24,827 24,583
---- ---- -------- -------- -------- -------- --------
Net sales............... 16.6% 11.5% 736,858 668,138 602,695 544,628 431,225
Cost of sales........... 17.0% 12.1% 536,925 482,964 422,783 401,570 307,652
---- ---- -------- -------- -------- -------- --------
Gross profit............ 15.4% 10.0% 199,933 185,174 179,912 143,058 123,573
Selling, general and
administrative
expenses............... 16.3% 12.7% 105,052 88,978 81,003 67,361 59,247
---- ---- -------- -------- -------- -------- --------
Operating income........ 14.4% 7.6% 94,881 96,196 98,909 75,697 64,326
Other (expense) income:
Interest expense........ (16,072) (14,111) (10,698) (6,955) (6,870)
Interest income......... 334 312 591 821 353
Equity in income (loss)
of unconsolidated
affiliates............. 4,308 1,665 2,154 -- --
Other, net.............. (433) (674) 4,274 (463) (249)
-------- -------- -------- -------- --------
(11,863) (12,808) (3,679) (6,597) (6,766)
-------- -------- -------- -------- --------
Income before income
taxes.................. 14.3% 14.8% 83,018 83,388 95,230 69,100 57,560
Minority interest....... (730) (1,721) (754) 153 13
Tax provision........... 15.0% 13.8% 30,470 30,543 36,574 26,265 22,095
---- ---- -------- -------- -------- -------- --------
Income from continuing
operations before
discontinued
operations,
extraordinary items and
accounting changes..... 13.7% 14.6% $ 51,818 $ 51,124 $ 57,902 $ 42,988 $ 35,478
---- ---- -------- -------- -------- -------- --------
Net income.............. 9.8% 14.6% $ 51,818 $ 51,124 $ 57,902 $ 42,988 $ 35,478
---- ---- -------- -------- -------- -------- --------
Diluted weighted average
shares outstanding..... 25,423 25,216 25,377 25,896 25,639
PER SHARE DATA
Income from continuing
operations before
discontinued
operations,
extraordinary items and
accounting changes..... 13.6% 10.5% $ 2.04 $ 2.03 $ 2.28 $ 1.66 $ 1.38
Net income.............. 9.8% 10.5% 2.04 2.03 2.28 1.66 1.38
Cash dividends
declared............... 0.66 0.58 0.50 0.435 0.375
Market price on December
31..................... $ 28.56 $ 34.25 $ 33.25 $ 20.00 $ 22.25
Shares outstanding
December 31............ 24,681 25,331 25,053 25,682 25,280
Price/Earnings ratio.... 14.00 16.87 14.58 12.05 16.12
TOTAL MARKET VALUE OF
COMMON STOCK........... $704,889 $867,587 $833,012 $513,640 $562,480
BALANCE SHEET DATA
Cash and cash
equivalents............ $ 2,610 $ 1,391 $ 11,989 $ 8,785 $ 12,465
Property, plant and
equipment-net.......... 324,470 291,036 256,834 181,930 150,391
Depreciation and
amortization........... 38,705 33,661 26,314 17,671 14,542
Capital expenditures.... 40,716 36,275 32,059 28,041 29,331
Total assets..... 618,797 550,090 476,280 322,076 266,863
Current maturities of
long-term debt......... 26,103 9 29 36 72
Revolving credit
loans.................. 147,000 129,000 100,000 10,000 --
Long-term debt, less
current maturities..... 82,881 83,129 83,261 83,380 83,446
Shareholders' equity
(deficit).............. 233,374 213,931 170,570 139,243 102,274
Total capital.... $489,358 $426,069 $353,860 $232,659 $185,792
OTHER KEY FINANCIAL
MEASURES
Total debt-to-total
capital................ 52.3% 49.8% 51.8% 40.2% 45.0%
Net debt-to-net
capital................ 52.1% 49.6% 50.1% 37.8% 41.0%
Effective tax rate...... 36.7% 37.4% 38.7% 38.0% 38.4%
Return on shareholders'
equity................. 23.2% 26.6% 37.4% 35.6% 40.2%
Return on average
capital................ 13.5% 15.4% 22.0% 22.6% 23.1%
Dividend payout ratio... 32.4% 28.6% 21.9% 26.2% 27.2%
Economic profit(B)...... $ 31,442 $ 30,419 $ 43,663 $ 29,104 $ 30,649

YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND GROWTH RATES)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Sales................... $365,410 $325,620 $288,773 $286,410 $287,076 $266,661
Freight................. 22,963 19,674 17,646 17,011 18,858 18,461
-------- -------- -------- -------- -------- --------
Net sales............... 342,447 305,946 271,127 269,399 268,218 248,200
Cost of sales........... 244,578 213,405 187,952 184,292 184,012 170,839
-------- -------- -------- -------- -------- --------
Gross profit............ 97,869 92,541 83,175 85,107 84,206 77,361
Selling, general and
administrative
expenses............... 49,355 42,402 36,655 37,555 34,982 31,704
-------- -------- -------- -------- -------- --------
Operating income........ 48,514 50,139 46,520 47,552 49,224 45,657
Other (expense) income:
Interest expense........ (6,822) (12,315) (17,754) (22,343) (26,721) (24,639)
Interest income......... 612 243 246 412 491 617
Equity in income (loss)
of unconsolidated
affiliates............. -- -- -- -- -- (807)
Other, net.............. 167 (151) (297) (409) (19) 106
-------- -------- -------- -------- -------- --------
(6,043) (12,223) (17,805) (22,340) (26,249) (24,723)
-------- -------- -------- -------- -------- --------
Income before income
taxes.................. 42,471 37,916 28,715 25,212 22,975 20,934
Minority interest....... 15 -- -- 235 1,369 617
Tax provision........... 15,165 14,839 11,095 9,468 8,774 8,331
-------- -------- -------- -------- -------- --------
Income from continuing
operations before
discontinued
operations,
extraordinary items and
accounting changes..... $ 27,321 $ 23,077 $ 17,620 $ 15,979 $ 15,570 $ 13,220
-------- -------- -------- -------- -------- --------
Net income.............. $ 32,471 $ 22,899 $ 17,620 $ 15,979 $ 15,570 $ 13,220
-------- -------- -------- -------- -------- --------
Diluted weighted average
shares outstanding..... 25,387 19,791 17,720 17,701 17,690 17,695
PER SHARE DATA
Income from continuing
operations before
discontinued
operations,
extraordinary items and
accounting changes..... $ 1.08 $ 1.17 $ 0.99 $ 0.90 $ 0.88 $ 0.75
Net income.............. 1.28 1.16 0.99 0.90 0.88 0.75
Cash dividends
declared............... 0.33 0.08 -- -- -- --
Market price on December
31..................... $ 16.75 $ 18.75 N/A N/A N/A N/A
Shares outstanding
December 31............ 24,968 24,639 17,649 17,649 17,619 17,618
Price/Earnings ratio.... 13.09 16.45 N/A N/A N/A N/A
TOTAL MARKET VALUE OF
COMMON STOCK........... $418,214 $461,981 N/A N/A N/A N/A
BALANCE SHEET DATA
Cash and cash
equivalents............ $ 14,371 $ 23,667 $ 4,547 $ 1,900 $ 13,364 $ 4,908
Property, plant and
equipment-net.......... 127,773 103,004 86,005 87,445 90,180 90,175
Depreciation and
amortization........... 12,493 10,661 10,515 13,077 11,756 7,531
Capital expenditures.... 21,251 16,880 10,647 10,634 12,486 10,612
Total assets..... 221,366 187,513 144,519 141,216 153,671 146,874
Current maturities of
long-term debt......... 64 71 36,292 36,216 39,514 34,633
Revolving credit
loans.................. -- -- -- -- -- --
Long-term debt, less
current maturities..... 83,515 83,388 126,021 145,459 173,170 189,736
Shareholders' equity
(deficit).............. 74,424 47,558 (68,732) (86,352) (102,578) (118,220)
Total capital.... $158,003 $131,017 $ 93,581 $ 95,323 $110,106 $106,149
OTHER KEY FINANCIAL
MEASURES
Total debt-to-total
capital................ 52.9% 63.7% (A) (A) (A) (A)
Net debt-to-net
capital................ 48.2% 55.7% (A) (A) (A) (A)
Effective tax rate...... 35.7% 39.1% 38.6% 37.6% 38.2% 39.8%
Return on shareholders'
equity................. 44.8% (A) (A) (A) (A) (A)
Return on average
capital................ 21.9% 27.2% 30.2% 29.1% 29.7% 29.9%
Dividend payout ratio... 25.8% 7.0% 0.0% 0.0% 0.0% 0.0%
Economic profit(B)...... $ 19,512 (A) (A) (A) (A) (A)
</TABLE>

- ---------------

(A) Not meaningful due to Company's leveraged recapitalization in 1986.
(B) Economic profit represents adjusted net operating profit after cash taxes
less a calculated capital charge for beginning-of-year capital employed.

12
<PAGE> 14

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

GENERAL

The Company is a major manufacturer of 100 percent recycled paperboard and
converted paperboard products, operating principally in three business segments.
The paperboard segment consists of facilities that manufacture 100 percent
recycled uncoated and clay-coated paperboard and facilities that collect
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 cans. The carton and custom
packaging segment consists of facilities that produce printed and unprinted
folding and set-up cartons and facilities that provide contract manufacturing
and contract packaging services.

The Company is vertically integrated to the extent that a large portion of
its paperboard production is consumed internally by its converting segments
(approximately 36 percent in 1998). As part of its strategy to optimize capacity
utilization, the Company regularly purchases paperboard from other manufacturers
in an effort to minimize the potential impact of demand declines on the
Company's own mill system. Additionally, each of the Company's mills can produce
recycled paperboard for more than one end-use product market, which allows it to
shift production between mills in response to customer or market demands. The
Company is also the only major manufacturer to serve all four recycled boxboard
end-use markets: tube and core, folding carton, gypsum wallboard facing paper
and other specialty.

Recovered fiber, which is derived from recycled paper stock, is the
Company's only significant raw material. Historically, the cost of recovered
fiber has fluctuated significantly due to market and industry conditions. For
example, the Company's 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 percent, before dropping to $66 per ton in 1996. Recovered fiber cost per
ton averaged $82 during 1997 and $71 during 1998. Although the Company raises
its selling prices in response to increases in raw material costs, it often is
unable to maintain its operating margins in the face of dramatic cost increases,
and it experiences short-term margin shrinkage during all periods of price
increases due to customary time lags in the implementation of price increases.
There can be no assurance that the Company will be able to recoup any future
increases in the cost of recovered fiber by raising the prices of its products.
There also can be no assurance that, even if the Company is able to recoup such
cost increases, its operating margins and results of operations will not be
materially and adversely affected by time delays in the implementation of price
increases.

RESULTS OF OPERATIONS 1998 -- 1997

The following tables set forth certain operating data regarding the
Company's volume and gross paper margins for the periods indicated. The volume
information shown below includes shipments of unconverted paperboard and
converted paperboard products. Tonnage volumes from the Company's business
segments are combined and presented along end-use market lines.

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------- %
1998 1997 CHANGE CHANGE
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Production source of paperboard tons sold (in thousands):
From paperboard mill production........................... 919.8 928.6 (8.8) -0.9%
Outside purchases......................................... 84.7 78.2 6.5 8.3%
-------- -------- ---- -----
Total paperboard tonnage.......................... 1,004.5 1,006.8 (2.3) -0.2%
======== ======== ==== =====
Tons sold by end-use market (in thousands):
Tube, core and can volume................................. 263.6 262.2 1.4 0.5%
Folding carton volume..................................... 293.0 287.4 5.6 1.9%
Gypsum facing paper volume................................ 255.2 261.3 (6.1) -2.3%
Other specialty volume.................................... 192.7 195.9 (3.2) -1.6%
-------- -------- ---- -----
Total paperboard tonnage.......................... 1,004.5 1,006.8 (2.3) -0.2%
======== ======== ==== =====
</TABLE>

13
<PAGE> 15

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------- %
1998 1997 CHANGE CHANGE
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Gross paper margins ($/ton):
Paperboard mill:
Average same-mill net selling price.................... $ 413 $ 410 $ 3 0.7%
Average same-mill recovered fiber cost................. 71 82 (11) -13.4%
-------- -------- ---- -----
Paperboard mill gross paper margin................... $ 342 $ 328 $ 14 4.3%
-------- -------- ---- -----
Tube and core:
Average net selling price.............................. $ 735 $ 722 $ 13 1.8%
Average paperboard cost................................ 407 404 3 0.7%
-------- -------- ---- -----
Tube and core gross paper margin..................... $ 328 $ 318 $ 10 3.1%
======== ======== ==== =====
</TABLE>

Consolidated net sales for the year ended December 31, 1998 increased 10.3
percent to $736.9 million from $668.1 million in 1997. Acquisitions accounted
for $91.1 million of sales during 1998. These acquisitions included Chesapeake
Paperboard Company and its wholly owned subsidiary, Chesapeake Fiber Packaging
Corporation, Etowah Recycling, Inc., Tenneco Packaging Inc.'s 20 percent
interest in the CPI partnership, and Boxall, Inc., all completed in 1998, and
The New General Packaging Service, Oak Tree Packaging Corporation, and Baxter
Tube Company, completed in 1997. Excluding acquisitions, net sales declined 3.3
percent. This decline was due primarily to lower sales volume in the paperboard
and tube and core segments partially offset by higher sales from the carton and
custom packaging segment.

Total paperboard tonnage for 1998 decreased 0.2 percent to 1,005 thousand
tons compared with 1997. Excluding acquisitions, total paperboard tonnage
declined 4.0 percent to 967 thousand tons. This decline was the result of lower
shipments of unconverted paperboard to external customers, primarily to
customers in the folding carton and other specialty end-use markets. Excluding
acquisitions, outside purchases (purchases of various grades of paperboard for
internal conversion and gypsum facing paper for resale) decreased 13.8 percent
to 67.4 thousand tons. Tons sold from paperboard mill production decreased 0.9
percent for 1998 versus 1997 and declined 3.2 percent excluding the Chesapeake
Paperboard acquisition. Total tonnage converted increased 10.4 percent in 1998
versus 1997 and was unchanged excluding acquisitions. Excluding acquisitions,
volumes by end-use market were as follows: tube, core and can volume decreased
1.2 percent; folding carton volume decreased 5.5 percent; and other specialty
volume decreased 7.6 percent.

Gross margin for 1998 decreased to 27.1 percent of net sales from 27.7
percent in 1997. This margin decrease was due primarily to the acquisition of
operations with lower margins, as a percent of sales, than the Company's other
operations combined with lower margins at the carton and custom packaging
segment. These lower margins were partially offset by improved same-mill margins
at the paperboard segment.

Operating income decreased $1.3 million, or 1.4 percent, to $94.9 million
from $96.2 million last year. Operating income at comparable facilities declined
$4.2 million, or 4.3 percent. This decline was due primarily to weaker volume,
partially offset by improved gross paper margins combined with the Company's
overall cost cutting initiatives. Selling, general and administrative expenses
increased by $16.1 million in 1998 versus 1997 due primarily to acquisitions and
increased information systems costs.

Interest expense increased to $16.1 million for 1998 from $14.1 million in
1997 due to higher average borrowings under the revolving credit facility.

Equity income from unconsolidated affiliates was $4.3 million, up 158.7
percent from 1997 due to improved results for the Company's gypsum wallboard
joint venture with Temple-Inland.

Net income increased 1.4 percent from $51.1 million in 1997 to $51.8
million. Diluted net income per common share increased 0.5 percent to $2.04 for
1998 from $2.03 in 1997.

14
<PAGE> 16

RESULTS OF OPERATIONS 1997 -- 1996

The following tables set forth certain operating data regarding the
Company's volume and gross paper margins for the periods indicated:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------- %
1997 1996 CHANGE CHANGE
------- ------ ------ ------
<S> <C> <C> <C> <C>
Production source of paperboard tons sold (in
thousands):
From paperboard mill production................ 928.6 826.9 101.7 12.3%
Outside purchases.............................. 78.2 102.5 (24.3) -23.7%
------- ------ ------ -----
Total paperboard tonnage.................. 1,006.8 929.4 77.4 8.3%
======= ====== ====== =====
Tons sold by end-use market (in thousands):
Tube, core and can volume...................... 262.2 268.0 (5.8) -2.2%
Folding carton volume.......................... 287.4 197.1 90.3 45.8%
Gypsum facing paper volume..................... 261.3 263.3 (2.0) -0.8%
Other specialty volume......................... 195.9 201.0 (5.1) -2.5%
------- ------ ------ -----
Total paperboard tonnage.................. 1,006.8 929.4 77.4 8.3%
======= ====== ====== =====
Gross paper margins ($/ton):
Paperboard mill:
Average same-mill net selling price.......... $ 406 $ 399 $ 7 1.8%
Average same-mill recovered fiber cost....... 83 67 16 23.9%
------- ------ ------ -----
Paperboard mill gross paper margin........ $ 323 $ 332 $ (9) -2.7%
------- ------ ------ -----
Tube and core:
Average net selling price.................... $ 722 $ 723 $ (1) -0.1%
Average paperboard cost...................... 404 396 8 2.0%
------- ------ ------ -----
Tube and core gross paper margin.......... $ 318 $ 327 $ (9) -2.7%
======= ====== ====== =====
</TABLE>

Consolidated net sales increased 10.9 percent to $668.1 million from $602.7
million in 1996. Acquisitions completed during 1997 and 1996 contributed
incremental sales of $72.3 million in 1997. These acquisitions included The New
General Packaging Service, Oak Tree Packaging Corporation and Baxter Tube
Company, all completed in 1997, and the Company's joint venture with Tenneco
Packaging Inc., completed in the second half of 1996. On a same-plant basis,
excluding acquisitions and dispositions, net sales rose $5.1 million, or 0.9
percent.

Total paperboard tonnage increased 8.3 percent to 1,007 thousand tons from
929 thousand tons last year. On a same-plant basis, excluding acquisitions,
total paperboard tonnage decreased 1.1 percent. The slight decline in total
paperboard tonnage (excluding acquisitions) resulted from reduced purchases of
paperboard from outside manufacturers (purchases of various grades of paperboard
for internal conversion and gypsum facing paper for resale) partially offset by
increased tonnage sold from paperboard mill production (including sales to
outside customers and transfers to the Company's converting operations).
Including acquisitions, tube, core and can volume decreased 2.2 percent in 1997
versus 1996; folding carton volume increased 45.8 percent; and other specialty
volume decreased 2.5 percent. Excluding acquisitions, tube, core and can volume
decreased 2.8 percent; folding carton volume increased 2.0 percent; and other
specialty volume decreased 3.9 percent. Total tonnage converted increased 2.0
percent in 1997 to 358 thousand tons from 351 thousand tons in 1996 but
decreased 1.1 percent excluding acquisitions.

Consolidated gross margin decreased to 27.7 percent of net sales from 29.9
percent in 1996. This margin decrease was due primarily to lower gross paper
margins (selling prices less raw materials costs) at the paperboard and tube and
core segments combined with lower margins at the folding carton and custom
packaging segment.

15
<PAGE> 17

Operating income declined $2.7 million, or 2.7 percent, to $96.2 million
from $98.9 million last year. Operating income at comparable facilities declined
$8.0 million, or 8.1 percent. This decline was due primarily to lower margins
across the Company's business segments. Selling, general and administrative
expenses increased $8.0 million in 1997 versus 1996. Excluding acquisitions and
dispositions, these expenses were unchanged.

Interest expense increased to $14.1 million for 1997 from $10.7 million in
1996 primarily due to higher average outstanding borrowings under the revolving
credit facility. The Company's effective tax rate declined to 37.4 percent in
1997 versus 38.7 percent in 1996, owing in large part to the implementation of
several tax strategies which reduced state and local taxes.

Net income decreased 11.7 percent from $57.9 million in 1996 to $51.1
million. Excluding the nonrecurring gain on the sale of a 50 percent interest in
the net assets of Standard Gypsum from 1996, net income declined $4.2 million,
or 7.6 percent. Diluted net income per common share decreased 11.0 percent to
$2.03 from $2.28 in 1996. Excluding the nonrecurring gain, net income per common
share decreased $0.15, or 6.9 percent.

LIQUIDITY AND CAPITAL RESOURCES

On December 31, 1998, the Company had loans of $147.0 million outstanding
under its revolving credit facility versus $129.0 million on December 31, 1997.
Loans under the revolving credit facility bear interest, payable monthly, at the
Eurodollar rate plus a margin based upon the Company's consolidated leverage
ratio, as defined in the revolving credit agreement. For the years ended
December 31, 1998 and 1997, the weighted average borrowings outstanding under
the revolving credit facility during such periods bore interest at 5.80 percent
and 5.86 percent, respectively. Other long-term debt, less current maturities,
primarily the Company's 7.74 percent senior notes, was $82.9 million at December
31, 1998 versus $83.1 million at December 31, 1997.

Effective with the second quarter of 1997, the Company has a $400 million,
five-year bank revolving credit facility which may be increased up to $500
million and its maturity extended by up to three additional years beyond the
second quarter of 2002, subject to certain conditions and approvals. The Company
can use the facility to fund ongoing working capital needs and for general
corporate purposes, including acquisitions. Interest under the facility is
computed using the Company's choice of: (a) the Eurodollar rate plus a margin;
or (b) the higher of the Federal Funds Rate plus a margin or the bank's prime
lending rate. The Company can also choose the basis for determining the margin
above the Eurodollar rate as either: (a) its consolidated leverage ratio; or (b)
its investment grade rating. The credit agreement contains certain restrictive
covenants regarding, among other matters, the incurrence of additional
indebtedness and the maintenance of certain leverage and interest coverage
ratios, as defined in the agreement.

In 1998, the Company registered with the Securities and Exchange Commission
a total of $300 million in public debt securities for issuance in one or more
series and with such specific terms as to be determined from time to time. The
debt securities will be unsecured obligations of the Company. It is currently
anticipated that the proceeds from the sale of these debt securities will be
used for general corporate purposes, including, but not limited to, repayment of
debt, working capital, capital expenditures and acquisitions.

Cash generated from operations was $94.7 million for the year ended
December 31, 1998 compared with $70.8 million last year. Operating cash flow was
favorably affected by working capital needs and deferred taxes in 1998 when
compared to 1997.

Capital expenditures, excluding acquisitions, were $40.7 million in 1998
versus $36.3 million for the same period last year. Capital expenditures of
approximately $38.0 million are anticipated for 1999.

16
<PAGE> 18

folding carton and other specialty markets. Chesapeake Fiber Packaging, located
in Hunt Valley, Maryland, manufactures folding cartons and specialty corrugated
products.

In May 1998, the Company acquired all of the outstanding stock of Etowah
Recycling, Inc. in exchange for approximately 140,000 shares of the Company's
common stock, valued at $4.7 million. Simultaneously, the Company repaid
Etowah's debt of approximately $2.1 million. Etowah operates two recovered fiber
facilities, located in Canton, Georgia and Hardeeville, South Carolina.

In June 1998, the Company acquired Tenneco Packaging, Inc.'s 20 percent
interest in the CPI partnership for $27.4 million. The CPI Partnership had
operated as a joint venture of the Company and TPI since July of 1996. As a
result of this transaction, the Company now owns 100 percent of CPI's
operations, which include clay-coated recycled paperboard mills located in
Rittman, Ohio and Tama, Iowa and recovered fiber recycling and brokerage
operations located in Rittman and Cleveland, Ohio. The purchase price consisted
of $1.4 million in cash paid at closing and a note payable to TPI for the
remaining $26.0 million due in June of 1999.

In October 1998, the Company acquired all of the outstanding stock of
Boxall, Inc. ("Boxall") in exchange for approximately 230,000 shares of the
Company's common stock valued at approximately $5.5 million. Simultaneously, the
Company repaid Boxall's debt of approximately $1.5 million. Boxall operates a
folding carton manufacturing facility in Birmingham, Alabama.

Cash dividends of $16.2 million were paid in 1998 versus $14.0 million in
the same period last year. The Company's senior notes agreement and its
revolving credit agreement contain no specific limitations on the payment of
dividends.

During 1998, the Company purchased and retired 1,043,000 shares of its
common stock. These purchases were made in a series of open market transactions
and privately negotiated purchases, at prices ranging from $21.25 to $33.00 per
share, totaling $25.4 million. These purchases were funded with borrowings under
the revolving credit facility and internally generated cash. The Company has
cumulatively purchased 3,235,000 shares since January 1996. The Company's board
of directors has authorized purchases of up to 765,000 additional shares, and
the Company intends to continue such purchases, subject to market conditions and
availability, but there can be no assurance as to the completion, timing or
prices of such future purchases.

The Company anticipates that it will be able to meet its funding needs for
the possible acquisition of additional facilities, working capital, capital
expenditures and additional stock purchases through internally generated cash
and borrowings under its revolving credit facility and the issuance of debt
securities in the public markets.

YEAR 2000

The Company uses software and related information technologies and other
equipment throughout its businesses that may be affected by the date change in
the year 2000. The use of systems and equipment that cannot correctly interpret
and process dates after 1999 could result in system or equipment failures. Such
failures could cause disruptions of operations including, among other things,
inaccurate processing of financial information and/or temporary inabilities to
process transactions, manufacture products or engage in similar normal business
activities.

The Company has attempted to identify and assess its areas of risk related
to the year 2000 issue. As called for in its overall plan to prepare for the
year 2000, the Company has conducted a comprehensive inventory and evaluation of
its information technology ("IT") systems to determine their year 2000
compliance. The primary financial computer systems were upgraded in December of
1997. This system and the Company's computerized financial software systems are
year 2000 compliant. Certain systems at individual operating company sites,
primarily involving order entry, shipping and inventory control are undergoing
remediation or replacement and are expected to be year 2000 compliant by
mid-year 1999. Non-IT electronic equipment, including equipment engaged in
manufacturing and other processes, is being tested and modified or replaced as
needed, and the Company anticipates that this process will be complete by mid-
year 1999. Ongoing efforts are being made to identify third parties that may be
unable to become year 2000
17
<PAGE> 19

compliant and to make contingency plans. However, the Company has no means of
ensuring that third parties with whom it deals will be year 2000 compliant or
that the information obtained from such third parties regarding year 2000
compliance will prove to be accurate.

The total cost associated with required modifications and replacement of
the Company's systems in response to the year 2000 issue is not expected to
materially affect the Company's financial condition or results of operations.
The estimated total cost of the year 2000 effort is approximately $4.2 million.
This estimate does not include costs to replace or upgrade systems that were
previously planned and not accelerated due to the year 2000 issue. The total
amount expended through 1998 was approximately $2.0 million. The future cost
related to the year 2000 is estimated to be approximately $2.2 million. The
Company's year 2000 efforts are funded primarily from the existing IT budget and
have been ongoing since 1997. The total cost of these efforts represents
approximately 20 percent of the total IT budget for the three-year period
1997-1999.

The Company believes the most reasonably likely worst case year 2000
scenario would be the failure of key customers or suppliers (e.g., utility
providers) to achieve year 2000 compliance, resulting in lost sales to such key
customers or lost production due to forced shutdowns at one or more mill
operations for an indefinite period of time. Such failures could materially and
adversely affect the Company's financial condition or results of operations.
Currently, based on responses obtained from third parties to date, the Company
is not aware of any material third parties that do not expect to be year 2000
compliant. However, due to uncertainty surrounding the readiness of third
parties, the Company is unable to presently determine whether the consequences
of year 2000 failures will materially impact the Company's financial condition
or results of operations. Ongoing efforts are expected to significantly reduce
this uncertainty.

The Company has developed contingency plans to address potential material
year 2000 issues primarily arising from failures of third party suppliers or
customers to become year 2000 compliant. These contingency plans include plans
to minimize the impact of any lost mill production. The Company normally
schedules downtime for regular maintenance and capital improvements during the
year-end period. To the extent possible, the Company plans to take a more
flexible approach to such scheduling to allow maintenance and
capital-improvement downtime to coincide with any year 2000 related forced
downtime. In addition, the Company can increase inventory levels prior to
year-end 1999 to mitigate any forced downtime based on assessments made closer
to the end of 1999. The Company also plans to minimize the impact of any lost
mill production by shifting production from any facilities affected by year 2000
failures to unaffected facilities. As mentioned above, the Company is continuing
its efforts to identify third parties who indicate that they may be unable to
become year 2000 compliant and will develop and modify its contingency plans as
needed.

Readers are cautioned that the year 2000 disclosures above contain certain
forward looking statements and should be read in conjunction with "Forward
Looking Information" which follows.

18
<PAGE> 20

FORWARD-LOOKING INFORMATION

This annual report on Form 10-K, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations," may contain various
"forward-looking statements," within the meaning of Section 21E of the
Securities Exchange Act of 1934, that are based on management's belief and
assumptions, as well as information currently available to management. When used
in this document, the words "anticipate," "estimate," "expect," and similar
expressions may identify forward-looking statements. Although the Company
believes that the expectations reflected in any such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to be
correct. Any such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, the Company's actual financial
results, performance or condition may vary materially from those anticipated,
estimated or expected. Among the key factors that may have a direct bearing on
the Company's actual financial results, performance or condition are
fluctuations in raw material prices and the economy in general, the degree and
nature of competition, demand for the Company's products, changes in government
regulations, the Company's ability to complete acquisitions and integrate the
operations of acquired businesses, the ability of the Company and third parties
with whom the Company deals to achieve year 2000 compliance, as described above,
and other matters discussed in this report and the Company's other filings with
the Securities and Exchange Commission.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations. At December 31, 1998 the
Company had $147,000,000 outstanding under a $400,000,000 bank revolving credit
facility which matures in 2002. Borrowings under this credit facility are at
variable rates, and, accordingly, the fair value of this instrument approximates
its carrying value.

The Company also has $82,750,000 in senior notes that bear interest at
7.74%, which approximates the current rates available to the Company for debt of
the same remaining maturity. Interest on the senior notes is payable
semiannually, and five annual principal installments of $16,550,000 are due
beginning in 2000. Market risk is estimated as the potential increase in fair
value of the senior notes resulting from a hypothetical 10% decrease in interest
rates and amounts to approximately $2,100,000.

19
<PAGE> 21

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

CARAUSTAR INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,610 $ 1,391
Receivables, net of allowances for doubtful accounts,
returns, and discounts of $1,069 and $1,139 in 1998 and
1997, respectively...................................... 76,394 70,944
Inventories............................................... 67,544 62,319
Refundable income taxes................................... 1,365 1,190
Other current assets...................................... 6,790 5,312
--------- ---------
Total current assets............................... 154,703 141,156
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 6,530 6,305
Buildings and improvements................................ 97,942 86,967
Machinery and equipment................................... 415,653 362,384
Furniture and fixtures.................................... 7,837 10,103
--------- ---------
527,962 465,759
Less accumulated depreciation............................. (203,492) (174,723)
--------- ---------
Property, plant and equipment, net................. 324,470 291,036
--------- ---------
GOODWILL, net of accumulated amortization of $7,994 and
$4,858 in 1998 and 1997, respectively..................... 120,127 104,323
--------- ---------
OTHER ASSETS................................................ 19,497 13,575
--------- ---------
$ 618,797 $ 550,090
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 26,103 $ 9
Accounts payable.......................................... 47,040 43,861
Accrued liabilities....................................... 25,631 21,414
Dividends payable......................................... 4,476 4,052
--------- ---------
Total current liabilities.......................... 103,250 69,336
--------- ---------
REVOLVING CREDIT LOANS...................................... 147,000 129,000
--------- ---------
LONG-TERM DEBT, less current maturities..................... 82,881 83,129
--------- ---------
DEFERRED INCOME TAXES....................................... 43,437 30,731
--------- ---------
DEFERRED COMPENSATION....................................... 3,889 4,190
--------- ---------
OTHER LIABILITIES........................................... 4,375 4,616
--------- ---------
MINORITY INTEREST........................................... 591 15,157
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value; 5,000,000 shares
authorized, no shares issued in 1998 and 1997........... -- --
Common stock, $.10 par value; 60,000,000 shares
authorized, 24,681,358 and 25,330,670 shares issued and
outstanding in 1998 and 1997, respectively.............. 2,468 2,533
Additional paid-in capital................................ 130,240 144,442
Retained earnings......................................... 103,991 68,823
Accumulated other comprehensive income.................... (3,325) (1,867)
--------- ---------
233,374 213,931
--------- ---------
$ 618,797 $ 550,090
========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

20
<PAGE> 22

CARAUSTAR INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
SALES...................................................... $774,312 $696,093 $629,674
FREIGHT.................................................... 37,454 27,955 26,979
-------- -------- --------
Net sales........................................ 736,858 668,138 602,695
COST OF SALES.............................................. 536,925 482,964 422,783
-------- -------- --------
Gross profit..................................... 199,933 185,174 179,912
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............... 105,052 88,978 81,003
-------- -------- --------
Operating income................................. 94,881 96,196 98,909
-------- -------- --------
OTHER (EXPENSE) INCOME:
Interest expense......................................... (16,072) (14,111) (10,698)
Interest income.......................................... 334 312 591
Equity in income of unconsolidated affiliates............ 4,308 1,665 2,154
Other, net............................................... (433) (674) 4,274
-------- -------- --------
(11,863) (12,808) (3,679)
-------- -------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST........... 83,018 83,388 95,230
MINORITY INTEREST.......................................... (730) (1,721) (754)
PROVISION FOR INCOME TAXES................................. 30,470 30,543 36,574
-------- -------- --------
NET INCOME................................................. $ 51,818 $ 51,124 $ 57,902
======== ======== ========
BASIC INCOME PER COMMON SHARE.............................. $ 2.05 $ 2.05 $ 2.33
======== ======== ========
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING........ 25,244 24,939 24,904
======== ======== ========
DILUTED INCOME PER COMMON SHARE............................ $ 2.04 $ 2.03 $ 2.28
======== ======== ========
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING...... 25,423 25,216 25,377
======== ======== ========
</TABLE>

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

21
<PAGE> 23

CARAUSTAR INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
------------------- PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) INCOME TOTAL
---------- ------ ---------- --------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995............... 25,682,371 $2,568 $154,013 $(13,275) $(4,063) $139,243
Net income............................. -- -- -- 57,902 -- 57,902
Issuance of common stock under
nonqualified stock option plans...... 359,519 36 6,055 -- -- 6,091
Issuance of common stock under 1993
stock purchase plan.................. 30,394 3 884 -- -- 887
Issuance of common stock under director
equity plan.......................... 1,176 -- 31 -- -- 31
Purchase and retirement of common
stock................................ (1,020,000) (102) (20,839) -- -- (20,941)
Pension liability adjustment........... -- -- -- -- (274) (274)
Foreign currency translation
adjustment........................... -- -- -- -- 49 49
Dividends declared of $.50 per share... -- -- -- (12,418) -- (12,418)
---------- ------ -------- -------- ------- --------
BALANCE, December 31, 1996............... 25,053,460 2,505 140,144 32,209 (4,288) 170,570
Net income............................. -- -- -- 51,124 -- 51,124
Issuance of common stock for
acquisitions......................... 985,041 99 27,078 -- -- 27,177
Issuance of common stock under
nonqualified stock option plans...... 301,410 30 4,181 -- -- 4,211
Issuance of common stock under 1993
stock purchase plan.................. 94,923 10 2,309 -- -- 2,319
Issuance of common stock under director
equity plan.......................... 1,836 -- 62 -- -- 62
Purchase and retirement of common
stock................................ (1,106,000) (111) (29,332) -- -- (29,443)
Pension liability adjustment........... -- -- -- -- 2,364 2,364
Foreign currency translation
adjustment........................... -- -- -- -- 57 57
Dividends declared of $.58 per share... -- -- -- (14,510) -- (14,510)
---------- ------ -------- -------- ------- --------
BALANCE, December 31, 1997............... 25,330,670 2,533 144,442 68,823 (1,867) 213,931
Net income............................. -- -- -- 51,818 -- 51,818
Issuance of common stock for
acquisitions......................... 369,073 37 10,094 -- -- 10,131
Issuance of common stock under 1993
stock purchase plan.................. 21,636 2 914 -- -- 916
Issuance of common stock under 1998
stock purchase plan.................. 1,202 -- 34 -- -- 34
Issuance of common stock under director
equity plan.......................... 2,077 -- 65 -- -- 65
Purchase and retirement of common
stock................................ (1,043,300) (104) (25,309) -- -- (25,413)
Pension liability adjustment........... -- -- -- -- (1,478) (1,478)
Foreign currency translation
adjustment........................... -- -- -- -- 20 20
Dividends declared of $.66 per share... -- -- -- (16,650) -- (16,650)
---------- ------ -------- -------- ------- --------
BALANCE, December 31, 1998............... 24,681,358 $2,468 $130,240 $103,991 $(3,325) $233,374
========== ====== ======== ======== ======= ========
</TABLE>

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

22
<PAGE> 24

CARAUSTAR INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 51,818 $ 51,124 $ 57,902
-------- -------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 38,705 33,661 26,314
Equity in income of unconsolidated affiliates.......... (4,308) (1,665) (2,154)
Gain on sale of interest in subsidiary................. -- -- (4,228)
Change in deferred income taxes........................ 8,076 1,109 2,742
Provision for deferred compensation.................... 519 279 596
Minority interest...................................... 730 1,721 754
Changes in operating assets and liabilities, net of
acquisitions:
Receivables.......................................... 1,531 (4,820) (1,015)
Inventories.......................................... 740 (5,245) 3,873
Other current assets................................. (1,111) (2,046) 2,145
Accounts payable and accrued liabilities............. (2,866) (11,057) 13,110
Income taxes......................................... 833 7,783 (2,791)
-------- -------- ---------
Total adjustments................................. 42,849 19,720 39,346
-------- -------- ---------
Net cash provided by operating activities......... 94,667 70,844 97,248
-------- -------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (40,716) (36,275) (32,059)
Acquisition of businesses, net of cash acquired........... (14,488) (22,032) (138,402)
Proceeds from sale of interest in subsidiary, net......... -- -- 10,524
Cash acquired in stock acquisition........................ 81 1,083 --
Other..................................................... 262 2,073 5,655
-------- -------- ---------
Net cash used in investing activities............. (54,861) (55,151) (154,282)
-------- -------- ---------
FINANCING ACTIVITIES:
Distributions to CPI partner.............................. (3,100) -- --
Proceeds from revolving credit loans...................... 80,000 85,000 145,000
Repayments of revolving credit loans...................... (62,000) (56,000) (55,000)
Repayments of long-term debt.............................. (11,918) (14,101) (126)
Dividends paid............................................ (16,227) (13,959) (11,993)
Proceeds from issuances of stock.......................... 755 2,986 4,092
Purchases of stock........................................ (25,275) (29,443) (20,941)
Other..................................................... (822) (774) (794)
-------- -------- ---------
Net cash (used in) provided by financing
activities...................................... (38,587) (26,291) 60,238
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,219 (10,598) 3,204
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 1,391 11,989 8,785
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 2,610 $ 1,391 $ 11,989
======== ======== =========
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest................................ $ 15,048 $ 14,186 $ 10,309
======== ======== =========
Cash payments for income taxes............................ $ 23,844 $ 22,655 $ 36,221
======== ======== =========
Stock issued for acquisitions............................. $ 10,131 $ 27,177 $ --
======== ======== =========
Note payable issued for acquisition....................... $ 26,000 $ -- $ --
======== ======== =========
</TABLE>

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

23
<PAGE> 25

CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996

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 paperboard and related products.

PRINCIPLES OF 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.

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.

INVENTORIES

Inventories are carried at the lower of cost or market. Cost includes
materials, labor, and overhead. Market, with respect to all inventories, is
replacement cost. Substantially all inventories (approximately 90 percent and 95
percent at December 31, 1998 and 1997, respectively) are valued using the
first-in, first-out method. Reserves related to inventories valued using the
last-in, first-out method are not significant.

Inventories at December 31, 1998 and 1997 were as follows (in thousands):

<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials and supplies.................................. $32,570 $29,567
Finished goods and work in process.......................... 34,974 32,752
------- -------
$67,544 $62,319
======= =======
</TABLE>

PROPERTY, PLANT AND EQUIPMENT

Property, plant, and equipment are stated at cost. When assets are retired
or otherwise disposed of, the related costs and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in income.
Expenditures for repairs and maintenance not considered to substantially
lengthen the asset lives are charged to expense as incurred.

For financial reporting purposes, depreciation is computed using both
straight-line and accelerated methods over the following estimated useful lives
of the assets:

<TABLE>
<S> <C>
Buildings and improvements.................................. 10-45 years
Machinery and equipment..................................... 3-20 years
Furniture and fixtures...................................... 5-10 years
</TABLE>

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results could differ from those
estimates.

24
<PAGE> 26
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SELF-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.

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." Net assets
of the non-U.S. subsidiaries are translated at current rates of exchange. Income
and expense items are translated at the average exchange rate for the year. The
resulting translation adjustments are recorded in shareholders' equity. Certain
other translation adjustments and transaction gains and losses continue to be
reported in net income and were not material in any year.

GOODWILL

Goodwill is amortized using the straight-line method over periods ranging
up to 40 years. The Company periodically evaluates goodwill for impairment. In
completing this evaluation, the Company estimates the future undiscounted cash
flows of the businesses to which goodwill relates in order to ensure that the
carrying amount of goodwill has not been impaired.

INCOME PER SHARE

The Company computes basic and diluted earnings per share in accordance
with SFAS No. 128, "Earnings Per Share." Basic income per share excludes
dilution and is computed by dividing income 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 securities
or other contracts to issue common stock were exercised or converted into common
stock. The dilutive effect of stock options outstanding during 1998, 1997 and
1996 added 179,000, 277,000 and 473,000, respectively, to the weighted average
shares outstanding for purposes of calculating diluted income per share.

COMPREHENSIVE INCOME

Total comprehensive income, consisting of net income plus other nonowner
changes in equity for the years ended December 31, 1998, 1997 and 1996 was
$50,360,000, $53,545,000 and $57,677,000, respectively. Components of
accumulated other comprehensive income (loss) at December 31, 1998 and 1997
consist of pension liability adjustments of $(2,877,000) and $(1,399,000),
respectively, and foreign currency translation adjustments of $(448,000) and
$(468,000), respectively.

NEW ACCOUNTING PRONOUNCEMENT

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It also
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for the Company's fiscal year ending
December 31, 2000. Management does not expect SFAS No. 133 to have a significant
impact on the Company's financial statements.

25
<PAGE> 27
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SHAREHOLDERS' EQUITY

PREFERRED STOCK

The Company has authorized 5,000,000 shares of $.10 par value preferred
stock. The preferred stock is issuable from time to time 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.

COMMON STOCK PURCHASE PLAN

During 1998 and 1997, the Company purchased and retired 1,043,000 and
1,106,000 shares, respectively, of its common stock pursuant to a plan
authorized and approved by its board of directors allowing purchases of up to
4,000,000 common shares. These purchases were made in a series of open market
transactions and privately negotiated purchases at an aggregate cost of
$25,413,000 and $29,443,000 in 1998 and 1997, respectively, and at prices
ranging from $21.25 to $33.00 per share in 1998 and $22.25 to $31.94 per share
in 1997.

3. ACQUISITIONS

Each of the following acquisitions was accounted for under the purchase
method of accounting, applying the provisions of Accounting Principles Board
("APB") Opinion No. 16, and as a result, the Company recorded the assets and
liabilities of the acquired companies at their estimated fair values with the
excess of the purchase price over these amounts being recorded as goodwill.
Actual allocations of goodwill and other identifiable assets will be based on
further studies and may change during the allocation period, generally one year
following the date of acquisition. The financial statements for the years ended
December 31, 1998, 1997, and 1996 reflect the operations of the acquired
businesses for the periods after their respective dates of acquisition.

In March 1998, the Company acquired all of the outstanding common stock of
Chesapeake Paperboard Company and its wholly owned subsidiary, Chesapeake Fiber
Packaging Corporation, for approximately $21.0 million, including approximately
$8.2 million of Chesapeake's debt, which was repaid by the Company. Chesapeake
Paperboard Company, located in Baltimore, Maryland, produces recycled paperboard
used primarily in the folding carton and other specialty markets. Chesapeake
Fiber Packaging Corporation, located in Hunt Valley, Maryland, manufactures
folding cartons and specialty corrugated products. No goodwill was recorded in
connection with the acquisition.

In May 1998, the Company acquired all of the outstanding stock of Etowah
Recycling, Inc. ("Etowah") in exchange for approximately 140,000 shares of the
Company's common stock, valued at $4.7 million. Simultaneously, the Company
repaid Etowah's debt of approximately $2.1 million. Etowah operates two
recovered fiber facilities located in Canton, Georgia, and Hardeeville, South
Carolina. Goodwill in the amount of $3,269,000 was recorded in connection with
the acquisition and is being amortized over 40 years.

In June 1998, the Company acquired Tenneco Packaging, Inc.'s ("TPI") 20
percent interest in the CPI partnership for $27.4 million. The CPI partnership
had operated as a joint venture of the Company and TPI since July 1996. As a
result of this transaction, the Company now owns 100 percent of CPI's
operations, which include clay-coated recycled paperboard mills located in
Rittman, Ohio, and Tama, Iowa, and recovered fiber recycling and brokerage
operations located in Rittman and Cleveland, Ohio. The purchase price consisted
of $1.4 million in cash paid at closing and a note payable to TPI for the
remaining $26 million due in June 1999. Goodwill in the amount of $9,741,000 was
recorded in connection with the acquisition and is being amortized over 40
years.

26
<PAGE> 28
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In March 1997, the Company acquired all of the outstanding stock of The New
General Packaging Service, Inc. ("NGP") in exchange for approximately 429,000
shares of the Company's common stock valued at $10,300,000. NGP, located in
Clifton, New Jersey, is a primary packager of pharmaceutical and medical
products as well as numerous health, beauty, and personal care products.
Goodwill in the amount of $6,100,000 was recorded in connection with the
acquisition and is being amortized over 40 years.

In August 1997, the Company acquired all of the outstanding common stock of
Oak Tree Packaging Corporation ("Oak Tree") in exchange for approximately
556,000 shares of the Company's common stock valued at $16,800,000. Simultaneous
with the acquisition, the Company redeemed Oak Tree's preferred stock for
approximately $8,500,000 and repaid Oak Tree's outstanding debt of approximately
$11,700,000 with funding from the Company's line of credit. Oak Tree's
operations consist of three folding carton plants located in Versailles,
Connecticut; Thorndike, Massachusetts; and York, Pennsylvania. Goodwill in the
amount of $11,300,000 was recorded in connection with the acquisition and is
being amortized over 40 years.

In October 1997, the Company acquired substantially all of the assets and
business of Baxter Tube Company, a subsidiary of The Tranzonic Companies, for
approximately $13,500,000 in cash. Baxter Tube Company manufactures spiral-wound
tubes at four facilities located in Ware Shoals, South Carolina; Perrysburg,
Ohio; Minerva, Ohio; and Leyland, Lancaster, United Kingdom (under the name
Unity Paper Tube, Ltd.). Goodwill in the amount of $8,100,000 was recorded in
connection with the acquisition and is being amortized over 40 years.

The following unaudited pro forma financial information assumes that the
above acquisitions occurred on January 1, 1997. These results have been prepared
for comparative purposes only and do not purport to be indicative of what would
have resulted had the acquisitions occurred on January 1, 1997 or the results
which may occur in the future (in thousands, except per share data):

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net sales................................................... $756,907 $777,470
Net income.................................................. 51,769 52,119
Diluted income per common share............................. $ 2.02 $ 2.00
</TABLE>

4. SALE OF INTEREST IN SUBSIDIARY

On April 1, 1996, the Company transferred substantially all of the
operating assets and liabilities of its wholly owned subsidiary, Standard Gypsum
Corporation, a producer of gypsum wallboard, to a newly formed limited liability
company, Standard Gypsum LLC ("Standard"). Simultaneous with the formation of
Standard, the Company sold a 50 percent interest in Standard to Temple-Inland
Forest Products Corporation ("Temple"), an unrelated third party, for
$10,800,000 in cash. Standard is operated as a joint venture managed by Temple.
The Company accounts for its interest in Standard under the equity method of
accounting. In conjunction with this transaction, the Company recognized a
nonrecurring gain, before income taxes, of $4,228,000, which is reflected as a
component of other, net, in the accompanying statement of income for the year
ended December 31, 1996. Additionally, from the date of the transaction through
December 31, 1996, the Company recognized earnings of $2,050,000 for its equity
interest in the earnings of Standard. The Company's equity interest in the
earnings of Standard for the years ended December 31, 1998 and 1997, was
$4,343,000 and $1,703,000, respectively. During April 1998, Standard entered
into a loan agreement with a financial institution for credit facilities in an
amount not to exceed $61,000,000. Proceeds of the new credit

27
<PAGE> 29
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

facility are being used to fund the construction of a green field gypsum
wallboard plant in Cumberland City, Tennessee. Borrowings under the credit
facility were $19,000,000 at December 31, 1998. The Company has guaranteed 50
percent of this credit facility.

5. REVOLVING CREDIT FACILITY

The Company has a $400,000,000 five-year bank revolving credit facility
which may be increased up to $500,000,000 and its maturity extended by up to
three additional years beyond the second quarter of 2002, subject to certain
conditions and approvals. Interest under the facility is computed using the
Company's choice of (a) the Eurodollar rate plus a margin or (b) the higher of
the federal funds rate plus a margin or the bank's prime lending rate. As of
December 31, 1998 and 1997, borrowings of $147,000,000 and $129,000,000,
respectively, were outstanding under revolving credit facilities at weighted
average interest rates of 5.57 percent and 6.15 percent, respectively.

6. LONG-TERM DEBT

At December 31, 1998 and 1997, long-term debt consisted of the following
(in thousands):

<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Senior notes, dated October 8, 1992,
terms as described below.................................. $ 82,750 $82,750
Other notes payable......................................... 26,234 388
-------- -------
108,984 83,138
Less current maturities..................................... 26,103 9
-------- -------
$ 82,881 $83,129
======== =======
</TABLE>

The senior notes dated October 8, 1992 (the "Notes") are payable to an
insurance company in five equal annual installments of $16,550,000 beginning
October 8, 2000. Interest on the Notes accrues at 7.74 percent and is payable
semiannually. The Notes also provide for optional prepayments, in whole or in
part, with a penalty, as defined, during specified periods.

The Notes and revolving credit facility (Note 5) contain certain
restrictive covenants on the part of the Company, including (but not limited to)
payment of dividends, sales of assets, incurrence of additional indebtedness,
capital expenditures, maintenance of certain leverage and interest coverage
ratios (as defined), investments, and minimum working capital requirements.

During 1998, the Company registered with the Securities and Exchange
Commission a total of $300,000,000 in public debt securities for issuance in one
or more series and with such specific terms as to be determined from time to
time. The debt securities will be unsecured obligations of the Company.
Management anticipates that the proceeds from the sale of these debt securities
will be used for general corporate purposes, including (but not limited to)
repayment of debt, working capital, capital expenditures, and acquisitions. At
December 31, 1998, none of this debt had been issued.

28
<PAGE> 30
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Aggregate maturities of long-term debt at December 31, 1998 are as follows
(in thousands):

<TABLE>
<S> <C>
1999........................................................ $ 26,103
2000........................................................ 16,626
2001........................................................ 16,560
2002........................................................ 16,550
2003........................................................ 16,550
Thereafter.................................................. 16,595
--------
$108,984
========
</TABLE>

7. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases certain buildings, machinery, and transportation
equipment under operating lease agreements expiring at various dates through
2022. Certain rental payments for transportation equipment are based on a fixed
rate plus an additional amount for mileage. Rental expense on operating leases
for the years ended December 31, 1998, 1997 and 1996 is as follows (in
thousands):

<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Minimum rentals........................................ $9,209 $6,905 $4,895
Contingent rentals..................................... 326 371 563
------ ------ ------
$9,535 $7,276 $5,458
====== ====== ======
</TABLE>

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, 1998 (in thousands):

<TABLE>
<S> <C>
1999........................................................ $ 8,461
2000........................................................ 6,545
2001........................................................ 3,760
2002........................................................ 2,474
2003........................................................ 1,751
Thereafter.................................................. 10,388
-------
$33,379
=======
</TABLE>

LITIGATION

The Company is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, after consultation with legal
counsel, the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial position or results of operations.

8. STOCK OPTION AND DEFERRED COMPENSATION PLANS

DIRECTOR EQUITY PLAN

During 1996, the Company's board of directors approved 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 an option to
purchase 1,000 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 grant. A maximum of 100,000 shares of
common stock may be granted under this plan. During 1998 and 1997, 2,077 and
1,836 shares,

29
<PAGE> 31
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively, of common stock and options to purchase 6,000 shares of common
stock were issued under this plan in each year.

INCENTIVE STOCK OPTION AND BONUS PLANS

The Company has a nonqualified stock option plan (the "Plan") adopted in
1987 for certain officers of the Company. Under the Plan, options to purchase a
maximum of 1,980,000 shares could be granted through 1990. The stock option
committee, appointed by the board of directors, determined the price, vesting
period, exercise dates, and expiration dates for options granted to officers.
Options outstanding under the Plan expired at various dates through 1997.

During 1992, the Company's board of directors 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 are subject to four-year and five-year respective vesting periods. The
Company's board of directors authorized 1,400,000 common shares for grant under
the 1993 Plan. During 1997 and 1996, the Company issued 189,215 and 142,060
qualified incentive stock options, respectively, under the 1993 Plan. During
1997 and 1996, the Company issued 31,816 and 10,859 bonus shares, respectively,
with a respective aggregate market value of $934,000 and $264,000, respectively.
Compensation expense of $457,000, $451,000, and $359,000 related to bonus shares
was recorded in 1998, 1997 and 1996, respectively.

During 1998, the Company's board of directors 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 may receive the right to acquire one share of restricted stock
contingent upon the direct purchase of two shares of unrestricted common stock.
In addition, the 1998 Plan provides for the issuance of both traditional and
performance stock options at market price and 120 percent of market price,
respectively. Restricted stock and options awarded under the 1998 Plan are
subject to five-year vesting periods. The Company's board of directors
authorized 1,600,000 common shares for grant under the 1998 Plan. During 1998,
the Company issued 235,404 options under the 1998 Plan. During 1998, the Company
issued 1,202 shares of restricted stock.

A summary of stock option activity for the years ended December 31, 1998,
1997 and 1996 is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1995............................ 1,141,696 $10.65
Granted................................................... 148,060 20.08
Forfeited................................................. (24,680) 17.99
Exercised................................................. (361,035) 8.79
---------
Outstanding at December 31, 1996............................ 904,041 12.06
Granted................................................... 195,215 30.13
Forfeited................................................. (13,805) 21.84
Exercised................................................. (364,813) 7.10
---------
</TABLE>

30
<PAGE> 32
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1997............................ 720,638 $19.27
Granted................................................... 241,404 35.60
Forfeited................................................. (6,215) 24.89
Exercised................................................. (34,204) 17.53
---------
Outstanding at December 31, 1998............................ 921,623 $23.57
---------
Options exercisable at:
December 31, 1998......................................... 464,844 $16.20
December 31, 1997......................................... 361,242 13.61
December 31, 1996......................................... 598,688 $ 8.66
</TABLE>

Summary information about the Company's stock options outstanding at
December 31, 1998 is as follows:

<TABLE>
<CAPTION>
OUTSTANDING AT WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
RANGE OF DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 1998 LIFE PRICE 1998 PRICE
- -------------- -------------- ---------------- ---------------- -------------- ----------------
(IN THOUSANDS) (IN YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 4.00 -- $ 7.00 103,750 2.0 $ 4.14 103,750 $ 4.14
15.00 -- 19.75 376,809 4.7 17.88 293,429 17.41
20.50 -- 24.44 8,500 8.6 22.97 2,000 20.50
25.25 -- 29.75 21,600 7.1 26.74 14,500 26.03
30.13 -- 40.80 410,964 8.7 33.54 51,165 30.75
- --------------- ------- --- ------ ------- ------
$ 4.00 -- $40.80 921,623 6.2 $23.57 464,844 $16.20
</TABLE>

An accrual of approximately $301,000 related to the outstanding incentive
stock options is included in deferred compensation in the accompanying balance
sheets at both December 31, 1998 and 1997.

As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for the director equity plan and the incentive stock option
and bonus plans under APB Opinion No. 25; however, the Company has computed for
pro forma disclosure purposes the value of all options granted during 1998, 1997
and 1996 using the Black-Scholes option pricing model as prescribed by SFAS No.
123 using the following weighted average assumptions for grants in 1998, 1997
and 1996:

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate................ 4.68%-5.76% 5.4%-6.86% 5.4%-6.86%
Expected dividend yield................ 1.87%-2.97% 1.61%-2.53% 1.61%-2.53%
Expected option lives.................. 8-10 years 6-10 years 6-10 years
Expected volatility.................... 30% 25%-30% 25%-30%
</TABLE>

The total values of the options granted during the years ended December 31,
1998, 1997 and 1996 were computed to be approximately $2,577,000, $2,061,000,
and $763,000, respectively, which would be amortized over the vesting period of
the options. If the Company had accounted for these plans in accordance with
SFAS

31
<PAGE> 33
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No. 123, the Company's reported and pro forma net income and net income per
share for the years ended December 31, 1998, 1997 and 1996 would have been as
follows (in thousands, except per share data):

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income:
As reported............................................. $51,818 $51,124 $57,902
Pro forma............................................... 51,022 50,824 57,659
Diluted income per common share:
As reported............................................. $ 2.04 $ 2.03 $ 2.28
Pro forma............................................... 2.01 2.02 2.27
</TABLE>

DEFERRED COMPENSATION PLANS

The Parent Company and certain of its subsidiaries have deferred
compensation plans for several of their present and former officers and key
employees. These plans provide for retirement, involuntary termination, and
death benefits. The involuntary termination and retirement benefits are accrued
over the period of active employment from the execution dates of the plans to
the normal retirement dates (age 65) of the employees covered. Deferred
compensation expense applicable to the plans was approximately $324,000,
$368,000, and $483,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Accruals of approximately $3,312,000 and $3,889,000 related to
these plans are included in deferred compensation in the accompanying balance
sheets at December 31, 1998 and 1997, respectively.

9. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS

PENSION PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Substantially all of the Company's employees participate in a
noncontributory defined benefit pension plan (the "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 and group annuity contracts. 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. Contributions to the Pension Plan totaled approximately
$4,784,000, $3,478,000 and $4,651,000 in 1998, 1997 and 1996, respectively.

Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits." The provisions of
SFAS No. 132 revise employers' disclosures about pension and other
postretirement benefit plans. SFAS No. 132 does not change the measurement or
recognition of these plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits.

During 1996, the Company adopted a supplemental executive retirement plan
("SERP"), which provides benefits to participants based on average compensation.
The SERP covers certain executives of the Company commencing upon retirement.
The SERP is unfunded at December 31, 1998.

32
<PAGE> 34
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Pension expense for the Pension Plan and the SERP includes the following
components for the years ended December 31, 1998, 1997 and 1996 (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service cost of benefits earned............................. $2,569 $2,153 $1,493
Interest cost on projected benefit obligation............... 3,281 2,629 2,191
Actual gain on plan assets.................................. (5,293) (4,480) (1,146)
Net amortization and deferral............................... 2,832 2,622 (110)
------ ------ ------
Net pension expense......................................... $3,389 $2,924 $2,428
------ ------ ------
</TABLE>

The table below represents a reconciliation of the funded status of the
Pension Plan and the SERP to prepaid (accrued) pension cost as of December 31,
1998 and 1997 (in thousands):

<TABLE>
<CAPTION>
SERP PENSION PLAN
--------------- -----------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligations:
Projected benefit obligation at end of prior
year........................................... $1,918 $1,707 $36,995 $34,318
Service cost................................... 93 83 2,476 2,071
Interest cost.................................. 155 128 3,126 2,501
Actuarial loss (gain).......................... 154 -- 3,130 (743)
Plan amendments................................ -- -- 475 286
Acquisition.................................... -- -- 4,717 --
Benefits paid.................................. -- -- (2,361) (1,438)
------ ------ ------- -------
Projected benefit obligation at end of year......... 2,320 1,918 48,558 36,995
------ ------ ------- -------
Change in plan assets:
Fair value of plan assets at end of prior year.... -- -- 31,725 25,205
Actual return on plan assets................... -- -- 5,293 4,480
Employer contributions......................... -- -- 4,784 3,478
Benefits paid.................................. -- -- (2,361) (1,438)
Acquisition.................................... -- -- 3,755 --
------ ------ ------- -------
Fair value of plan assets at end of year............ -- -- 43,196 31,725
------ ------ ------- -------
Funded status of the plans.......................... (2,320) (1,918) (5,362) (5,270)
Unrecognized transition (asset)obligation........... 1,480 1,593 -- (73)
Unrecognized prior service cost..................... -- -- 694 442
Unrecognized net loss............................... 154 -- 7,564 6,042
------ ------ ------- -------
(Accrued) prepaid pension cost before minimum
pension liability adjustment...................... $ (686) $ (325) $ 2,896 $ 1,141
====== ====== ======= =======
Other comprehensive income:
Increase (decrease) in intangible asset........... $ (22) $ (136) $ 252 $ 117
(Increase) decrease in additional minimum pension
liability...................................... 22 136 (1,730) 2,247
------ ------ ------- -------
Other comprehensive income.......................... $ -- $ -- $(1,478) $ 2,364
====== ====== ======= =======
</TABLE>

In accordance with SFAS No. 87, the Company has recorded an additional
minimum pension liability for underfunded plans representing the excess of
unfunded accumulated benefit obligations over previously recorded pension
liabilities. The cumulative additional liability totaled $4,592,000 and
$2,884,000 at December 31, 1998 and 1997, respectively, and has been offset by
intangible assets to the extent of previously

33
<PAGE> 35
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

unrecognized prior service costs. Amounts in excess of previously unrecognized
prior service cost are recorded as reductions in shareholders' equity.

Net pension expense and projected benefit obligations are calculated using
assumptions of weighted average discount rates, future compensation levels, and
expected long-term rates of return on assets. The weighted average discount rate
used to measure the projected benefit obligation at December 31, 1998 and 1997
is 7.5 percent, the rate of increase in future compensation levels is 3.5
percent, and the expected long-term rate of return on assets is 9.5 percent.

OTHER POSTRETIREMENT BENEFITS

The Company provides postretirement medical benefits at certain of its
subsidiaries. The Company accounts for these postretirement medical benefits in
accordance with SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits."

Net periodic postretirement benefit cost for the years ended December 31,
1998, 1997 and 1996 included the following components (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost of benefits earned............................. $ 94 $100 $ 86
Interest cost on accumulated postretirement benefit
obligation................................................ 291 287 239
---- ---- ----
Net periodic postretirement benefit cost.................... $385 $387 $325
---- ---- ----
</TABLE>

Postretirement benefits totaling $544,000, $305,000, and $203,000 were paid
during 1998, 1997 and 1996, respectively.

The accrued postretirement benefit cost as of December 31, 1998 and 1997
consists of the following (in thousands):

<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation at end of prior year......... $ 4,063 $ 3,424
Service cost........................................... 94 100
Interest cost.......................................... 291 287
Actuarial (gain) loss.................................. (13) 246
Acquisition............................................ 7 311
Benefits paid.......................................... (544) (305)
------- -------
Projected benefit obligation at end of year................. $ 3,898 $ 4,063
------- -------
Funded status............................................... $(3,898) $(4,063)
Unrecognized net loss....................................... 272 285
------- -------
Net amount recognized....................................... $(3,626) $(3,778)
------- -------
</TABLE>

The accumulated postretirement benefit obligations at December 31, 1998 and
1997 were determined using a weighted average discount rate of 7.5 percent. The
rate of increase in the costs of covered health care benefits is assumed to be 7
percent in 1999, gradually decreasing to 5 percent by the year 2003. Increasing
the assumed health care costs trend rate by one percentage point would increase
the accumulated postretirement benefit obligation as of December 31, 1998 by
approximately $458,000 and would increase net periodic postretirement benefit
cost by approximately $48,000 for the year ended December 31, 1998.

34
<PAGE> 36
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. 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 provision for income taxes for the years ended December 31, 1998, 1997
and 1996 consisted of the following (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................. $19,444 $26,128 $29,989
State................................................... 2,950 3,306 3,843
------- ------- -------
22,394 29,434 33,832
Deferred.................................................. 8,076 1,109 2,742
------- ------- -------
$30,470 $30,543 $36,574
======= ======= =======
</TABLE>

The principal differences between the federal statutory tax rate and the
provision for income taxes for the years ended December 31, 1998, 1997 and 1996
are as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate.................................. 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit..................... 2.7 3.2 3.5
Other....................................................... (0.7) (0.8) 0.2
---- ---- ----
Effective tax rate.......................................... 37.0% 37.4% 38.7%
==== ==== ====
</TABLE>

Significant components of the Company's deferred income tax assets and
liabilities as of December 31, 1998 and 1997 are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred income tax assets:
Deferred employee benefits................................ $ 1,677 $ 1,834
Postemployment benefits................................... 61 431
Postretirement benefits other than pensions............... 1,060 989
Accounts receivable....................................... 351 439
Other..................................................... 396 396
-------- --------
Total deferred income tax assets.................. 3,545 4,089
-------- --------
Deferred income tax liabilities:
Depreciation and amortization............................. (41,862) (30,720)
Asset revaluations........................................ (3,846) (3,460)
Other..................................................... (1,274) (640)
-------- --------
Total deferred income tax liabilities............. (46,982) (34,820)
-------- --------
Valuation allowance......................................... -- --
-------- --------
$(43,437) $(30,731)
======== ========
</TABLE>

35
<PAGE> 37
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. QUARTERLY FINANCIAL DATA (UNAUDITED)

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

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998:
Net sales................................... $176,871 $189,658 $188,532 $181,797
Gross profit................................ 49,755 51,229 51,516 47,433
Net income.................................. 13,177 13,331 12,793 12,517
Diluted income per common share............. $ 0.52 $ 0.52 $ 0.50 $ 0.50
1997:
Net sales................................... $157,583 $160,834 $173,720 $176,001
Gross profit................................ 43,820 47,822 46,800 46,732
Net income.................................. 11,741 12,819 12,624 13,940
Diluted income per common share............. $ 0.47 $ 0.51 $ 0.50 $ 0.55
</TABLE>

12. SEGMENT INFORMATION

The Company operates principally in three business segments organized by
products. The paperboard segment consists of facilities that manufacture 100
percent recycled uncoated and clay-coated paperboard and facilities that collect
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 cans. The carton and custom
packaging segment consists of facilities that produce printed and unprinted
folding and set-up cartons and facilities that provide contract manufacturing
and contract packaging services. Intersegment sales are recorded at prices which
approximate market prices. Sales to external customers located in foreign
countries accounted for approximately 7.8 percent, 7.4 percent and 5.7 percent
of the Company's sales for 1998, 1997 and 1996, respectively.

Operating income includes 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,
refundable income taxes, property, plant, and equipment and investments in
unconsolidated affiliates.

The following table presents certain business segment information for the
years ended December 31, 1998, 1997, and 1996 (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales (aggregate):
Paperboard........................................... $419,421 $412,382 $358,220
Tube, core and composite container................... 254,096 242,434 240,623
Carton and custom packaging.......................... 178,464 117,222 99,767
-------- -------- --------
Total........................................ $851,981 $772,038 $698,610
======== ======== ========
</TABLE>

36
<PAGE> 38
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Less net sales (intersegment):
Paperboard........................................... $112,581 $102,311 $ 94,619
Tube, core and composite container................... 2,315 1,587 1,282
Carton and custom packaging.......................... 227 2 14
-------- -------- --------
Total........................................ $115,123 $103,900 $ 95,915
======== ======== ========
Net sales (external customers):
Paperboard........................................... $306,840 $310,071 $263,601
Tube, core and composite container................... 251,781 240,847 239,341
Carton and custom packaging.......................... 178,237 117,220 99,753
-------- -------- --------
Total........................................ $736,858 $668,138 $602,695
======== ======== ========
Operating income:
Paperboard........................................... $ 79,281 $ 81,312 $ 80,571
Tube, core and composite container................... 18,477 18,974 20,736
Carton and custom packaging.......................... 8,053 5,804 7,111
-------- -------- --------
105,811 106,090 108,418
Corporate expense...................................... (10,930) (9,894) (9,509)
-------- -------- --------
Operating income....................................... 94,881 96,196 98,909
Interest expense....................................... (16,072) (14,111) (10,698)
Interest income........................................ 334 312 591
Equity in income of unconsolidated affiliates.......... 4,308 1,665 2,154
Other, net............................................. (433) (674) 4,274
-------- -------- --------
Income before income taxes and minority interest....... 83,018 83,388 95,230
Minority interest...................................... (730) (1,721) (754)
Provision for income taxes............................. 30,470 30,543 36,574
-------- -------- --------
Net income............................................. $ 51,818 $ 51,124 $ 57,902
======== ======== ========
Identifiable assets:
Paperboard........................................... $294,480 $263,596 $257,769
Tube, core and composite container................... 127,852 127,591 109,892
Carton and custom packaging.......................... 171,244 139,395 79,147
Corporate............................................ 25,221 19,508 29,472
-------- -------- --------
Total........................................ $618,797 $550,090 $476,280
======== ======== ========
Depreciation and amortization:
Paperboard........................................... $ 21,185 $ 19,155 $ 13,836
Tube, core and composite container................... 7,808 7,099 6,753
Carton and custom packaging.......................... 9,250 6,466 4,533
Corporate............................................ 462 941 1,192
-------- -------- --------
Total........................................ $ 38,705 $ 33,661 $ 26,314
======== ======== ========
Capital expenditures, excluding acquisitions of
businesses:
Paperboard........................................... $ 26,382 $ 21,373 $ 22,401
Tube, core and composite container................... 6,966 8,331 3,311
Carton and custom packaging.......................... 6,415 5,892 5,857
Corporate............................................ 953 679 490
-------- -------- --------
Total........................................ $ 40,716 $ 36,275 $ 32,059
======== ======== ========
</TABLE>

37
<PAGE> 39
CARAUSTAR INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments as of December 31, 1998:

- Cash and Cash Equivalents. The carrying amount approximates fair value
because of the short maturity of these instruments.

- Long-Term Debt. The fair values of the Company's senior notes and
revolving credit facility are based on the current rates available to the
Company for debt of the same remaining maturity and, as of December 31,
1998, approximate the carrying amounts. The carrying amounts of the other
notes payable are assumed to approximate fair value due to the short
maturity and variable rate structure of the instruments.

38
<PAGE> 40

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and
Board of Directors of
Caraustar Industries, Inc.:

We have audited the accompanying consolidated balance sheets of CARAUSTAR
INDUSTRIES, INC. (a North Carolina corporation) AND SUBSIDIARIES as of December
31, 1998 and 1997 and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Caraustar Industries, Inc.
and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

/s/ Arthur Andersen LLP

Atlanta, Georgia
January 28, 1999

39
<PAGE> 41

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

The Company had no disagreements on accounting or financial disclosure
matters with its independent public accountants to report under this Item 9.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information contained under the caption "Election of Directors" in the
Proxy Statement is incorporated herein by reference in response to this Item 10.
The information in response to this Item 10 regarding the executive officers of
the Company is contained in Item 1, Part I hereof under the caption "Executive
Officers."

ITEM 11. EXECUTIVE COMPENSATION

Information contained under the caption "Executive Compensation" in the
Proxy Statement, except the item captioned "Compensation Committee Report" is
incorporated herein by reference in response to this Item 11.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information contained under the caption "Share Ownership" in the Proxy
Statement is incorporated by reference herein in response to this Item 12.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Russell M. Robinson, II, Chairman of the Company's Board of Directors, is a
shareholder in the firm of Robinson, Bradshaw & Hinson, P.A., the Company's
principal outside legal counsel, which performed services for the Company during
the last fiscal year and during the current fiscal year. Certain members of such
firm beneficially owned approximately 114,637 of the Company's common shares as
of March 1, 1999.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

a. Documents filed as part of the Report

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

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheets as of December 31, 1998 and 1997

Consolidated Statements of Income for the years ended December
31, 1998, 1997 and 1996

Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996

Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

40
<PAGE> 42

(2) The Report of Independent Public Accountants as to Schedule and
the following financial statement schedule are filed as part of the report:

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

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, are inapplicable, or the required
information is included elsewhere in the financial statements.

(3) Exhibits:

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

b. Reports on Form 8-K.

No current reports on Form 8-K were filed during the quarter ending
December 31, 1998.

41
<PAGE> 43

SCHEDULE II
CARAUSTAR INDUSTRIES, INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS* END OF YEAR
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1996: Allowances for doubtful accounts receivable,
returns, and discounts....................... $1,275 $3,254 $(3,215) $1,314
1997: Allowances for doubtful accounts receivable,
returns, and discounts....................... $1,314 $4,734 $(4,909) $1,139
1998: Allowances for doubtful accounts receivable,
returns, and discounts....................... $1,139 $6,301 $(6,371) $1,069
</TABLE>

- ---------------

* Principally charges for which reserves were provided, net of recoveries.

42
<PAGE> 44

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To the Shareholders of
Caraustar Industries, Inc.:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of CARAUSTAR INDUSTRIES, INC. (a North
Carolina corporation) AND SUBSIDIARIES as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 included in this
Form 10-K and have issued our report thereon dated January 28, 1999. Our audit
was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in Item 14a.(2) is the responsibility of
the Company's management, is presented for purposes of complying with the
Securities and Exchange Commission's rules, and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

/s/ ARTHUR ANDERSEN LLP
- -------------------------------------
ARTHUR ANDERSEN LLP

Atlanta, Georgia
January 28, 1999

43
<PAGE> 45

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/ H. LEE THRASH, III
----------------------------------
H. Lee Thrash, III Vice President
and Chief Financial Officer

Date: March 25, 1999

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 indicated on March 25, 1999.

<TABLE>
<CAPTION>
SIGNATURE
---------
<S> <C>
/s/ THOMAS V. BROWN
- ------------------------------------------------------------
Thomas V. Brown, President and Chief Executive Officer
(Principal Executive Officer); Director

/s/ H. LEE THRASH, III
- ------------------------------------------------------------
H. Lee Thrash, III, Vice President and Chief Financial
Officer
(Principal Financial Officer and Principal Accounting
Officer); Director

/s/ JAMES E. ROGERS
- ------------------------------------------------------------
James E. Rogers, Director

/s/ BOB M. PRILLAMAN
- ------------------------------------------------------------
Bob M. Prillaman, Director

/s/ RUSSELL M. ROBINSON, II
- ------------------------------------------------------------
Russell M. Robinson, II, Chairman of the Board
</TABLE>

44
<PAGE> 46

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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 -- Second Amended and Restated Bylaws of the Company
(Incorporated by reference -- Exhibit 3.02 to Registration
Statement on Form S-4 [SEC File No. 333-29937])
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 Second Amended and Restated
Bylaws (included in Exhibit 3.02)
4.04 -- Rights Agreement, dated as of April 19, 1995, between
Caraustar Industries, Inc. and The Bank of New York, as
Successor Rights Agent (Incorporated by reference -- Exhibit
1 to Current Report on Form 8-K dated April 19, 1995 [SEC
File No. 0-20646])
10.01 -- Note Agreement, dated as of October 1, 1992, between the
Company and the Prudential Insurance Company of America,
regarding the Company's 7.89% Senior Subordinated Notes
(Incorporated by reference -- Exhibit 10.02 to Annual Report
for 1992 on Form 10-K [SEC File No. 0-20646])
10.02 -- Amendment Agreement, dated as of June 2, 1995, between the
Company and the Prudential Insurance Company of America
regarding the Company's 7.89% Senior Subordinated Notes
(Incorporated by reference -- Exhibit 10.03 to Report on
Form 10-Q for the quarter ended September 30, 1995 [SEC File
No. 0-20646])
10.03 -- Amendment Agreement, dated as of July 23, 1997, between the
Company and the Prudential Insurance Company of America
regarding the Company's 7.89% Senior Subordinated Notes
(Incorporated by reference -- Exhibit 10.03 to report on
Form 10-Q for the quarter ended June 30, 1997 [SEC File No.
0-20646])
10.04 -- Amendment Agreement, dated as of August 12, 1998, between
the Company and the Prudential Insurance Company of America
regarding the Company's 7.89% Senior Subordinated Notes
(Incorporated by reference -- Exhibit 10.04 to report on
Form 10-Q for the quarter ended September 30, 1998 [SEC File No.
0-20646])
10.05* -- Employment Agreement, dated December 31, 1990, between the
Company and Thomas V. Brown (Incorporated by
reference -- Exhibit 10.06 to Registration Statement on Form
S-1 [SEC File No. 33-50582])
10.06 -- Asset Purchase Agreement, dated August 7, 1992, between the
Company and Domtar Gypsum Inc. (Incorporated by
reference -- Exhibit 10.07 to Registration Statement on Form
S-1 [SEC File No. 33-50582])
10.07* -- 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])
10.08* -- 1987 Executive Stock Option Plan (Incorporated by
reference -- Exhibit 10.09 to Registration Statement on Form
S-1 [SEC File No. 33-50582])
10.09* -- 1993 Key Employees' Share Ownership Plan (Incorporated by
reference -- Exhibit 10.10 to Registration Statement on Form
S-1 [SEC File No. 33-50582])
10.10 -- Energy Purchase Agreement, dated December 18, 1989, between
Camden Paperboard Corporation and Camden Cogen, L.P.
(Incorporated by reference -- Exhibit 10.11 to Registration
Statement on Form S-1 [SEC File No. 33-50582])
10.11* -- Incentive Bonus Plan of the Company (Incorporated by
reference -- Exhibit 10.10 to Annual Report for 1993 on Form
10-K [SEC File No. 0-20646])
</TABLE>
<PAGE> 47

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.12 -- 1996 Director Equity Plan of the Company (Incorporated by
reference -- Exhibit 10.12 to Report on Form 10-Q for the
quarter ended March 31, 1996 [SEC File No. 0-20646])
10.13 -- Credit Agreement, dated as of July 23, 1997, by and among
the Company, as Borrower, the banks listed therein, Bankers
Trust Company, as Administrative Agent, NationsBank, N.A.,
as Syndication Agent, SunTrust Bank, Atlanta, as
Documentation Agent, First Union National Bank, as Managing
Agent and each of Credit Lyonnais, The Bank of New York, The
Bank of Nova Scotia, The Bank of Tokyo -- Mitsubishi, Ltd.,
and Wachovia Bank, as Co-Agents (Incorporated by
Reference -- Exhibit 10.13 to Report on Form 10-Q for the
Quarter Ended June 30, 1997 (SEC File No. 0-20646])
10.14* -- 1998 Key Employee Incentive Compensation Plan (Incorporated
by reference -- Exhibit 10.14 to Annual Report for 1997 on
Form 10-K [SEC File No. 0-20646])
10.15 -- Amendment No. 1 to Credit Agreement, dated as of October 8,
1997, by and among the Company, as Borrower, the banks
listed therein, Bankers Trust Company, as Administrative
Agent, NationsBank, N.A., as Syndication Agent, SunTrust
Bank, Atlanta, as Documentation Agent, First Union National
Bank, as Managing Agent and each of Credit Lyannais, The
Bank of New York, The Bank of Nova Scotia, The Bank of
Tokyo -- Mitsubishi, Ltd., and Wachovia Bank, as Co-Agents
(Incorporated by reference -- Exhibit 10.15 to report on
Form 10-Q for the quarter ended September 30, 1998 [SEC File No.
0-20646])
10.16 -- Amendment No. 2 to Credit Agreement, dated as of October 30,
1998, by and among the Company, as Borrower, the banks
listed therein, Bankers Trust Company, as Administrative
Agent, NationsBank, N.A., as Syndication Agent, SunTrust
Bank, Atlanta, as Documentation Agent, First Union National
Bank, as Managing Agent and each of Credit Lyannais, The
Bank of New York, The Bank of Nova Scotia, The Bank of
Tokyo -- Mitsubishi, Ltd., and Wachovia Bank, as Co-Agents
(Incorporated by reference -- Exhibit 10.16 to report on
Form 10-Q for the quarter ended September 30, 1998 [SEC File No.
0-20646])
21.01+ -- Subsidiaries of the Company
23.01+ -- Consent of Arthur Andersen LLP
27.01+ -- Financial Data Schedule for the year ended December 31, 1998
(For SEC purposes only)
</TABLE>

- ---------------

+ Filed herewith
* Management contract or compensatory plan required to be filed under Item 14(c)
of Form 10-K and Item 601 of Regulation S-K of the Securities and Exchange
Commission.

<PAGE> 1
EXHIBIT 21.01

SUBSIDIARIES* OF CARAUSTAR INDUSTRIES, INC.

STATE OF
NAME INCORPORATION TRADE, D/B/A NAMES
---- ------------- -------------------

<S> <C> <C>
ACC Services, Inc. North Carolina
Atlantic Coast Carton Company North Carolina
Austell Box Board Corporation Georgia
Boxall, Inc. Alabama
Buffalo Paperboard Corporation New York
Camden Paperboard Corporation New Jersey
Caraustar Exports, Inc. U.S. Virgin Islands
Caraustar Paper Sales, Inc. Georgia Caraustar Paper Sales-South
Caraustar Paperboard Corporation Ohio **
Carolina Paper Board Corporation North Carolina
Carolina Paper Box Co., Inc. North Carolina
Carolina Recycling, Inc. North Carolina
Carotell Paper Board Corporation South Carolina
Chattanooga Paperboard Corporation Tennessee
Chesapeake Fiber Packaging Corporation Maryland
Chesapeake Paperboard Company Maryland
Chicago Paperboard Corporation Illinois
Cincinnati Paperboard Corporation Ohio
Columbus Recycling, Inc. Georgia
Etowah Recycling, Inc. Georgia
Federal Packaging Corporation Delaware
Federal Transport, Inc. Ohio
Macon Recycling, Inc. Georgia
McQueeny Gypsum Corporation Texas
Mid-State Paper Box Company, Inc. North Carolina
The New General Packaging Service, Inc. New Jersey General Packaging Services
Oak Tree Packaging Corporation New Jersey
Packrite Packaging, Inc. North Carolina
Paper Recycling, Inc. Georgia
Paragon Plastics, Inc. (80% owned) South Carolina
Reading Paperboard Corporation Pennsylvania
Richmond Paperboard Corporation Virginia
Special Packaging, Inc. Delaware
Star Paper Tube de Mexico, S.A.
de C.V. (65% owned) Mexico
Star Paper Tube, Inc. South Carolina
Star Recycling Incorporated Georgia
Sweetwater Paper Board Company, Inc. Georgia
The Garber Company Delaware
The Mid/Packaging Group, Inc. Tennessee
Unity Tubes, Limited Leyland, Lancaster,
United Kingdom
</TABLE>

* Each subsidiary is wholly-owned by Caraustar Industries, Inc. unless
otherwise indicated.

** Does business in Ohio as Rittman Paperboard, Caraustar Paper Sales - North,
and Cleveland Paper Stock and in Iowa as Tama Paperboard.

<PAGE> 1

EXHIBIT 23.01

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
reports dated January 28, 1999 included in this Form 10-K, into Caraustar
Industries, Inc.'s previously filed Registration Statements on Form S-8 (File
No. 33-77682, File No. 33-75838, File No. 33-53808, File No. 33-53726, and File
No. 33-53728), Forms S-3 (File No. 333-66943 and File No. 333-65555) and
Form S-4 (File No. 333-66945).

/s/ ARTHUR ANDERSEN LLP
- -----------------------
ARTHUR ANDERSEN LLP

Atlanta, Georgia
March 25, 1999

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,610
<SECURITIES> 0
<RECEIVABLES> 76,394<F1>
<ALLOWANCES> 0
<INVENTORY> 67,544
<CURRENT-ASSETS> 154,703
<PP&E> 527,962
<DEPRECIATION> 203,492
<TOTAL-ASSETS> 618,797
<CURRENT-LIABILITIES> 103,250
<BONDS> 229,881<F2>
0
0
<COMMON> 2,468
<OTHER-SE> 230,906
<TOTAL-LIABILITY-AND-EQUITY> 618,797
<SALES> 736,858
<TOTAL-REVENUES> 736,858
<CGS> 536,925
<TOTAL-COSTS> 536,925
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,072
<INCOME-PRETAX> 83,018
<INCOME-TAX> 30,470
<INCOME-CONTINUING> 51,818
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,818
<EPS-PRIMARY> 2.05
<EPS-DILUTED> 2.04
<FN>
<F1>Receivables are presented net of the allowances for doubtful accounts.
<F2>Bonds represent revolving credit loans and long-term debt, less current
maturities.
</FN>

</TABLE>