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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2004

For the transition period from              to             

Commission File Number 0-20646

Caraustar Industries, Inc.

(Exact name of registrant as specified in its charter)

(770) 948-3101

(Registrant’s telephone number, including area code)

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 for 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

Indicate the number of shares outstanding of each of issuer’s classes of common stock, as of the latest practicable date, April 30, 2004.

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FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004

CARAUSTAR INDUSTRIES, INC.

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ITEM 1. Condensed Consolidated Financial Statements

CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share data)

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

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except per share data)

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

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

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

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004

(UNAUDITED)

Note 1. Basis of Presentation

The financial information included herein is unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. Certain notes and other information have been condensed or omitted from the interim financial statements; therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to prior year balances to conform with the 2004 presentation.

Note 2. New Accounting Pronouncements

In December 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106”. SFAS No. 132 requires disclosures about defined benefit pension plans’ and other postretirement plans’ assets, obligations, cash flows and net cost. The Company adopted the annual disclosure provisions for the fiscal year ended December 31, 2003. The Company adopted the interim disclosure provisions effective with this filing as provided in Note 10.

Note 3. Accounting for Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock options. Interim pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” which requires that the information be determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair values for these options were estimated as of the grant dates using the Black-Scholes option pricing model with the following weighted average assumptions:

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The total fair value of the options granted during the year ended December 31, 2003 was computed to be approximately $1.0 million. As of March 31, 2004 no additional options had been granted. If the Company had accounted for these plans in accordance with SFAS No. 123 “Accounting for Stock-Based Compensation” and included the amortization expense related to options vesting each year, the Company’s reported and pro forma net loss and net loss per share for the three months ended March 31, 2004 and 2003 would have been as follows (in thousands, except per share data):

Note 4. Acquisition

In January 2003, the Company acquired its venture partner’s 50% interest in the equity of Caraustar Northwest, LLC, located in Tacoma, WA, for approximately $695 thousand. The Tacoma facility, which manufactures tubes, cores and edge protectors and performs custom slitting for customers on the West coast, became a part of the tube, core and composite container segment. This acquisition was accounted for under the purchase method of accounting, applying the provisions of Statements of Financial Accounting Standards No. 141 “Business Conditions”. As a result, the Company recorded the assets and liabilities of the acquired company at its estimated fair value. The financial statements reflect the operating results of the acquired business for the periods after the date of acquisition.

Note 5. Inventory

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

Inventories at March 31, 2004 and December 31, 2003 were as follows (in thousands):

Note 6. Senior Credit Facility and Other Long-Term Debt

At March 31, 2004 and December 31, 2003, total long-term debt consisted of the following (in thousands):

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Senior Credit Facility

The Company’s senior credit facility provides for a revolving line of credit of $75.0 million and is secured primarily by a first priority security interest in the Company’s accounts receivable and inventory. The facility matures in June 2006. Borrowing availability is subject to borrowing base requirements established by eligible accounts receivable and inventory. The facility includes a subfacility of $50.0 million for letters of credit, usage of which reduces availability under the facility. As of March 31, 2004, no borrowings were outstanding under the facility; however, an aggregate of $40.5 million in letter of credit obligations were outstanding. Availability under the facility at March 31, 2004 was limited to $24.5 million after taking into consideration outstanding letter of credit obligations and minimum borrowing availability requirements.

Borrowings under the facility bear interest at a rate equal to, at the Company’s option, either (1) the base rate (which is the prime rate most recently announced by Bank of America, N.A., the administrative agent under the facility plus a margin of 0.50% or (2) the adjusted Eurodollar Interbank Offered Rate plus a margin of 2.50%. The undrawn portion of the facility is subject to a facility fee at an annual rate of 0.50%. Outstanding letters of credit are subject to an annual fee equal to the applicable margin for Eurodollar-based loans.

The facility contains covenants that restrict, among other things, the Company’s ability and its subsidiaries’ ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, make capital expenditures in excess of $30.0 million per year or change the nature of the Company’s business. The facility also contains a fixed charge coverage ratio covenant, which applies only in the event borrowing availability falls below $10.0 million or suppressed availability falls below $20.0 million. Suppressed availability is defined as the amount of eligible accounts receivable and inventory (less reserves and aggregate credit outstandings) in excess of $75.0 million or the amount of eligible inventory (less reserves and aggregate credit outstandings) in excess of $37.5 million. The fixed charge ratio covenant did not require measurement at March 31, 2004.

The facility contains events of default including, but not limited to, nonpayment of principal or interest, violation of covenants, incorrectness of representations and warranties, cross-default to other indebtedness, bankruptcy and other insolvency events, material judgments, certain ERISA events, actual or asserted invalidity of loan documentation and certain changes of control of the Company.

For information regarding the Company’s former senior credit facility, which was in place during the first quarter of 2003 and was replaced June 24, 2003, see the Form 10-K for the year ended December 31, 2003.

Senior and Senior Subordinated Notes

On June 1, 1999, the Company issued $200.0 million in aggregate principal amount of 7 ³/8% senior notes due June 1, 2009. The 7 ³/8% senior notes were issued at a discount to yield an effective interest rate of 7.47% and pay interest semiannually. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 7 ³/8% senior notes is 6.4%. The 7 ³/8% senior notes are unsecured obligations of the Company. The Company purchased an aggregate of $10.3 million of these notes in the open market, including $3.5 million purchased in February 2004.

On March 29, 2001, the Company issued $285.0 million of 9 ⁷/8% senior subordinated notes due April 1, 2011 and $29.0 million of 7 ¹/4% senior notes due May 1, 2010. These senior subordinated notes and senior notes were issued at a discount to yield effective interest rates of 10.5% and 9.4%, respectively. After taking into account realized gains from unwinding various interest rate swap agreements, the current effective interest rate of the 9 ⁷/8% senior subordinated notes is 9.2%. These publicly traded senior subordinated and senior notes are unsecured, but are guaranteed, on a joint and several basis, by all of the Company’s domestic subsidiaries, other than two that are not wholly-owned.

Interest Rate Swap Agreements

In January 2003, the Company effectively unwound $85.0 million of its $135.0 million interest rate swap agreement related to the 9 ⁷/8% senior subordinated notes by assigning the Company’s rights and obligations under the swap to one of the Company’s lenders under the senior credit facility. In exchange, the Company received approximately $4.3 million. The $4.3 million gain, which was classified as a component of debt, will be accreted to interest expense over the life of the notes and will partially offset the increase in interest expense. The gain lowered the effective interest rate of the 9 ⁷/8% senior subordinated notes by approximately 30 basis points.

In May 2003, the Company unwound the remaining $50.0 million of its interest rate swap agreement related to the 9 ⁷/8% senior subordinated notes and received approximately $4.6 million from the bank counter-party. The $4.6 million gain, which

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was classified as a component of debt, will be accreted to interest expense over the life of the notes and will partially offset the increase in interest expense. The $4.6 million gain lowered the effective interest rate of the 9 ⁷/8% senior subordinated notes by approximately 30 basis points.

In July 2003, the Company entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which had payment and expiration dates that corresponded to the terms of the note obligations it covered, effectively converted $50.0 million of the Company’s fixed rate 9 ⁷/8% senior subordinated notes into variable rate obligations. The variable rates were based on six-month LIBOR plus a fixed margin.

In December 2003, the Company entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and expiration dates that correspond to the terms of the note obligations it covers, effectively converted $50.0 million of the Company’s fixed rate 9 ⁷/8% senior subordinated notes into variable rate obligations. The variable rates are based on six-month LIBOR plus a fixed margin.

In March 2004, the Company unwound the July 2003 $50.0 million interest rate swap agreement related to the 9 ⁷/8% senior subordinated notes and received approximately $380 thousand from the bank counter-party. The $380 thousand gain, which is classified as a component of debt, will be accreted to interest expense over the remaining life of the notes and will partially offset the increase in interest expense.

In April 2004, the Company entered into an interest rate swap agreement in the notional amount of $50.0 million. This agreement, which has payment and expiration dates that correspond to the terms of the note obligations it covers, effectively converted $50.0 million of the Company’s fixed rate 9 ⁷/8% senior subordinated notes into variable rate obligations. The variable rates are based on six-month LIBOR plus a fixed margin.

Under the provisions of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” as amended, the Company has designated and accounted for its interest rate swap agreements as fair value hedges. The Company has assumed no ineffectiveness with regard to these agreements as they qualified for the short-cut method of accounting for fair value hedges of debt obligations, as prescribed by SFAS No. 133. The March 31, 2004 estimated fair value of the swap was $1.0 million and is classified as a component of other long-term assets, with a corresponding adjustment to long-term debt in the accompanying balance sheet. The December 31, 2003 aggregate estimated liability related to the swaps was $1.1 million and is classified as a component of other long-term liabilities, with a corresponding adjustment to long-term debt in the accompanying balance sheet.

Note 7. Segment Information

The Company operates principally in three business segments organized by products. The paperboard segment consists of facilities that manufacture 100% 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 composite cans. The carton and custom packaging segment consists of facilities that produce printed and unprinted folding cartons and set-up boxes and facilities that provide contract manufacturing and contract packaging services. Intersegment sales are recorded at prices which approximate market prices.

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

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The following table presents certain business segment information for the periods indicated (in thousands):

Note 8. Goodwill and Other Intangible Assets

Goodwill

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Under this pronouncement the Company no longer amortizes goodwill but instead performs an impairment test at least annually. The Company’s most recent impairment test was performed during the fourth quarter of 2003 and did not result in an impairment charge. There were no changes in goodwill during the three months ended March 31, 2004.

Intangible Assets

As of March 31, 2004 and December 31, 2003, the Company had an intangible asset of $7.7 million, net of $1.0 million of accumulated amortization, and $7.8 million, net of $858 thousand of accumulated amortization, respectively, which is classified with other assets. Amortization expense for the three months ended March 31, 2004 and 2003 was $142 thousand. The intangible asset is associated with the acquisition of certain assets of the Smurfit Industrial Packaging Group, which was completed in 2002, and is attributable to the acquired customer relationships. This intangible asset is being amortized over 15 years. Scheduled amortization of the intangible asset for the next five years is as follows (in thousands):

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Note 9. Restructuring and Impairment Costs

In March 2003, the Company announced the permanent closure of its Buffalo Paperboard mill located in Lockport, New York. The Company recorded a charge of approximately $4.3 million in connection with this closure. The $4.3 million charge included a $3.1 million impairment charge for assets, a $670 thousand accrual for severance and other termination benefits, and a $607 thousand accrual for other exit costs leaving no accrual as of March 31, 2004. At December 31, 2003, a $3 thousand liability remained for other exit costs. During the first quarter of 2004, all remaining other exit costs were paid and an additional $45 thousand for other exit costs were expensed and paid leaving no accrual as of March 31, 2004. As of March 31, 2004 the exit plan for Buffalo was complete except for the sale of the property which the Company is currently marketing.

In June 2003, the Company initiated a plan to permanently close its Ashland, Ohio carton facility. The Company downsized this facility in December 2002; however, due to severe margin pressure and excess industry capacity, the Company decided to close the facility. During 2003, the Company recorded a charge of approximately $6.7 million, which includes a $4.1 million impairment charge for assets, a $1.2 million accrual for severance and other termination benefits and an accrual of $1.4 million for other exit costs. At December 31, 2003 an accrual of $302 thousand for severance and other termination benefits remained and an accrual of $43 thousand remained for other exit costs. Substantially all of the Ashland carton sales were transferred to the Company’s other carton manufacturing facilities. During the first quarter of 2004, the Company recorded an additional $429 thousand impairment charge for assets and an additional $495 thousand for other exit costs. During the first quarter of 2004, the Company paid $142 thousand related to severance and other termination benefits and $495 thousand for other exit costs, leaving accruals of $160 thousand and $43 thousand for severance and other termination benefits and other exit costs, respectively.

In January 2004, the Company announced the permanent closure of the Cedartown paperboard mill located in Cedartown, Georgia. The Company recorded a charge of approximately $1.0 million in connection with this closure. The $1.0 million charge included a $500 thousand impairment charge for assets, a $188 thousand charge for severance and other termination benefits and a $339 thousand charge for other exit costs. During the first quarter of 2004 all of these costs were paid and no accrual remained. As of March 31, 2004, there was one employee remaining at the mill. Substantially all of Cedartown’s paperboard production was transferred to the Company’s other paperboard mills. As of March 31, 2004, the exit plan for Cedartown was complete except for the sale of the property which the Company is currently marketing.

In January 2004, the Company initiated a plan to centralize the accounting and finance operations to the Company’s headquarters located in Austell, Georgia. This action was initiated to enhance the accounting control environment and reduce costs. The Company recorded a charge of approximately $800 thousand in connection with this plan related to consulting fees and relocation expenses that were paid during the period leaving no accrual as of March 31, 2004. The Company expects to incur an additional $300 thousand in restructuring charges and to complete this centralization plan during the second quarter of 2004.

During 2001 and 2002, the Company initiated restructuring activities to consolidate its Carolina Converting Inc. operation with its Carolina Components operation, to close the Chicago paperboard mill, and to close the Halifax paperboard mill. At December 31, 2003, a $4.2 million accrual remained for other exit costs related to these activities. During the first quarter of 2004, the Company incurred an additional $246 thousand charge for impairment of assets related to these restructuring activities. The Company also paid $573 thousand in other exit costs, leaving an accrual of $3.6 million at March 31, 2004. All of these restructuring activities are substantially complete except for selling the real estate or fulfilling the Company’s obligation under a real estate lease.

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The following is a summary of restructuring and impairment costs and the restructuring liability from December 31, 2003 to March 31, 2004 (in thousands):

For restructuring plans initiated during 2003 and 2004, the paperboard segment recorded $1.1 million of restructuring and impairment costs during the first quarter of 2004. The paperboard segment has recorded $6.1 million cumulatively related to these plans and expects to record an additional $300 thousand in other exit costs to complete the plans. The carton and custom packaging segment recorded $924 thousand of restructuring and impairment costs during the first quarter of 2004. The carton and custom packaging segment has recorded $7.6 million cumulatively related to these plans and expects to record an additional $700 thousand in other exit costs to complete the plans.

10. 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. Based on estimates at December 31, 2003 no contributions will be required for the year ended December 31, 2004.

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 March 31, 2004.

Pension expense for the Pension Plan and the SERP includes the following components for the three months ended March 31, 2004 and 2003 (in thousands):

Other Postretirement Benefits

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

Net periodic postretirement benefit cost for the three months ended March 31, 2004 and 2003 included the following components (in thousands):

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Note 11. Loss Per Share

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

Since the three months ended March 31, 2004 and 2003 were net losses, the impact of the dilutive effect of stock options, if any, were not added to the weighted average shares.

Note 12. Equity Interests in Unconsolidated Affiliate

The Company owns 50% of Standard Gypsum, L.P. (“Standard”). Standard is a joint venture, accounted for under the equity method, that operates two gypsum wallboard manufacturing facilities. One facility is located in McQueeny, Texas and the other is in Cumberland City, Tennessee. The joint venture is managed by Temple-Inland Forest Products Corporation, which is the owner of the remaining 50% interest in the joint venture. Because of the significance of Standard’s operating results to the Company for the year ended December 31, 2003 and the three-month period ended March 31, 2004, Standard’s summarized income statement and balance sheet are presented below (in thousands):

Note 13. Guarantor Condensed Consolidating Financial Statements

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

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CARAUSTAR INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING BALANCE SHEETS

(In thousands)