# SECURITIES	AND	EXCHANGE	COMMISSION

ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)

OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

For	the	fiscal	year	ended	December	31,	2002

Commission	file	number	1-15399

# PACKAGING	CORPORATION	OF	AMERICA

(Exact	Name	of	Registrant	as	Specified	in	its	Charter)

Delaware

(State	or	Other	Jurisdiction	of Incorporation	or	Organization)

1900	West	Field	Court,	Lake	Forest,	Illinois

(Address	of	Principal	Executive	Offices)

(I.R.S.	Employer Identification	No.)

(Zip	Code)

Registrant's	telephone	number,	including	area	code	(847)	482-3000

Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

Class

Common	Stock,	$0.01	par	value

# Name	of	Each	Exchange

on	Which	Registered

# New	York	Stock	Exchange

Securities	registered	pursuant	to	Section	12(g)	of	the	Act:

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	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	o

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.	o

Indicate	by	check	mark	whether	the	registrant	is	an	accelerated	filer	(as	defined	in	Rule	12b-2	of	the	Exchange	Act).	Yes	x			No	o

At	June	28,	2002,	the	last	business	day	of	the	Registrant's	most	recently	completed	second	fiscal	quarter,	the	aggregate	market	value	of	the	Registrant's	common equity	held	by	nonaffiliates	was	approximately	$1,194,557,459.	This	calculation	of	market	value	has	been	made	for	the	purposes	of	this	report	only	and	should	not	be considered	as	an	admission	or	conclusion	by	the	Registrant	that	any	person	is	in	fact	an	affiliate	of	the	Registrant.

# Documents	Incorporated	by	Reference

Specified	portions	of	the	Proxy	Statement	for	the	Registrant's	2003	Annual	Meeting	of	Shareholders	are	incorporated	by	reference	to	the	extent	indicated	in	Part	III of	this	Form	10-K.

# PART	II

# PART	I

# Item	1.	BUSINESS

# General

Packaging	Corporation	of	America,	or	PCA,	is	the	sixth	largest	producer	of	containerboard	and	corrugated	products	in	the	United	States,	based	on	production capacity	as	reported	in	the	Pulp	&	Paper	2002	North	American	Fact	Book.	With	2002	net	sales	of	$1.7	billion,	PCA	produced	about	2.2	million	tons	of	containerboard, about	80%	of	which	was	consumed	in	our	corrugated	products	manufacturing	plants,	and	shipped	about	27.5	billion	square	feet	(BSF)	of	corrugated	products.

|  |  | First<br>Quarter | Second<br>Quarter | Third<br>Quarter | Fourth<br>Quarter | Full<br>Year |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Containerboard\tProduction\t(thousand\ttons) | 2002 | 520 | 548 | 578 | 558 | 2,204 |
|  | 2001 | 502 | 519 | 561 | 543 | 2,125 |
| Corrugated\tShipments\t(BSF) | 2002 | 6.5 | 7.2 | 7.3 | 6.5 | 27.5 |
|  | 2001 | 6.6 | 6.8 | 6.8 | 6.3 | 26.5 |

In	2002,	we	produced	about	1.4	million	tons	of	kraft	linerboard	at	our	mills	located	in	Counce,	Tennessee	and	Valdosta,	Georgia.	We	also	produced	about 0.8	million	tons	of	semi-chemical	corrugating	medium	at	our	mills	located	in	Tomahawk,	Wisconsin	and	Filer	City,	Michigan.	We	currently	lease	the	cutting	rights	to approximately	140,000	acres	of	timberland	located	near	our	Counce	and	Valdosta	mills.	We	also	have	supply	agreements	on	about	600,000	of	the	800,000	acres	of timberland	we	sold	during	1999	and	2000.

Our	converting	operations	produce	a	wide	variety	of	corrugated	packaging	products,	including	conventional	shipping	containers	used	to	protect	and	transport manufactured	goods.	We	also	produce	multi-color	boxes	and	displays	with	strong	visual	appeal	that	help	to	merchandise	the	packaged	product	in	retail	locations.	Finally, we	are	a	large	producer	of	meat	boxes	and	wax-coated	boxes	for	the	agricultural	industry.

# Corporate	Developments

On	April	12,	1999,	Pactiv	Corporation,	formerly	known	as	Tenneco	Packaging	Inc.,	a	wholly	owned	subsidiary	of	Tenneco	Inc.,	sold	its	containerboard	and corrugated	products	business	to	PCA,	an	entity	formed	by	Madison	Dearborn	Partners,	LLC,	a	private	equity	investment	firm,	in	January	1999,	for	$2.2	billion, consisting	of	$246.5	million	in	cash,	the	assumption	of	$1,760.0	million	of	debt	incurred	by	Pactiv	immediately	prior	to	the	contribution,	and	a	45%	common	equity interest	in	PCA	valued	at	$193.5	million.	PCA	Holdings	LLC,	an	entity	organized	and	controlled	by	Madison	Dearborn,	acquired	the	remaining	55%	common	equity interest	in	PCA	for	$236.5	million	in	cash,	which	was	used	to	finance	in	part	the	transactions.

The	financing	of	the	transactions	consisted	of	(1)	borrowings	under	a	new	$1,469.0	million	senior	credit	facility	for	which	J.P.	Morgan	Securities	Inc.	and	BT	Alex. Brown	Incorporated	(the	predecessor	to	Deutsche	Banc	Alex.	Brown)	were	co-lead	arrangers,	(2)	the	offering	of	$550.0	million	of	9 	5 /8%	senior	subordinated	notes	due 2009,	and	$100.0	million	of	12 	3 /8%	senior	exchangeable	preferred	stock	due	2010,	(3)	a	cash	equity	investment	of	$236.5	million	by	PCA	Holdings	LLC	and	(4)	an equity	investment	by	Pactiv	valued	at	$193.5	million.	As	required	by	their	terms,	the	$550.0	million	of	senior	subordinated	notes	and	$100.0	million	of	senior exchangeable	preferred	stock	issued	in	the	April	12,	1999	transactions	were	exchanged	for	publicly	registered	securities	in	the	same	amounts	in	a	registered	exchange offer	completed	in	October	1999.

The	senior	credit	facility	was	entered	into	to	finance	in	part	the	transactions	and	to	pay	related	fees	and	expenses	and	to	provide	future	borrowings	to	PCA	for general	corporate	purposes,	including	working	capital.	The	senior	credit	facility	initially	consisted	of	three	term	loan	facilities	in	an	original	aggregate	principal	amount of	$1,219.0	million	and	a	revolving	credit	facility	with	up	to	$250.0	million	in	availability.	Effective	December	14,	1999,	PCA	elected	to	reduce	its	availability	under the	revolving	credit	facility	from	$250.0	million	to	$150.0	million.

On	January	28,	2000,	PCA	became	a	publicly-traded	company	with	the	initial	public	offering	of	its	common	stock.	In	the	offering,	Pactiv	sold	35,000,000	shares and	PCA	sold	11,250,000	new	shares	of	common	stock,	both	at	an	offering	price	of	$12.00	per	share.	PCA	used	its	net	proceeds	to	redeem	all	of	the	outstanding	senior exchangeable	preferred	stock	on	March	3,	2000.

PCA	completed	the	refinancing	of	its	$735.0	million	senior	secured	debt	and	$150.0	million	senior	secured	revolving	credit	facility	on	June	29,	2000.	Completion of	the	refinancing	eliminated	a	$226.5	million	term	loan,	and	reduced	PCA's	average	effective	interest	rate	on	its	senior	secured	term	debt	by	approximately	100	basis points.	PCA's	total	borrowings	under	the	senior	credit	facility	as	of	December	31,	2002	consisted	of	$79.0	million	of	term	loans.	No	amounts	were	outstanding	under	the senior	revolving	credit	facility	as	of	that	date.

On	November	29,	2000,	PCA	established	an	on-balance	sheet	securitization	program	for	its	trade	accounts	receivable.	To	effectuate	this	program,	PCA	formed	a wholly-owned	limited	purpose	subsidiary,	Packaging	Credit	Company,	LLC,	or	PCC,	which	in	turn	formed	a	wholly-owned,	bankruptcy-remote,	special-purpose subsidiary,	Packaging	Receivables	Company,	LLC,	or	PRC,	for	the	purpose	of	acquiring	receivables	from	PCC.	Both	of	these	entities	are	included	in	the	consolidated financial	statements	of	PCA.	Under	this	program,	PCC	purchases	on	an	ongoing	basis	all	of	the	receivables	of	PCA	and	sells	such	receivables	to	PRC.	PRC	and	lenders established	a	$150.0	million	receivables-backed	revolving	credit	facility	through	which	PRC	obtains	funds	to	purchase	receivables	from	PCC.	The	receivables purchased	by	PRC	are	and	will	be	solely	the	property	of	PRC.	In	the	event	of	a	liquidation	of	PRC,	the	creditors	of	PRC	would	be	entitled	to	satisfy	their	claims	from PRC's	assets	prior	to	any	distribution	to	PCC	or	PCA.	Credit	available	under	the	receivables	credit	facility	is	on	a	borrowing-base	formula.	As	a	result,	the	full	amount of	the	facility	may	not	be	available	at	all	times.	As	of	December	31,	2002,	$113.0	million	was	outstanding	and	$37.0	million	was	available	for	additional	borrowing under	the	receivables	credit	facility.	The	highest	outstanding	principal	balance	under	the	receivables	credit	facility	during	fiscal	2002	was	$126.0	million.

During	2001,	Pactiv	sold	approximately	6,160,240	shares	of	PCA	common	stock,	which	represented	its	remaining	ownership	interest.

# Industry	Overview

According	to	the	Fibre	Box	Association,	the	value	of	industry	shipments	of	corrugated	products	was	over	$22	billion	in	2002.

The	primary	end-use	markets	for	corrugated	products	are	shown	below:

Converting	plants	tend	to	be	located	in	close	proximity	to	customers	to	minimize	freight	costs.	The	corrugated	products	industry	consists	of	approximately	675 companies	in	the	United	States.

Containerboard,	which	includes	both	linerboard	and	corrugating	medium,	is	the	principal	raw	material	used	to	manufacture	corrugated	products.	Linerboard	is	used as	the	inner	and	outer	facings,	or	liners,	of	corrugated	products.	Corrugating	medium	is	fluted	and	laminated	to	linerboard	in	corrugator	plants	to	produce	corrugated sheets.	The	sheets	are	subsequently	printed,	cut,	folded	and	glued	in	corrugator	plants	or	sheet	plants	to	produce	corrugated	products.

Containerboard	may	be	manufactured	from	both	softwood	and	hardwood	fibers,	as	well	as	from	recycled	fibers	from	used	corrugated	and	waste	from	converting operations.	Kraft	linerboard	is	made	predominantly	from	softwoods	like	pine.	Semi-chemical	corrugating	medium	is	made	from	hardwoods	such	as	oak.	The	finished paper	product	is	wound	into	large	rolls,	which	are	slit	to	size	as	required	by	converters,	and	shipped	to	them.

Linerboard	is	made	in	a	range	of	grades	or	basis	weights.	The	most	commonly	used	basis	weight	of	linerboard	is	35	lb.,	although	linerboard	is	produced	in	weights that	vary	from	under	26	lb.	to	over	90	lb.	Basis	weight	represents	the	weight	in	pounds	per	thousand	square	feet	of	linerboard.	Producers	also	market	linerboard	by performance	characteristics,	appearance	and	color.	The	following	table	describes	different	product	weight,	performance	and	color	characteristics:

Historically,	pricing	for	containerboard	has	reflected	changes	in	containerboard	supply	as	well	as	changes	in	demand.

# PCA	Operations	and	Products

Our	two	linerboard	mills	can	manufacture	a	broad	range	of	linerboard	grades	ranging	from	26	lb.	to	96	lb.	Our	two	semi-chemical	corrugating	medium	mills	can manufacture	grades	ranging	in	weight	from	21	lb.	to	47	lb.	All	four	of	our	mills	have	completed	an	extensive	independent	review	process	to	become	ISO	9002	certified. ISO	9002	is	an	international	quality	certification	that	verifies	a	facility	maintains	and	follows	stringent	procedures	for	manufacturing,	sales	and	customer	service.

Counce.			Our	Counce,	Tennessee	mill	is	one	of	the	largest	linerboard	mills	in	the	United	States.	Its	production	capacity	is	approximately	980,000	tons	per	year.	In 2002,	we	produced	approximately	966,000	tons	of	kraft	linerboard	on	two	paper	machines	at	Counce.	We	produced	a	broad	range	of	basis	weights	from	31	lb.	to	90	lb. The	mill	also	produces	a	variety	of	performance	and	specialty	grades	of	linerboard	including	high-ring	crush	and	wet	strength.

Valdosta.			Our	Valdosta,	Georgia	mill	is	a	kraft	linerboard	mill	that	has	a	production	capacity	of	approximately	406,000	tons	per	year.	In	2002,	our	single	paper machine	at	Valdosta	produced	approximately	425,000	tons	of	kraft	linerboard.	Linerboard	production	for	2002	exceeded	the	stated	capacity	of	the	mill	due	to	an unusually	high	percentage	of	middleweight	production.	Valdosta	produces	light	to	middleweight	linerboard	ranging	from	35	lb.	to	56	lb.,	and	heavyweight/super heavyweight	linerboard	ranging	from	61	lb.	to	90	lb.

Tomahawk.			Our	Tomahawk,	Wisconsin	mill	is	the	second	largest	corrugating	medium	mill	in	the	United	States	with	production	capacity	of	547,000	tons	per	year. In	2002,	we	produced	approximately	533,000	tons	of	semi-chemical	corrugating	medium	on	three	paper	machines,	one	of	which	is	among	the	largest	corrugating medium	machines	in	the	world.	These	machines	produce	a	broad	range	of	basis	weights	from	23	lb.	to	40	lb.	Our	Tomahawk	mill	also	produces	a	variety	of	performance and	specialty	grades	of	corrugating	medium.	This	includes	high	ring	crush,	wet	strength,	tare	weight	and	super	heavyweight.

Filer	City.			Our	Filer	City,	Michigan	mill	is	a	semi-chemical	corrugating	medium	mill	currently	operating	with	two	machines	with	a	production	capacity	of 292,000	tons.	In	2002,	we	produced	approximately	281,000	tons	of	corrugating	medium.	In	July	1998,	we	shut	down	one	machine	at	Filer	City.	Mill	production	capacity at	Filer	City	is	362,000	tons	a	year	if	we	run	all	three	paper	machines.	Filer	City	produces	a	range	of	corrugating	medium	grades	in	basis	weights	from	23	lb.	to	40	lb.

We	operate	64	corrugated	manufacturing	operations,	a	technical	and	development	center,	five	regional	graphic	design	centers,	a	rotogravure	printing	operation	and	a complement	of	packaging	supplies	and	distribution	centers.	Of	the	64	manufacturing	facilities,	39	operate	as	combining	operations	that	manufacture	corrugated	sheets and	finished	corrugated	containers.	The	remaining	25	manufacturing	facilities	purchase	combined	sheets	and	manufacture	finished	corrugated	containers.	The	five graphic	design	centers	are	located	in	Cincinnati,	Ohio;	Dallas,	Texas;	Cranbury,	New	Jersey;	Salisbury,	North	Carolina	and	South	Gate,	California.

Our	corrugated	manufacturing	operations	are	spread	throughout	the	United	States.	Each	corrugator	plant	serves	a	market	radius	that	typically	averages	150	miles. Our	sheet	plants	are	generally	located	in	close	proximity	to	our	larger	corrugator	plants	which	enables	us	to	offer	additional	services	and	converting	capabilities	such	as small	volume	and	quick	turnaround	items.

We	produce	a	wide	variety	of	products	ranging	from	basic	corrugated	shipping	containers	to	specialized	packaging	such	as	wax-coated	boxes	for	the	agriculture industry.	We	also	have	multi-color	printing	capabilities	to	make	high-impact	graphics	boxes	and	displays	that	offer	customers	more	attractive	packaging.

# Timberland

We	currently	lease	the	cutting	rights	to	approximately	140,000	acres	of	timberland	located	near	our	Counce	and	Valdosta	mills.	Virtually	all	of	the	acres	under cutting	rights	agreements	are	located	within	100	miles	of	our	mills,	which	results	in	lower	wood	transportation	costs	and	provides	a	secure	source	of	wood	fiber.	Most	of these	leased	cutting	rights	agreements	have	terms	with	over	15	years	remaining.

During	1999	and	2000,	PCA	sold	about	800,000	acres	of	timberland.	As	part	of	the	timberland	sale	agreements,	we	entered	into	supply	arrangements	covering about	600,000	acres	of	the	total	acres	sold.	We	also	retained	a	one-third	equity	ownership	interest	in	385,000	acres	sold	to	Southern	Timber	Venture,	LLC	in November	2000.

In	addition	to	the	timberland	we	manage	ourselves,	our	Forest	Management	Assistance	Program	provides	professional	forestry	assistance	to	private	timberland owners	to	improve	harvest	yields	and	to	optimize	their	harvest	schedule.	We	have	managed	the	regeneration	of	approximately	120,000	acres	by	supplying	pine seedlings.	In	exchange	for	our	expertise,	we	are	given	the	right	of	first	refusal	over	timber

sales	from	those	lands.	These	private	lands	include	over	210,000	acres	of	timberland.	We	expect	to	harvest	approximately	85,000	cords	of	wood	from	these	forests annually.

PCA	also	participates	in	the	Sustainable	Forestry	Initiative,	which	is	organized	by	the	American	Forest	and	Paper	Association.	This	initiative	is	aimed	at	ensuring the	long-term	health	and	conservation	of	America's	forestry	resources.	Activities	include	limiting	tree	harvest	sizes,	replanting	harvest	acreage,	participating	in	flora	and fauna	research	and	protecting	water	streams.

# Solid	Wood	and	Recycling	Facilities

We	own	three	sawmills	located	in	Ackerman	and	Fulton,	Mississippi	and	Selmer,	Tennessee.	During	2002,	these	three	sawmills	sold	approximately	115	million board	feet	of	lumber	used	to	make	furniture	and	building	products.	We	also	have	an	air-dry	yard	operation	in	Burnsville,	Mississippi	that	holds	newly	cut	lumber	while	it dries.

We	also	operate	two	paper	recycling	centers,	one	in	Jackson,	Tennessee	and	one	in	Nashville,	Tennessee.	These	recycling	centers	collect	old	corrugated	containers, newspapers	and	other	paper	that	provide	a	source	of	recycled	fiber	to	our	nearby	Counce	mill.

# Sales	and	Marketing

Our	corrugated	products	are	sold	through	a	direct	sales	and	marketing	organization.	Sales	representatives	and	a	sales	manager	at	each	converting	operations	facility serve	local	and	regional	accounts.	Corporate	account	managers	serve	large	national	accounts	at	multiple	customer	locations.	Additionally,	our	graphic	design	centers maintain	an	on-site	dedicated	graphics	sales	force.	General	marketing	support	is	located	at	our	corporate	headquarters.

Our	containerboard	sales	group	is	responsible	for	the	sale	of	linerboard	and	corrugating	medium	to	our	corrugator	plants,	to	other	domestic	customers	and	to	the export	market.	This	group	handles	order	processing	for	all	shipments	of	containerboard	from	our	mills	to	our	corrugator	plants.	These	personnel	also	coordinate	and execute	all	containerboard	trade	agreements	with	other	containerboard	manufacturers.

In	addition	to	direct	sales	and	marketing	personnel,	we	utilize	support	personnel	that	are	new	product	development	engineers	and	product	graphics	and	design specialists.	These	individuals	are	located	at	both	the	corrugator	plants	as	well	as	the	graphic	design	centers.

# Distribution

Our	corrugated	products	are	usually	delivered	by	truck	due	to	our	large	number	of	customers	and	their	demand	for	timely	service.	Shipping	costs	represent	a relatively	high	percentage	of	our	total	costs	due	to	the	high	bulk	of	corrugated	products.	As	a	result,	our	converting	operations	typically	service	customers	within	a	150 miles	radius.

Containerboard	produced	in	our	mills	is	shipped	by	rail	or	truck.	Our	individual	mills	do	not	own	or	maintain	outside	warehousing	facilities.	We	do	use	some	third- party	warehouses	for	short-term	storage.

# Customers

PCA's	corrugated	products	group	sells	to	over	8,300	customers	in	over	14,600	locations.	About	70%	of	our	corrugated	products	customers	are	regional	and	local accounts,	which	are	broadly	diversified	across	industries	and	geographic	locations.	The	remaining	30%	of	our	customer	base	consists	primarily	of	national	accounts,	or those	customers	with	a	national	presence.	These	customers	typically	purchase	corrugated	products	from	several	of	our	box	plants	throughout	the	United	States.

In	2002,	our	corrugated	products	plants	consumed	approximately	1,752,000	tons,	or	80%	of	our	mills'	containerboard	production.	Of	the	remaining	20%	of	our containerboard	mill	production	that	we	did	not	consume	at	our	own	converting	operations,	about	12%	of	the	tons	was	sold	to	domestic	customers,	and	about	8%	of	the tons	was	sold	to	export	customers.

# Major	Raw	Materials	Used

Fiber	supply.			Fiber	is	the	single	largest	cost	in	the	manufacture	of	containerboard.	PCA	consumes	both	wood	fiber	and	recycled	fiber	in	our	containerboard	mills. We	have	no	100%	recycled	mills,	or	those	mills	whose	fiber	consumption	consists	solely	of	recycled	fiber.	To	reduce	our	fiber	costs,	we	have	invested	in	processes	and equipment	to	ensure	a	high	degree	of	fiber	flexibility.	Our	mills	have	the	capability	to	shift	a	portion	of	their	fiber	consumption	between	softwood,	hardwood	and recycled	sources.	With	the	exception	of	our	Valdosta	mill,	our	other	mills	can	utilize	some	recycled	fiber	in	their	containerboard	production.	Our	ability	to	use	various types	of	virgin	and	recycled	fiber	helps	mitigate	the	impact	of	changes	in	the	prices	of	various	fibers.	Our	corrugated	products	plants	generate	recycled	fiber	as	a	by- product	from	the	manufacturing	process,	which	is	sold	to	our	mills	directly	or	through	trade	agreements.	During	2002,	our	containerboard	mills	consumed approximately	554,000	tons	of	recycled	fiber,	of	which	about	198,000	tons	was	generated	from	our	own	box	plants,	resulting	in	net	recycled	consumption	of	356,000 tons,	or	16%	of	our	total	fiber	requirements.

Energy	supply.			Energy	at	the	mills	is	obtained	through	purchased	electricity	or	through	various	fuels,	which	are	converted	to	steam	or	electricity	on-site.	Fuel sources	include	coal,	natural	gas,	oil,	internally	produced	and	purchased	bark	and	by-products	of	the	containerboard	manufacturing	and	pulping	process.	These	fuels	are burned	in	boilers	to	produce	steam.	Steam	turbine	generators	are	used	to	produce	electricity.	To	reduce	our	mill	energy	cost,	we	have	invested	in	processes	and equipment	to	ensure	a	high	level	of	purchased	fuel	flexibility.	Historically,	natural	gas	and	fuel	oil	have	shown	more	price	volatility	than	coal	and	purchased	bark. During	2002,	11.8	million	M 2 	BTU's	(million	BTU's),	or	approximately	70%	of	our	mills	purchased	fuel	needs,	were	from	purchased	bark	and	coal,	historically	our two	lowest	cost	fuels.	For	the	same	period,	our	mills	consumed	about	3.0	million	M 2 	BTU's	of	natural	gas	and	1.9	million	M 2 	BTU's	of	fuel	oil.

Our	two,	kraft	linerboard	mills	at	Counce	and	Valdosta	generate	approximately	65%	to	70%	of	their	fuel	requirements	from	their	own	by-products.	Approximately 45%	to	50%	of	the	electricity	consumed	by	our	four	mills	is	generated	on-site.

PCA's	corrugated	products	combining	plants	each	have	a	boiler	that	produces	steam	which	is	used	by	the	corrugator.	The	majority	of	these	boilers	burn	natural	gas,

although	some	also	have	the	ability	to	burn	fuel	oil.	During	2002,	PCA's	corrugated	products	plants	consumed	approximately	2.1	million	M 2 	BTU's	of	natural	gas.

# Competition

Corrugated	products	are	produced	by	about	675	U.S.	companies	operating	approximately	1,425	plants.	Most	corrugated	products	are	custom	manufactured	to	the customer's	specifications.	Corrugated	producers	generally	sell	within	a	150-mile	radius	of	their	plants	and	compete	with	other	corrugated	producers	in	their	local	market. In	fact,	the	Fibre	Box	Association	tracks	industry	data	by	47	distinct	market	regions.

The	larger,	multi-plant	integrated	companies	may	also	solicit	larger,	multi-plant	customers	who	purchase	for	all	of	their	facilities	on	a	consolidated	basis.	These customers	are	often	referred	to	as	national	or	corporate	accounts.

Corrugated	products	businesses	seek	to	differentiate	themselves	through	pricing,	quality,	service,	design	and	product	innovation.	We	compete	for	both	local	and national	account	business	and	we	compete

against	producers	of	other	types	of	packaging	products.	On	a	national	level,	our	competitors	include	Georgia-Pacific	Corporation,	International	Paper	Company, Smurfit-Stone	Container	Corporation,	Temple-Inland	Inc.	and	Weyerhaeuser	Company.	However,	with	our	strategic	focus	on	local	and	regional	accounts,	we	believe	we compete	as	much	with	the	smaller,	independent	converters	as	with	the	larger,	integrated	producers.

Our	principal	competitors	with	respect	to	our	containerboard	produced	but	not	consumed	at	our	own	corrugated	products	plants	are	a	number	of	large,	diversified paper	companies,	including	Georgia-Pacific	Corporation,	International	Paper	Company,	Smurfit-Stone	Container	Corporation,	Temple-Inland	Inc.	and	Weyerhaeuser Company,	as	well	as	other	regional	manufacturers.	Containerboard	is	generally	considered	a	commodity-type	product	and	can	be	purchased	from	numerous	suppliers.

# Employees

As	of	December	31,	2002,	we	had	approximately	7,900	employees.	Approximately	2,200	of	these	employees	were	salaried	and	approximately	5,700	were	hourly.

Approximately	75%	of	our	hourly	employees	are	represented	by	unions.	Our	unionized	employees	are	represented	primarily	by	the	Paper,	Allied	Industrial,	Chemical, Energy	Workers	International	Union,	the	International	Association	of	Machinists,	the	Graphic	Communications	International	Union	and	the	United	Steel	Workers	of America	(USWA).

The	contract	for	our	unionized	mill	employees	at	our	Valdosta,	Georgia	kraft	linerboard	mill	expires	in	September	2003.	Contracts	for	unionized	mill	employees	at our	three	remaining	containerboard	mills	expire	between	October	2005	and	June	2007.	Contracts	for	unionized	converting	plant	employees	expire	between February	2003	and	November	2008.	We	are	currently	in	negotiations	to	renew	or	extend	any	union	contracts	that	have	recently	expired	or	are	expiring	in	the	near	future.

During	2002	we	experienced	no	work	stoppages.	In	2001,	we	experienced	a	one-month	strike	at	our	Filer	City	mill	with	the	USWA.	The	strike	was	settled,	and	the mill's	current	agreement	expires	in	May	2006.	Prior	to	this	incident	we	had	experienced	no	instances	of	significant	work	stoppages	in	the	previous	15	years.	We	believe we	have	satisfactory	relations	with	our	employees.

# Environmental	Matters

Compliance	with	environmental	requirements	is	a	significant	factor	in	our	business	operations.	We	commit	substantial	resources	to	maintaining	environmental compliance	and	managing	environmental	risk.	We	are	subject	to,	and	must	comply	with,	a	variety	of	federal,	state	and	local	environmental	laws,	particularly	those relating	to	air	and	water	quality,	waste	disposal	and	the	cleanup	of	contaminated	soil	and	groundwater.	We	believe	that	we	are	currently	in	material	compliance	with	all applicable	environmental	rules	and	regulations.	Because	environmental	regulations	are	constantly	evolving,	we	have	incurred,	and	will	continue	to	incur,	costs	to maintain	compliance	with	those	laws.	We	work	diligently	to	anticipate	and	budget	for	the	impact	of	applicable	environmental	regulations	and	do	not	currently	expect that	future	environmental	compliance	obligations	will	materially	affect	our	business	or	financial	condition.

In	April	1998,	the	United	States	Environmental	Protection	Agency	(EPA)	finalized	a	new	Clean	Air	and	Water	Act	commonly	referred	to	as	the	Cluster	Rules, which	govern	all	pulp	and	paper	mill	operations,	including	those	at	our	mills.	Over	the	next	several	years,	the	Cluster	Rules	will	affect	our	allowable	discharges	of	air and	water	pollutants.	As	a	result,	PCA	and	its	competitors	are	required	to	incur	costs	to	ensure	compliance	with	these	new	rules.	From	1997	through	2002,	we	spent approximately	$30.3	million	on	Cluster	Rule	compliance	to	meet	Clean	Air	Act	requirements.	Total	capital	costs	for	environmental	matters,	including	Cluster Rule	compliance,	were	$4.3	million	for	2002.	We	currently	estimate	2003	environmental	capital	expenditures	will	be	$14.7	million,	of	which	$4.4	million	of	the

expenditures	are	to	meet	Cluster	Rule	requirements.	Our	current	spending	projections	to	complete	all	Cluster	Rule	compliance	requirements	at	our	four	mills	is	about $14.4	million	from	2003	to	2005.

As	is	the	case	with	any	industrial	operation,	we	have	in	the	past	incurred	costs	associated	with	the	remediation	of	soil	or	groundwater	contamination.	From	1994 through	2002,	remediation	costs	at	our	mills	and	converting	plants	totaled	about	$2.9	million.	We	do	not	believe	that	any	on-going	remedial	projects	are	material	in nature.	As	of	December	31,	2002,	we	maintained	an	environmental	reserve	of	$3.7	million,	which	includes	funds	relating	to	onsite	landfill	and	surface	impoundments	as well	as	on-going	and	anticipated	remedial	projects.	We	believe	these	reserves	are	adequate.

We	could	also	incur	environmental	liabilities	as	a	result	of	claims	by	third	parties	for	civil	damages,	including	liability	for	personal	injury	or	property	damage, arising	from	releases	of	hazardous	substances	or	contamination.	We	are	not	aware	of	any	material	claims	of	this	type	currently	pending	against	us.

As	a	part	of	the	April	12,	1999	transactions,	Pactiv	agreed	to	retain	all	liability	for	all	former	facilities	and	all	sites	associated	with	pre-closing	offsite	waste disposal.	Pactiv	also	retained	environmental	liability	for	a	closed	landfill	located	near	the	Filer	City	mill.

# Forward-looking	Statements

Some	of	the	statements	in	this	report	and	in	our	2002	Annual	Report	to	Shareholders,	and	in	particular,	statements	found	in	Management's	Discussion	and	Analysis of	Financial	Condition	and	Results	of	Operations,	that	are	not	historical	in	nature	may	constitute	forward-looking	statements.	These	statements	are	often	identified	by the	words	"will,"	"should,"	"anticipate,"	"believe,"	"expect,"	"intend,"	"estimate,"	"hope,"	or	similar	expressions.	These	statements	reflect	management's	current	views with	respect	to	future	events	and	are	subject	to	risks	and	uncertainties.	There	are	important	factors	that	could	cause	actual	results	to	differ	materially	from	those	in forward-looking	statements,	many	of	which	are	beyond	our	control.	These	factors,	risks	and	uncertainties	include	the	following:

·							the	impact	of	general	economic	conditions;

·							containerboard	and	corrugated	products	general	industry	conditions,	including	competition,	product	demand	and	product	pricing;

·							fluctuations	in	wood	fiber	and	recycled	fiber	costs;

·							fluctuations	in	purchased	energy	costs;

·							legislative	or	regulatory	requirements,	particularly	concerning	environmental	matters.

Our	actual	results,	performance	or	achievement	could	differ	materially	from	those	expressed	in,	or	implied	by,	these	forward-looking	statements,	and	accordingly, we	can	give	no	assurances	that	any	of	the	events	anticipated	by	the	forward-looking	statements	will	transpire	or	occur,	or	if	any	of	them	do	so,	what	impact	they	will have	on	our	results	of	operations	or	financial	condition.	In	view	of	these	uncertainties,	investors	are	cautioned	not	to	place	undue	reliance	on	these	forward-looking statements.	We	expressly	disclaim	any	obligation	to	publicly	revise	any	forward-looking	statements	that	have	been	made	to	reflect	the	occurrence	of	events	after	the	date hereof.	For	a	discussion	of	other	factors	that	may	affect	our	business,	see	the	"Risk	Factors"	exhibit	included	with	this	report.

# Available	Information

The	Company's	internet	website	address	is	www.packagingcorp.com.	Our	annual	reports	on	Form	10-K,	quarterly	reports	on	Form	10-Q,	current	reports	on	Form	8- K,	and	amendments	to	those	reports	filed	or	furnished	pursuant	to	section	13(a)	or	15(d)	of	the	Exchange	Act	are	available	free	of	charge	through	our	website	as	soon	as reasonably	practicable	after	they	are	electronically	filed	with,	or	furnished	to,	the	Securities	and	Exchange	Commission.

The	table	below	provides	a	summary	of	our	containerboard	mills,	the	principal	products	produced	and	each	mill's	annual	capacity.

| Location | Function | Capacity	(tons) |
| :--- | :--- | :--- |
| Counce,\tTN | Kraft\tlinerboard\tmill | 980,000 |
| Valdosta,\tGA | Kraft\tlinerboard\tmill | 406,000 |
| Tomahawk,\tWI | Semi-chemical\tmedium\tmill | 547,000 |
| Filer\tCity,\tMI | Semi-chemical\tmedium\tmill | 362,000* |
| Total |  | 2,295,000 |

Each	of	the	mills	is	currently	subject	to	a	mortgage	held	by	Morgan	Guaranty	Trust	Company	of	New	York	on	behalf	of	the	lenders	under	the	senior	credit	facility.

In	addition	to	our	mills,	we	own	42	corrugated	products	plants.	We	also	own	three	sawmills,	an	air-drying	yard,	one	recycling	facility,	one	warehouse	and miscellaneous	other	property,	which	includes	sales	offices	and	woodlands	forest	management	offices.	These	sales	offices	and	woodlands	forest	management	offices generally	have	one	to	four	employees	and	serve	as	administrative	offices.	We	lease	22	corrugated	products	plants,	five	regional	design	centers,	one	recycling	facility	and numerous	other	distribution	centers,	warehouses	and	facilities.	PCA	has	one	leased	property,	a	warehouse	and	assembly	center,	outside	of	the	continental	United	States in	Nogales,	Mexico.	All	of	our	owned	real	property	is	subject	to	a	first	priority	mortgage	held	by	Morgan	Guaranty	Trust	Company	of	New	York	on	behalf	of	the lenders	under	the	senior	credit	facility.

We	lease	the	cutting	rights	to	approximately	140,000	acres	of	timberland	located	near	our	Counce	and	Valdosta	mills.	Most	of	these	cutting	rights	agreements	have terms	with	over	15	years	remaining.

We	currently	lease	our	executive	and	administrative	offices	in	Lake	Forest,	Illinois	under	a	lease	expiring	in	January	2005.	We	currently	believe	that	our	facilities and	properties	are	sufficient	to	meet	our	operating	requirements	for	the	foreseeable	future.

	On	May	14,	1999,	PCA	was	named	as	a	defendant	in	a	Consolidated	Class	Action	Complaint	which	alleged	a	civil	violation	of	Section	1	of	the	Sherman	Act.	The suit,	captioned	Winoff	Industries,	Inc.	v.	Stone	Container	Corporation,	MDL	No.	1261	(E.D.	Pa.),	names	us	as	a	defendant	based	solely	on	the	allegation	that	PCA	is successor	to	the	interests	of	Tenneco	Packaging	Inc.	and	Tenneco	Inc.,	both	of	which	were	also	named	as	defendants	in	the	suit,	along	with	nine	other	linerboard manufacturers.	The	complaint	alleges	that	the	defendants,	during	the	period	October	1,	1993	through	November	30,	1995,	conspired	to	limit	the	supply	of	linerboard, and	that	the	purpose	and	effect	of	the	alleged	conspiracy	was	artificially	to	increase	prices	of	corrugated	containers.	The	plaintiffs	have	moved	to	certify	a	class	of	all persons	in	the	United	States	who	purchased	corrugated	containers	directly	from	any	defendant	during	the	above	period,	and	seek	treble	damages	and	attorneys'	fees	on behalf	of	the	purported	class.	The	Court	granted	plaintiffs'	motion	on	September	4,	2001,	but	modified	the	proposed	class	to	exclude	those	purchasers	who	purchased corrugated	containers	pursuant	to	contracts	in	which	the	price	was	"not	tied	to	the	price	of	linerboard".	The	Court's	class	certification	decision	was	affirmed	by	the	Court of	Appeals	for	the	Third	Circuit	on	September	5,	2002.	The	case	is	currently	set	for	trial	in	April,	2004.	We	believe	that	the	plaintiffs'	allegations	have	no	merit	and intend	to	defend	against	the	suit	vigorously.	We	do	not	believe	that	the

outcome	of	this	litigation	should	have	a	material	adverse	effect	on	our	financial	position,	results	of	operations,	or	cash	flow.

PCA	is	also	party	to	various	legal	actions	arising	in	the	ordinary	course	of	our	business.	These	legal	actions	cover	a	broad	variety	of	claims	spanning	our	entire business.	We	believe	that	the	resolution	of	these	legal	actions	will	not,	individually	or	in	the	aggregate,	have	a	material	adverse	effect	on	our	financial	condition	or results	of	operations.

# Item	4.												SUBMISSION	OF	MATTERS	TO	A	VOTE	OF	SECURITY	HOLDERS

No	matters	were	submitted	to	a	vote	of	security	holders	in	the	fourth	quarter	of	2002.

# Item	5.										MARKET	FOR	REGISTRANT'S	COMMON	STOCK	AND	RELATED	SHAREHOLDER	MATTERS

# Market	for	Common	Stock;	Dividends

PCA's	common	stock	is	listed	on	the	New	York	Stock	Exchange	under	the	symbol	"PKG".	The	following	table	sets	forth	the	high	and	low	sale	prices	as	reported by	the	New	York	Stock	Exchange	during	the	last	two	years.

|  | First<br>Quarter | Second<br>Quarter | Fiscal	Year	2002<br>Third<br>Quarter | Fourth<br>Quarter | Year |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Stock\tsale\tprices\tper\tshare: |  |  |  |  |  |
| High | $19.88 | $21.10 | $19.85 | $18.60 | $ 21.10 |
| Low | $16.45 | $18.81 | $16.27 | $16.20 | $ 16.20 |

|  | First<br>Quarter | Second<br>Quarter | Fiscal	Year	2001<br>Third<br>Quarter | Fourth<br>Quarter | Year |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Stock\tsale\tprices\tper\tshare: |  |  |  |  |  |
| High | $16.50 | $16.98 | $20.70 | $18.64 | $20.70 |
| Low | $12.65 | $12.85 | $14.75 | $14.23 | $12.65 |

As	of	March	18,	2003,	there	were	52	holders	of	record	of	our	common	stock.

We	have	never	paid	dividends	on	our	common	stock,	and	we	currently	have	no	plans	to	do	so.	The	payment	of	any	future	dividends	will	be	determined	by	PCA's Board	of	Directors	in	light	of	conditions	then	existing,	including	our	earnings,	financial	condition	and	capital	requirements,	restrictions	in	financing	agreements, business	conditions	and	other	factors.	Under	the	terms	of	the	agreements	governing	our	outstanding	indebtedness,	we	are	restricted	in	the	amount	of	dividends	we	can pay	on	our	common	stock.

No	equity	securities	of	PCA	were	sold	by	PCA	during	fiscal	year	2002	which	were	not	registered	under	the	Securities	Act	of	1933.

Stock	Repurchase	Program

On	May	16,	2001,	PCA	announced	a	$100.0	million	common	stock	repurchase	program.	We	currently	expect	to	continue	to	repurchase	shares	from	time	to	time.

The	following	table	sets	forth	our	share	repurchases	during	the	last	two	years.

| Time	Period | Number	of<br>Shares | Average	Price<br>Per	Share | Total	Cost |
| :--- | :--- | :--- | :--- |
|  |  |  | (In\tthousands) |
| First\tQuarter |  | –– $— | $— |
| Second\tQuarter | 222,900 | 15.55 | 3,465 |
| Third\tQuarter | 1,589,800 | 16.75 | 26,634 |
| Fourth\tQuarter | 510,500 | 16.12 | 8,229 |
| Total\t2001 | 2,323,200 | $ 16.50 | $ 38,328 |
| First\tQuarter | 385,100 | $ 17.54 | $6,754 |
| Second\tQuarter | 120,100 | 19.61 | 2,355 |
| Third\tQuarter | 1,078,700 | 17.37 | 18,735 |
| Fourth\tQuarter | 303,800 | 16.93 | 5,143 |
| Total\t2002 | 1,887,700 | $ 17.47 | $ 32,987 |
| Total\tProgram\tTo\tDate | 4,210,900 | $ 16.94 | $ 71,315 |

The	following	table	sets	forth	the	selected	historical	financial	and	other	data	of	PCA	and	the	containerboard	and	corrugated	products	business	of	Pactiv	Corporation (the	"Group").	The	selected	historical	financial	and	other	data	as	of	and	for	the	years	ended	December	31,	1998,	and	for	the	period	from	January	1,	1999	to	April	11, 1999,	was	derived	from	the	audited	combined	financial	statements	of	the	Group.	The	historical	financial	data	as	of	December	31,	1999	and	for	the	period	from	April	12, 1999	to	December	31,	1999,	and	for	the	years	ended	December	31,	2000,	2001and	2002	has	been	derived	from	the	audited	consolidated	financial	statements	of	PCA included	elsewhere	in	this	report.	The	information	contained	in	the	following	table	also	should	be	read	in	conjunction	with	"Management's	Discussion	and	Analysis	of Financial	Condition	and	Results	of	Operations,"	and	the	historical	consolidated	financial	statements	of	PCA	including	the	notes	thereto,	contained	elsewhere	in	this report.

|  | PCA(1) | PCA(1) | PCA(1) |  | Group |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | For\tthe\tYear\tEnded\tDecember\t31, | For\tthe\tYear\tEnded\tDecember\t31, | For\tthe\tYear\tEnded\tDecember\t31, | April\t12,\t1999\nThrough | Jan.\t1,\t1999\nThrough | Year\tEnded |
|  | 2002 | 2001 | 2000 | Dec.\t31,\t1999 | April\t11,\t1999 \t Dec.\t31,\t1998 | April\t11,\t1999 \t Dec.\t31,\t1998 |
| (In\tthousands,\texcept\tper\tshare\tdata) |  |  |  |  |  |  |
| Statement\tof\tIncome\tData: |  |  |  |  |  |  |
| Net\tsales | $1,735,858 | $1,789,956 | $1,921,868 | $1,317,342 | $453,207 | $1,643,823 |
| Income\t(loss)\tbefore\tcumulative\teffect\tof |  |  |  |  |  |  |
| accounting\tchange\tand\textraordinary |  |  |  |  |  |  |
| item | $48,179 | $107,522 | $172,961 | $47,397 | $(128,599) | $71,439 |
| Cumulative\teffect\tof\taccounting\tchange | — | (495) | — | — | — | — |
| Extraordinary\titem | — | (609) | (11,060) | (6,897) | (6,327) | — |
| Net\tincome\t(loss) | 48,179 | 106,418 | 161,901 | 40,500 | (134,926) | 71,439 |
| Preferred\tdividends\tand\taccretion\tof\tpreferred |  |  |  |  |  |  |
| stock\tissuance\tcosts | — | — | (18,637) | (9,296) | — | — |
| Net\tincome\t(loss)\tavailable\tto\tcommon |  |  |  |  |  |  |
| stockholders | $48,179 | $106,418 | $143,264 | $31,204 | $(134,926) | $71,439 |
| Basic\tearnings\tper\tshare(2): |  |  |  |  |  |  |
| Income\t(loss)\tbefore\tcumulative\teffect\tof |  |  |  |  |  |  |
| accounting\tchange\tand\textraordinary |  |  |  |  |  |  |
| item | $.46 | $1.01 | $1.47 | $.41 | $(1.36) | $.76 |
| Cumulative\teffect\tof\taccounting\tchange | — | — | — | — | — | — |
| Extraordinary\titem | — | (.01) | (.10) | (.07) | (.07) | — |
| Net\tincome\t(loss)\tper\tcommon\tshare | $.46 | $1.00 | $1.37 | $.34 | $(1.43) | $.76 |
| Diluted\tearnings\tper\tshare(2): |  |  |  |  |  |  |
| Income\t(loss)\tbefore\tcumulative\teffect\tof |  |  |  |  |  |  |
| accounting\tchange\tand\textraordinary\titem | $.45 | $.99 | $1.43 | $.39 | $(1.36) | $.76 |
| Cumulative\teffect\tof\taccounting\tchange | — | — | — | — | — | — |
| Extraordinary\titem | — | (.01) | (.10) | (.07) | (.07) | — |
| Net\tincome\t(loss)\tper\tcommon\tshare | $.45 | $.98 | $1.33 | $.32 | $(1.43) | $.76 |
| Weighted\taverage\tcommon\tshares\n\toutstanding | 105,053 | 106,277 | 104,890 | 92,108 | 94,600 | 94,600 |
| Balance\tSheet\tData: |  |  |  |  |  |  |
| Total\tassets | $1,982,551 | $1,971,780 | $1,942,112 | $2,153,208 | $2,391,089 | $1,367,403 |
| Total\tlong-term\tobligations(3) | 742,213 | 795,217 | 869,414 | 1,432,553 | 1,760,466 | 17,552 |
| Shareholders\tequity/interdivision\taccount | 795,875 | 769,834 | 687,424 | 416,699 | 156,697 | 908,392 |

2)						Earnings	per	share	through	April	11,	1999	has	been	calculated	using	the	historical	earnings	of	the	Group	and	the	number	of	common	shares	resulting	from	the	closing	of	the	acquisition	on April	12,	1999	(94,600,000	common	shares	after	giving	effect	to	the	220-for-one	stock	split).	For	the	PCA	historical	period	from	April	12,	1999	to	December	31,	1999,	earnings	available	to common	stockholders	includes	a	reduction	for	$9,296	of	preferred	stock	dividends.	For	the	year	ended	December	31,	2000,	earnings	available	to	common	stockholders	includes	reductions	of $2,371	of	preferred	stock	dividends	and	$16,266	for	the	redemption	of	PCA's	12	3/8%	preferred	stock.	PCA	did	not	declare	any	dividends	on	its	common	shares	in	1999,	2000,	2001	or	2002.

									For	all	periods	presented	through	April	11,	1999,	basic	and	diluted	earnings	per	share	are	the	same	because	there	are	no	potentially	dilutive	securities.	For	the	PCA	historical	period	from April	12,	1999	to	December	31,	1999	and	for	the	years	ended	December	31,	2000,	2001	and	2002	diluted	earnings	per	share	includes	the	dilutive	effect	of	outstanding	options.	This	dilutive effect	is	calculated	using	the	treasury	stock	method.

3)						Total	long-term	obligations	include	long-term	debt,	the	current	maturities	of	long-term	debt	and	redeemable	preferred	stock.	The	amount	excludes	amounts	due	to	Pactiv	or	other	Tenneco affiliates	as	part	of	the	Group's	interdivision	account	or	other	financing	arrangement.

Item	7.							MANAGEMENT'S	DISCUSSION	AND	ANALYSIS	OF	FINANCIAL	CONDITION	AND

The	following	discussion	of	historical	results	of	operations	and	financial	condition	should	be	read	in	conjunction	with	the	audited	financial	statements	and	the	notes thereto	which	appear	elsewhere	in	this	report.

# Overview

In	connection	with	the	April	12,	1999	transactions,	PCA	acquired	the	containerboard	and	corrugated	products	business	of	Pactiv	Corporation	(the	"Group"), formerly	known	as	Tenneco	Packaging	Inc.,	a	wholly	owned	subsidiary	of	Tenneco,	Inc.	The	Group	operated	prior	to	April	12,	1999	as	a	division	of	Pactiv,	and	not	as	a separate,	stand-alone	entity.	From	its	formation	in	January	1999	and	through	the	closing	of	the	acquisition	on	April	12,	1999,	PCA	did	not	have	any	significant operations.

The	April	12,	1999	acquisition	was	accounted	for	using	historical	values	for	the	contributed	assets.	Purchase	accounting	was	not	applied	because,	under	the applicable	accounting	guidance,	a	change	of	control	was	deemed	not	to	have	occurred	as	a	result	of	the	participating	veto	rights	held	by	Pactiv	after	the	closing	of	the transactions	under	the	terms	of	the	stockholders	agreement	entered	into	in	connection	with	the	transactions.

Containerboard	demand	is	dependent	upon	both	domestic	demand	for	corrugated	products	and	linerboard	export	activity.

According	to	Pulp	&	Paper	Week,	after	giving	effect	to	price	changes	in	2002,	average	mid-point	prices	in	December	2002	for	linerboard	and	corrugating	medium, East,	were	4%	higher	than	December	2001	prices.

Pulp	&	Paper	Week,	in	its	February	17,	2003	publication,	reported	that	average	prices	for	linerboard	and	corrugating	medium	decreased	$10	per	ton,	or	2%,	and $15	per	ton,	or	4%,	respectively,	compared	to	December	2002	levels.	The	March	17,	2003	Pulp	&	Paper	Week	publication	reported	that	prices	remained	unchanged from	February	2003	levels.

# Results	of	Operations

The	historical	results	of	operations	of	PCA	are	set	forth	below:

| (In	millions) | 2002 | For	the	Year	Ended	December	31,<br>2001 | 2000 |
| :--- | :--- | :--- | :--- |
| Net\tSales | $ 1,735.9 | $ 1,790.0 | $1,921.9 |
| Operating\tIncome | $145.3 | $249.5 | $404.8 |
| Interest\tExpense | (67.7) | (74.1) | (117.6) |
| Income\tBefore\tTaxes,\tCumulative\tEffect\tof |  |  |  |
| Accounting\tChange\tand\tExtraordinary\tItem | 77.6 | 175.4 | 287.2 |
| Provision\tfor\tIncome\tTaxes | (29.4) | (67.9) | (114.2) |
| Income\tBefore\tCumulative\tEffect\tof\tAccounting |  |  |  |
| Change\tand\tExtraordinary\tItem | 48.2 | 107.5 | 173.0 |
| Cumulative\tEffect\tof\tAccounting\tChange | — | (0.5) | — |
| Extraordinary\tItem | — | (0.6) | (11.1) |
| Net\tIncome | 48.2 | 106.4 | 161.9 |
| Preferred\tDividends\tand\tAccretion\tof\tPreferred\tStock |  |  |  |
| Issuance\tCosts | — | — | (18.6) |
| Net\tIncome\tAvailable\tto\tCommon\tShareholders | $48.2 | $106.4 | $143.3 |

# Net	Sales

Net	sales	decreased	by	$54.1	million,	or	3.0%,	for	the	year	ended	December	31,	2002	from	the	year	ended	December	31,	2001.	The	decrease	was	primarily	the result	of	decreased	sales	prices	of	corrugated	products	and	containerboard,	partially	offset	by	increased	corrugated	products	volume	and	slightly	higher	volume	of containerboard	sold	to	third	parties.

Total	corrugated	products	volume	increased	3.5%	to	27.5	billion	square	feet	in	2002	compared	to	26.5	billion	square	feet	in	2001.	On	a	comparable	shipment-per- workday	basis,	corrugated	products	volume	increased	3.9%	in	2002	from	2001.	The	larger	percentage	increase	was	due	to	the	fact	that	2001	had	one	more	workday, those	days	not	falling	on	a	weekend	or	holiday,	than	2002.	Containerboard	volume	to	external	domestic	and	export	customers	increased	11.4%	to	477,000	tons	for	the year	ended	December	31,	2002	from	428,000	tons	in	the	comparable	period	of	2001.	Our	total	containerboard	mill	production	in	2002	was	2,204,000	tons	compared	to 2,125,000	tons	in	2001.

According	to	Pulp	&	Paper	Week,	average	industry	mid-point	linerboard	and	semi-chemical	medium	prices	for	42	lb.	Liner-East	and	26	lb.	Medium-East,	which are	representative	benchmark	grades,	were	$426	and	$383,	respectively,	per	ton	in	2002.	This	compares	to	$444	and	$404,	respectively,	per	ton	in	2001.	With	respect	to box	prices,	PCA	realized	an	additional	$9	per	ton	increase	in	October	after	implementing	$10	per	ton	increases	in	both	August	and	September.

In	November	2002,	Pulp	&	Paper	Week	reported	that	average	linerboard	prices	for	42	lb.	Liner-East	decreased	$5	per	ton	to	$435	per	ton.	The	same	publication reported	that	prices	for	26	lb.	Medium-East,	semi-chemical	medium	remained	unchanged	for	the	month	at	$395	per	ton.	Pulp	&	Paper	Week	reported	no	changes	in linerboard	or	medium	prices	in	December.

# Income	Before	Interest	Expense	and	Income	Taxes	(Operating	Income)

Operating	income	decreased	by	$104.2	million,	or	41.8%,	for	the	year	ended	December	31,	2002	compared	to	2001.	The	decrease	was	primarily	the	result	of decreased	sales	prices,	which	reduced	operating	income	by	$97.8	million,	plus	increased	costs	for	recycled	fiber	at	our	containerboard	mills,

higher	medical	costs	and	increased	depreciation	expense.	These	items	were	only	partially	offset	by	increased	corrugated	products	and	containerboard	volume.

PCA	did	not	record	any	material	benefit	related	to	changes	in	accounting	treatment	of	goodwill	in	2002.	Goodwill	amortization	was	not	material	for	the	years	ended December	31,	2000	and	2001.

Gross	profit	decreased	$91.4	million,	or	21.9%,	for	the	year	ended	December	31,	2002	from	the	year	ended	December	31,	2001.	Gross	profit	as	a	percentage	of sales	declined	from	23.3%	of	sales	in	2001	to	18.8%	of	sales	in	the	current	year	primarily	due	to	the	sales	price	decreases	described	above.

Selling	and	administrative	expenses	increased	$8.6	million,	or	6.9%,	for	the	year	ended	December	31,	2002	from	the	comparable	period	in	2001.	The	increase	was

primarily	the	result	of	increased	salary,	medical	and	other	general	selling	related	expenses.

# Interest	Expense	and	Income	Taxes

Interest	expense	decreased	by	$6.4	million,	or	8.6%,	for	the	year	ended	December	31,	2002	from	the	comparable	period	in	2001,	primarily	due	to	prepayments	PCA made	in	2001	and	2002	on	the	term	loans	under	its	senior	credit	facility	and	the	receivables	credit	facility.

PCA's	effective	tax	rate	was	37.9%	for	the	year	ended	December	31,	2002	and	38.7%	for	the	year	ended	December	31,	2001.	The	tax	rate	is	higher	than	the	federal statutory	rate	of	35.0%	due	to	state	income	taxes.

Net	sales	decreased	by	$131.9	million,	or	6.9%,	for	the	year	ended	December	31,	2001	from	the	year	ended	December	31,	2000.	The	decrease	was	primarily	the result	of	decreased	sales	prices,	reduced	volume	of	containerboard	sold	to	third	parties,	and	slightly	lower	corrugated	products	volume.

Total	corrugated	products	volume	decreased	1.1%	to	26.5	billion	square	feet	in	2001	compared	to	26.9	billion	square	feet	in	2000.	On	a	comparable	shipment-per- workday	basis,	corrugated	products	volume	decreased	1.5%	in	2001	from	2000.	The	larger	percentage	decrease	was	due	to	the	fact	that	2001	had	one	more	workday, those	days	not	falling	on	a	weekend	or	holiday,	than	2000.	Containerboard	volume	to	external	domestic	and	export	customers	decreased	16.0%	to	428,000	tons	for	the year	ended	December	31,	2001	from	509,000	tons	in	the	comparable	period	of	2000.	Our	total	containerboard	mill	production	in	2001	was	2,125,000	tons	compared	to 2,165,000	tons	in	2000.

According	to	Pulp	&	Paper	Week,	average	industry	mid-point	linerboard	and	semi-chemical	medium	prices	for	42	lb.	Liner-East	and	26	lb.	Medium-East,	which are	representative	benchmark	grades,	were	$444	and	$404,	respectively,	per	ton	in	2001.	This	compares	to	$468	and	$446,	respectively,	per	ton	in	2000.

Operating	income	decreased	by	$95.0	million,	or	27.6%,	for	the	year	ended	December	31,	2001	compared	to	2000.	The	decrease	was	the	result	of	decreased	sales prices	which	reduced	operating	income	by	$63.4	million	in	addition	to	lower	volume	of	containerboard	sold	to	third	parties,	and	slightly	lower	corrugated	products volume.	Operating	income	for	2000	excludes	a	fourth	quarter	gain	on	timberland	sales	of	$60.4	million.

Gross	profit	decreased	$85.5	million,	or	17.0%,	for	the	year	ended	December	31,	2001	from	the	year	ended	December	31,	2000.	Gross	profit	as	a	percentage	of sales	declined	from	26.2%	of	sales	in	2000	to	23.3%	of	sales	in	2001	primarily	due	to	the	sales	price	decreases	described	above.

Selling	and	administrative	expenses	increased	$5.5	million,	or	4.7%,	for	the	year	ended	December	31,	2001	from	the	comparable	period	in	2000.	The	increase	was primarily	the	result	of	increased	salary	and	other	general	selling	related	expenses.

Interest	expense	decreased	by	$43.7	million,	or	37.1%,	for	the	year	ended	December	31,	2001	from	the	comparable	period	in	2000,	primarily	due	to	prepayments PCA	made	on	its	term	loans	under	the	senior	credit	facility.

PCA's	effective	tax	rate	was	38.7%	for	the	year	ended	December	31,	2001	and	39.8%	for	the	year	ended	December	31,	2000.	The	tax	rate	is	higher	than	the	federal statutory	rate	of	35.0%	due	to	state	income	taxes.

# Liquidity	and	Capital	Resources

# Operating	Activities

Cash	flow	provided	by	operating	activities	decreased	$74.3	million,	or	23.6%,	to	$240.0	million,	for	the	year	ended	December	31,	2002	compared	to	the	year	ended December	31,	2001.	The	decrease	was	primarily	due	to	lower	net	income	as	a	result	of	decreased	sales	prices	of	containerboard	and	corrugated	products,	as	well	as decreased	deferred	income	taxes	and	unfavorable	changes	in	working	capital.	The	unfavorable	changes	in	working	capital	were	primarily	driven	by	higher	balances	of accounts	receivable	related	to	the	strong	sales	volumes	previously	described,	partially	offset	by	lower	inventory	levels	and	a	smaller	reduction	of	the	accounts	payable balance	than	in	2001.

Cash	flow	provided	by	operating	activities	decreased	$26.7	million,	or	7.8%,	to	$314.3	million,	for	the	year	ended	December	31,	2001	from	the	comparable	period in	2000.	The	decrease	was	primarily	due	to	lower	net	income	and	decreased	deferred	taxes	partially	offset	by	a	favorable	change	in	working	capital,	caused	by	lower balances	of	accounts	receivable	due	to	lower	sales	prices	and	volumes	described	previously.

# Investing	Activities

Cash	used	for	investing	activities	decreased	by	$25.3	million,	or	18.7%,	to	$109.6	million,	for	the	year	ended	December	31,	2002	compared	to	the	year	ended December	31,	2001.	The	change	was	primarily	the	result	of	decreased	additions	to	property,	plant	and	equipment	and	one	business	acquisition	in	the	second	quarter	of 2001.

Cash	used	for	investing	activities	increased	by	$251.8	million,	or	215.3%,	to	$134.9	million,	for	the	year	ended	December	31,	2001	compared	to	the	year	ended December	31,	2000.	The	change	was	primarily	attributable	to	a	reduction	in	proceeds	from	timberland	sales	of	$247.9	million.

As	of	December	31,	2002,	PCA	had	commitments	for	capital	expenditures	of	$31.3	million.	PCA	believes	operating	cash	flow	from	continuing	operations	will	be sufficient	to	fund	these	commitments.

# Financing	Activities

Cash	used	for	financing	activities	decreased	by	$23.3	million,	or	22.2%,	to	$81.6	million,	for	the	year	ended	December	31,	2002	compared	to	the	year	ended December	31,	2001,	primarily	attributable	to	decreased	prepayments	made	by	PCA	on	its	various	debt	agreements	and	a	decrease	in	expenditures	to	repurchase	PCA common	stock.

Cash	used	for	financing	activities	decreased	by	$355.5	million,	or	77.2%,	for	the	year	ended	December	31,	2001	compared	to	the	year	ended	December	31,	2000, primarily	reflecting	decreased	prepayments	made	by	PCA	on	its	various	debt	agreements.

On	January	28,	2000,	PCA	became	a	publicly	traded	company	with	an	initial	public	offering	of	its	common	stock.	On	March	3,	2000,	PCA	used	the	net	proceeds from	the	offering	to	redeem	all	of	its	outstanding	shares	of	12 	3 /8%	senior	exchangeable	preferred	stock	due	2010.

On	November	16,	2000,	PCA	completed	the	sale	of	approximately	385,000	acres	of	timberland	to	Southern	Timber	Venture,	LLC.	PCA	received	$247.9	million	in

cash	and	a	33 	1 /3%	equity	ownership	interest	in	Southern	Timber	Venture,	LLC.	PCA	recorded	a	pre-tax	gain	of	$60.4	million,	and	a	portion	of	the	gain	was	not recognized	as	a	result	of	PCA's	continuing	ownership	interest.	In	March	2002	PCA	received	a	$2.3	million	dividend	($1.4	million,	after-tax)	from	Southern	Timber Venture,	LLC.

On	November	29,	2000,	PCA	established	an	on-balance	sheet	securitization	program	for	its	trade	accounts	receivable.	To	effectuate	this	program,	PCA	formed	a wholly-owned	limited	purpose	subsidiary,	Packaging	Credit	Company,	LLC,	or	PCC,	which	in	turn	formed	a	wholly-owned,	bankruptcy-remote,	special-purpose subsidiary,	Packaging	Receivables	Company,	LLC,	or	PRC,	for	the	purpose	of	acquiring	receivables	from	PCC.	Both	of	these	entities	are	included	in	the	consolidated financial	statements	of	PCA.	Under	this	program,	PCC	purchases	on	an	ongoing	basis	substantially	all	of	the	receivables	of	PCA	and	sells	such	receivables	to	PRC.	PRC and	lenders	established	a	$150.0	million	receivables-backed	revolving	credit	facility	through	which	PRC	obtains	funds	to	purchase	receivables	from	PCC.	The receivables	purchased	by	PRC	are	and	will	be	solely	the	property	of	PRC.	In	the	event	of	a	liquidation	of	PRC,	the	creditors	of	PRC	would	be	entitled	to	satisfy	their claims	from	PRC's	assets	prior	to	any	distribution	to	PCC	or	PCA.	Credit	available	under	the	receivables	credit	facility	is	on	a	borrowing-base	formula.	As	a	result,	the full	amount	of	the	facility	may	not	be	available	at	all	times.	As	of	December	31,	2002,	$113.0	million	was	outstanding	and	$37.0	million	was	available	for	additional borrowing	under	the	receivables	credit	facility.	The	highest	outstanding	principal	balance	under	the	receivables	credit	facility	during	fiscal	2002	was	$126.0	million.

# Contractual	Obligations

The	following	table	summarizes	PCA's	contractual	obligations	at	December	31,	2002:

|  |  |  | Less	than |  |  | More	than |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (In\tthousands) | (In\tthousands) | Total | 1\tYear | 1-3\tYears | 3-5\tYears | 5\tYears |
| Term\tloans | Term\tloans | $79,000 | $— | $45,734 | $33,266 | $— |
| Receivables\tcredit\tfacility | Receivables\tcredit\tfacility | 113,000 | 113,000 | — | — | — |
|  | \t5 |  |  |  |  |  |
| Senior\tsubordinated\tnotes,\t9 | /8%,\tcallable |  |  |  |  |  |
| beginning\tApril\t1,\t2004\tat\t104.8125% | beginning\tApril\t1,\t2004\tat\t104.8125% | 550,000 | — | — | — | 550,000 |
| Other\tlong-term\tdebt | Other\tlong-term\tdebt | 213 | 94 | 119 | — | — |
| Total\tshort-term\tand\tlong-term\tdebt | Total\tshort-term\tand\tlong-term\tdebt | 742,213 | 113,094 | 45,853 | 33,266 | 550,000 |
| Operating\tleases | Operating\tleases | 94,409 | 19,589 | 31,207 | 12,051 | 31,562 |
| Purchase\tcommitments | Purchase\tcommitments | 19,715 | 15,639 | 4,076 | — | — |
| Letters\tof\tcredit | Letters\tof\tcredit | 16,600 | 14,535 | 2,065 | — | — |
| Total | Total | $ 872,937 | $ 162,857 | $83,201 | $45,317 | $ 581,562 |

The	lease	commitments,	purchase	commitments	and	letters	of	credit	are	not	reflected	on	PCA's	consolidated	balance	sheet	as	of	December	31,	2002.	See	Notes	6 and	10	to	the	audited	consolidated	financial	statements	for	additional	information.

PCA's	primary	sources	of	liquidity	are	cash	flows	from	operations	and	borrowings	under	PCA's	senior	revolving	credit	facility	and	receivables	credit	facility.	As	of December	31,	2002,	PCA	had	$187.0	million	in	unused	borrowing	capacity	under	its	existing	credit	agreements.	PCA's	primary	uses	of	cash	are	for	debt	service	and capital	expenditures.	PCA	expects	to	be	able	to	fund	its	debt	service	and	capital	expenditures	from	these	sources.

The	following	table	provides	the	outstanding	balance	and	the	weighted	average	interest	rate	as	of	December	31,	2002	for	each	of	PCA's	outstanding	term	loans,	the revolving	credit	facility	and	the	receivables	credit	facility:

| Borrowing	Arrangement	(in	thousands) | Balance	at<br>December	31,	2002 | Weighted	Average<br>Interest	Rate |
| :--- | :--- | :--- |
| Term\tLoan\tA | $54,618 | 6.70%(a) |
| Term\tLoan\tB | 24,382 | 6.95%(a) |
| Senior\tRevolving\tCredit\tFacility: |  |  |
| Revolver—Eurodollar | — | N/A |
| Revolver—Base\tRate | — | N/A |
| Receivables\tCredit\tFacility | 113,000 | 1.78% |
| Total | $ 192,000 | 3.84% |

(a)		The	term	loan	interest	rates	reflect	the	floor	of	the	interest	rate	collar	agreement	that	expires	in	June	of	2003	plus	the	applicable	spread.	The	floor	of	this	agreement was	4.95%	at	December	31,	2002.

In	addition	to	the	term	loans	and	other	borrowing	arrangements	noted	above,	PCA	has	$550.0	million	of	9	5/8%	senior	subordinated	notes	callable	beginning April	1,	2004	at	104.8125%	and	due	2009.

The	borrowings	under	the	senior	revolving	credit	facility	are	available	to	fund	PCA's	working	capital	requirements,	capital	expenditures	and	other	general	corporate purposes.	The	Term	Loan	A	must	be	repaid	in	quarterly	installments	from	September	2004	through	2006.	The	Term	Loan	B	must	be	repaid	in	quarterly	installments from	March	2005	through	2007.	The	senior	revolving	credit	facility	will	terminate	in	2006.	The	receivables	credit	facility	will	terminate	on	November	29,	2003.

Since	April	12,	1999,	PCA	has	made	prepayments	totaling	approximately	$1,027.0	million	using	cash	flow	from	operations	of	$516.0	million	and	proceeds	from the	sales	of	timberland	of	$511.0	million	to	permanently	reduce	its	borrowings	under	the	term	loans	and	variable	rate	debt.

The	instruments	governing	PCA's	indebtedness	contain	financial	and	other	covenants	that	restrict,	among	other	things,	the	ability	of	PCA	and	its	subsidiaries	to:

·							incur	additional	indebtedness,

·							pay	dividends	or	make	certain	other	restricted	payments,

·							consummate	certain	asset	sales,

·							enter	into	certain	transactions	with	affiliates,	or

·							merge	or	consolidate	with	any	other	person	or	sell	or	otherwise	dispose	of	all	or	substantially	all	of	the	assets	of	PCA.

These	limitations	could	limit	corporate	and	operating	activities.

In	addition,	we	must	maintain	minimum	debt	service,	minimum	net	worth	and	maximum	leverage	ratios	under	the	senior	credit	facility.	A	failure	to	comply	with

the	restrictions	contained	in	the	senior	credit	facility	could	lead	to	an	event	of	default,	which	could	result	in	an	acceleration	of	such	indebtedness.	Such	an	acceleration would	also	constitute	an	event	of	default	under	the	notes	indenture	and	the	receivables	credit	facility.

PCA	estimates	that	it	will	make	approximately	$115.0	million	in	capital	expenditures	in	2003.	These	expenditures	will	be	used	primarily	for	maintenance	capital, cost	reduction,	business	growth,	and	environmental	compliance.

PCA	believes	that	cash	generated	from	operations	will	be	adequate	to	meet	its	anticipated	debt	service	requirements,	capital	expenditures	and	working	capital	needs for	the	next	12	months,	and	that	cash	generated	from	operations	and	amounts	available	under	the	senior	revolving	credit	facility	will	be	adequate	to	meet	its	anticipated debt	service	requirements,	capital	expenditures	and	working	capital	needs	for	the	foreseeable	future.	PCA's	future	operating	performance	and	its	ability	to	service	or refinance	the	notes	and	to	service,	extend	or	refinance	the	credit	facilities	will	be	subject	to	future	economic	conditions	and	to	financial,	business	and	other	factors,	many of	which	are	beyond	PCA's	control.

We	are	subject	to,	and	must	comply	with,	a	variety	of	federal,	state	and	local	environmental	laws,	particularly	those	relating	to	air	and	water	quality,	waste	disposal and	the	cleanup	of	contaminated	soil	and	groundwater.	Because	environmental	regulations	are	constantly	evolving,	we	have	incurred,	and	will	continue	to	incur,	costs	to maintain	compliance	with	those	laws.	In	particular,	the	EPA	finalized	the	Cluster	Rules	which	govern	pulp	and	paper	mill	operations,	including	those	at	the	Counce, Filer	City,	Valdosta	and	Tomahawk	mills.	Over	the	next	several	years,	the	Cluster	Rules	will	affect	our	allowable	discharges	of	air	and	water	pollutants,	and	require	us to	spend	money	to	ensure	compliance	with	those	new	rules.

As	is	the	case	with	any	industrial	operation,	we	have,	in	the	past,	incurred	costs	associated	with	the	remediation	of	soil	or	groundwater	contamination,	as	required by	the	federal	Comprehensive	Environmental	Response,	Compensation	and	Liability	Act,	commonly	known	as	the	federal	"Superfund"	law,	and	analogous	state	laws. Cleanup	requirements	arise	with	respect	to	properties	we	currently	own	or	operate,	former	facilities	and	off-site	facilities	where	we	have	disposed	of	hazardous substances.	Under	the	terms	of	the	contribution	agreement,	Pactiv	has	agreed	to	retain	all	liability	for	all	former	facilities	and	all	sites	associated	with	pre-closing	off-site waste	disposal.	Pactiv	has	also	retained	environmentally	impaired	real	property	in	Filer	City,	Michigan	unrelated	to	current	mill	operations.

Because	liability	for	remediation	costs	under	environmental	laws	is	strict,	meaning	that	liability	is	imposed	without	fault,	joint	and	several,	meaning	that	liability	is imposed	on	each	party	without	regard	to	contribution,	and	retroactive,	we	could	receive	notifications	of	cleanup	liability	in	the	future	and	this	liability	could	be	material. From	January	1994	through	December	2002,	remediation	costs	at	our	mills	and	converting	plants	totaled	about	$2.9	million.	As	of	December	31,	2002,	we	maintained an	environmental	reserve	of	$3.7	million,	which	includes	funds	relating	to	onsite	landfills	and	surface	impoundments	as	well	as	on-going	and	anticipated	remedial projects.	Total	capital	costs	for	environmental	matters,	including	Cluster	Rule	compliance,	were	$4.3	million	for	2002	and	we	currently	estimate	2003	environmental capital	expenditures	will	be	$14.7	million,	of	which	$4.4	million	of	the	expenditures	are	to	meet	Cluster	Rule	requirements.

# Impact	of	Inflation

PCA	does	not	believe	that	inflation	has	had	a	material	impact	on	its	financial	position	or	results	of	operations	during	the	past	three	years.

# Critical	Accounting	Policies

Management's	discussion	and	analysis	of	our	financial	condition	and	results	of	operations	are	based	upon	our	consolidated	financial	statements,	which	have	been prepared	in	accordance	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	The	preparation	of	these	financial	statements	requires	us	to	make estimates	and	judgments	that	affect	the	reported	amounts	of	assets,	liabilities,	revenues	and	expenses,	and	related	disclosures	of	contingent	assets	and	liabilities.	On	an ongoing	basis,	we	evaluate	our	estimates,	including	those	related	to	bad	debts,	inventories,	intangible	assets,	pensions	and	other	post-retirement	benefits,	income	taxes, and	contingencies	and	litigation.	We	base	our	estimates	on	historical	experience	and	on	various	other	assumptions	that	are	believed	to	be	reasonable	under	the circumstances,	the	results	of	which	form	the	basis	for	making	judgments	about	the	carrying	values	of	assets	and	liabilities	that	are	not	readily	apparent	from	other sources.	Actual	results	may	differ	from	these	estimates	under	different	assumptions	or	conditions.

We	believe	the	following	critical	accounting	policies	affect	our	more	significant	judgments	and	estimates	used	in	the	preparation	of	our	consolidated	financial statements.	For	a	further	discussion	on	the	application	of	these	and	other	accounting	policies,	see	Note	2	to	our	audited	consolidated	financial	statements	included elsewhere	in	this	report.

# Accounts	Receivable—Allowance	for	Doubtful	Accounts

We	evaluate	the	collectibility	of	our	accounts	receivable	based	upon	a	combination	of	factors.	In	circumstances	where	we	are	aware	of	a	specific	customer's inability	to	meet	its	financial	obligations	to	us	(e.g.,	bankruptcy	filings,	substantial	downgrading	of	credit	sources),	we	record	a	specific	reserve	for	bad	debts	against amounts	due	to	reduce	the	net	recognized	receivable	to	the	amount	we	reasonably	believe	will	be	collected.	For	all	other	customers,	we	recognize	reserves	for	bad	debts consisting	of	0.3%	for	amounts	less	than	90	days	past	due	and	30%	for	amounts	more	than	90	days	past	due	based	on	our	historical	collection	experience.	If	our collection	experience	deteriorates	(i.e.,	higher	than	expected	defaults	or	an	unexpected	material	adverse	change	in	a	major	customer's	ability	to	meet	its	financial obligations	to	us),	our	estimates	of	the	recoverability	of	amounts	due	us	could	be	reduced	by	a	material	amount.

As	of	December	31,	2002,	the	balance	in	the	allowance	for	doubtful	accounts	reserve	was	$5.8	million,	compared	to	$5.2	million	at	December	31,	2001.	Bad	debt expense	in	2002	was	$3.0	million,	compared	to	$0.7	million	in	2001.	Of	the	$2.3	million	increase,	$1.7	million	was	attributable	to	three	customers	that	filed	for bankruptcy	during	2002.	For	the	year	ended	December	31,	2001	bad	debt	expense	was	$0.7	million	compared	to	$5.8	million	in	2000.	During	2000,	$2.8	million	of	bad debt	expense	was	attributable	to	six	customers	that	filed	for	bankruptcy	during	the	year.

# Inventory

We	record	our	inventory	at	the	lower	of	cost	or	market.	The	estimated	market	value	is	based	on	assumptions	for	future	demand	and	related	pricing.	If	actual	market conditions	are	less	favorable	than	those	projected	by	management,	reductions	in	the	value	of	inventory	may	be	required.	Raw	materials,	work	in	process	and	finished goods	are	valued	using	the	lower	of	last-in,	first-out	("LIFO")	cost	or	market	method.	Supplies	and	materials	inventories	are	valued	using	a	moving	average	cost.

# Derivatives

We	hold	derivative	financial	instruments	to	hedge	our	interest	rate	risk	associated	with	our	variable	rate	long-term	debt.	These	derivatives	qualify	for	hedge accounting	as	discussed	in	Note	2	to	our	audited	consolidated	financial	statements.	We	do	not	speculate	in	derivatives	trading.	Hedge	accounting	results	when	we designate	and	document	the	hedging	relationships	involving	these	derivative	instruments.	While	we	intend	to	continue	to	meet	the	conditions	for	hedge	accounting,	if hedges	do	not	qualify	as	highly	effective	or	if	we	did	not	believe	that	forecasted	transactions	would	occur,	the	changes	in	the	fair	value	of	the	derivatives	used	as	hedges would	be	reflected	in	earnings.

To	hedge	interest	rate	risk,	interest	rate	collars	are	used	to	protect	against	rising	interest	rates	and	simultaneously	guarantee	minimum	interest	rates	related	to	our variable	rate	debt.	These	instruments	are	valued	using	the	market	standard	methodology	of	netting	the	discounted	future	cash	receipts	and	cash	payments.	The	cash receipts	and	cash	payments	are	based	on	an	expectation	of	future	interest	rates	derived	from	observed	market	interest	rate	curves.	We	have	not	changed	our	methods	of

calculating	these	fair	values	or	developing	the	underlying	assumptions.	The	values	of	these	derivatives	will	change	over	time	as	cash	receipts	and	payments	are	made	and as	market	conditions	change.	Information	about	the	fair	values,	notional	amounts,	and	contractual	terms	of	these	instruments	can	be	found	in	Notes	6	and	7	to	our audited	consolidated	financial	statements	and	the	section	titled	"Quantitative	and	Qualitative	Disclosures	About	Market	Risk."	included	elsewhere	in	this	report.

In	addition	to	the	above	derivative	financial	instruments,	we	have	other	contracts	covering	a	portion	of	our	purchases	of	natural	gas	and	electricity	that	have	the characteristics	of	derivatives	but	are	not	required	to	be	accounted	for	as	derivatives.	These	contracts	for	the	physical	delivery	of	these	items	qualify	for	the	normal purchases	exception	under	SFAS	No.	133	as	we	take	physical	delivery	of	the	item	and	use	it	in	the	production	process.	This	exception	is	an	election	and,	if	not	elected, these	contracts	would	be	carried	on	the	balance	sheet	at	fair	value	with	changes	in	fair	value	reflected	in	income.	These	contracts	cover	natural	gas	and	electricity	usage at	our	mills	through	2004.	At	December	31,	2002,	estimated	future	payments	under	these	contracts	amounted	to	$19.7	million.

# Environmental	Liabilities

The	estimated	landfill	closure	and	postclosure	maintenance	costs	expected	to	be	incurred	upon	and	subsequent	to	the	closing	of	existing	operating	landfill	areas	are accrued	based	on	the	landfill	capacity	used	to	date.	Amounts	are	estimates	using	current	technologies	for	closure	and	monitoring	and	are	not	discounted.

The	potential	costs	for	various	environmental	matters	are	uncertain	due	to	such	factors	as	the	unknown	magnitude	of	possible	cleanup	costs,	the	complexity	and evolving	nature	of	governmental	laws	and	regulations	and	their	interpretations,	and	the	timing,	varying	costs	and	effectiveness	of	alternative	cleanup	technologies. Liabilities	recorded	for	environmental	contingencies	are	estimates	of	the	probable	costs	based	upon	available	information	and	assumptions.	Because	of	these uncertainties,	however,	our	estimates	may	change.	We	believe	that	any	additional	costs	identified	as	further	information	becomes	available	would	not	have	a	material effect	on	our	financial	statements.

In	connection	with	the	sale	to	PCA	of	the	containerboard	and	corrugated	products	business	of	Pactiv	Corporation	in	April	1999,	Pactiv	agreed	to	retain	all	liability for	all	former	facilities	and	all	sites	associated	with	offsite	waste	disposal	prior	to	April	12,	1999.	Pactiv	also	retained	environmental	liability	for	a	closed	landfill	located near	the	Filer	City	mill.

# Revenue	Recognition

We	recognize	revenue	as	title	to	the	products	is	transferred	to	customers.

# Impairment	of	Long-Lived	Assets

Long-lived	assets	to	be	held	and	used	are	reviewed	for	impairment	whenever	events	or	changes	in	circumstances	indicate	that	the	carrying	amount	of	an	asset	may not	be	fully	recoverable.	In	the	event	that	facts	and	circumstances	indicate	that	the	carrying	amount	of	any	long-lived	assets	may	be	impaired,	an	evaluation	of recoverability	would	be	performed.	If	an	evaluation	were	required,	the	estimated	future	undiscounted	cash	flows	associated	with	the	asset	would	be	compared	to	the asset's	carrying	amount	to	determine	if	a	write-down	to	fair	value	were	required.

Goodwill	is	tested	annually	for	impairment	in	accordance	with	SFAS	No.	142,	"Goodwill	and	Other	Intangible	Assets."

# New	Accounting	Standards

For	a	description	of	changes	in	accounting	principles	affecting	PCA,	see	Note	2	to	PCA's	audited	consolidated	financial	statements	included	elsewhere	in	this report.

# Item	7A.	QUANTITIVE	AND	QUALITATIVE	DISCLOSURES	ABOUT	MARKET	RISK

PCA	is	exposed	to	the	impact	of	interest	rate	changes	and	changes	in	the	market	value	of	its	financial	instruments.	PCA	periodically	enters	into	derivatives	in	order to	minimize	these	risks,	but	not	for	trading	purposes.

PCA	has	interest	rate	collar	agreements	that	protect	against	rising	interest	rates	and	simultaneously	guarantee	a	minimum	interest	rate.	The	notional	amount	of	these collar	agreements	was	$78.8	million	and	$175.0	million	as	of	December	31,	2002	and	2001,	respectively.	The	weighted	average	floor	of	the	interest	rate	collar agreements	was	4.95%	and	5.02%	as	of	December	31,	2002	and	2001,	respectively.	The	weighted	average	ceiling	of	the	interest	rate	collar	agreements	was	6.75%	and 6.85%	as	of	December	31,	2002	and	2001.	The	interest	rate	on	approximately	41%	and	71%	of	PCA's	variable-rate	debt	as	of	December	31,	2002	and	2001, respectively,	was	capped.	PCA	receives	payments	under	the	collar	agreements	if	the	applicable	interest	rate	(LIBOR	or	commercial	paper)	exceeds	the	ceiling. Correspondingly,	PCA	makes	payments	under	the	collar	agreements	if	the	applicable	interest	rate	drops	below	the	floor.	In	both	cases,	the	amounts	received	or	paid	are based	upon	the	notional	amount	and	the	difference	between	the	actual	interest	rate	and	the	ceiling	or	floor	rate.	At	December	31,	2002,	the	commercial	paper	based interest	rate	collar	agreement	expired.	The	remaining	interest	rate	collar	agreement,	with	a	floor	of	4.95%,	expires	June	30,	2003.

As	a	result	of	the	collar	agreements	noted	above	and	the	interest	rate	environment,	a	one	percent	increase	in	interest	rates	would	result	in	an	increase	in	interest expense	and	a	corresponding	decrease	in	income	before	taxes	of	approximately	$1.1	million	and	$0.7	million	annually	for	the	years	ended	December	31,	2002	and	2001, respectively.	As	of	December	31,	2002	and	2001,	the	weighted	average	LIBOR	was	1.40%	and	1.91%,	respectively,	and	the	weighted	average	commercial	paper	rate was	1.40%	and	1.92%,	respectively.	The	effect	of	an	interest	rate	change	to	the	fair	market	value	of	the	outstanding	debt	is	insignificant.	This	analysis	does	not	consider any	other	impact	on	fair	market	value	that	could	exist	in	such	an	interest	rate	environment.	In	the	event	of	a	change	in	interest	rates,	management	could	take	actions	to further	mitigate	its	exposure	to	the	change.	However,	due	to	the	uncertainty	of	the	specific	actions	that	would	be	taken	and	their	possible	effects,	the	sensitivity	analysis assumes	no	changes	in	PCA's	financial	structure.

# Item	8.	FINANCIAL	STATEMENTS	AND	SUPPLEMENTARY	DATA

The	response	to	this	item	is	included	in	a	separate	section	of	this	report	on	page	F-1.

# Item	9.									CHANGES	IN	AND	DISAGREEMENTS	WITH	ACCOUNTANTS	ON	ACCOUNTING	AND 												FINANCIAL	DISCLOSURES

There	were	no	changes	in	or	disagreements	with	PCA's	accountants	during	2002	or	2001.

# PART	III

# Item	10.	DIRECTORS	AND	EXECUTIVE	OFFICERS	OF	THE	REGISTRANT

	Information	with	respect	to	PCA's	directors	is	included	under	the	caption	"Board	of	Directors"	in	PCA's	Proxy	Statement,	and	is	incorporated	herein	by	reference. Information	regarding	certain	Section	16(a)	compliance	is	included	under	the	caption	"Section	16(a)	Beneficial	Ownership	Reporting	Compliance"	in	PCA's	Proxy Statement,	and	is	incorporated	herein	by	reference.

Executive	Officers

Brief	statements	setting	forth	the	age	at	March	18,	2003,	the	principal	occupation,	employment	during	the	past	five	years,	the	year	in	which	such	person	first became	an	officer	of	PCA,	and	other	information	concerning	each	of	our	executive	officers	appears	below.

Paul	T.	Stecko	is	58	years	old	and	has	served	as	Chief	Executive	Officer	of	PCA	since	January	1999	and	as	Chairman	of	PCA	since	March	1999.	From November	1998	to	April	1999,	Mr.	Stecko	served	as	President	and	Chief	Operating	Officer	of	Tenneco	Inc.	From	January	1997	to	November	1998,	Mr.	Stecko	served	as Chief	Operating	Officer	of	Tenneco.	From	December	1993	through	January	1997,	Mr.	Stecko	served	as	President	and	Chief	Executive	Officer	of	Tenneco Packaging	Inc.	Prior	to	joining	Tenneco	Packaging,	Mr.	Stecko	spent	16	years	with	International	Paper	Company.	Mr.	Stecko	is	a	member	of	the	board	of	directors	of Pactiv	Corporation,	Tenneco	Automotive	Inc.,	State	Farm	Mutual	Insurance	Company,	American	Forest	and	Paper	Association	and	Cives	Corporation.

William	J.	Sweeney	is	62	years	old	and	has	served	as	Executive	Vice	President—Corrugated	Products	of	PCA	since	April	1999.	From	May	1997	to	April	1999, Mr.	Sweeney	served	as	Executive	Vice	President—Paperboard	Packaging	of	Tenneco	Packaging	Inc.	From	May	1990	to	May	1997,	Mr.	Sweeney	served	as	Senior	Vice President	and	General	Manager—Containerboard	Products	of	Tenneco	Packaging.	From	1983	to	May	1990,	Mr.	Sweeney	served	as	General	Manager	and	Vice President	of	Stone	Container	Corporation.	From	1978	to	1983,	Mr.	Sweeney	served	as	Sales	Manager,	Operations	Manager	and	Division	Vice	President	at	Continental Group	and	from	1967	to	1978,	as	Sales	Manager	and	General	Manager	of	Boise	Cascade	Corporation.

Mark	W.	Kowlzan	is	48	years	old	and	has	served	as	Senior	Vice	President—Containerboard	of	PCA	since	March	2002	and	as	Vice	President	from	April	1999	to March	2002.	From	1998	to	April	1999,	Tenneco	Packaging	Inc.	employed	Mr.	Kowlzan	as	Vice	President	and	General	Manager—Containerboard	and	from	May	1996 to	1998,	as	Operations	Manager	and	Mill	Manager	of	the	Counce	mill.	Prior	to	joining	Tenneco	Packaging,	Mr.	Kowlzan	spent	15	years	at	International	Paper Company,	where	he	held	a	series	of	operational	positions	within	its	mill	organization.

Richard	B.	West	is	50	years	old	and	has	served	as	Chief	Financial	Officer	of	PCA	since	March	1999,	as	Corporate	Secretary	since	April	1999	and	also	as	Senior Vice	President	since	March	2002.	From	April	1999	to	March	2002,	Mr.	West	served	as	Vice	President	and	from	March	1999	to	June	1999,	Mr.	West	also	served	as Treasurer	of	PCA.	Mr.	West	served	as	Vice	President	of	Finance—Paperboard	Packaging	of	Tenneco	Packaging	Inc.	from	1995	to	April	1999.	Prior	to	joining	Tenneco Packaging,	Mr.	West	spent	20	years	with	International	Paper	Company	where	he	served	as	an	Internal	Auditor,	Internal	Audit	Manager	and	Manufacturing	Controller for	the	Printing	Papers	Group	and	Director/	Business	Process	Redesign.

Stephen	T.	Calhoun	is	57	years	old	and	was	promoted	to	Vice	President,	Human	Resources	of	PCA	in	November	2002.	From	July	1997	to	October	2002, Mr.	Calhoun	served	as	Director,	Human	Resources	of	Corporate	and	Containerboard	Division.	From	April	1989	to	July	1997,	Mr.	Calhoun	was	employed	principally	by Tenneco	Packaging	Inc.	where	he	held	the	positions	of	Area	Employee	Relations	Manager	and	Human	Resources	Manager.	Prior	to	joining	Tenneco	Packaging	in	1989, Mr.	Calhoun	spent	fifteen	years	with	the	then	American	Can	Company	where	he	held	several	human	resources	and	manufacturing	positions.

# Item	11.	EXECUTIVE	COMPENSATION

	Information	with	respect	to	executive	compensation	is	included	under	the	caption	"Executive	Compensation"	in	PCA's	Proxy	Statement	and	is	incorporated	herein by	reference,	other	than	the	Report	of	the	Compensation	Committee	and	the	Performance	Graph.

# Item	12.	SECURITY	OWNERSHIP	OF	CERTAIN	BENEFICIAL	OWNERS	AND	MANAGEMENT	AND	RELATED	STOCKHOLDER	MATTERS

	Information	with	respect	to	security	ownership	of	certain	beneficial	owners	and	management	is	included	under	the	caption	"Information	Regarding	Beneficial Ownership	of	our	Principal	Shareholders,	Directors	and	Management"	in	PCA's	Proxy	Statement	and	is	incorporated	herein	by	reference.

Information	with	respect	to	securities	authorized	for	issuance	under	equity	compensation	plans	is	included	under	the	caption	"Compensation	of	Executive	Officers" in	PCA's	Proxy	Statement	and	is	incorporated	herein	by	reference.

# Item	13.	CERTAIN	RELATIONSHIPS	AND	RELATED	TRANSACTIONS

Information	with	respect	to	certain	relationships	and	related	transactions	is	included	under	the	caption	"Certain	Relationships	and	Related	Transactions"	in	PCA's Proxy	Statement	and	is	incorporated	herein	by	reference.

# Item	14.	CONTROLS	AND	PROCEDURES

PCA's	Chief	Executive	Officer	and	Chief	Financial	Officer	evaluated	the	effectiveness	of	PCA's	disclosure	controls	and	procedures,	as	defined	in	Rules	13a-14 and	15d-14	of	the	Securities	Exchange	Act	of	1934,	as	of	a	date	within	90	days	of	the	filing	date	of	this	annual	report	and	concluded	that	PCA's	disclosure	controls	and procedures	were	functioning	properly	as	of	the	evaluation	date.

Based	on	this	most	recent	evaluation,	there	do	not	appear	to	have	been	any	significant	changes	in	PCA's	internal	controls	or	in	other	factors	that	could	significantly affect	these	controls	subsequent	to	the	date	of	this	evaluation,	including	any	corrective	actions	with	regard	to	significant	deficiencies	and	material	weaknesses.	The results	of	this	evaluation	have	been	discussed	with	PCA's	Audit	Committee	and	with	Ernst	&	Young	LLP,	PCA's	independent	auditors.

# PART	IV

# Item	15.	EXHIBITS,	FINANCIAL	STATEMENT	SCHEDULES	AND	REPORTS	ON	FORM	8-K

(a)											The	following	documents	are	filed	as	a	part	of	this	report:

(1)										The	financial	statements	listed	in	the	"Index	to	Financial	Statements."

The	following	consolidated	financial	statement	schedule	of	PCA	for	the	years	ended	December	31,	2002,	2001	and	2000	is	included	in	this	report.

Schedule	II—Packaging	Corporation	of	America—Valuation	and	Qualifying	Accounts.

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	not	material,	or	the	information	called	for	thereby	is	otherwise	included	in	the	financial	statements	and	therefore	has	been

# omitted.

PCA	did	not	file	any	Reports	on	Form	8-K	during	the	last	quarter	of	the	period	covered	by	this	report.

4.2 Form	of	Rule	144A	Global	Note	and	Subsidiary	Guarantee.	(Incorporated	herein	by	reference	to Exhibit	4.6	to	PCA's	Registration	Statement	on	Form	S-4,	Registration	No.	333-79511.)

99.1 Certification	of	Chief	Executive	Officer	and	Chief	Financial	Officer	pursuant	to	18	U.S.C.	§1350,	as

adopted	pursuant		to	Section	906	of	the	Sarbanes-Oxley	Act	of	2002.

(1)										Incorporated	herein	by	reference	to	the	same	numbered	exhibit	to	PCA's	Registration	Statement	on	Form	S-1	(Registration	No.	333-86963).

(3)										Incorporated	herein	by	reference	to	the	same	numbered	exhibit	to	PCA's	Quarterly	Report	on	Form	10-Q	for	the	period	ended	June	30,	2000.

(4)										Incorporated	herein	by	reference	to	the	same	numbered	exhibit	to	PCA's	Annual	Report	on	Form	10-K	for	the	period	ended	December	31,	2001.

# 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	on	March	18,	2003.

By:/s/	Paul	T.	Stecko

Name:	Paul	T.	Stecko

Title:	Chairman	and	Chief	Executive	Officer

By:/s/	Richard	B.	West

Name:	Richard	B.	West

Title:	Senior	Vice	President,	Chief	Financial

Officer	and	Corporate	Secretary

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	registrant	and	in the	capacities	indicated	on	March	18,	2003.

Richard	B.	West

(Attorney-In-Fact)

# CERTIFICATIONS

# I,	Paul	T.	Stecko,	certify	that:

(1)			I	have	reviewed	this	annual	report	on	Form	10-K	of	Packaging	Corporation	of	America;

(2)			Based	on	my	knowledge,	this	annual	report	does	not	contain	any	untrue	statement	of	a	material	fact	or	omit	to	state	a	material	fact	necessary	to	make	the statements	made,	in	light	of	the	circumstances	under	which	such	statements	were	made,	not	misleading	with	respect	to	the	period	covered	by	this	annual report;

(3)			Based	on	my	knowledge,	the	financial	statements,	and	other	financial	information	included	in	this	annual	report,	fairly	present	in	all	material	respects	the financial	condition,	results	of	operations	and	cash	flows	of	Packaging	Corporation	of	America	as	of,	and	for,	the	periods	presented	in	this	annual	report;

(4)			PCA's	other	certifying	officer	and	I	are	responsible	for	establishing	and	maintaining	disclosure	controls	and	procedures	(as	defined	in	Exchange	Act Rules	13a-14	and	15d-14)	for	PCA	and	we	have:

a)					designed	such	disclosure	controls	and	procedures	to	ensure	that	material	information	relating	to	PCA,	including	its	consolidated	subsidiaries,	is	made known	to	us	by	others	within	those	entities,	particularly	during	the	period	in	which	this	annual	report	is	being	prepared;

b)					evaluated	the	effectiveness	of	PCA's	disclosure	controls	and	procedures	as	of	a	date	within	90	days	prior	to	the	filing	of	this	annual	report	(the "Evaluation	Date");	and

c)					presented	in	this	annual	report	our	conclusions	about	the	effectiveness	of	the	disclosure	controls	and	procedures	based	on	our	evaluation	as	of	the Evaluation	Date;

(5)			PCA's	other	certifying	officer	and	I	have	disclosed,	based	on	our	most	recent	evaluation,	to	PCA's	auditors	and	the	Audit	Committee	of	PCA's	Board	of Directors	(or	persons	performing	the	equivalent	function):

a)					all	significant	deficiencies	in	the	design	or	operation	of	internal	controls	which	could	adversely	affect	the	PCA's	ability	to	record,	process,	summarize	and report	financial	data	and	have	identified	for	the	PCA's	auditors	any	material	weaknesses	in	internal	controls;	and

b)					any	fraud,	whether	or	not	material,	that	involves	management	or	other	employees	who	have	a	significant	role	in	PCA's	internal	controls;	and

(6)			PCA's	other	certifying	officer	and	I	have	indicated	in	this	annual	report	whether	or	not	there	were	significant	changes	in	internal	controls	or	in	other	factors that	could	significantly	affect	internal	controls	subsequent	to	the	date	of	our	most	recent	evaluation,	including	any	corrective	actions	with	regard	to	significant deficiencies	and	material	weaknesses.

# /s/	Paul	T.	Stecko

Paul	T.	Stecko

# Chairman	and	Chief	Executive	Officer

# I,	Richard	B.	West,	certify	that:

a.						all	significant	deficiencies	in	the	design	or	operation	of	internal	controls	which	could	adversely	affect	PCA's	ability	to	record,	process,	summarize	and report	financial	data	and	have	identified	for	PCA's	auditors	any	material	weaknesses	in	internal	controls;	and

# /s/	Richard	B.	West

Senior	Vice	President,	Chief	Financial	Officer	and	Corporate Secretary

# INDEX	TO	FINANCIAL	STATEMENTS

# Packaging	Corporation	of	America	Consolidated	Financial	Statements	as	of	December	31,	2002,

# REPORT	OF	INDEPENDENT	AUDITORS

Board	of	Directors	and	Shareholders	of	Packaging	Corporation	of	America:

We	have	audited	the	accompanying	consolidated	balance	sheets	of	Packaging	Corporation	of	America	(the	"Company")	as	of	December	31,	2002	and	2001,	and	the related	consolidated	statements	of	income,	changes	in	shareholders'	equity	and	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2002.	Our	audits also	included	the	financial	statement	schedule	listed	in	the	index	at	Item	15(a).	These	financial	statements	and	schedule	are	the	responsibility	of	the	Company's management.	Our	responsibility	is	to	express	an	opinion	on	these	financial	statements	and	schedule	based	on	our	audits.

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

In	our	opinion,	the	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	consolidated	financial	position	of	Packaging	Corporation	of America	at	December	31,	2002	and	2001,	and	the	consolidated	results	of	its	operations	and	its	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31, 2002,	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States.	Also,	in	our	opinion,	the	related	financial	statement	schedule,	when	considered	in relation	to	the	basic	financial	statements	taken	as	a	whole,	presents	fairly,	in	all	material	respects,	the	information	set	forth	therein.

As	discussed	in	Note	2	to	the	audited	consolidated	financial	statements,	the	Company	adopted	Statement	of	Financial	Accounting	Standards	No.	133,	"Accounting for	Derivative	Instruments	and	Hedging	Activities,"	as	amended,	on	January	1,	2001.

Ernst	&	Young	LLP

Chicago,	Illinois

|  | 2002 | 2001 |
| :--- | :--- | :--- |
| (In\tthousands,\texcept\tshare\tand\tper\tshare\tamounts) |  |  |
| Assets |  |  |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | $131,305 | $82,465 |
| Accounts\tand\tnotes\treceivable,\tnet\tof\tallowance\tfor\tdoubtful\taccounts\tof\t$5,821 |  |  |
| and\t$5,232\tas\tof\tDecember\t31,\t2002\tand\t2001,\trespectively | 175,716 | 170,175 |
| Inventories | 160,549 | 170,173 |
| Prepaid\texpenses\tand\tother\tcurrent\tassets | 22,600 | 12,058 |
| Deferred\tincome\ttaxes | 19,384 | 13,346 |
| Total\tcurrent\tassets | 509,554 | 448,217 |
| Property,\tplant\tand\tequipment,\tnet | 1,408,980 | 1,451,224 |
| Intangible\tassets,\tnet\tof\taccumulated\tamortization\tof\t$1,726\tand\t$1,647\tas\tof |  |  |
| December\t31,\t2002\tand\t2001,\trespectively | 3,854 | 4,037 |
| Other\tlong-term\tassets | 60,163 | 68,302 |
| Total\tassets\nLiabilities\tand\tshareholders'\tequity | $ 1,982,551 | $ 1,971,780 |
| Current\tliabilities: |  |  |
| Short-term\tdebt\tand\tcurrent\tmaturities\tof\tlong-term\tdebt | $113,094 | $54 |
| Accounts\tpayable | 85,807 | 93,873 |
| Accrued\tinterest | 13,362 | 13,590 |
| Accrued\tliabilities | 84,543 | 84,378 |
| Total\tcurrent\tliabilities | 296,806 | 191,895 |
| Long-term\tliabilities: |  |  |
| Long-term\tdebt | 629,119 | 795,163 |
| Deferred\tincome\ttaxes | 241,372 | 194,452 |

| Other	liabilities | 19,379 | 20,436 |
| :--- | :--- | :--- |
| Total\tlong-term\tliabilities | 889,870 | 1,010,051 |
| Shareholders'\tequity: |  |  |
| Common\tstock\t(par\tvalue\t$.01\tper\tshare,\t300,000,000\tshares\tauthorized, |  |  |
| 104,510,094\tshares\tand\t105,570,203\tshares\tissued\tas\tof\tDecember\t31,\t2002\tand |  |  |
| 2001,\trespectively) | 1,045 | 1,056 |
| Additional\tpaid\tin\tcapital | 466,911 | 490,915 |
| Retained\tearnings | 329,065 | 280,886 |
| Accumulated\tother\tcomprehensive\tincome\t(loss): |  |  |
| Unrealized\tloss\ton\tderivatives,\tnet | (811) | (2,967) |
| Cumulative\tforeign\tcurrency\ttranslation\tadjustment | (1) | — |
| Total\taccumulated\tother\tcomprehensive\tincome\t(loss) | (812) | (2,967) |
| Common\tstock\theld\tin\ttreasury,\tat\tcost\t(18,800\tshares\tand\t3,000\tshares\tas\tof |  |  |
| December\t31,\t2002\tand\t2001,\trespectively) | (334) | (56) |
| Total\tshareholders'\tequity | 795,875 | 769,834 |
| Total\tliabilities\tand\tshareholders'\tequity | $ 1,982,551 | $ 1,971,780 |

See	notes	to	consolidated	financial	statements.

# Consolidated	Statements	of	Income

|  | 2002 | Year	Ended<br>December	31,<br>2001 | 2000 |
| :--- | :--- | :--- | :--- |
| (In\tthousands,\texcept\tper\tshare\tamounts) |  |  |  |
| Net\tsales | $1,735,858 | $1,789,956 | $1,921,868 |
| Cost\tof\tsales | (1,409,294) | (1,372,019) | (1,418,465) |
| Gross\tprofit | 326,564 | 417,937 | 503,403 |
| Selling\tand\tadministrative\texpenses | (132,477) | (123,886) | (118,373) |
| Other\tincome\t(expense),\tnet | (8,069) | (4,306) | 59,996 |
| Corporate\toverhead | (40,738) | (40,290) | (40,192) |
| Income\tbefore\tinterest,\ttaxes,\tcumulative\teffect\tof\taccounting |  |  |  |
| change\tand\textraordinary\titem | 145,280 | 249,455 | 404,834 |
| Interest\texpense,\tnet | (67,666) | (74,021) | (117,683) |
| Income\tbefore\ttaxes,\tcumulative\teffect\tof\taccounting\tchange\tand |  |  |  |
| extraordinary\titem | 77,614 | 175,434 | 287,151 |
| Provision\tfor\tincome\ttaxes | (29,435) | (67,912) | (114,190) |
| Income\tbefore\tcumulative\teffect\tof\taccounting\tchange\tand |  |  |  |
| extraordinary\titem | 48,179 | 107,522 | 172,961 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet\tof\ttax | — | (495) | — |
| Income\tbefore\textraordinary\titem | 48,179 | 107,027 | 172,961 |
| Extraordinary\titem,\tnet\tof\ttax | — | (609) | (11,060) |
| Net\tincome | 48,179 | 106,418 | 161,901 |
| Preferred\tdividends\tand\taccretion\tof\tpreferred\tstock\tissuance\tcosts | — | — | (18,637) |
| Net\tincome\tavailable\tto\tcommon\tshareholders | $48,179 | $106,418 | $143,264 |
| Weighted\taverage\tcommon\tshares\toutstanding |  |  |  |
| Basic | 105,053 | 106,277 | 104,890 |
| Diluted | 107,208 | 108,801 | 107,518 |
| Basic\tearnings\tper\tcommon\tshare: |  |  |  |
| Income\tbefore\tcumulative\teffect\tof\taccounting\tchange\tand |  |  |  |
| extraordinary\titem | $0.46 | $1.01 | $1.47 |
| Cumulative\teffect\tof\taccounting\tchange | — | — | — |
| Extraordinary\titem | — | (0.01) | (0.10) |
| Net\tincome\tper\tcommon\tshare | $0.46 | $1.00 | $1.37 |
| Diluted\tearnings\tper\tcommon\tshare: |  |  |  |
| Income\tbefore\tcumulative\teffect\tof\taccounting\tchange\tand |  |  |  |
| extraordinary\titem | $0.45 | $0.99 | $1.43 |
| Cumulative\teffect\tof\taccounting\tchange | — | — | — |
| Extraordinary\titem | — | (0.01) | (0.10) |
| Net\tincome\tper\tcommon\tshare | $0.45 | $0.98 | $1.33 |

Consolidated	Statements	of	Changes	in	Shareholders'	Equity

|  | Junior	Preferred | Junior	Preferred |  |  |  |  | Additional | Other |  | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (In\tthousands\texcept\tshare\tdata) | Stock\nShares | \t Amount | Common\tStock\nShares | Amount | Treasury\tStock\nShares | Amount | Paid\tIn\nCapital | Comprehensive\nIncome\t(Loss) | Retained\nEarnings | Shareholders'\nEquity |
| Balance\tat\tJanuary\t1,\t2000 | 100 | $ — | 94,600,000 | $946 | — | $— | $384,549 | $— | $31,204 | $416,699 |
| Net\tincome | — | — | — | — | — | — | — | — | 161,901 | 161,901 |
| Initial\tpublic\toffering | — | — | 11,250,000 | 112 | — | — | 125,852 | — | — | 125,964 |
| Redemption\tof\tpreferred\tstock | — | — | — | — | — | — | — | — | (16,266) | (16,266) |

| Dividends	declared	on	preferred	stock | — | — | — | — | — | — | — | — | (2,291) | (2,291) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Accretion\tof\tpreferred\tstock\tcosts | — | — | — | — | — | — | — | — | (80) | (80) |
| Exercise\tof\tstock\toptions | — | — | 398,138 | 4 | — | — | 1,807 | — | — | 1,811 |
| Treasury\tstock | — | — | — | — | (27,470) | (314) | — | — | — | (314) |
| Buyout\tof\tpreferred\tstock | (100) | — | — | — | — | — | — |  | — | — |
| Balance\tat\tDecember\t31,\t2000 | — | $ — | 106,248,138 | $ 1,062 | (27,470) | $(314) | $512,208 | $— | $174,468 | $687,424 |
| Net\tincome | — | — | — | — | — | — | — | — | 106,418 | 106,418 |
| Loss\ton\tderivatives: |  |  |  |  |  |  |  |  |  |  |
| Loss\ton\tderivatives,\tnet\tof\t$2,143\tincome\ttaxes | — | — | — | — | — | — | — | (3,329) | — | (3,329) |
| Less:\treclassification\tadjustment,\tnet\tof\t($233)\tincome |  |  |  |  |  |  |  |  |  |  |
| taxes | — | — | — | — | — | — | — | 362 | — | 362 |
| Total\tcomprehensive\tincome,\tnet\tof\ttax |  |  |  |  |  |  |  |  |  | 103,451 |
| Exercise\tof\tstock\toptions | — | — | 1,669,735 | 17 | — | — | 17,270 | — | — | 17,287 |
| Common\tstock\t(repurchases)/retirement,\tnet | — | — | (2,347,670) | (23) | 24,470 | 258 | (38,563) | — | — | (38,328) |
| Balance\tat\tDecember\t31,\t2001 | — | $ — | 105,570,203 | $ 1,056 | (3,000) | $(56) | $490,915 | $(2,967) | $280,886 | $769,834 |
| Net\tincome | — | — | — | — | — | — | — | — | 48,179 | 48,179 |
| Gain\ton\tderivatives,\tnet\tof\t$1,388\tincome\ttaxes | — | — | — | — | — | — | — | 2,156 | — | 2,156 |
| Foreign\tcurrency\ttranslation\tadjustment | — | — | — | — | — | — | — | (1) | — | (1) |
| Total\tcomprehensive\tincome,\tnet\tof\ttax |  |  |  |  |  |  |  |  |  | 50,334 |
| Exercise\tof\tstock\toptions | — | — | 811,791 | 8 | — | — | 8,686 | — | — | 8,694 |
| Common\tstock\t(repurchases)/retirement,\tnet | — | — | (1,871,900) | (19) | (15,800) | (278) | (32,690) | — | — | (32,987) |
| Balance\tat\tDecember\t31,\t2002 | — | $ — | 104,510,094 | $ 1,045 | (18,800) | $(334) | $466,911 | $(812) | $329,065 | $795,875 |

# Consolidated	Statements	of	Cash	Flows

|  | 2002 | Year	Ended<br>December	31,<br>2001 | 2000 |
| :--- | :--- | :--- | :--- |
| (In\tthousands) |  |  |  |
| Cash\tFlows\tfrom\tOperating\tActivities: |  |  |  |
| Net\tincome | $48,179 | $106,418 | $161,901 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tprovided\tby\toperating |  |  |  |
| activities: |  |  |  |
| Depreciation,\tdepletion\tand\tamortization | 149,380 | 141,516 | 140,841 |
| Amortization\tof\tfinancing\tcosts | 4,033 | 4,851 | 7,375 |
| Cumulative\teffect\tof\taccounting\tchange | — | 495 | — |
| Extraordinary\tloss—early\tdebt\textinguishment | — | 609 | 11,060 |
| Increase\tin\tdeferred\tincome\ttaxes | 36,006 | 46,354 | 83,276 |
| Gain\ton\tsale\tof\ttimberlands | — | — | (60,414) |
| (Gain)\tloss\ton\tdisposal\tof\tproperty,\tplant\tand\tequipment | 5,171 | 1,718 | (103) |
| Pension\tand\tpostemployment\tbenefits | 2,324 | 1,996 | 862 |
| Tax\tbenefit\tassociated\twith\tstock\toption\texercises | 4,212 | 9,562 | — |
| Other,\tnet | 369 | 516 | 1,668 |
| Changes\tin\tcomponents\tof\tworking\tcapital: |  |  |  |
| (Increase)\tdecrease\tin\tcurrent\tassets— |  |  |  |
| Accounts\treceivable | (5,592) | 47,077 | (6,940) |
| Inventories | 9,624 | (9,821) | 5,207 |
| Prepaid\texpenses\tand\tother | (6,194) | (6,285) | 2,443 |
| Increase\t(decrease)\tin\tcurrent\tliabilities— |  |  |  |
| Accounts\tpayable | (8,074) | (21,910) | (13,663) |
| Accrued\tliabilities | 578 | (8,799) | 7,490 |
| Net\tcash\tprovided\tby\toperating\tactivities | 240,016 | 314,297 | 341,003 |
| Cash\tFlows\tfrom\tInvesting\tActivities: |  |  |  |
| Additions\tto\tproperty,\tplant\tand\tequipment | (107,404) | (131,158) | (128,991) |
| Additions\tto\tlong\tterm\tassets | (5,027) | (3,467) | (4,748) |
| Acquisition\tof\tbusinesses | — | (4,827) | — |
| Proceeds\tfrom\tdisposals\tof\tproperty,\tplant\tand\tequipment | 2,806 | 4,570 | 3,249 |
| Proceeds\tfrom\ttimberlands\tsales | — | — | 247,936 |
| Investments\tin\tjoint\tventure | — | — | (500) |
| Net\tcash\tprovided\tby\t(used\tfor)\tinvesting\tactivities | (109,625) | (134,882) | 116,946 |
| Cash\tFlows\tfrom\tFinancing\tActivities: |  |  |  |
| Redemption\tof\tpreferred\tstock | — | — | (124,432) |
| Proceeds\tfrom\tlong-term\tdebt\tissued | — | — | 142,605 |
| Payments\ton\tlong-term\tdebt | (53,046) | (74,239) | (602,826) |
| Proceeds\tfrom\tinitial\tpublic\toffering | — | — | 126,364 |
| Financing\tcosts | — | — | (3,565) |
| Repurchases\tof\tcommon\tstock | (32,987) | (38,328) | (314) |
| Issuance\tof\tcommon\tstock\tupon\texercise\tof\tstock\toptions | 4,482 | 7,725 | 1,811 |
| Net\tcash\tused\tfor\tfinancing\tactivities | (81,551) | (104,842) | (460,357) |
| Net\tincrease\t(decrease)\tin\tcash\tand\tcash\tequivalents | 48,840 | 74,573 | (2,408) |
| Cash\tand\tcash\tequivalents,\tbeginning\tof\tperiod | 82,465 | 7,892 | 10,300 |
| Cash\tand\tcash\tequivalents,\tend\tof\tperiod | $131,305 | $82,465 | $7,892 |

Packaging	Corporation	of	America Notes	to	Consolidated	Financial	Statements December	31,	2002

# 1.		BASIS	OF	PRESENTATION	AND	NATURE	OF	BUSINESS

Packaging	Corporation	of	America	("PCA"	or	the	"Company")	was	incorporated	on	January	25,	1999	pursuant	to	the	General	Corporation	Law	of	the	State	of Delaware.	PCA	was	formed	to	acquire	the	containerboard	and	corrugated	packaging	products	business	(the	"Group")	of	Pactiv	Corporation,	formerly	known	as	Tenneco Packaging	Inc.,	a	wholly	owned	subsidiary	of	Tenneco	Inc.	PCA	had	no	operations	from	the	date	of	incorporation	on	January	25,	1999	to	April	11,	1999.

On	April	12,	1999,	Pactiv	Corporation	("Pactiv")	sold	the	Group	to	PCA	for	$2.2	billion.	The	Group	is	the	predecessor	to	PCA.	The	$2.2	billion	purchase	price	paid to	Pactiv	for	the	Group	consisted	of	$246.5	million	in	cash,	the	assumption	of	$1.8	billion	of	debt	incurred	by	Pactiv	immediately	prior	to	closing,	and	the	issuance	of	a 45%	common	equity	interest	in	PCA.	PCA	Holdings	LLC,	an	entity	organized	and	controlled	by	Madison	Dearborn	Partners,	LLC,	acquired	the	remaining	55% common	equity	interest	in	PCA	for	$236.5	million	in	cash.	These	events	are	collectively	referred	to	as	the	"Transactions."	Because	significant	veto	rights	were	retained by	Pactiv,	the	carryover	basis	of	accounting	was	used	and	no	goodwill	was	recognized.	Fees	of	$23.8	million	were	incurred	as	part	of	the	Transactions	and	were	recorded as	a	charge	to	shareholders'	equity.

On	August	25,	1999,	PCA	Holdings	LLC	and	Pactiv	agreed	that	the	acquisition	consideration	should	be	reduced	as	a	result	of	a	post-closing	price	adjustment	by $20.0	million.	On	September	23,	1999,	Pactiv	paid	PCA	$20.7	million,	representing	the	$20.0	million	adjustment	and	$0.7	million	of	interest	through	the	date	of payment	by	Pactiv.

The	Company	is	comprised	of	mills	and	corrugated	products	operations.	The	mill	operations	(the	"Mills")	consist	of	two	kraft	linerboard	mills	located	in	Counce, Tennessee,	and	Valdosta,	Georgia,	and	two	medium	mills	located	in	Filer	City,	Michigan,	and	Tomahawk,	Wisconsin.	The	Mills	also	include	two	recycling	centers located	in	Nashville	and	Jackson,	Tennessee.	The	Company	leases	the	cutting	rights	to	approximately	140,000	acres	of	timberland	as	of	December	31,	2002.	The	Mills transfer	the	majority	of	their	output	to	PCA's	corrugated	products	operations	("Corrugated").

PCA's	corrugated	manufacturing	operations	consist	of	64	corrugated	products	plants,	a	technical	and	development	center,	five	graphic	design	centers,	a	rotogravure printing	operation	and	a	complement	of	packaging	supplies	and	distribution	centers.	All	plants	are	located	in	North	America.	Corrugated	products	manufacturing	plants combine	linerboard	and	medium	(primarily	from	PCA's	mills)	into	sheets	that	are	converted	into	corrugated	shipping	containers,	point-of-sale	graphics	packaging, point-of-purchase	displays	and	other	specialized	packaging.	Our	corrugated	products	manufacturing	plants	sell	to	diverse	customers	primarily	in	North	America.

As		of	December	31,	2002,	we	had	approximately	7,900	employees.	Approximately	2,200	of	these	employees	were	salaried	and	approximately	5,700	were	hourly. Approximately	75%	of	our	hourly	employees	are	represented	by	unions.	Our	unionized	employees	are	represented	primarily	by	the	Paper,	Allied	Industrial,	Chemical, Energy	Workers	International	Union,	the	International	Association	of	Machinists,	the	Graphic	Communications	International	Union	and	the	United	Steel	Workers	of America	(USWA).

The	contract	for	our	unionized	mill	employees	at	our	Valdosta,	Georgia	kraft	linerboard	mill	expires	in	September	2003.	Contracts	for	unionized	mill	employees	at our	three	remaining	containerboard	mills	expire	between	October	2005	and	June	2007.	Contracts	for	unionized	converting	plant	employees	expire

Notes	to	Consolidated	Financial	Statements	(Continued)

# 1.		BASIS	OF	PRESENTATION	AND	NATURE	OF	BUSINESS	(Continued)

between	February	2003	and	November	2008.	We	are	currently	in	negotiations	to	renew	or	extend	any	union	contracts	that	have	recently	expired	or	are	expiring	in	the near	future.

# 2.		SUMMARY	OF	SIGNIFICANT	ACCOUNTING	POLICIES

# Basis	of	Consolidation

The	accompanying	consolidated	financial	statements	of	Packaging	Corporation	of	America	include	all	majority-owned	subsidiaries.	All	significant	intercompany transactions	have	been	eliminated.	The	Company	has	one	joint	venture	that	is	carried	under	the	equity	method.

# 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	amounts	in	the	financial	statements	and	the	accompanying	notes.	Actual	results	could	differ	from	those	estimates.

# Cash	and	Cash	Equivalents

Cash	and	cash	equivalents	include	all	cash	balances	and	highly	liquid	investments	with	a	maturity	of	three	months	or	less.	Cash	equivalents	are	stated	at	cost,	which approximates	market.

# Accounts	Receivable

The	collectibility	of	PCA's	accounts	receivable	is	based	upon	a	combination	of	factors.	In	circumstances	where	a	specific	customer	is	unable	to	meet	its	financial obligations	to	us	(e.g.,	bankruptcy	filings,	substantial	downgrading	of	credit	sources),	a	specific	reserve	for	bad	debts	is	recorded	against	amounts	due	to	reduce	the	net recognized	receivable	to	the	amount	we	reasonably	believe	will	be	collected.	For	all	other	customers,	reserves	for	bad	debts	are	recognized	consisting	of	0.3%	for amounts	less	than	90	days	past	due	and	30%	for	amounts	more	than	90	days	past	due	based	on	historical	collection	experience.	If	collection	experience	deteriorates	(i.e., higher	than	expected	defaults	or	an	unexpected	material	adverse	change	in	a	major	customer's	ability	to	meet	its	financial	obligations	to	us),	the	estimate	of	the recoverability	of	amounts	due	could	be	reduced	by	a	material	amount.

# Inventories

Raw	materials,	work	in	process	and	finished	goods	are	valued	using	the	lower	of	last-in,	first-out	("LIFO")	cost	or	market	method.	Supplies	and	materials inventories	are	valued	using	a	moving	average	cost.	All	inventories	are	stated	at	the	lower	of	cost	or	market.	Inventories	valued	using	the	LIFO	method	comprised	71% and	73%	of	inventories	at	current	cost	at	December	31,	2002	and	2001,	respectively.

# 2.		SUMMARY	OF	SIGNIFICANT	ACCOUNTING	POLICIES	(Continued)

The	components	of	inventories	are	as	follows:

|  | 2002 | 2001 |
| :--- | :--- | :--- |
| (In\tthousands) |  |  |
| Raw\tmaterials | $73,730 | $82,540 |
| Work\tin\tprocess | 5,423 | 5,989 |
| Finished\tgoods | 49,306 | 51,227 |
| Supplies\tand\tmaterials | 61,571 | 58,118 |
| Inventories\tat\tFIFO\tcost | 190,030 | 197,874 |
| Excess\tof\tFIFO\tover\tLIFO\tcost | (29,481) | (27,701) |
| Inventory,\tnet | $ 160,549 | $ 170,173 |

# Property,	Plant	and	Equipment

Property,	plant	and	equipment	and	timber	and	timberlands	are	recorded	at	cost.

Property,	plant	and	equipment	by	major	classification	are	as	follows:

|  | 2002 | 2001 |
| :--- | :--- | :--- |
| (In\tthousands) |  |  |
| Land\tand\tland\timprovements | $75,006 | $71,936 |
| Buildings | 298,616 | 292,571 |
| Machinery\tand\tequipment | 2,147,210 | 2,071,048 |
| Other | 32,248 | 32,802 |
| Property,\tplant\tand\tequipment,\tat\tcost | 2,553,080 | 2,468,357 |
| Less:\tAccumulated\tdepreciation | (1,173,421) | (1,065,425) |
| Total | 1,379,659 | 1,402,932 |
| Construction\tin\tprogress | 27,985 | 44,997 |
| Timber\tand\ttimberlands,\tat\tcost,\tless\tdepletion | 1,336 | 3,295 |
| Property,\tplant\tand\tequipment,\tnet | $1,408,980 | $1,451,224 |

The	amount	of	interest	capitalized	related	to	construction	in	progress	was	approximately	$0.4	million,	$0.9	million	and	$0.6	million	for	the	years	ended December	31,	2002,	2001	and	2000,	respectively.

Depreciation	is	computed	on	the	straight-line	basis	over	the	estimated	useful	lives	of	the	related	assets.	The	following	lives	are	used	for	the	various	categories	of assets:

Timber	depletion	is	provided	on	the	basis	of	timber	cut	during	the	period	related	to	the	estimated	quantity	of	recoverable	timber.	Assets	under	capital	leases	are depreciated	on	the	straight-line	method	over	the	term	of	the	lease.

Expenditures	for	repairs	and	maintenance	are	expensed	as	incurred.

# Intangible	Assets

The	Company	has	capitalized	certain	intangible	assets,	primarily	customer	lists,	covenants	not	to	compete,	and	goodwill,	based	on	their	estimated	fair	value	at	the date	of	acquisition.	Amortization	is	provided	for	customer	lists	on	a	straight-line	basis	over	periods	ranging	from	10	to	15	years.	Covenants	not	to	compete	are	amortized on	a	straight-line	basis	over	the	terms	of	the	respective	agreements.	Goodwill,	which	amounted	to	$1.8	million	and	$1.3	million	as	of	December	31,	2002	and	2001, respectively,	is	not	being	amortized	but	is	subject	to	annual	impairment	tests	in	accordance	with	Statement	of	Financial	Accounting	Standards	("SFAS")	No.	142, "Goodwill	and	Other	Intangible	Assets"	beginning	January	1,	2002.	Goodwill	amortization	was	not	material	during	the	years	ended	December	31,	2000	and	2001.

# Other	Long-Term	Assets

PCA	has	capitalized	certain	costs	related	to	obtaining	its	financing.	These	costs	are	amortized	to	interest	expense	using	the	effective	interest	rate	method	over	the terms	of	the	senior	credit	facility	and	senior	subordinated	notes,	which	range	from	four	years	to	seven	years.	Unamortized	deferred	financing	costs	were	$19.2	million and	$23.2	million	as	of	December	31,	2002	and	2001,	respectively.

PCA	currently	leases	the	cutting	rights	to	approximately	140,000	acres	of	timberland	and	capitalizes	the	annual	lease	payments	and	reforestation	costs	associated with	these	leases.	These	costs	are	recorded	as	depletion	when	timber	is	harvested	and	used	in	PCA's	business	operations.	Capitalized	long-term	lease	costs	were $21.0	million	and	$23.1	million	as	of	December	31,	2002	and	2001,	respectively.

PCA	also	capitalizes	certain	costs	related	to	the	purchase	and	development	of	software	which	is	used	in	its	business	operations.	The	costs	attributable	to	these software	systems	are	amortized	over	their	estimated	useful	lives	based	on	various	factors	such	as	the	effects	of	obsolescence,	technology	and	other	economic	factors. Capitalized	software	costs	were	$11.8	million	and	$12.4	million	as	of	December	31,	2002	and	2001,	respectively.

Long-lived	assets	to	be	held	and	used	are	reviewed	for	impairment	in	accordance	with	provisions	of	SFAS	No.	144,	"Accounting	for	the	Impairment	or	Disposal	of

Long-Lived	Assets."	In	the	event	that	facts	and	circumstances	indicate	that	the	carrying	amount	of	any	long-lived	assets	may	be	impaired,	an	evaluation	of recoverability	would	be	performed.	If	an	evaluation	is	required,	the	estimated	future	undiscounted	cash	flows	associated	with	the	asset	would	be	compared	to	the	asset's carrying	amount	to	determine	if	a	write-down	to	fair	value	is	required.

# Financial	Instruments

The	Company	uses	interest	rate	collar	agreements	to	manage	interest	costs	and	the	risk	associated	with	changing	interest	rates.

# Income	Taxes

PCA	utilizes	the	liability	method	of	accounting	for	income	taxes	whereby	it	recognizes	deferred	tax	assets	and	liabilities	for	the	future	tax	consequences	of temporary	differences	between	the	tax	basis	of	assets	and	liabilities	and	their	reported	amounts	in	the	financial	statements.	Deferred	tax	assets	will	be	reduced	by	a valuation	allowance	if,	based	upon	management's	estimates,	it	is	more	likely	than	not	that	a	portion	of	the	deferred	tax	assets	will	not	be	realized	in	a	future	period.	The estimates	utilized	in	the	recognition	of	deferred	tax	assets	are	subject	to	revision	in	future	periods	based	on	new	facts	or	circumstances.

The	Company	recognizes	revenue	as	title	to	the	products	is	transferred	to	customers.	Shipping	and	handling	costs	are	included	in	cost	of	sales.	Shipping	and handling	billings	to	a	customer	in	a	sales	transaction	are	included	in	revenue.

# Research	and	Development

Research	and	development	costs	are	expensed	as	incurred.	The	amount	charged	to	expense	was	$6.7	million,	$5.5	million,	and	$3.4	million	for	the	years	ended December	31,	2002,	2001	and	2000,	respectively.

# Freight	Trades

PCA	regularly	trades	containerboard	with	other	manufacturers	primarily	to	reduce	shipping	costs.	The	freight	trade	transactions	are	accounted	for	primarily	as transactions	in	the	inventory	accounts;	the	impact	on	income	is	not	material.

# Segment	Information

PCA	is	primarily	engaged	in	one	line	of	business:	the	manufacture	and	sale	of	packaging	materials,	boxes	and	containers	for	industrial	and	consumer	markets.	No single	customer	accounts	for	more	than	10%	of	total	revenues.	PCA's	manufacturing	operations	are	located	within	the	United	States.

# Comprehensive	Income	(Loss)

For	the	years	ended	December	31,	2002	and	2001,	total	comprehensive	income	was	$2.2	million	more	than	net	income	due	to	derivative	gains	and	foreign	currency translation	adjustments,	and	$3.0	million	less	than	net	income	due	to	derivative	losses,	respectively.	There	was	no	difference	for	the	year	ended	December	31,	2000.

# Derivative	Instruments	and	Hedging	Activities	and	Accounting	Change

Effective	January	1,	2001,	the	Company	adopted	Statement	of	Financial	Accounting	Standards	("SFAS")	No.	133,	"Accounting	for	Derivative	Instruments	and Hedging	Activities,"	as	amended	by	SFAS	No.	137	and	SFAS	No.	138.	The	Statement	requires	the	Company	to	recognize	derivative	instruments	as	either	assets	or liabilities	in	the	balance	sheet	at	fair	value.	It	further	provides	criteria	for	derivative	instruments	to	be	designated	as	fair	value,	cash	flow	or	foreign	currency	hedges	and establishes	respective	accounting	standards	for	reporting	changes	in	the	fair	value	of	the	derivative	instruments.	The	gains	or	losses	resulting	from	adjusting	the derivative	instruments	to	fair	value	are	recorded	in	net	income	or	accumulated	other	comprehensive	income	(loss)	(OCI),	as	appropriate.

The	Company	recorded	a	transition	adjustment	upon	adoption	of	SFAS	No.	133	to	recognize	its	derivative	instruments	at	fair	value	and	to	recognize	the	effective and	ineffective	portions	of	the	cash	flow	hedges.	The	effect	of	this	transition	adjustment	was	to	decrease	reported	net	income	in	the	first	quarter	of	2001	by approximately	$0.5	million	($0.8	million	pre-tax).	The	Company	also	recorded	a	minimal	transition	adjustment	in	OCI	and	an	increase	in	noncurrent	liabilities	of approximately	$0.8	million.

The	Company	uses	derivative	instruments	to	manage	interest	costs	and	the	risk	associated	with	changing	interest	rates.	The	Company's	objectives	for	holding derivatives	are	to	minimize	the	risks	using	the	most	effective	methods	to	eliminate	or	reduce	the	impacts	of	these	exposures.	The	Company	has	one	interest	rate	collar agreement	that	protects	against	rising	interest	rates	and	simultaneously	guarantees	a	minimum	interest	rate.	As	interest	rates	change,	the	differential	paid	or	received	is recognized	in	interest	expense	of	the	period.	Interest	rate	collar	agreements	are	accounted	for	as	cash	flow	hedges.

Derivative	losses	included	in	OCI	as	of	December	31,	2002,	will	be	reclassified	into	earnings	over	the	lives	of	the	collar	agreements,	through	June	30,	2003.

# New	Accounting	Pronouncements

Effective	January	1,	2002,	the	Company	adopted	SFAS	No.	144,	"Accounting	for	the	Impairment	or	Disposal	of	Long-Lived	Assets,"	which	addresses	financial accounting	and	reporting	for	the	impairment	or	disposal	of	long-lived	assets	and	supersedes	SFAS	No.	121,	"Accounting	for	the	Impairment	of	Long-Lived	Assets	and

for	Long-Lived	Assets	to	be	Disposed	of,"	and	the	accounting	and	reporting	provisions	of	APB	Opinion	No.	30,	"Reporting	the	Results	of	Operations"	for	a	disposal	of	a segment	of	a	business.	The	adoption	of	SFAS	No.	144	on	January	1,	2002,	did	not	have	a	material	impact	on	the	Company's	consolidated	financial	position	or	results	of operations.

In	June	2001,	the	Financial	Accounting	Standards	Board	issued	SFAS	No.	143,	"Accounting	for	Asset	Retirement	Obligations,"	which	is	effective	for	fiscal	years beginning	after	June	15,	2002.	The	Statement	requires	legal	obligations	associated	with	the	retirement	of	long-lived	assets	to	be	recognized	at	their	fair	value	at	the	time that	the	obligations	are	incurred.	Upon	initial	recognition	of	a	liability,	that	cost	should	be	capitalized	as	part	of	the	related	long-lived	asset	and	allocated	to	expense	over the	useful	life	of	the	asset.	The	Company	will	adopt	the	new	rules	on	asset	retirement	obligations	on	January	1,	2003.	The	adoption	of	the	Statement	is	not	expected	to have	a	material	impact	on	the	Company's	financial	statements.

In	June	2002,	the	FASB	issued	SFAS	No.	146,	"Accounting	for	Costs	Associated	with	Exit	or	Disposal	Activities,"	effective	for	exit	or	disposal	activities	initiated after	December	31,	2002.	This	Statement	addresses	financial	accounting	and	reporting	for	costs	associated	with	exit	or	disposal	activities	and	nullifies	Emerging	Issues Task	Force	("EITF")	Issue	No.	94-3,	"Liability	Recognition	for	Certain	Employee	Termination	Benefits	and	Other	Costs	to	Exit	an	Activity	(including	Certain	Costs Incurred	in	a	Restructuring)."		The	adoption	of	SFAS	No.	146	on	January	1,	2003,	is	not	expected	to	have	a	material	impact	on	the	Company's	consolidated	financial position	or	results	of	operations.

In	November	2002,	the	FASB	issued	FASB	Interpretation	("FIN")	No.	45,	"Guarantors	Accounting	and	Disclosure	Requirements	for	Guarantees,	Including Indirect	Guarantees	of	Indebtedness	of	Others."		This	Interpretation	elaborates	on	the	disclosures	to	be	made	by	a	guarantor	in	its	interim	and	annual	financial	statements about	its	obligations	under	certain	guarantees	that	it	has	issued.	It	also	clarifies	that	a	guarantor	is	required	to	recognize,	at	the	inception	of	a	guarantee,	a	liability	for	the fair	value	of	the	obligation	undertaken	in	issuing	the	guarantee.	This	Interpretation	does	not	prescribe	a	specific	approach	for	subsequently	measuring	the	guarantor's recognized	liability	over	the	term	of	the	related	guarantee.	This	Interpretation	also	incorporates,	without	change,	the	guidance	in	FIN	No.	34,	"Disclosure	of	Indirect Guarantees	of	Indebtedness	of	Others,"	which	is	being	superseded.	The	initial	recognition	and	initial	measurement	provisions	are	applicable	on	a	prospective	basis	to guarantees	issued	or	modified	after	December	31,	2002.	The	disclosure	requirements	are	effective	for	financial	statements	of	interim	or	annual	periods	ending	after December	15,	2002.	See	Note	6,	Debt,	for	disclosures	regarding	letters	of	credit.

In	January	2003,	the	FASB	issued	FIN	No.	46,	"Consolidation	of	Variable	Interest	Entities,"	which	addresses	the	financial	reporting	by	companies	involved	with variable	interest	entities.	A	variable	interest	entity	is	a	corporation,	partnership,	trust,	or	any	other	legal	structure	used	for	business	purposes	that	either	(a)	does	not	have equity	investors	with	voting	rights	or	(b)	has	equity	investors	that	do	not	provide	sufficient	financial	resources	for	the	entity	to	support	its	activities.	FIN	No.	46	requires a	variable	interest	entity	to	be	consolidated	by	a	company	if	that	company	is	subject	to	a	majority	of	the	risk	of	loss	from	the	variable	interest	entity's	activities	or	entitled to	receive	a	majority	of	the	entity's	residual	returns	or	both.	Previously,	a	company	generally	included	an	entity	in	its	consolidated	financial	statements	only	if	it controlled	the	entity	through	voting	interests.	The	consolidation	requirements	of	FIN	No.	46	apply	immediately	to	variable	interest	entities	created	after	January	31, 2003.	Existing	variable	interest	entities	must	be	consolidated	in	the	first	fiscal	year	or	interim	period	beginning	after	June	15,	2003.	The	Company	is	a	33 1 /3%	owner	of Southern	Timber	Venture,	LLC.	The	Company	is	currently	evaluating	FIN	No.	46	to	determine	if	Southern	Timber	Venture,	LLC	is	a	variable	interest	entity	and	if	so which,	if	any,	entity	is	the	primary	beneficiary	for	consolidation	purposes.

Also	in	January	2003,	the	FASB	issued	SFAS	No.	148,	"Accounting	for	Stock-Based	Compensation—Transition	and	Disclosure,"	which	amends	SFAS	No.	123, "Accounting	for	Stock-Based	Compensation."		SFAS	No.	148	provides	alternative	methods	of	transition	for	a	voluntary	change	to	the	fair	value	based	method	of accounting	for	stock-based	compensation.	In	addition,	SFAS	No.	148	amends	the	disclosure	requirements	of	SFAS	No.	123	to	require	more	prominent	and	more frequent	disclosures	in	financial	statements	about	the	effects	of	stock-based	compensation.	SFAS	No.	148	is	effective	for	fiscal	years	ending	after	December	15,	2002. See	Note	2,	Stock-Based	Compensation,	for	disclosure	information.

# Stock-Based	Compensation

PCA	entered	into	management	equity	agreements	in	June	1999	with	125	of	its	management-level	employees.	These	agreements	provide	for	the	grant	of	options	to purchase	up	to	an	aggregate	of	6,576,460	shares	of	PCA's	common	stock	at	$4.55	per	share,	the	same	price	per	share	at	which	PCA	Holdings	LLC	purchased	common stock	in	the	Transactions.	The	agreement	called	for	these	options	to	vest	ratably	over	a	five-year	period,	or	upon	completion	of	an	initial	public	offering,	full	vesting	with contractual	restrictions	on	transfer	for	a	period	of	up	to	18	months	following	completion	of	the	offering.	The	options	vested	with	the	initial	public	offering	in January	2000,	and	the	restriction	period	ended	August,	2001.

In	October	1999,	the	Company	adopted	a	long-term	equity	incentive	plan,	which	provides	for	grants	of	stock	options,	stock	appreciation	rights	(SARs),	restricted stock	and	performance	awards	to	directors,	officers	and	employees	of	PCA,	as	well	as	others	who	engage	in	services	for	PCA.	Option	awards	granted	to	officers	and employees	vest	ratably	over	a	four-year	period,	whereas	option	awards	granted	to	directors	vest	immediately.	Under	the	plan,	which	will	terminate	on	June	1,	2009,	up	to 4,400,000	shares	of	common	stock	is	available	for	issuance	under	the	long-term	equity	incentive	plan.

A	summary	of	the	Company's	stock	option	activity,	and	related	information	for	the	years	ended	December	31,	2002,	2001	and	2000	follows:

|  | Options | Exercise	Price |
| :--- | :--- | :--- |
| Balance,\tJanuary\t1,\t2000 | 6,569,200 | $4.55 |
| Granted | 1,059,700 | 11.92 |
| Exercised | (398,138) | 4.55 |
| Forfeited | (26,560) | 6.88 |
| Balance,\tDecember\t31,\t2000 | 7,204,202 | $5.62 |
| Granted | 953,350 | 15.45 |
| Exercised | (1,662,475) | 4.59 |

| Forfeited | (16,634) | 11.18 |
| :--- | :--- | :--- |
| Balance,\tDecember\t31,\t2001 | 6,478,443 | $7.31 |
| Granted | 871,000 | 19.55 |
| Exercised | (811,791) | 5.52 |
| Forfeited | (63,550) | 15.44 |
| Balance,\tDecember\t31,\t2002 | 6,474,102 | $9.10 |

The	following	table	summarizes	information	for	options	outstanding	and	exercisable	at	December	31,	2002:

|  |  |  | Options	Outstanding |  | Options	Exercisable | Options	Exercisable |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Year | Weighted-\nAverage | Weighted-Average | Weighted-\nAverage | Weighted-\nAverage |
| Range\tof\tExercise\tPrice | Number | Granted | Remaining\tLife | Exercise\tPrice | Number | Exercise\tPrice |
| $4.55 | 3,790,015 | 1999 | 6.5 | $4.55 | 3,790,015 | $4.55 |
| $10.44-$12.00 | 925,275 | 2000 | 7.4 | 11.90 | 437,825 | 11.87 |
| $13.38-$15.50 | 902,912 | 2001 | 8.4 | 15.45 | 236,138 | 15.31 |
| $19.55-$19.59 | 855,900 | 2002 | 9.5 | 19.55 | 21,000 | 19.59 |
|  | 6,474,102 |  |  | $9.10 | 4,484,978 | $5.90 |

As	permitted	by	SFAS	No.	123,	"Accounting	for	Stock-Based	Compensation"	and	amended	by	SFAS	No.	148,	"Accounting	for	Stock-Based	Compensation— Transition	and	Disclosure,"	the	Company	has	elected	to	account	for	its	stock	option	plan	under	Accounting	Principles	Board	("APB")	Opinion	No.	25,	"Accounting	for Stock	Issued	to	Employees,"	and	adopt	the	disclosure	only	provisions	of	SFAS	No.	123	and	SFAS	No.	148.	Under	APB	No.	25,	no	compensation	costs	are	recognized because	the	number	of	options	is	fixed	and	the	option	exercise	price	is	equal	to	the	fair	market	price	of	the	common	stock	on	the	date	of	the	grant.	Under	SFAS	No.	123, stock	options	are	valued	at	the	grant	date	using	the	Black-Scholes	valuation	model	and	compensation	costs	are	recognized	ratably	over	the	vesting	period.	Had	stock options	been	accounted	for	using	the	fair	value	method	as	recommended	in	SFAS	No.	123,	compensation	expense	would	have	had	the	following	pro	forma	effect	on	our net	income	and	earnings	per	share	for	the	years	ended	December	31,	2002,	2001	and	2000.

|  | 2002 | Year	Ended	December	31,<br>2001 | 2000 |
| :--- | :--- | :--- | :--- |
| Net\tincome\tavailable\tto\tcommon\tshareholders—as\treported | $48,179 | $ 106,418 | $ 143,264 |
| Less:\t\t\tStock-based\tcompensation\texpense\tdetermined\tusing\tfair\tvalue |  |  |  |
| method,\tnet\tof\ttax | (2,315) | (1,399) | (5,058) |
| Net\tincome—pro\tforma | $45,864 | $105,019 | $138,206 |
| Basic\tearnings\tper\tcommon\tshare—as\treported | $0.46 | $1.00 | $1.37 |
| Diluted\tearnings\tper\tcommon\tshare—as\treported | $0.45 | $0.98 | $1.33 |
| Basic\tearnings\tper\tcommon\tshare—pro\tforma | $0.44 | $0.99 | $1.32 |
| Diluted\tearnings\tper\tcommon\tshare—pro\tforma | $0.43 | $0.97 | $1.28 |

Black-Scholes	option-pricing	model	assumptions	and	fair	value	for	these	options	are	shown	in	the	following	table:

|  | 2002 | 2001 | 2000 |
| :--- | :--- | :--- | :--- |
| Actuarial\tassumptions |  |  |  |
| Risk-free\tinterest\trate\t(%) | 4.85 | 5.67 | 6.68 |
| Expected\tlife\t(years) | 5 | 5 | 5 |
| Volatility\t(%) | 33.80 | 37.50 | 39.00 |
| Dividend\tyield\t(%) | 0.00 | 0.00 | 0.00 |
| Weighted-average\tfair\tvalue\t($) | 7.45 | 6.52 | 5.36 |

The	Black-Scholes	option	valuation	model	was	developed	for	use	in	estimating	the	fair	value	of	traded	options	which	have	no	vesting	restrictions	and	are	fully transferable.	In	addition,	option	valuation	models	require	the	input	of	highly	subjective	assumptions	including	the	expected	stock	price	volatility.	Because	the Company's	employee	stock	options	have	characteristics	significantly	different	from	those	of	traded	options,	and	because	changes	in	the	subjective	input	assumptions can	materially	affect	the	fair	value	estimate,	in	management's	opinion,	the	existing	models	do	not	necessarily	provide	a	reliable	single	measure	of	the	fair	value	of	its employee	stock	options.

# Reclassifications

Prior	year's	financial	statements	have	been	reclassified	where	appropriate	to	conform	with	current	year	presentation.

# 3.		EARNINGS	PER	SHARE

The	following	table	sets	forth	the	computation	of	basic	and	diluted	income	per	common	share	for	the	periods	presented.

|  | 2002 | 2001 | 2000 |
| :--- | :--- | :--- | :--- |
| (In\tthousands,\texcept\tper\tshare\tdata) |  |  |  |
| Numerator: |  |  |  |
| Net\tincome\tavailable\tto\tcommon\tstockholders | $48,179 | $ 106,418 | $ 143,264 |
| Denominator: |  |  |  |
| Basic\tcommon\tshares\toutstanding | 105,053 | 106,277 | 104,890 |
| Effect\tof\tdilutive\tsecurities: |  |  |  |
| Stock\toptions | 2,155 | 2,524 | 2,397 |
| Non-vested\tstock | — | — | 231 |
| Dilutive\tcommon\tshares\toutstanding | 107,208 | 108,801 | 107,518 |
| Basic\tincome\tper\tcommon\tshare | $0.46 | $1.00 | $1.37 |
| Diluted\tincome\tper\tcommon\tshare | $0.45 | $0.98 | $1.33 |

# 4.		ACCRUED	LIABILITIES

The	components	of	accrued	liabilities	are	as	follows:

|  | December	31,<br>2002 | 2001 |
| :--- | :--- | :--- |
| (In\tthousands) |  |  |
| Benefits | $24,800 | $24,832 |
| Medical\tinsurance\tand\tworkers'\tcompensation | 16,573 | 16,138 |
| Vacation\tand\tholiday\tpay | 12,191 | 11,290 |
| Customer\tvolume\tdiscounts\tand\trebates | 9,805 | 10,841 |
| Payroll\tand\tpayroll\ttaxes | 7,778 | 6,233 |
| Other | 13,396 | 15,044 |
| Total | $84,543 | $84,378 |

# 5.		EMPLOYEE	BENEFIT	PLANS	AND	OTHER	POSTRETIREMENT	BENEFITS

In	connection	with	the	Transactions,	PCA	and	Pactiv	entered	into	a	human	resources	agreement	which,	among	other	items,	granted	PCA	employees	continued participation	in	the	Pactiv	pension	plan	for	a	period	of	up	to	five	years	following	the	closing	of	the	Transactions	for	an	agreed	upon	fee.	For	salaried	employees,	PCA will	pay	Pactiv	$4.0	million	in	the	first	and	second	years,	$6.0	million	in	the	third	year,	$8.0	million	in	the	fourth	year,	and	$10.0	million	in	the	fifth	year	following	the closing	date	of	the	Transactions.	For	hourly	employees,	PCA	will	pay	Pactiv	$1.2	million	per	year	through	December	31,	2000	and	then	$4.5	million	per	year	for	two additional	years.	These	amounts	can	be	adjusted	if	there	are	material	increases	in	the	pension	costs	to	Pactiv.	The	fees	paid	to	Pactiv	are	expensed	ratably	throughout	the year.

Effective	January	1,	2003,	PCA	adopted	a	mirror-image	pension	plan	for	eligible	hourly	employees	to	succeed	the	Pactiv	pension	plan	in	which	PCA	had participated	though	December	31,	2002.	The	new	PCA	pension	plan	for	hourly	employees	recognizes	service	earned	under	both	the	new	PCA	plan	and	the	prior	Pactiv plan.	Benefits	earned	under	the	PCA	plan	are	reduced	by	retirement	benefits	earned	under	the	Pactiv	plan	through	December	31,	2002.	All	assets	and	liabilities associated	with	benefits	earned	through	December	31,	2002	for	hourly	employees	and	retirees	of	PCA	were	retained	by	the	Pactiv	plan.	PCA	intends	to	adopt	its	own retirement	plan	sometime	in	the	future	with	respect	to	its	salaried	employees	currently	participating	in	the	Pactiv	pension	plan.

The	Company	adopted	a	supplemental	executive	retirement	plan	in	2000	that	provides	supplemental	pension	benefits	for	certain	executive	officers	of	the	Company. Benefits	are	based	upon	years	of	service	and	the	highest	three	year	average	of	compensation.	The	benefit	obligation	and	pension	costs	were	not	significant.

PCA	also	provides	certain	medical	benefits	for	retired	salaried	employees	and	certain	medical	and	life	insurance	benefits	for	certain	hourly	employees.	For	salaried employees,	the	plan	covers	employees	retiring	from	PCA	on	or	after	attaining	age	58	who	have	had	at	least	10	years	of	full-time	service	with	PCA	after	attaining	age 48.	For	hourly	employees,	the	postretirement	medical	coverage,	where	applicable,	is	available	according	to	the	eligibility	provisions	in	effect	at	the	employee's	work location.	Per	the	human	resources	agreement	referred	to	above,	Pactiv	retained	the	liability	relating	to	retiree	medical	and	life

# 5.		EMPLOYEE	BENEFIT	PLANS	AND	OTHER	POSTRETIREMENT	BENEFITS	(Continued)

benefits	for	PCA	employees	who	had	retired	on	or	before	the	closing	date	of	the	Transactions	or	who	will	be	eligible	to	retire	within	two	years	of	that	date.

Financial	data	pertaining	to	the	Company's	postretirement	benefit	plans	follow:

|  | 2002 | 2001 | 2000 |
| :--- | :--- | :--- | :--- |
| (In\tthousands) |  |  |  |
| Change\tin\tbenefit\tobligation: |  |  |  |
| Benefit\tobligation\tat\tbeginning\tof\tperiod | $7,703 | $5,276 | $4,044 |
| Service\tcost | 1,107 | 855 | 587 |

| Interest	cost | 553 | 406 | 304 |
| :--- | :--- | :--- | :--- |
| Plan\tamendments | 105 | 132 | — |
| Actuarial\tloss\t(gain) | (95) | 1,038 | 341 |
| Participant\tcontributions | 82 | — | — |
| Benefits\tpaid | (270) | (4) | — |
| Benefit\tobligation\tat\tSeptember\t30 | $9,185 | $7,703 | $5,276 |
| Plan\tassets\tat\tfair\tvalue\tat\tSeptember\t30 | $— | $— | $— |
| Development\tof\tnet\tamount\trecognized: |  |  |  |
| Funded\tstatus\tat\tSeptember\t30 | $ (9,185) | $ (7,703) | $ (5,276) |
| Unrecognized\tcost: |  |  |  |
| Actuarial\tloss\t(gain) | 889 | 938 | (479) |
| Prior\tservice\tcost | 215 | 121 | — |
| Accrued\tbenefit\trecognized\tat\tDecember\t31 | $ (8,081) | $ (6,644) | $ (5,755) |
| Components\tof\tnet\tperiodic\tbenefit\tcost: |  |  |  |
| Service\tcost\tfor\tbenefits\tearned\tduring\tthe\tyear | $1,107 | $855 | $587 |
| Interest\tcost\ton\taccumulated\tpostretirement\tbenefit |  |  |  |
| obligation | 553 | 406 | 304 |
| Net\tamortization\tof\tunrecognized\tamounts | 35 | 3 | (29) |
| Net\tperiodic\tpension\tand\tpostretirement\tbenefit\tcost | $1,695 | $1,264 | $862 |

The	accrued	postretirement	benefit	cost	has	been	recorded	based	upon	certain	actuarial	estimates	as	of	September	30,	2002,	2001	and	2000,	as	shown	below.	These estimates	are	subject	to	revision	in	future	periods	given	new	facts	or	circumstances.

|  | Postretirement	Plan | Postretirement	Plan | Postretirement	Plan |
| :--- | :--- | :--- | :--- |
|  | 2002 | 2001 | 2000 |
| Discount\trate | 6.75% | 7.25% | 7.50% |

Increasing	the	assumed	health	care	cost	trend	rate	by	one	percentage	point	would	increase	the	2002	postretirement	benefit	obligation	by	approximately	$1.6	million and	would	increase	the	net	postretirement		benefit	cost	by	approximately	$0.4	million.

On	February	1,	2000,	the	Company	adopted	two	defined	contribution	benefit	plans	that	cover	all	full-time	salaried	employees	and	certain	hourly	employees	at several	of	the	Company's	facilities.	Employees	can	make	voluntary	contributions	in	accordance	with	the	provisions	of	their	respective	plan.	The	Company	expensed $6.9	million,	$6.7	million	and	$6.1	million	for	employer	contributions	during	the	years	ended	December	31,	2002,	2001	and	2000,	respectively.

A	summary	of	debt	is	set	forth	in	the	following	table:

|  | December	31,<br>2002 | 2001 |
| :--- | :--- | :--- |
| (In\tthousands) |  |  |
| Senior\tcredit\tfacility— |  |  |
| December\t31,\t2002\tand\t2001,\trespectively,\tdue\tin\tvarying |  |  |
| quarterly\tinstallments\tthrough\tJune\t30,\t2006 | $54,618 | $82,272 |
| December\t31,\t2002\tand\t2001,\trespectively,\tdue\tin\tvarying |  |  |
| quarterly\tinstallments\tthrough\tJune\t30,\t2007 | 24,382 | 36,728 |
| Receivables\tcredit\tfacility,\teffective\tinterest\trate\tof\t1.78%\tand\t2.33% |  |  |
| as\tof\tDecember\t31,\t2002\tand\t2001,\trespectively,\tdue |  |  |
| November\t29,\t2003 | 113,000 | 126,000 |
| Senior\tsubordinated\tnotes,\tinterest\tat\t9.625%\tpayable\tsemi-annually, |  |  |
|  | 550,000 | 550,000 |
| Other | 213 | 217 |
| Total | 742,213 | 795,217 |
| Less:\tCurrent\tportion | 113,094 | 54 |
| Total\tlong-term\tdebt | $ 629,119 | $ 795,163 |

Additional	information	regarding	PCA's	variable	rate	debt	before	the	effects	of	the	interest	rate	collars	described	below,	is	shown	below:

|  | Rate<br>December	31,<br>2002 | 2001 | Applicable	Margin<br>December	31,<br>2002 | 2001 |
| :--- | :--- | :--- | :--- | :--- |
| LIBOR\tbased\tdebt: |  |  |  |  |
| Senior\tcredit\tfacility |  |  |  |  |
| Term\tLoan\tA | 1.40% | 1.91% | 1.75% | 1.25% |
| Term\tLoan\tB | 1.40% | 1.91% | 2.00% | 2.00% |
| Commercial\tpaper\tbased\tdebt: |  |  |  |  |
| Receivables\tcredit\tfacility | 1.40% | 1.92% | 0.38% | 0.38% |

Since	April	12,	1999,	PCA	has	made	debt	prepayments	totaling	approximately	$1,027.0	million	using	excess	cash	and	proceeds	from	the	sale	of	certain	timberlands to	permanently	reduce	its	borrowings	under	the	term	loans.	As	a	result	of	these	prepayments,	PCA	recorded	a	charge	of	$1.0	million	($0.6	million	after	tax)	and $18.4	million	($11.1	million	after	tax),	respectively,	as	an	early	extinguishment	of	debt	for	the	years	ended	December	31,	2001	and	2000.	No	quarterly	installments	will be	required	under	any	of	the	term	loans	until	September	30,	2004.

Interest	payments	in	connection	with	the	Company's	debt	obligations	for	the	years	ended	December	31,	2002,	2001	and	2000	amounted	to	$66.0	million, $73.6	million,	and	$112.6	million,	respectively.

On	June	29,	2000,	the	Company	completed	the	refinancing	of	its	senior	credit	facility.	The	new	refinancing	lowered	the	Company's	margins	over	LIBOR	on	Term Loans	A	and	B	and	eliminated	Term	Loan	C,	resulting	in	an	average	margin	reduction	of	about	100	basis	points.	The	Company	incurred	approximately	$3.6	million	in bank	syndication	and	arrangement	fees,	which	were	rolled	into	the	current	debt	structure.

On	November	29,	2000,	the	Company	established	an	on-balance	sheet	securitization	program	for	its	trade	accounts	receivable.	To	effectuate	this	program,	the Company	formed	a	wholly	owned	limited	purpose	subsidiary,	Packaging	Credit	Company,	LLC	("PCC"),	which	in	turn	formed	a	wholly	owned,	bankruptcy-remote, special-purpose	subsidiary,	Packaging	Receivables	Company,	LLC	("PRC"),	for	the	purpose	of	acquiring	receivables	from	PCC.	Both	of	these	entities	are	included	in the	consolidated	financial	statements	of	the	Company.	Under	this	program,	PCC	purchases	on	an	ongoing	basis	substantially	all	of	the	receivables	of	the	Company	and sells	such	receivables	to	PRC.	PRC	and	lenders	established	a	$150.0	million	receivables-backed	revolving	credit	facility	("Receivables	Credit	Facility")	through	which PRC	obtains	funds	to	purchase	receivables	from	PCC.	The	receivables	purchased	by	PRC	are	and	will	be	solely	the	property	of	PRC.	In	the	event	of	liquidation	of	PRC, the	creditors	of	PRC	would

be	entitled	to	satisfy	their	claims	from	PRC's	assets	prior	to	any	distribution	to	PCC	or	the	Company.	Credit	available	under	the	receivables	credit	facility	is	on	a borrowing-base	formula.	As	a	result,	the	full	amount	of	the	facility	may	not	be	available	at	all	times.	At	December	31,	2002,	$113.0	million	was	outstanding	and $37.0	million	was	available	for	additional	borrowing	under	the	receivables	credit	facility.	The	highest	outstanding	principal	balance	under	the	receivables	credit	facility during	fiscal	2002	was	$126.0	million.

The	senior	revolving	credit	facility	is	(1)	jointly	and	severally	guaranteed	by	each	of	PCA's	existing	domestic	subsidiaries	(excluding	Packaging	Receivables Company,	LLC)	and	(2)	secured	by	a	first	priority	lien	covering	substantially	all	of	the	owned	timberland,	mills,	plants	and	other	facilities	and	substantially	all	tangible and	intangible	personal	property	of	PCA	and	its	domestic	subsidiaries	and	by	a	pledge	of	all	of	the	capital	stock	of	PCA's	domestic	subsidiaries.	In	addition,	the	senior credit	facility	will	also	be	secured	by	a	pledge	of	65%	of	the	capital	stock	of	any	first	tier	foreign	subsidiaries	that	PCA	may	acquire	or	form	in	the	future.	PCA's	future domestic	subsidiaries	will	guarantee	the	senior	credit	facility	and	secure	that	guarantee	with	certain	of	their	real	property	and	substantially	all	of	their	tangible	and intangible	personal	property.

PCA's	various	debt	agreements	contain	covenants	that	restrict	the	ability	of	PCA	and	its	subsidiaries	to	incur	additional	indebtedness,	pay	dividends	or	make certain	other	restricted	payments,	consummate	certain	asset	sales,	incur	liens,	enter	into	certain	transactions	with	affiliates,	or	merge	or	consolidate	with	any	other	person or	sell	or	dispose	of	all	or	substantially	all	of	the	assets	of	the	Company.	They	also	require	PCA	to	comply	with	certain	financial	covenants,	including	the	ratio	of earnings	before	interest,	taxes,	depreciation,	and	amortization	(EBITDA)	to	cash	interest	expense,	the	ratio	of	debt	to	EBITDA,	and	minimum	net	worth	levels.	A	failure to	comply	with	the	restrictions	contained	in	the	senior	credit	facility	could	lead	to	an	event	of	default,	which	could	result	in	an	acceleration	of	such	indebtedness.	Such	an acceleration	would	also	constitute	an	event	of	default	under	the	notes	indenture	and	the	receivables	credit	facility.	At	December	31,	2002,	the	Company	was	in compliance	with	all	of	its	covenants.

The	Company	maintains	interest	rate	collar	agreements	for	its	variable	rate	debt.	The	interest	rate	collar	agreements	protect	against	rising	interest	rates	while simultaneously	guaranteeing	minimum	interest	rates.	The	notional	amount	of	these	collars	is		$78.8	million	and	$175.0	million	at	December	31,	2002	and	2001, respectively.	Approximately	41.0%	of	PCA's	variable	rate	debt	are	capped	at	December	31,	2002.	The	weighted	average	floor	of	the	interest	rate	collar	agreements	is 4.95%	and	the	weighted	average	ceiling	is	6.75%.	On	January	14,	2000,	PCA	terminated	$110.0	million	of	interest	rate	collar	agreements	and	received	$1.9	million.	The senior	credit	facility	provides	PCA	with	the	right	to	lock-in	LIBOR	interest	rates	for	any	amount	of	term	loans	for	one,	two,	three,	or	six-month	periods.	With	the approval	of	the	lenders,	PCA	can	lock-in	LIBOR	interest	rates	for	either	a	two-week	or	twelve-month	period.	The	receivables	credit	facility	also	provides	PCA	with	the right	to	lock-in	commercial	paper	interest	rates	for	a	one,	two,	or	three-month	period.

A	summary	of	the	Company's	drawings	under	credit	facilities	as	of	December	31,	2002	follows:

|  | Term | Commitments | Utilized | Available |
| :--- | :--- | :--- | :--- | :--- |
| (In\tthousands) |  |  |  |  |
| Receivables\tcredit\tfacility | 2003 | $ 150,000 | $ 113,000 | $37,000 |
| Senior\trevolving\tcredit\tfacility | 2006 | 150,000 | — | 150,000 |
|  |  | $ 300,000 | $ 113,000 | $ 187,000 |

PCA	is	required	to	pay	commitment	fees	on	the	unused	portions	of	the	credit	facilities.	In	December	of	2000,	PCA	reduced	the	availability	under	the	senior revolving	credit	facility	from	$250.0	million	to	$150.0	million.

A	summary	of	the	Company's	letters	of	credit	is	set	forth	in	the	following	table:

|  | 2002 | 2001 |
| :--- | :--- | :--- |
| (In\tthousands) |  |  |
| Workers'\tcompensation | $11,775 | $8,500 |
| Environmental | 1,431 | 9,079 |
| Management\tequity\tloans | 2,065 | 4,600 |
| Equipment\tleases | 1,329 | 1,643 |
| Total | $16,600 | $23,822 |

The	letter	of	credit	related	to	the	management	equity	loans	guaranteed	bank	financing	to	enable	some	members	of	PCA's	management	to	purchase	equity	under	the management	equity	agreements	discussed	in	Note	9,	Shareholders'	Equity.	The	letter	of	credit	expires	in	June	of	2004.

The	remaining	letters	of	credit	guarantee	payment	by	PCA	of	various	environmental	obligations,	including	landfills	and	solid	waste	programs,	workers' compensation,	and	equipment	leases.

The	carrying	and	estimated	fair	values	of	PCA's	financial	instruments	at	December	31,	2002	and	2001	were	as	follows:

| (In	thousands) | 2002<br>Carrying<br>Amount | Fair	Value | 2001<br>Carrying<br>Amount | Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| Short-term\tassets | $307,021 | $307,021 | $252,640 | $252,640 |
| Short-term\tliabilities | $(85,807) | (85,807) | (93,873) | (93,873) |
| Long-term\tdebt— |  |  |  |  |
| Senior\tcredit\tfacility | (79,000) | (79,000) | (119,000) | (119,000) |
| 9.625%\tsenior\tsubordinated\tnotes | (550,000) | (594,000) | (550,000) | (596,750) |
| Receivables\tcredit\tfacility | (113,000) | (113,000) | (126,000) | (126,000) |
| Other | (213) | (213) | (217) | (217) |
| Interest\trate\tcollars | (1,422) | (1,422) | (5,228) | (5,228) |

# 7.			FINANCIAL	INSTRUMENTS	(Continued)

# Short-Term	Assets	and	Liabilities

The	fair	value	of	cash	and	cash	equivalents,	accounts	receivable,	notes	receivable	and	accounts	payable	approximate	their	carrying	amounts	due	to	the	short-term nature	of	these	financial	instruments.

# Long-Term	Debt

The	fair	value	of	the	senior	credit	facility	and	the	receivables	credit	facility	approximates	their	carrying	amount	due	to	the	variable	interest-rate	feature	of	the instruments.	The	fair	value	of	the	senior	subordinated	notes	is	based	on	quoted	market	prices.	The	fair	values	of	the	remaining	debt	were	considered	to	be	the	same	as	or were	not	determined	to	be	materially	different	from	the	carrying	amounts.

# Interest	Rate	Collars

The	fair	values	of	the	interest	rate	collars	are	the	amounts	at	which	they	could	be	settled	and	are	estimated	by	obtaining	quotes	from	banks.

# 8.		MANDATORY	REDEEMABLE	PREFERRED	STOCK

On	April	12,	1999,	PCA	issued	1,000,000	shares	of	12.375%	senior	exchangeable	preferred	stock,	liquidation	preference	of	$100	per	share.	Holders	of	the preferred	shares	were	entitled	to	receive	cumulative	dividends	paid	in	cash	or	in	kind	at	a	rate	of	12.375%	which	were	paid	semi-annually.	If	PCA	failed	to	pay dividends,	holders	of	the	preferred	stock	were	entitled	to	elect	two	additional	members	to	PCA's	Board	of	Directors.	Holders	of	the	preferred	stock	had	no	voting	rights. The	preferred	stock	ranked	senior	to	the	common	stock.	3,000,000	shares	were	authorized,	and	1,058,094	shares	were	issued	and	outstanding	as	of	December	31,	1999. PCA	incurred	$3.5	million	of	issuance	costs,	which	were	being	amortized	through	2010	at	which	time	the	preferred	stock	was	required	to	be	redeemed.

PCA	used	substantially	all	of	the	net	proceeds	from	its	initial	public	offering	to	redeem	all	outstanding	shares	of	its	12.375%	senior	exchangeable	preferred	stock due	2010	(1,058,094	shares	as	of	March	3,	2000)	at	a	redemption	price	of	112.375%	of	its	liquidation	preference,	plus	accrued	and	unpaid	dividends	through	March	3, 2000,	the	date	of	redemption.	The	total	paid	to	redeem	the	senior	exchangeable	preferred	stock	was	$124.4	million,	which	included	$5.5	million	of	accrued	and	unpaid dividends.

# 9.		SHAREHOLDERS'	EQUITY

In	June	1999,	PCA	entered	into	management	equity	agreements	with	125	of	its	management-level	employees.	Under	these	agreements,	PCA	Holdings	LLC	and Pactiv	Corporation	sold	3,132,800	shares	of	common	stock	to	113	of	these	employees	at	$4.55	per	share.	The	stock	purchased	under	the	management	equity	agreements was	subject	to	vesting.	As	of	August	2001,	the	stock	was	fully	vested.	The	management	equity	agreements	also	provide	for	the	grant	of	options	(see	Note	2).

On	January	28,	2000,	PCA	became	a	publicly	traded	company	through	the	initial	public	offering	of	its	common	stock	in	which	Pactiv	Corporation	sold	35,000,000 of	its	41,160,240	shares	of	common	stock	in	PCA,	and	PCA	issued	an	additional	11,250,000	shares.	The	net	proceeds	to	PCA	were	approximately	$126.4	million,	after

# deducting	underwriting	discounts	and	offering	expenses	at	an	initial	public	offering

# 9.		SHAREHOLDERS'	EQUITY	(Continued)

price	of	$12.00	per	share.	PCA	utilized	these	proceeds	to	redeem	its	senior	exchangeable	preferred	stock	(see	Note	8).

On	May	16,	2001,	the	Company	announced	a	$100.0	million	common	stock	repurchase	program.	PCA	currently	expects	to	continue	to	repurchase	shares	from time	to	time.	Through	December	31,	2002,	the	Company	repurchased	4,210,900	shares	of	common	stock	for	approximately	$71.3	million.	Of	these	shares,	18,800	were held	in	treasury	at	December	31,	2002	and	were	subsequently	retired	in	February	2003.	The	remaining	shares	were	retired	prior	to	December	31,	2002.

The	Company's	share	repurchases	were	as	follows:

| Time	Period | Number	of<br>Shares | Average	Price<br>Per	Share | Total	Cost |
| :--- | :--- | :--- | :--- |
|  |  |  | (In\tthousands) |
| First\tQuarter | — | $— | $— |
| Second\tQuarter | 222,900 | 15.55 | 3,465 |
| Third\tQuarter | 1,589,800 | 16.75 | 26,634 |
| Fourth\tQuarter | 510,500 | 16.12 | 8,229 |
| Total\t2001 | 2,323,200 | $ 16.50 | $ 38,328 |
| First\tQuarter | 385,100 | $ 17.54 | $6,754 |
| Second\tQuarter | 120,100 | 19.61 | 2,355 |
| Third\tQuarter | 1,078,700 | 17.37 | 18,735 |
| Fourth\tQuarter | 303,800 | 16.93 | 5,143 |
| Total\t2002 | 1,887,700 | $ 17.47 | $ 32,987 |
| Total\tProgram\tTo\tDate | 4,210,900 | $ 16.94 | $ 71,315 |

# 10.		COMMITMENTS	AND	CONTINGENCIES

# Capital	Commitments

The	Company	had	authorized	capital	expenditures	of	approximately	$31.3	million	and	$44.5	million	as	of	December	31,	2002	and	2001,	respectively,	in	connection with	the	expansion	and	replacement	of	existing	facilities	and	equipment.

# 10.		COMMITMENTS	AND	CONTINGENCIES	(Continued)

# Operating	Leases

The	Company	holds	certain	of	its	facilities,	equipment,	and	other	assets	under	long-term	leases.	The	minimum	lease	payments	under	non-cancelable	operating leases	with	lease	terms	in	excess	of	one	year	are	as	follows:

| (In	thousands) |  |
| :--- | :--- |
| 2003 | $19,589 |
| 2004 | 18,180 |
| 2005 | 13,027 |
| 2006 | 7,969 |
| 2007 | 4,082 |
| Thereafter | 31,562 |
| Total | $94,409 |

Commitments	under	capital	leases	were	not	significant	to	the	accompanying	financial	statements.	Total	lease	expense	for	the	years	ended	December	31,	2002,	2001 and	2000	was	$27.0	million,	$26.7	million	and	$24.7	million,	respectively.	These	costs	are	included	primarily	in	cost	of	goods	sold.

# Purchase	Commitments

The	Company	has	entered	into	various	minimum	purchase	agreements	to	buy	energy	over	periods	ranging	from	one	to	two	years	at	fixed	prices.	Total	purchase commitments	over	the	next	two	years	are	as	follows:

These	purchase	agreements	are	not	marked	to	market.	The	Company	purchased	approximately	$24.4	million	during	the	year	ended	December	31,	2002,

$18.8	million	during	the	year	ended	December	31,	2001,	and	$9.3	million	during	the	year	ended	December	31,	2000	under	these	purchase	agreements.

# Litigation

On	May	14,	1999,	PCA	was	named	as	a	defendant	in	a	Consolidated	Class	Action	Complaint	which	alleged	a	civil	violation	of	Section	1	of	the	Sherman	Act.	The suit,	captioned	Winoff	Industries,	Inc.	v.	Stone	Container	Corporation,	MDL	No.	1261	(E.D.	Pa.),	names	the	Company	as	a	defendant	based	solely	on	the	allegation	that

PCA	is	successor	to	the	interests	of	Tenneco	Packaging	Inc.	and	Tenneco	Inc.,	both	of	which	were	also	named	as	defendants	in	the	suit,	along	with	nine	other	linerboard manufacturers.	The	complaint	alleges	that	the	defendants,	during	the	period	October	1,	1993	through	November	30,	1995,	conspired	to	limit	the	supply	of	linerboard, and	that	the	purpose	and	effect	of	the	alleged	conspiracy	was	artificially	to	increase	prices	of	corrugated	containers.	The	plaintiffs	have	moved	to	certify	a	class	of	all persons	in	the	United	States	who	purchased	corrugated	containers	directly	from	any	defendant	during	the

above	period,	and	seek	treble	damages	and	attorneys'	fees	on	behalf	of	the	purported	class.	The	Court	granted	plaintiffs'	motion	on	September	4,	2001,	but	modified	the proposed	class	to	exclude	those	purchasers	who	purchased	corrugated	containers	pursuant	to	contracts	in	which	the	price	was	"not	tied	to	the	price	of	linerboard".	The Court's	class	certification	decision	was	affirmed	by	the	Court	of	Appeals	for	the	Third	Circuit	on	September	5,	2002.	The	case	is	currently	set	for	trial	in	April	2004. PCA	believes	that	the	plaintiffs'	allegations	have	no	merit	and	intends	to	defend	against	the	suit	vigorously.	PCA	does	not	believe	that	the	outcome	of	this	litigation should	have	a	material	adverse	effect	on	its	financial	position,	results	of	operations,	or	cash	flow.

PCA	is	also	party	to	various	legal	actions	arising	in	the	ordinary	course	of	business.	These	legal	actions	cover	a	broad	variety	of	claims	spanning	our	entire business.	PCA	believes	that	the	resolution	of	these	legal	actions	will	not,	individually	or	in	the	aggregate,	have	a	material	adverse	effect	on	its	financial	position	or results	of	operations.

The	potential	costs	for	various	environmental	matters	are	uncertain	due	to	such	factors	as	the	unknown	magnitude	of	possible	cleanup	costs,	the	complexity	and evolving	nature	of	governmental	laws	and	regulations	and	their	interpretations,	and	the	timing,	varying	costs	and	effectiveness	of	alternative	cleanup	technologies.	From January	1994	through	December	2002,	remediation	costs	at	our	mills	and	converting	plants	totaled	about	$2.9	million.	As	of	December	31,	2002,	we	maintained	an environmental	reserve	of	$3.7	million,	which	includes	funds	relating	to	onsite	landfills	and	surface	impoundments	as	well	as	on-going	and	anticipated	remedial	projects. Total	capital	costs	for	environmental	matters,	including	Cluster	Rule	compliance,	were	$4.3	million	for	2002.	Liabilities	recorded	by	the	Company	for	environmental contingencies	are	estimates	of	the	probable	costs	based	upon	available	information	and	assumptions.	Because	of	these	uncertainties,	however,	PCA's	estimates	may change.	PCA	believes	that	any	additional	costs	identified	as	further	information	becomes	available	would	not	have	a	material	effect	on	its	financial	statements.

In	the	April	12,	1999	transactions,	Pactiv	agreed	to	retain	all	liability	for	all	former	facilities	and	all	sites	associated	with	pre-closing	offsite	waste	disposal.	Pactiv also	retained	environmental	liability	for	a	closed	landfill	located	near	the	Filer	City	mill.

Following	is	an	analysis	of	the	components	of	consolidated	income	tax	expense	(benefit):

| (In	thousands) | 2002 | 2001 | 2000 |
| :--- | :--- | :--- | :--- |
| Current— |  |  |  |
| U.S. | $(7,526) | $17,816 | $30,273 |
| State\tand\tlocal | 1,298 | 3,742 | 4,074 |
| Total\tcurrent\tprovision\tfor\ttaxes | (6,228) | 21,558 | 34,347 |
| Deferred— |  |  |  |
| U.S. | 32,159 | 40,793 | 70,948 |
| State\tand\tlocal | 3,504 | 5,561 | 8,895 |
| Total\tdeferred\tprovision\tfor\ttaxes | 35,663 | 46,354 | 79,843 |
| Total\tprovision\tfor\ttaxes | $29,435 | $67,912 | $ 114,190 |

The	effective	tax	rate	varies	from	the	U.S.	Federal	statutory	tax	rate	principally	due	to	the	following:

| (In	thousands) | 2002 | 2001 | 2000 |
| :--- | :--- | :--- | :--- |
| Provision\tcomputed\tat\tU.S.\tFederal\tstatutory\trate\tof\t35% | $27,165 | $61,402 | $ 100,503 |
| State\tand\tlocal\ttaxes,\tnet\tof\tfederal\tbenefit | 3,221 | 7,339 | 12,963 |
| Other | (951) | (829) | 724 |
| Total | $29,435 | $67,912 | $ 114,190 |

The	components	of	the	deferred	tax	assets	(liabilities)	were	as	follows:

| (In	thousands) | 2002 | 2001 |
| :--- | :--- | :--- |
| Current\tdeferred\ttaxes—\nAccrued\tliabilities | $2,444 | $1,980 |
|  | 8,467 | 7,929 |
| Employee\tbenefits\tand\tcompensation |  |  |
| Reserve\tfor\tdoubtful\taccounts | 3,056 | 1,365 |
| Inventory | 3,669 | 1,064 |

| Pensions	and	postretirement	benefits | 1,748 | 1,808 |
| :--- | :--- | :--- |
| Derivatives | — | (800) |
| Total\tcurrent\tdeferred\ttaxes | $19,384 | $13,346 |
| Noncurrent\tdeferred\ttaxes— |  |  |
| Pension\tand\tpostretirement\tbenefits | $2,053 | $3,042 |
| Excess\tof\tfinancial\treporting\tover\ttax\tbasis\tin\tplant\tand |  |  |
| equipment | (254,659) | (209,170) |
| Accrued\tliabilities | 2,013 | (3,666) |
| Asset\tfor\talternative\tminimum\ttax\tcredits | 8,664 | 12,495 |
| Derivatives | 557 | 2,847 |
| Total\tnoncurrent\tdeferred\ttaxes | $ (241,372) | $ (194,452) |

# 11.		INCOME	TAXES	(Continued)

Cash	payments	for	income	taxes	were	$1.2	million,	$23.4	million	and	$23.7	million	for	the	years	ended	December	31,	2002,	2001	and	2000,	respectively.	As	of December	31,	2002	and	2001,	the	Company	had	available	for	income	tax	purposes	approximately	$8.7	million	and	$12.5	million,	respectively,	in	alternative	minimum tax	credits	which	may	be	used	to	offset	future	taxable	income.

# 12.		RELATED	PARTY	TRANSACTIONS

PCA	owns	a	33 	1 /3%	interest	in	Southern	Timber	Venture,	LLC	("STV").	At	December	31,	2002,	PCA	had	not	guaranteed	the	debt	of	STV	and	has	no	future funding	requirements.	The	Company's	investment	recorded	on	its	balance	sheet	at	December	31,	2002	is	zero.

PCA	purchases	pulpwood	from	STV	in	accordance	with	the	terms	of	a	fiber	supply	agreement	between	the	two	companies	which	expires	December	31,	2017.	The price	of	pulpwood	in	this	agreement	is	based	upon	the	fair	market	value	of	pulpwood	and	will	be	adjusted	annually	for	any	changes	in	market	value	beginning January	2003.	PCA	purchased	$19.8	million,	$19.7	million	and	$1.7	million	of	pulpwood	for	its	Counce,	Tennessee	and	Valdosta,	Georgia	mills	from	STV	during	the years	ended	December	31,	2002,	2001	and	from	November	16,	2000,	through	December	31,	2000,	respectively.

As	Pactiv	Corporation	sold	its	remaining	interest	in	PCA	during	the	first	half	of	2001,	it	is	no	longer	considered	a	related	party.	PCA's	sales	to	Pactiv	Corporation, which	includes	both	containerboard	and	corrugated	products,	are	included	in	the	accompanying	consolidated	financial	statements.	The	net	sales	to	Pactiv	Corporation	for the	years	ended	December	31,	2001	and	2000	were	$92.9	million	and	$100.5	million,	respectively.	The	accounts	receivable	relating	to	these	sales	as	of	December	31, 2001	and	2000	were	$9.3	million	and	$13.3	million,	respectively.

PCA	and	Pactiv	entered	into	a	facility	use	agreement	which	provides	for	PCA's	use	of	a	portion	of	Pactiv's	headquarters	located	in	Lake	Forest,	Illinois	and	certain building	and	business	services	through	January	2005.	PCA	paid	Pactiv	$2.0	million,	$1.8	million	and	$2.4	million	for	the	years	ended	December	31,	2002,	2001	and 2000,	respectively

# 13.		RESTRUCTURING	AND	OTHER	CHARGES

As	part	of	the	April	12,	1999	Transactions,	the	Company	assumed	accruals	related	to	a	previously	recorded	restructuring	charge	set	forth	below.	This	charge	was recorded	prior	to	the	Transactions	following	approval	by	Tenneco's	Board	of	Directors	of	a	comprehensive	restructuring	plan	for	all	of	Tenneco's	operations,	including those	of	the	Company.	In	connection	with	this	restructuring	plan,	four	corrugated	facilities	were	closed	and	109	positions	were	eliminated.

The	following	table	reflects	the	components	of	this	assumed	accrual:

| (In	thousands) | Balance<br>April	12,<br>1999 | Activity | Balance<br>Dec.	31,<br>1999 | Activity | Balance<br>Dec.	31,<br>2000 | Activity | Balance<br>Dec.	31,<br>2001 | Activity | Balance<br>Dec.	31,<br>2002 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Severance | $1,087 | $819 | $268 | $268 | $— $— | $— $— | $— | $— | $— |
| Facility\texit\tcosts | 1,920 | 278 | 1,642 | 1,489 | 153 | 138 | 15 | 15 | — |
| Total\taccrual | $3,007 | $1,097 | $1,910 | $1,757 | $153 | $138 | $15 | $15 | $— |

# 13.		RESTRUCTURING	AND	OTHER	CHARGES	(Continued)

The	fixed	assets	at	the	closed	facilities	were	written	down	to	their	estimated	fair	value.	No	significant	cash	proceeds	were	received	from	the	ultimate	disposal	of these	assets.

# 14.		SALE	OF	TIMBERLANDS

On	November	16,	2000,	PCA	completed	the	sale	of	approximately	385,000	acres	of	timberland	to	Southern	Timber	Venture,	LLC.	The	Company	received $247.9	million	in	cash	and	a	33 	1 /3%	equity	ownership	interest	in	Southern	Timber	Venture,	LLC.	PCA	recorded	a	pre-tax	gain	of	$60.4	million,	and	a	portion	of	the gain	was	not	recognized	as	a	result	of	PCA's	continuing	ownership	interest.

In	March	2002,	PCA	received	a	$2.3	million	dividend	($1.4	million	after-tax)	from	Southern	Timber	Venture,	LLC.

# 15.		ACQUISITIONS

On	May	25,	2001,	PCA	International,	Inc.	a	wholly	owned	subsidiary	of	PCA,	was	formed	to	acquire	the	assets	of	Sunbelt	Packaging	Services,	Inc.	for approximately	$4.8	million.	The	transaction	was	completed	on	June	1,	2001.	The	purchase	method	of	accounting	was	used	to	account	for	the	acquisition.	Sales	and	total assets	of	the	acquisition	were	not	material.

# 16.			SUMMARIZED	COMBINED	FINANCIAL	INFORMATION	ABOUT	GUARANTOR	SUBSIDIARIES

The	following	is	summarized	aggregated	financial	information	for	Packaging	Credit	Company,	LLC,	Dixie	Container	Corporation,	PCA	International,	Inc.,	PCA International	Services,	LLC	and	PCA	Hydro,	Inc.,	each	of	which	was	a	wholly-owned	subsidiary	of	PCA	and	included	in	the	Company's	consolidated	financial statements.	Each	of	these	subsidiaries	fully,	unconditionally,	jointly	and	severally	guaranteed	$550.0	million	in	senior	subordinated	notes	issued	by	PCA	in	connection with	the	Transactions.	Separate	financial	statements	of	the	guarantor	subsidiaries	are	not	presented	because,	in	the	opinion	of	management,	such	financial	statements	are not	material	to	investors.	Financial	information	for	Packaging	Receivables	Company,	LLC,	PCAI	de	Mexico	S.	de	R.L.	de	C.V.,	and	PCAI	Services	de	Mexico	S.	de R.L.	de	C.V.	are	reflected	as	non-guarantor	subsidiaries.

| (In	thousands) | PCA | Guarantor	Subs | Subs | Eliminations | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2002 |  |  |  |  |  |
| Current\tassets | $337,266 | $ 102,784 | $ 186,029 | $(116,525) | $509,554 |
| Non-current\tassets | 1,615,361 | 157,527 | 23 | (299,914) | 1,472,997 |
| Total\tassets | 1,952,627 | 260,311 | 186,052 | (416,439) | 1,982,551 |
| Current\tliabilities | 319,186 | 3,607 | 113,183 | (139,170) | 296,806 |
| Non-current\tliabilities | 889,483 | 387 | — | — | 889,870 |
| Total\tliabilities | 1,208,669 | 3,994 | 113,183 | (139,170) | 1,186,676 |
| Net\tassets | $743,958 | $ 256,317 | $72,869 | $(277,269) | $795,875 |
| December\t31,\t2001 |  |  |  |  |  |
| Current\tassets | $260,573 | $62,264 | $ 204,370 | $(78,990) | $448,217 |
| Non-current\tassets | 1,649,244 | 114,932 | — | (240,613) | 1,523,563 |
| Total\tassets | 1,909,817 | 177,196 | 204,370 | (319,603) | 1,971,780 |
| Current\tliabilities | 288,009 | 2,651 | 100 | (98,865) | 191,895 |
| Non-current\tliabilities | 883,799 | 252 | 126,000 | — | 1,010,051 |
| Total\tliabilities | 1,171,808 | 2,903 | 126,100 | (98,865) | 1,201,946 |
| Net\tassets | $738,009 | $ 174,293 | $78,270 | $(220,738) | $769,834 |
| Year\tended\tDecember\t31,\t2002 |  |  |  |  |  |
| Net\tsales | $ 1,727,884 | $7,974 | $— $— | $— $— | $1,735,858 |
| Pre-tax\tprofit | 44,481 | 80,694 | 141 | (47,702) | 77,614 |
| Net\tincome | 28,087 | 48,946 | 141 | (28,995) | 48,179 |
| Year\tended\tDecember\t31,\t2001 |  |  |  |  |  |
| Net\tsales | $ 1,784,765 | $5,191 | $— $— | $— $— | $1,789,956 |
| Pre-tax\tprofit | 131,731 | 76,620 | 19,865 | (52,782) | 175,434 |
| Net\tincome | 79,012 | 41,167 | 19,865 | (33,625) | 106,418 |
| Year\tended\tDecember\t31,\t2000 |  |  |  |  |  |
| Net\tsales | $ 1,921,868 | $— $— $— | $— $— $— | $— $— $— | $1,921,868 |
| Pre-tax\tprofit | 280,075 | 3,907 | 1,630 | 1,539 | 287,151 |
| Net\tincome | 157,507 | 3,884 | 1,630 | (1,120) | 161,901 |

# 17.		QUARTERLY	FINANCIAL	DATA	(UNAUDITED)

| (In	thousands,	except	per	share	amounts) | First | Second | Third | Fourth | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 2002: |  |  |  |  |  |
| Net\tsales | $ 414,706 | $ 447,390 | $ 455,570 | $ 418,192 | $ 1,735,858 |
| Income\tbefore\tinterest\tand\ttaxes | 33,170 | 36,560 | 40,035 | 35,515 | 145,280 |
| Net\tincome | 9,626 | 11,595 | 14,598 | 12,360 | 48,179 |
| Basic\tearnings\tper\tshare | 0.09 | 0.11 | 0.14 | 0.12 | 0.46 |
| Diluted\tearnings\tper\tshare | 0.09 | 0.11 | 0.14 | 0.12 | 0.45 |
| Stock\tprice—high | 19.88 | 21.10 | 19.85 | 18.60 | 21.10 |
| Stock\tprice—low | 16.45 | 18.81 | 16.27 | 16.20 | 16.20 |
| 2001: |  |  |  |  |  |
| Net\tsales | $ 454,666 | $ 466,964 | $ 455,214 | $ 413,112 | $ 1,789,956 |
| Income\tbefore\tinterest,\ttaxes,\tcumulative\teffect | 65,960 | 69,554 | 65,364 | 48,577 | 249,455 |

| Net	income | 27,619 | 31,259 | 29,154 | 18,386 | 106,418 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Basic\tearnings\tper\tshare | 0.26 | 0.29 | 0.27 | 0.17 | 1.00 |
| Diluted\tearnings\tper\tshare | 0.25 | 0.29 | 0.27 | 0.17 | 0.98 |
| Stock\tprice—high | 16.50 | 16.98 | 20.70 | 18.64 | 20.70 |
| Stock\tprice—low | 12.65 | 12.85 | 14.75 | 14.23 | 12.65 |
| 2000: |  |  |  |  |  |
| Net\tsales | $ 475,890 | $ 492,372 | $ 487,676 | $ 465,930 | $ 1,921,868 |
| Income\tbefore\tinterest,\ttaxes\tand\textraordinary |  |  |  |  |  |
| item | 72,741 | 88,537 | 96,568 | 146,988 | 404,834 |
| Net\tincome | 25,246 | 33,278 | 40,009 | 63,368 | 161,901 |
| Net\tincome\tavailable\tto\tcommon\tshareholders | 6,609 | 33,278 | 40,009 | 63,368 | 143,264 |
| Basic\tearnings\tper\tshare | 0.07 | 0.31 | 0.38 | 0.60 | 1.37 |
| Diluted\tearnings\tper\tshare | 0.06 | 0.31 | 0.37 | 0.58 | 1.33 |
| Stock\tprice—high | 12.19 | 12.75 | 13.19 | 16.81 | 16.81 |
| Stock\tprice—low | 9.25 | 9.88 | 10.25 | 10.88 | 9.25 |

Note:	The	sum	of	the	quarters	may	not	equal	the	total	of	the	respective	year's	earnings	per	share	on	either	a	basic	or	diluted	basis	due	to	changes	in	the	weighted	average shares	outstanding	throughout	the	year.



Question: what is the total value of the balance of options as of december 31 , 2002 , in millions?
Calculation:   shares_balance = 6474102
 price = 9.10
 value = shares_balance * price
 answer = value / 1000000
Answer: 58.9