# UNITED	STATES

# 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,	2005

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)

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

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

Title	of	Each

Class

Common	Stock,	$0.01	par	value

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

(Zip	Code)

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	if	the	Registrant	is	a	well-known	seasoned	issure,	as	defined	in	Rule	405	of	the	Securities	Act.	Yes	x			No	o

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

Indicate	by	check	mark	whether	the	Registrant	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the	preceding 12	months	(or	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.	x

Indicate	by	check	mark	whether	the	Registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	or	a	non-accelerated	filer.	See	definition	of	"accelerated	filer	and	large	accelerated filer"	in	Rule	12b-2	of	the	Exchange	Act.	(Check	one).

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

At	June	30,	2005,	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	$1,328,559,467	based	on	the	closing	sale	price	as	reported	on	the	New	York	Stock	Exchange.	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	2006	Annual	Meeting	of	Shareholders	are	incorporated	by	reference	to	the	extent	indicated	in	Part	III	of	this Form	10-K.

# INDEX

# PART	II

| Item	12. | Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder |  |
| :--- | :--- | :--- |
|  | Matters | 35 |
| Item\t13. | Certain\tRelationships\tand\tRelated\tTransactions | 35 |
| Item\t14. | Principal\tAccounting\tFees\tand\tServices | 35 |
|  | PART\tIV |  |
| Item\t15. | Exhibits,\tFinancial\tStatement\tSchedules | 36 |
| SIGNATURES |  | 40 |

# 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	by	company	Securities	and	Exchange	Commission	(SEC)	filings	and	press	releases.	With	2005	net	sales	of	$2.0	billion,	PCA	produced	about 2.3	million	tons	of	containerboard,	of	which	about	82%	of	the	tons	produced	was	consumed	in	our	corrugated	products	manufacturing	plants,	13%	was	sold	to	domestic customers	and	5%	was	sold	to	the	export	market.	Our	corrugated	products	manufacturing	plants	sold	about	31.2	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) | 2005 | 565 | 585 | 601 | 596 | 2,347 |
|  | 2004 | 547 | 577 | 595 | 599 | 2,318 |
|  | 2003 | 531 | 557 | 567 | 578 | 2,233 |
| Corrugated\tShipments\t(BSF) | 2005 | 7.6 | 8.0 | 8.0 | 7.6 | 31.2 |
|  | 2004 | 7.2 | 7.7 | 7.6 | 7.4 | 29.9 |
|  | 2003 | 6.8 | 7.0 | 7.3 | 7.0 | 28.1 |

The	2.3	million	tons	of	containerboard	that	we	produced	in	2005	included	1.4	million	tons	of	kraft	linerboard	produced	at	our	mills	located	in	Counce,	Tennessee and	Valdosta,	Georgia,	and	0.9	million	tons	of	semi-chemical	corrugating	medium	produced	at	our	mills	located	in	Tomahawk,	Wisconsin	and	Filer	City,	Michigan.	We currently	lease	the	cutting	rights	to	approximately	108,000	acres	of	timberland	located	near	our	Counce	and	Valdosta	mills.	We	also	have	supply	agreements	on	about 390,000	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,	multi-color	boxes	and	displays	with	strong	visual	appeal	that	help	to	merchandise	the	packaged	product	in	retail	locations.	In	addition,	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.	The	business	was	sold for	$2.2	billion,	consisting	of	$246.5	million	in	cash	and	the	assumption	of	$1,760.0	million	of	debt	incurred	by	Pactiv	immediately	prior	to	the	contribution.	Pactiv retained	a	45%	common	equity	interest,	or	193,500	shares,	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,	or	236,500	shares,	in	PCA	for	$236.5	million	in	cash,	which	was	used	to	finance	in	part	the	transactions.

The	share	amounts	discussed	above	are	prior	to	a	220-for-1	stock	split	which	occurred	in	October	1999.	Including	the	effect	of	the	220-for-1	split,	Pactiv	received 42,570,000	shares	and	PCA	Holdings,	LLC	received	52,030,000	shares.

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 ¤8%	senior	subordinated	notes	due 2009,	and	$100.0	million	of	12 ¤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.

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.	On	October	13,	2003,	PCA	renewed	the	receivables	credit	facility	for	an	additional	three-year	term,	expiring	on October	10,	2006.	As	of	December	31,	2005,	$109.0	million	was	outstanding	and	$41.0	million	was	available	for	additional	borrowing	under	the	receivables	credit facility.	The	highest	outstanding	principal	balance	under	the	receivables	credit	facility	during	fiscal	2005	was	$109.0	million.

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

On	July	7,	2003,	PCA	repaid	all	borrowings	under	its	then-existing	senior	credit	facility.	This	facility	was	replaced	with	a	senior	unsecured	credit	facility	that provides	for	a	$100.0	million	revolving	credit	facility,	including	a	$35.0	million	subfacility	for	letters	of	credit,	and	a	$50.0	million	term	loan.	The	senior	credit	facility closed	on	July	21,	2003,	and	it	expires	in	July	2008.	PCA's	total	borrowings	under	the	senior	credit	facility	as	of	December	31,	2005	consisted	of	$39.0	million	of	term loans.

On	July	21,	2003,	PCA	closed	its	offering	and	private	placement	of	$150.0	million	of	4¤8%	five-year	notes	and	$400.0	million	of	5 ¤4%	ten-year	notes.	On July	22,	2003,	PCA	used	the	net	proceeds	from	the	offering,	together	with	the	borrowings	under	the	senior	credit	facility	and	cash	on	hand,	to	purchase	$546.4	million, or	99.3%,	of	its	then	outstanding	9 ¤8%	senior	subordinated	notes.	As	a	result	of	these	transactions,	PCA	recorded	a	one-time	charge	of	approximately	$76.6	million ($46.7	million	after-tax)	in	the	third	quarter	of	2003.	The	$76.6	million	charge	includes	the	tender	offer	premium	of	$55.9	million	and	a	$17.4	million	non-cash	charge for	the	write-off	of	deferred	financing	fees	due	to	the	early	extinguishment	of	debt,	which	are	included	in	interest	expense,	and	fees	and	expenses	of	$3.3	million,	which are	included	in	corporate	overhead.	As	required	by	their	terms,	the	$150.0	million	of	4 ¤8%	five-year	notes	and	$400.0	million	of	5 ¤4%	ten-year	notes	were	exchanged for	publicly	registered	securities	in	the	same	amounts	in	a	registered	exchange	offer	completed	in	December	2003.	The	remaining	senior	subordinated	notes	were repurchased	on	April	1,	2004.

On	October	13,	2003,	PCA	announced	its	intentions	to	begin	paying	a	quarterly	cash	dividend	of	$0.15	per	share,	or	$0.60	per	share	annually,	on	its	common stock.	The	first	quarterly	dividend	of	$0.15	per	share	was	paid	on	January	15,	2004	to	shareholders	of	record	as	of	December	15,	2003.

On	January	19,	2005	PCA	announced	an	increase	on	its	quarterly	dividend	to	$0.25	per	share,	or	$1.00	per	share	annually,	on	its	common	stock.	The	first	quarterly cash	dividend	of	$0.25	per	share	was	paid	on	April	15,	2005	to	shareholders	of	record	as	of	March	15,	2005.

On	December	21,	2005,	PCA	completed	a	secondary	offering	of	its	common	stock	pursuant	to	a	registration	statement	filed	with	the	Securities	and	Exchange Commission	on	December	9,	2005.	The	selling	stockholder,	PCA	Holdings	LLC,	sold	17,825,000	shares	of	common	stock	of	PCA,	which	included	2,325,000	shares pursuant	to	the	underwriters'	exercise	in	full	of	their	over-allotment	option.	All	of	these	shares	were	sold	at	an	initial	price	to	the	public	market	of	$21.50	per	share,	and the	selling	stockholder	received	proceeds,	net	of	the	underwriting	discount,	of	$20.69	per	share.	The	Company	did	not	sell	any	shares	in,	or	receive	any	proceeds	from, the	secondary	offering.

Concurrent	with	the	closing	of	the	secondary	offering	on	December	21,	2005,	PCA	entered	into	a	common	stock	repurchase	agreement	with	PCA	Holdings	LLC. Pursuant	to	the	repurchase	agreement,	PCA	purchased	4,500,000	shares	of	common	stock	directly	from	PCA	Holdings	LLC	at	the	initial	price	to	the	public	net	of	the underwriting	discount,	or	$20.69	per	share,	the	same	net	price	per	share	received	by	PCA	Holdings	LLC	in	the	secondary	offering.	These	shares	were	retired	on December	21,	2005.

# Industry	Overview

According	to	the	Fibre	Box	Association,	the	value	of	industry	shipments	of	corrugated	products	was		$23.7	billion	in	2005.

The	primary	end-use	markets	for	corrugated	products	are	shown	below	(as	reported	in	the	most	recent	2004	Fibre	Box	Association	annual	report):

Corrugated	products	plants	tend	to	be	located	in	close	proximity	to	customers	to	minimize	freight	costs.	The	U.S.	corrugated	products	industry	consists	of approximately	650	companies	and	1,400	plants.

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.

# 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	979,000	tons	per	year.	In 2005,	we	produced	966,000	tons	of	kraft	linerboard	on	two	paper	machines	at	Counce.	We	produced	a	broad	range	of	basis	weights	from	26	lb.	to	90	lb.	The	mill	also produces	a	variety	of	performance	and	specialty	grades	of	linerboard.

Valdosta.			Our	Valdosta,	Georgia	mill	is	a	kraft	linerboard	mill	that	has	a	production	capacity	of	approximately	487,000	tons	per	year.	In	2005,	our	single	paper machine	at	Valdosta	produced	475,000	tons	of	kraft	linerboard.	Valdosta	produces	linerboard	ranging	from	33	lb.	to	90	lb.

Tomahawk.			Our	Tomahawk,	Wisconsin	mill	is	the	second	largest	corrugating	medium	mill	in	the	United	States	with	production	capacity	of	575,000	tons	per	year on	three	paper	machines.	In	2005,	we	produced	532,000	tons	of	semi-chemical	corrugating	medium	at	Tomahawk.	Our	number	four	paper	machine	at	Tomahawk	is among	the	largest	corrugating	medium	machines	in	the	world.	In	April,	2005,	we	completed	an	indefinite	closure	of	our	number	three	paper	machine	at	Tomahawk.	This

was	done	after	resuming	production	on	our	number	one	paper	machine	at	Filer	City	which	had	been	down	since	July	1998.	The	machine	shutdown	at	Tomahawk	was the	result	of	higher	incremental	fiber	and	transportation	costs	at	Tomahawk	compared	to	the	same	incremental	costs	to	operate	the	number	one	machine	at	Filer	City. Tomahawk's	production	capacity	on	the	two	paper	machines	remaining	in	operation	is	510,000	tons.	Our	Tomahawk	mill	produces	a	broad	range	of	basis	weights	from 23	lb.	to	40	lb.	and	a	variety	of	performance	and	specialty	grades	of	corrugating	medium.

Filer	City.			Our	Filer	City,	Michigan	mill	is	a	semi-chemical	corrugating	medium	mill	with	a	production	capacity	of	385,000	tons.	In	2005,	we	produced	375,000 tons	of	corrugating	medium.	On	January	25,	2005,	we	resumed	operation	of	our	number	one	paper	machine	at	Filer	City	and	now	operate	all	three	paper	machines	at	the mill.	Filer	City	produces	corrugating	medium	grades	ranging	in	basis	weight	from	23	lb.	to	40	lb.

We	operate	68	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	68	manufacturing	facilities,	40	operate	as	combining	operations,	commonly	called	corrugated	plants,	that	manufacture	corrugated	sheets and	finished	corrugated	containers.	The	remaining	28	manufacturing	facilities,	commonly	called	sheet	plants,	purchase	combined	sheets	primarily	produced	at	PCA's combining	operations	and	manufacture	finished	corrugated	containers.	The	five	graphic	design	centers	are	located	in	Fairfield,	Ohio;	Dallas,	Texas;	Cranbury,	New Jersey;	Salisbury,	North	Carolina	and	South	Gate,	California.

We	have	corrugated	manufacturing	operations	in	27	states	in	the	U.S.,	with	no	manufacturing	facilities	outside	of	the	continental	U.S.	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	108,000	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	these	two	mills,	which	results	in	lower	wood	transportation	costs	and	provides	a	secure	source	of	wood	fiber. These	leased	cutting	rights	agreements	have	terms	with	over	15	years	remaining,	on	average.

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.	In	2005,	the	supply	agreement	related	to	our	Valdosta	mill	on	approximately	200,000	acres	was	terminated	through	a	mutual agreement	because	lower	cost	pulpwood	was	available	in	closer	proximity	to	the	mill.	We	hold	a	31 ¤3%	equity	ownership	interest	in	approximately	53,000	acres	owned by	Southern	Timber	Venture,	LLC	(STV).	This	acreage	is	located	primarily	in	southern	Georgia	and	northern	Florida,	and	includes	both	timberlands	and	higher beneficial	use	(HBU)	properties.	We	currently	have	in	place	supply	agreements	covering	about	390,000	of	the	800,000	acres	sold.	The	majority	of	the	acreage	under supply	agreement	is	located	in	close	proximity	to	our	Counce	mill.

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	125,000	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	75,000	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	Facilities

During	2005,	we	owned	and	operated	two	sawmills	located	in	Ackerman	and	Fulton,	Mississippi,	which	sold	131	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.

# Sales	and	Marketing

Our	corrugated	products	are	sold	through	a	direct	sales	and	marketing	organization.	We	have	sales	representatives	and	a	sales	manager	at	each	corrugated manufacturing	operation	who	serve	local	and	regional	accounts.	We	also	have	corporate	account	managers	who	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.	Rail	shipments	represent	about	65%	of	the	tons	shipped	and	the	remaining	35%	is	comprised	of truck	shipments.	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	15,000	locations.	About	65%	to	70%	of	our	corrugated	products	customers	are	regional	and local	accounts,	which	are	broadly	diversified	across	industries	and	geographic	locations.	The	remaining	30%	to	35%	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.

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	manufacturing	operations	generate	recycled	fiber	as a	by-product	from	the	manufacturing	process,	which	is	sold	to	our	mills	directly	or	through	trade	agreements.	During	2005,	our	containerboard	mills	consumed approximately	592,000	tons	of	recycled	fiber	and	our	corrugated	converting	operations	generated	approximately	211,000	tons	of	recycled	fiber.	As	a	result,	PCA	was	a net	recycled	fiber	buyer	of	381,000	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.	In	recent	history,	natural	gas	and	fuel	oil	have	exhibited	higher	costs	per	thermal	unit	and	more	price	volatility	than	coal	and	bark.	During	2005,	12.4	million MMBTU's	(million	BTU's),	or	approximately	75%	of	our	mills'	purchased	fuel	needs,	were	from	purchased	bark	and	coal,	historically	our	two	lowest	cost	purchased fuels.	For	the	same	period,	our	mills	consumed	about	1.1	million	MMBTU's	of	natural	gas	(7%	of	the	mills'	total	purchased	fuels)	and	2.8	million	MMBTU's	of	oil (17%	of	the	mills'	total	purchased	fuels).	Our	two,	kraft	linerboard	mills	at	Counce	and	Valdosta	generate	approximately	two-thirds	of	their	fuel	requirements	from	their own	by-products.

PCA's	corrugated	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	2005,	PCA's	corrugated	products	plants	consumed	approximately	2.1	million	MMBTU's	of	natural	gas.

The	following	table	shows	PCA's	purchased	fuel	consumption	by	fuel	type	for	2005:

| Containerboard	Mills | 1Q | 2Q | 3Q | 2005	Purchased	MMBTU's<br>4Q | Year | %	of	Mill<br>Total | %	of	PCA<br>Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Coal | 1,976,430 | 1,767,175 | 1,857,031 | 1,874,216 | 7,474,852 | 45% | 40% |
| Purchased\tBark | 1,323,013 | 995,182 | 1,158,640 | 1,447,759 | 4,924,594 | 29% | 26% |
| Purchased\tSteam | 59,122 | 46,427 | 105,705 | 87,655 | 298,909 | 2% | 2% |
| Coal,\tBark\tand\tSteam | 3,358,565 | 2,808,784 | 3,121,376 | 3,409,630 | 12,698,355 | 76% | 68% |
| Oil | 907,461 | 609,744 | 532,313 | 771,740 | 2,821,258 | 17% | 15% |
| Natural\tGas | 487,320 | 295,393 | 189,402 | 143,890 | 1,116,005 | 7% | 6% |
| Total\tMills\tPurchased\tFuels | 4,753,346 | 3,713,921 | 3,843,091 | 4,325,260 | 16,635,618 | 100% | 89% |
| Corrugated\tProducts |  |  |  |  |  |  |  |
| Natural\tGas | 652,485 | 494,753 | 431,813 | 545,123 | 2,124,174 |  | 11% |
| Total\tCompany\tPurchased\tFuels | 5,405,831 | 4,208,674 | 4,274,904 | 4,870,383 | 18,759,792 |  | 100% |

In	the	second	half	of	2005,	a	concentrated	effort	was	undertaken	to	minimize	the	use	of	natural	gas,	the	highest	cost	per	MMBTU	fuel	consumed	in	our	mills.	As	a result	of	this	effort,	we	were	able	to	operate	our	mills	with	only	4.9%	natural	gas	use	during	the	third	quarter	and	only	3.3%	natural	gas	use	during	the	fourth	quarter.

Approximately	45%	of	the	electricity	consumed	by	our	four	mills	is	generated	on-site.	Our	mills	purchase	approximately	8,965,000	CkWh	annually,	or	the equivalent	of	3.1	million	MMBTU's.	PCA's	corrugated	products	plants	purchase	about	2,420,000	CkWh	annually,	or	the	equivalent	of	0.8	million	MMBTU's.

# Competition

Corrugated	products	are	produced	by	about	650	U.S.	companies	operating	approximately	1,400	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	International	Paper Company,	Koch	Industries,	Inc.,	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	sales	of	our	containerboard	produced	but	not	consumed	at	our	own	corrugated	products	plants	are	a	number	of	large, diversified	paper	companies,	including	International	Paper	Company,	Koch	Industries,	Inc.,	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,	2005,	we	had	approximately	8,300	employees.	Approximately	2,300	of	these	employees	were	salaried	and	approximately	6,000	were	hourly. Approximately	75%	of	our	hourly	employees	are	represented	by	unions.	The	majority	of	our	unionized	employees	are	represented	primarily	by	the	United	Steel	Workers (USW),	the	International	Brotherhood	of	Teamsters	(IBT),	and	the	International	Association	of	Machinists	(IAM).

Contracts	for	unionized	employees	at	our	containerboard	mills	expire	between	May	2006	and	October	2009.	Contracts	for	unionized	corrugated	plant	employees expire	between	February	2006	and	December	2011.	We	are	currently	in	negotiations	to	renew	or	extend	any	union	contracts	that	are	expiring	in	the	near	future.

During	2005,	we	experienced	no	work	stoppages.	In	2001,	we	experienced	a	one-month	strike	at	our	Filer	City	mill	with	the	USW.	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	employment	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.	The	most	significant	of	these	laws	affecting	us	are:

We	believe	that	we	are	currently	in	material	compliance	with	these	and	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	these	and	other	environmental	laws.	For	the	year	ended December	31,	2005,	we	spent	approximately	$15.8	million	to	comply	with	the	requirements	of	these	and	other	environmental	laws.	For	the	years	ended	December	31, 2004	and	2003,	the	costs	of	environmental	compliance	were	approximately	$15.1	million	and	$12.4	million,	respectively.	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	2005,	we	spent approximately	$37.5	million	on	Cluster	Rule	compliance	to	meet	Clean	Air	Act	requirements.	Total	capital	costs	for	environmental	matters,	including	Cluster Rule	compliance,	were	$12.9	million	for	2005.	We	currently	estimate	2006	environmental	capital	expenditures	will	be	$5.5	million,	of	which	$1.9	million	of	the expenditures	are	to	meet	Cluster	Rule	requirements.	We	currently	expect	to	complete	all	projects	related	to	Cluster	Rule	compliance	requirements	at	our	four	mills during	2006	and	estimate	the	cost	to	do	so	to	be	about	$1.9	million.

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	2005,	remediation	costs	at	our	mills	and	converting	plants	totaled	about	$3.2	million.	We	do	not	believe	that	any	on-going	remedial	projects	are	material	in nature.	As	of	December	31,	2005,	we	maintained	an	environmental	reserve	of	$5.5	million,	which	includes	funds	relating	to	on-site	landfill	and	surface	impoundments as	well	as	on-going	and	anticipated	remedial	projects.	Of	the	$5.5	million	reserve,	$3.3	million	is	reserved	for	our	landfill	obligations,	which	are	accounted	for	in accordance	with	SFAS	No.	143,	"Accounting	for	Asset	Retirement	Obligations".	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.

As	of	this	filing,	we	believe	that	it	is	not	reasonably	possible	that	future	environmental	expenditures	above	the	$5.5	million	accrued	as	of	December	31,	2005	will have	a	material	impact	on	our	financial	condition	and	results	of	operations.

# 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.

# Item	1A.			RISK	FACTORS

Some	of	the	statements	in	this	report	and	in	our	2005	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	within	the	meaning	of	the	Private	Securities Litigation	Reform	Act	of	1995.	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,	but	are	not	limited	to,	the	factors	described	below.

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.

# Industry	Risks

Industry	Earnings	Cyclicality—Imbalances	of	supply	and	demand	for	containerboard	affect	the	price	at	which	we	can	sell	containerboard	and,	as	a	result, could	result	in	lower	selling	prices	and	earnings.

The	price	of	containerboard	could	fall	if	the	supply	of	containerboard	available	for	sale	in	the	market	exceeds	the	demand.	The	demand	for	containerboard	is	driven by	market	needs	for	containerboard	in	the	United	States	and	abroad	to	manufacture	corrugated	shipping	containers.	Market	needs	or	demand	are	driven	by	both	global and	U.S.	business	conditions.	If	supply	exceeds	demand,	prices	for	containerboard	could	decline,	resulting	in	decreased	earnings	and	cash	flow.

From	time	to	time,	we	have	taken	downtime	(or	slowbacks)	at	some	of	our	mills	to	balance	our	production	of	containerboard	with	the	market	demand	for	our containerboard,	and	we	may	continue	to	do	so	in	the	future.	Some	of	our	competitors	have	also	temporarily	closed	or	reduced	production	at	their	containerboard	mills, some	of	which	could	reopen	and	increase	production	capacity.	This	could	result	in	a	supply	and	demand	imbalance	and	cause	prices	to	fall.

# Competition—The	intensity	of	competition	in	the	containerboard	and	corrugated	packaging	industry	combined	with	the	commodity	nature	of	containerboard could	result	in	downward	pressure	on	pricing,	which	could	lower	earnings.

PCA	operates	in	an	industry	that	is	highly	competitive,	with	no	single	containerboard	or	corrugated	packaging	producer	having	a	dominant	position.	Containerboard cannot	generally	be	differentiated	by	producer,	which	tends	to	intensify	price	competition.	The	corrugated	packaging	industry	is	also	sensitive	to	price	fluctuations,	as well	as	other	factors	including	innovation,	design,	quality	and	service.	To	the	extent	that	one	or	more	competitors	are	more	successful	with	respect	to	any	key competitive	factor,	our	business	could	be	adversely	affected.	Our	products	also	compete,	to	some	extent,	with	various	other	packaging	materials,	including	products made	of	paper,	plastics,	wood	and	various	types	of	metal.	The	intensity	of	containerboard	competition	and	the	commodity	nature	of	containerboard,	plus	the	intensity	of corrugated	packaging	competition,	could	lead	to	a	reduction	in	our	market	share	as	well	as	lower	prices	for	our	products,	both	of	which	could	reduce	our	earnings.

# Company	Risks

# Cost	of	Wood	Fiber—Dependence	on	external	wood	fiber	sources	could	lead	to	higher	costs	and	lower	earnings	for	PCA.

During	1999	and	2000,	PCA	sold	800,000	acres	of	owned	timberlands.	In	connection	with	these	sales,	we	entered	into	supply	agreements	at	market	prices	for	wood fiber	to	be	consumed	at	three	of	our	four	mills.	Currently,	we	have	supply	agreements	on	about	390,000	of	the	800,000	acres	of	timberlands	sold.	In	addition	to	these supply	agreements,	PCA	also	secures	wood	fiber	from	various	other	sources	at	market	prices.

Because	we	do	not	own	any	timberlands,	we	are	more	vulnerable	to	changes	in	availability	of	wood	fiber	in	areas	adjacent	to	our	mills	than	those	of	our competitors	who	do	own	timberlands	in	areas	adjacent	to	their	mills,	and	therefore	could	face	higher	wood	fiber	costs	than	those	competitors,	both	in	terms	of	the	cost	of the	wood	fiber	itself	as	well	as	the	transportation	costs	to	get	the	wood	fiber	to	our	mills.	The	price	for	wood	fiber	has	historically	fluctuated	on	a	cyclical	basis	and	has often	depended	on	a	variety	of	factors	over	which	we	have	no	control,	including	environmental	and	conservation	regulations,	natural	disasters	and	the	weather.

Any	increase	in	wood	fiber	costs	could	cause	our	manufacturing	costs	to	increase	and	our	earnings	to	decrease	to	a	greater	extent	than	those	of	our	competitors	who own	their	own	timberlands.

# Cost	of	Recycled	Fiber—An	increase	in	the	cost	of	recycled	fiber	could	increase	our	containerboard	manufacturing	costs	and	lower	our	earnings.

PCA	purchases	recycled	fiber	for	use	at	three	of	its	four	containerboard	mills.	PCA	currently	purchases,	net	of	recycled	fiber	generated	at	its	box	plants, approximately	400,000	tons	of	recycled	fiber	per	year.

The	increase	in	demand	of	products	manufactured,	in	whole	or	in	part,	from	recycled	fiber	on	a	global	basis	has	caused	an	occasional	tightening	in	the	supply	of recycled	fiber.	These	periods	of	supply	and	demand	imbalance	have	tended	to	create	significant	price	volatility.	We	expect	that	periods	of	above	average	recycled	fiber costs	and	overall	price	volatility	will	continue,	which	could	result	in	earnings	volatility.

# Cost	of	Purchased	Energy—An	increase	in	the	cost	of	purchased	energy,	particularly	natural	gas	and	oil,	could	lead	to	higher	manufacturing	costs,	resulting in	reduced	earnings.

PCA	has	the	capability	to	use	various	types	of	purchased	fuels	in	its	manufacturing	operations,	including	coal,	bark,	natural	gas	and	oil.	Energy	prices,	in	particular prices	for	oil	and	natural	gas,	have

fluctuated	dramatically	in	the	past	and	have	risen	substantially	in	recent	years.	These	fluctuations	impact	our	manufacturing	costs	and	result	in	earnings	volatility.	If energy	prices	rise,	our	production	costs	will	increase,	which	will	lead	to	higher	manufacturing	costs	and	reduced	earnings.

# Environmental	Matters—PCA	may	incur	significant	environmental	liabilities	with	respect	to	both	past	and	future	operations.

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	our	2005	Annual	Report	on	Form	10-K	under	the	caption	"Environmental	Matters,"	we	provide	certain	estimates	of expenditures	we	expect	to	make	for	environmental	compliance	in	the	next	few	years.	Although	we	have	established	reserves	to	provide	for	future	environmental	liability, these	reserves	may	not	be	adequate.

Restrictions	Imposed	by	the	Senior	Credit	Facility,	the	Receivables	Revolving	Credit	Facility	and	the	Indenture	Governing	our	Notes—Our	operating flexibility	is	limited	in	certain	respects	by	the	covenants	in	our	senior	credit	facility,	the	receivables	revolving	credit	facility	and	the	indenture	governing	our	notes.

Our	senior	credit	facility,	receivables	revolving	credit	facility	and	the	indenture	governing	our	notes	impose	restrictions	on	us	that	could	increase	our	vulnerability to	general	adverse	economic	and	industry	conditions	by	limiting	our	flexibility	in	planning	for	and	reacting	to	changes	in	our	business	and	industry.	Specifically,	these restrictions	limit	our	ability,	among	other	things,	to:

·							enter	into	certain	transactions	with	affiliates;

·							enter	into	sale	and	leaseback	transactions;	and

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

# Major	Stockholder;	Potential	Conflicts—The	interests	of	our	major	stockholder	could	conflict	with	those	of	the	other	holders	of	our	common	stock.

Our	largest	stockholder,	PCA	Holdings,	LLC,	an	entity	controlled	by	Madison	Dearborn	Partners,	holds	21,773,010,	or	21.0%,		of	our	outstanding	shares	of common	stock	as	of	February	17,	2006.	Two	representatives	of	Madison	Dearborn	Partners	are	members	of	PCA's	seven	member	Board	of	Directors,	and	will	continue to	play	a	major	role	in	determining	the	outcome	of	all	matters	submitted	to	a	vote	of	our	stockholders,	including	the	election	of	directors.	The	interests	of	Madison Dearborn	Partners	could	conflict	with	the	interests	of	our	other	stockholders.

# Investment	Risks

Availability	of	Significant	Amounts	of	Common	Stock	for	Sale—The	market	price	of	our	common	stock	could	be	adversely	affected	as	a	result	of	the availability	of	a	significant	amount	of	our	common	stock	for	sale.

PCA	Holdings	LLC	currently	has	registration	rights	that	require	us	to	register	its	shares	of	common	stock	under	the	Securities	Act	at	our	expense.	The	future	sale	of a	significant	number	of	shares	of	PCA's	common	stock	held	by	PCA	Holdings	in	the	public	market,	or	the	perception	that	such	sales	could	occur,	could	adversely	affect the	prevailing	market	price	of	our	common	stock.

# Potential	Impediments	to	a	Change	of	Control—Some	of	the	provisions	of	our	charter	documents	and	the	presence	of	a	large	stockholder	could	discourage acquisition	proposals	by	third	parties	and	could	delay,	deter	or	prevent	a	change	in	control.

Our	certificate	of	incorporation	authorizes	our	Board	of	Directors,	subject	to	any	limitations	prescribed	by	law,	to	issue	shares	of	preferred	stock	in	one	or	more series	without	stockholder	approval.	The	issuance	of	preferred	stock,	while	providing	desirable	flexibility	in	connection	with	possible	acquisitions	and	for	other corporate	purposes,	could	have	the	effect	of	making	it	more	difficult	for	a	third	party	to	acquire,	or	discouraging	a	third	party	from	seeking	to	acquire,	a	majority	of	our outstanding	voting	stock.	The	presence	of	a	significant	stockholder	may	also	deter	a	potential	acquirer	from	making	a	tender	offer	or	otherwise	attempting	to	obtain control	of	PCA,	even	if	that	might	be	favorable	to	PCA	or	PCA's	other	stockholders.

# Market	Price	of	our	Common	Stock—The	market	price	of	our	common	stock	may	be	volatile,	which	could	cause	the	value	of	your	investment	to	decline.

Securities	markets	worldwide	experience	significant	price	and	volume	fluctuations.	This	market	volatility,	as	well	as	general	economic,	market	or	political conditions,	could	reduce	the	market	price	of	our	common	stock	in	spite	of	our	operating	performance.	In	addition,	our	operating	results	could	be	below	the	expectations of	public	market	analysts	and	investors,	and	in	response,	the	market	price	of	our	common	stock	could	decrease	significantly.

# Item	1B.			UNRESOLVED	STAFF	COMMENTS.

None.

The	table	below	provides	a	summary	of	our	containerboard	mills,	the	principal	products	produced	and	each	mill's	annual	capacity	based	upon	current	operations:

| Location | Function | Capacity	(tons) |
| :--- | :--- | :--- |
| Counce,\tTN | Kraft\tlinerboard\tmill | 979,000 |
| Valdosta,\tGA | Kraft\tlinerboard\tmill | 487,000 |
| Tomahawk,\tWI | Semi-chemical\tmedium\tmill | 575,000 |
| Filer\tCity,\tMI | Semi-chemical\tmedium\tmill | 385,000 |
| Total | Total | 2,426,000* |

*																				In	January,	2005	we	resumed	operations	on	our	number	one	paper	machine	at	our	Filer	City	mill	and	shut	down	our	number	three	paper	machine	at	our	Tomahawk mill	in	April,	2005.	Shutting	down	the	number	three	machine	at	Tomahawk	reduces	our	total	productive	capacity	by	65,000	tons	at	Tomahawk	to	510,000	tons	and to	2,361,000	tons	for	our	total	containerboard	mill	system.	This	action	was	based	on	market	conditions	and	productivity	and	could	change	if	market	conditions	or productivity	levels	change	going	forward.

We	currently	own	our	four	containerboard	mills	and	46	of	our	corrugated	manufacturing	operations	(37	corrugated	plants	and	nine	sheet	plants).	We	also	own	two sawmills,	an	air-drying	yard,	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.	PCA	leases	the	space	for	three	corrugated plants,	19	sheet	plants,	five	regional	design	centers,	and	numerous	other	distribution	centers,	warehouses	and	facilities.	The	equipment	in	these	leased	facilities	is,	in virtually	all	cases,	owned	by	PCA,	except	for	forklifts	and	other	rolling	stock	which	are	generally	leased.

We	lease	the	cutting	rights	to	approximately	108,000	acres	of	timberland	located	near	our	Valdosta	(89,000	acres)	and	Counce	(19,000	acres)	mills.	Most	of	these cutting	rights	agreements	have	terms	with	over	15	years	remaining,	on	average.

We	currently	lease	space	for	our	corporate	headquarters	in	Lake	Forest,	Illinois.	The	lease	for	the	Lake	Forest,	Illinois	facility	is	a	short	term,	facility	use	agreement lease	with	automatic	renewal	rights.	Specifically,	this	lease	is	a	continuous	month-to-month	lease	with	unlimited	automatic	renewals	entitling	either	party	the	right	to terminate	the	lease	with	at	least	8	months	notice.	We	currently	believe	that	our	owned	and	leased	space	for	facilities	and	properties	are	sufficient	to	meet	our	operating requirements	for	the	foreseeable	future.

# Item	3.					LEGAL	PROCEEDINGS

On	May	14,	1999,	PCA	was	named	as	a	defendant	in	two	Consolidated	Class	Action	Complaints	which	alleged	a	civil	violation	of	Section	1	of	the	Sherman	Act. The	suits,	then	captioned	Winoff	Industries,	Inc.	v.	Stone	Container	Corporation,	MDL	No.	1261	(E.D.	Pa.)	and	General	Refractories	Co.	v.	Gaylord	Container Corporation,	MDL	No.	1261	(E.D.	Pa.),	name	PCA	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	suits,	along	with	nine	other	linerboard	and	corrugated	sheet	manufacturers.	The	complaints	allege	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	to	artificially	increase	prices	of	corrugated	containers	and	corrugated	sheets,	respectively.	On	November	3,	2003,	Pactiv	(formerly	known	as	Tenneco Packaging),	Tenneco	and	PCA	entered	into	an	agreement	to	settle	the	class	action	lawsuits.	The	settlement	agreement	provides	for	a	full	release	of	all	claims	against PCA	as	a	result	of	the	class	action	lawsuits	and	was	approved	by	the	Court	in	an	opinion	issued	on	April	21,	2004.	Approximately	160	plaintiffs	opted	out	of	the	class and	together	filed	about	ten	direct	action	complaints	in	various	federal	courts	across	the	country.	All	of	the	opt-out	complaints	make	allegations	against	the	defendants, including	PCA,	substantially	similar	to	those	made	in	the	class	actions.	The	settlement	agreement	does	not	cover	these	direct	action	cases.	These	actions	have	all	been consolidated	as	In	re	Linerboard,	MDL	1261	(E.D.	Pa.)	for	pretrial	purposes.	Pactiv,	Tenneco	and	PCA	have	reached	an	agreement	to	settle	all	of	the	opt-out	cases. These	agreements	provide	for	a	full	release	of	all	claims	against	PCA	as	a	result	of	litigation.	PCA	has	made	no	payments	to	the	plaintiffs	as	a	result	of	the	settlement	of any	of	the	opt-out	suits.	As	of	the	date	of	this	filing,	we	believe	it	is	not	reasonably	possible	that	the	outcome	of	any	pending	litigation	related	to	these	matters	will	have a	material	adverse	effect	on	our	financial	position,	results	of	operations	or	cash	flows.

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.	As	of	the	date	of	this	filing,	we	believe	it	is	not	reasonably	possible	that	the	resolution	of	these	legal	actions	will,	individually	or	in	the	aggregate,	have	a material	adverse	effect	on	our	financial	condition,	results	of	operations	or	cash	flows.

# 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	2005.

# Executive	Officers	of	the	Registrant

Brief	statements	setting	forth	the	age	at	February	21,	2006,	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	61	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	Tenneco	Inc.,	State	Farm	Mutual	Insurance	Company,

American	Forest	and	Paper	Association	and	Cives	Corporation.

William	J.	Sweeney	is	65	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	50	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	53	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	60	years	old	and	has	served	as	Vice	President,	Human	Resources	of	PCA	since	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	15	years	with	the	then	American	Can	Company	where	he	held	several	human	resources	and	manufacturing	positions.

Thomas	A.	Hassfurther	is	50	years	old	and	has	served	as	Senior	Vice	President,	Sales	and	Marketing,	Corrugated	Products	since	February	2005	and	as	Vice President,	Sales	and	Marketing	from	March	1998	to	February	2005.	Mr.	Hassfurther	served	as	Vice	President	and	Area	General	Manager	from	January	1991	to February	1998	for	Tenneco	Packaging	Inc.	From	1977	-	1990	Mr.	Hassfurther	served	as	a	sales	representative,	Sales	Manager	and	General	Manager	within	the Containerboard	Products	Group.

# Item	5.					MARKET	FOR	THE	REGISTRANT'S	COMMON	EQUITY,	RELATED	SHAREHOLDER	MATTERS	AND	ISSUER	PURCHASES	OF	EQUITY SECURITIES

# 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	and dividends	as	reported	by	the	New	York	Stock	Exchange	during	the	last	two	years.

|  | 2005 | 2005 |  | 2004 | 2004 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Quarter\tEnded | Sales\tPrice\nHigh | Low | Dividends\nDeclared | Sales\tPrice\nHigh | Low | Dividends\nDeclared |
| March\t31 | $ 25.63 | $ 21.87 | $0.25 | $ 23.97 | $ 21.10 | $0.15 |
| June\t30 | 24.91 | 20.09 | 0.25 | 25.21 | 20.99 | 0.15 |
| September\t30 | 22.43 | 19.13 | 0.25 | 24.79 | 22.07 | 0.15 |
| December\t31 | 24.17 | 18.24 | 0.25 | 24.60 | 21.28 | 0.15 |

As	of	February	17,	2006,	there	were	64	holders	of	record	of	our	common	stock.

The	Company	expects	to	pay	regular	cash	dividends,	although	there	is	no	assurance	as	to	future	dividends	because	they	depend	on	future	earnings,	capital requirements	and	financial	condition.	There	are	currently	no	restrictions	on	the	amount	of	dividends	we	can	pay	on	our	common	stock	under	our	existing	indebtedness agreements.

No	equity	securities	of	PCA	were	sold	by	PCA	during	fiscal	year	2005	which	were	not	registered	under	the	Securities	Act	of	1933.

# Stock	Repurchase	Agreement

On	December	21,	2005,	the	Company	completed	a	secondary	offering	of	its	common	stock	pursuant	to	a	registration	statement	filed	with	the	Securities	and Exchange	Commission	on	December	9,	2005.	The	selling	stockholder,	PCA	Holdings	LLC,	sold	17,825,000	shares	of	common	stock	of	the	Company,	which	included 2,325,000	shares	pursuant	to	the	underwriters'	exercise	in	full	of	their	over-allotment	option.	All	of	these	shares	were	sold	at	an	initial	price	to	the	public	market	of $21.50	per	share,	and	the	selling	stockholder	received	proceeds,	net	of	the	underwriting	discount,	of	$20.69	per	share.	The	Company	did	not	sell	any	shares	in,	or receive	any	proceeds	from,	the	secondary	offering.

Concurrent	with	the	closing	of	the	secondary	offering	on	December	21,	2005,	the	Company	entered	into	a	common	stock	repurchase	agreement	with	PCA	Holdings LLC.	Pursuant	to	the	repurchase	agreement,	the	Company	purchased	4,500,000	shares	of	common	stock	directly	from	PCA	Holdings	LLC	at	the	initial	price	to	the public	net	of	the	underwriting	discount,	or	$20.69	per	share,	the	same	net	price	per	share	received	by	PCA	Holdings	LLC	in	the	secondary	offering.	These	shares	were retired	on	December	21,	2005.

The	following	table	sets	forth	information	about	our	share	repurchases	under	the	common	stock	repurchase	agreement	in	the	fiscal	fourth	quarter	of	2005.

| 2005) | — | $— | — | $— |
| :--- | :--- | :--- | :--- | :--- |
| Month\t#2\t(November\t1,\t2005\tto\tNovember\t30, |  |  |  |  |
| 2005) | — | — | — | — |
| Month\t#3\t(December\t1,\t2005\tto\tDecember\t31, |  |  |  |  |
| 2005) | 4,500,000 | 20.69 | 4,500,000 | — |
| Total | 4,500,000 | $ 20.69 | 4,500,000 | $— |

# Stock	Repurchase	Program

On	May	16,	2001,	PCA	announced	a	$100	million	common	stock	repurchase	program.	The	Company	may	continue	to	repurchase	shares	from	time	to	time	under this	program.	Through	December	31,	2003,	the	Company	repurchased	5,195,600	shares	of	common	stock	for	$88.8	million.	All	repurchased	shares	were	retired	prior	to December	31,	2003.	No	shares	of	common	stock	were	repurchased	under	this	program	in	2004	or	2005.

The	following	table	sets	forth	the	selected	historical	financial	and	other	data	of	PCA.	The	information	contained	in	the	table	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.

|  |  | For	the	Year	Ended	December	31, | For	the	Year	Ended	December	31, |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
| (In\tthousands,\texcept\tper\tshare\tdata) | 2005 | 2004 | 2003 | 2002 | 2001 |
| Statement\tof\tIncome\tData: |  |  |  |  |  |
| Net\tsales | $ 1,993,658 | $ 1,890,085 | $ 1,735,534 | $ 1,735,858 | $ 1,789,956 |
| Income\t(loss)\tbefore\tcumulative\teffect\tof |  |  |  |  |  |
| accounting\tchange | $52,604 | $68,730 | $(14,358) | $48,179 | $106,913 |
| Cumulative\teffect\tof\taccounting |  |  |  |  |  |
| change(1) | — | — | — | — | (495) |
| Net\tincome\t(loss) | $52,604 | $68,730 | $(14,358) | $48,179 | $106,418 |
| Basic\tearnings\tper\tshare: |  |  |  |  |  |
| Income\t(loss)\tbefore\tcumulative\teffect\tof |  |  |  |  |  |
| accounting\tchange | $.49 | $.65 | $(.14) | $.46 | $1.00 |
| Cumulative\teffect\tof\taccounting\tchange | — | — | — | — | — |
| Net\tincome\t(loss)\tper\tcommon\tshare | $.49 | $.65 | $(.14) | $.46 | $1.00 |
| Diluted\tearnings\tper\tshare: |  |  |  |  |  |
| Income\t(loss)\tbefore\tcumulative\teffect\tof |  |  |  |  |  |
| accounting\tchange | $.49 | $.64 | $(.14) | $.45 | $.98 |
| Cumulative\teffect\tof\taccounting\tchange | — | — | — | — | — |
| Net\tincome\t(loss)\tper\tcommon\tshare | $.49 | $.64 | $(.14) | $.45 | $.98 |
| Weighted\taverage\tcommon\tshares |  |  |  |  |  |
| outstanding: |  |  |  |  |  |
| —basic | 107,334 | 106,358 | 104,628 | 105,053 | 106,277 |
| —diluted | 108,098 | 107,570 | 104,628 | 107,208 | 108,801 |
| Cash\tdividends\tdeclared\tper\tcommon |  |  |  |  |  |
| share(2) | $1.00 | $0.60 | $0.15 | — | — |
| Balance\tSheet\tData: |  |  |  |  |  |
| Total\tassets | $1,973,298 | $ 2,082,774 | $ 1,985,126 | $ 1,982,551 | $ 1,971,780 |
| Total\tlong-term\tobligations(3) | 695,203 | 694,892 | 697,961 | 742,213 | 795,217 |
| Shareholders'\tequity | 681,420 | 817,570 | 797,480 | 795,875 | 769,834 |

(1)										On	January	1,	2001,	the	Company	recorded	a	transition	adjustment	upon	adoption	of	SFAS	No.	133,	"Accounting	for	Derivative	Instruments	and	Hedging Activities,"	to	recognize	its	derivative	instruments	at	fair	value	and	to	recognize	the	effective	and	ineffective	portions	of	the	cash	flow	hedges. (2)										On	October	13,	2003,	PCA	announced	its	intention	to	begin	paying	a	quarterly	cash	dividend	of	$0.15	per	share,	or	$0.60	per	share	annually,	on	its	common	stock.

The	first	quarterly	dividend	of	$0.15	per	share	was	paid	on	January	15,	2004	to	shareholders	of	record	as	of	December	15,	2003.	On	January	19,	2005,	the Company	announced	an	increase	in	its	quarterly	cash	dividend	to	$0.25	per	common	share,	or	$1.00	per	share	annually,	on	its	common	stock.	The	first	quarterly cash	dividend	of	$0.25	per	share	was	paid	on	April	15,	2005	to	shareholders	of	record	as	of	March	15,	2005	PCA	did	not	declare	any	dividends	on	its	common stock	for	the	years	ended	December	31,	2002	or	2001.

(3)										Total	long-term	obligations	include	long-term	debt,	short-term	debt	and	the	current	maturities	of	long-term	debt.

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

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

On	April	12,	1999,	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.

# Results	of	Operations

The	historical	results	of	operations	of	PCA	for	the	years	ended	December,	31	2005	and	2004	are	set	forth	the	below:

|  | For	the	Year	Ended<br>December	31, | For	the	Year	Ended<br>December	31, |  |
| :--- | :--- | :--- | :--- |
| (In\tmillions) | 2005 | 2004 | Change |
| Net\tsales | $ 1,993.7 | $ 1,890.1 | $ 103.6 |
| Income\tbefore\tinterest\tand\ttaxes | $116.1 | $140.5 | $(24.4) |
| Interest\texpense,\tnet | (28.1) | (29.6) | 1.5 |
| Income\tbefore\ttaxes | 88.0 | 110.9 | (22.9) |
| Provision\tfor\tincome\ttaxes | (35.4) | (42.2) | 6.8 |
| Net\tincome | $52.6 | $68.7 | $(16.1) |

# Net	Sales

Net	sales	increased	by	$103.6	million,	or	5.5%,	for	the	year	ended	December	31,	2005	from	the	year	ended	December	31,	2004.	Net	sales	increased	primarily	due	to increased	sales	prices	and	volumes	of	corrugated	products	compared	to	2004.

Total	corrugated	products	volume	sold	increased	4.2%	to	31.2	billion	square	feet	in	2005	compared	to	29.9	billion	square	feet	in	2004.	On	a	comparable	shipment- per-workday	basis,	corrugated	products	sales	volume	increased	4.6%	in	2005	from	2004.	Excluding	PCA's	acquisition	of	Midland	Container	in	April	2005,	corrugated products	volume	was	3.0%	higher	in	2005	than	2004	and	up	3.4%	compared	to	2004	on	a	shipment-per-workday	basis.	Shipments-per-workday	is	calculated	by	dividing our	total	corrugated	products	volume	during	the	year	by	the	number	of	workdays	within	the	year.	The	larger	percentage	increase	was	due	to	the	fact	that	2005	had	one less	workday	(250	days),	those	days	not	falling	on	a	weekend	or	holiday,	than	2004	(251	days).	Containerboard	sales	volume	to	external	domestic	and	export	customers decreased	12.2%	to	417,000	tons	for	the	year	ended	December	31,	2005	from	475,000	tons	in	2004.

# Income	Before	Interest	and	Taxes

Income	before	interest	and	taxes	decreased	by	$24.4	million,	or	17.3%,	for	the	year	ended	December	31,	2005	compared	to	2004.	Included	in	income	before	interest and	taxes	for	the	year	ended	December	31,	2004	is	income	of	$27.8	million,	net	of	expenses,	attributable	to	a	dividend	paid	to	PCA	by	Southern	Timber	Venture,	LLC (STV),	the	timberlands	joint	venture	in	which	PCA	owns	a	31 ¤3%	ownership	interest.	Additionally	in	2004,	STV	purchased	a	portion	of	the	Company's	interest	in	STV which	resulted	in	a	pre-tax	gain	of	$2.0	million.	Included	in	income	before	interest	and	taxes	for	the	year	ended	December	31,	2005	is	income	of	$14.0	million,	net	of expenses,	due	to	two	additional	dividends	paid	to	PCA	by	STV.

Excluding	the	dividends	from	STV	and	the	equity	sale	described	previously,	operating	income	decreased	$8.6	million	in	2005	compared	to	2004.	The	$8.6	million decrease	in	income	before	interest	and	taxes	was	primarily	attributable	to	increased	costs	related	to	transportation	($21.1	million),	energy,	primarily	purchased	fuels	and electricity	($20.5	million),	wood	fiber	($10.4	million),	annual	wage	increases	for	hourly	and	salaried	personnel	($13.8	million),	medical,	pension	and	other	benefit	costs ($7.5	million),	other	corrugated	converting	costs,	primarily	materials	and	supplies	($4.9	million)	and	mill	chemicals	($3.9	million).	Those	cost	items	were	largely	offset by	increased	sales	prices	and	volume	($74.6	million).

Gross	profit	increased	$9.1	million,	or	3.1%,	for	the	year	ended	December	31,	2005	from	the	year	ended	December	31,	2004.	Gross	profit	as	a	percentage	of	net sales	declined	from	15.8%	of	net	sales	in	2004	to	15.4%	of	net	sales	in	the	current	year	primarily	due	to	the	cost	increases	described	above	which	was	almost	entirely offset	by	improved	sales	pricing	and	volume.

Selling	and	administrative	expenses	increased	$10.3	million,	or	7.6%,	for	the	year	ended	December	31,	2005	from	the	comparable	period	in	2004.	The	increase	was primarily	the	result	of	increased	salary	and	incentive	compensation	expense	($7.1	million)	and	related	fringe	benefits	($1.7	million),	and	higher	warehousing	costs	due	to customer	requirements	($1.7	million).

Corporate	overhead	for	the	year	ended	December	31,	2005,	increased	by	$2.9	million,	or	6.4%,	from	the	year	ended	December	31,	2004.	The	increase	was primarily	attributable	to	higher	professional	fees	primarily	related	to	investor	relations,	legal	and	human	resource	matters	($1.4	million)	and	increased	salaries ($1.1	million)	.

Other	expense,	net,	increased	$4.5	million,	or	73.5%	for	the	year	ended	December	31,	2005	compared	to	the	year	ended	December	31,	2004.	The	increase	was primarily	due	to	a	$3.3	million	increase	in	expenses	related	to	the	disposals	of	property,	plant	and	equipment	as	part	of	planned	disposals	in	connection	with	capital projects,	and	a	portion	of	a	corrugated	products	manufacturing	plant's	closure	costs	($1.4	million)	which	were	recorded	in	other	expense,	net.

# Interest	Expense,	Net	and	Income	Taxes

Interest	expense,	net	of	interest	income,	decreased	by	$1.5	million,	or	5.0%,	for	the	year	ended	December	31,	2005	from	2004	primarily	as	a	result	of	an	increase	in interest	income	earned	on	the	Company's	cash		equivalents,	partially	offset	by	higher	interest	expense	on	the	Company's	variable	rate	debt	due	to	higher	interest	rates.

PCA's	effective	tax	rate	was	40.2%	for	the	year	ended	December	31,	2005	and	38.0%	for	the	year	ended	December	31,	2004.	The	higher	tax	rate	in	2005	is	due	to an	increase	in	tax	accruals	recorded	for	prior	years.	For	both	years	2005	and	2004,	tax	rates	are	higher	than	the	federal	statutory	rate	of	35.0%	due	to	state	income	taxes.

The	historical	results	of	operations	of	PCA	for	the	years	ended	December	31,	2004	and	2003	are	set	forth	below:

| (In	millions) | For	the	Year	Ended<br>December	31,<br>2004 | 2003 | Change |
| :--- | :--- | :--- | :--- |
| Net\tsales | $ 1,890.1 | $ 1,735.5 | $ 154.6 |
| Income\tbefore\tinterest\tand\ttaxes | $140.5 | $96.9 | $43.6 |
| Interest\texpense,\tnet | (29.6) | (121.8) | 92.2 |
| Income\t(loss)\tbefore\ttaxes | 110.9 | (24.9) | 135.8 |
| (Provision)\tbenefit\tfor\tincome\ttaxes | (42.2) | 10.5 | (52.7) |
| Net\tincome\t(loss) |  |  |  |
|  | $68.7 | $(14.4) | $83.1 |

Net	sales	increased	by	$154.6	million,	or	8.9%,	for	the	year	ended	December	31,	2004	from	the	year	ended	December	31,	2003.	Net	sales	increased	due	to improved	sales	volumes	and	prices	of	corrugated	products	and	containerboard	compared	to	2003.

Total	corrugated	products	volume	sold	increased	6.6%	to	29.9	billion	square	feet	in	2004	compared	to	28.1	billion	square	feet	in	2003.	On	a	comparable	shipment- per-workday	basis,	corrugated	products	sales	volume	increased	7.0%	in	2004	from	2003.	Excluding	PCA's	acquisition	of	Acorn	in	February	2004,	corrugated	products volume	was	5.3%	higher	in	2004	than	2003	and	up	5.8%	compared	to	2003	on	a	shipment-per-workday	basis.	Shipments-per-workday	is	calculated	by	dividing	our	total corrugated	products	volume	during	the	year	by	the	number	of	workdays	within	the	year.	The	larger	percentage	increase	was	due	to	the	fact	that	2004	had	one	less

workday	(251	days),	those	days	not	falling	on	a	weekend	or	holiday,	than	2003	(252	days).	Containerboard	sales	volume	to	external	domestic	and	export	customers increased	6.8%	to	475,000	tons	for	the	year	ended	December	31,	2004	from	445,000	tons	in	2003.

Income	before	interest	and	taxes	increased	by	$43.6	million,	or	45.1%,	for	the	year	ended	December	31,	2004	compared	to	2003.	Included	in	income	before	interest and	taxes	for	the	year	ended	December	31,	2004	is	income	of	$27.8	million,	net	of	expenses,	attributable	to	a	dividend	paid	to	PCA	by	STV,	the	timberlands	joint venture	in	which	PCA	owns	a	31 ¤3%	ownership	interest.	Included	in	income	before	interest	and	taxes	for	the	year	ended	December	31,	2003	is	a	$3.3	million	charge	for fees	and	expenses	related	to	the	Company's	debt	refinancing	which	was	completed	in	July	2003,	and	a	fourth	quarter	charge	of	$16.0	million	to	settle	certain	benefits related	matters	with	Pactiv	Corporation	dating	back	to	April	12,	1999	when	PCA	became	a	stand-alone	company,	as	described	below.

During	the	fourth	quarter	of	2003,	Pactiv	notified	PCA	that	we	owed	Pactiv	additional	amounts	for	hourly	pension	benefits	and	workers'	compensation	liabilities dating	back	to	April	12,	1999.	A	settlement	of	$16.0	million	was	negotiated	between	Pactiv	and	PCA	in	December	2003.	The	full	amount	of	the	settlement	was	accrued in	the	fourth	quarter	of	2003.

Excluding	these	special	items,	operating	income	decreased	$3.4	million	in	2004	compared	to	2003.	The	$3.4	million	decrease	in	income	before	interest	and	taxes was	primarily	attributable	to	increased	energy	and	transportation	costs	($19.2	million),	higher	recycled	and	wood	fiber	costs	($16.7	million),	increased	salary	expenses related	to	annual	increases	and	new	hires	($5.7	million),	and	increased	contractual	hourly	labor	costs	($5.6	million),	which	was	partially	offset	by	increased	sales	volume and	sales	prices	($44.3	million).

Gross	profit	decreased	$0.2	million,	or	0.1%,	for	the	year	ended	December	31,	2004	from	the	year	ended	December	31,	2003.	Gross	profit	as	a	percentage	of	net sales	declined	from	17.2%	of	net	sales	in	2003	to	15.8%	of	net	sales	in	the	current	year	primarily	due	to	the	cost	increases	described	above.

Selling	and	administrative	expenses	increased	$8.6	million,	or	6.7%,	for	the	year	ended	December	31,	2004	from	the	comparable	period	in	2003.	The	increase	was primarily	the	result	of	increased	salary	and	incentive	compensation	expense	($4.2	million)	and	related	fringe	benefits	($1.0	million),	higher	warehousing	costs	due	to customer	requirements	($1.1	million),	increased	travel,	entertainment	and	promotional	expenses	($0.9	million),	increased	broker	commissions	($0.6	million)	and	higher recruiting,	relocation	and	training	costs	($0.6	million).

Corporate	overhead	for	the	year	ended	December	31,	2004,	decreased	by	$1.6	million,	or	3.5%,	from	the	year	ended	December	31,	2003.	The	decrease	was primarily	attributable	to	the	fees	and	expenses	related	to	the	debt	refinancing	($3.3	million)	incurred	in	2003,	partially	offset	by	increased	salaries	($0.8	million)	and higher	professional	fees	primarily	related	to	audits	of	internal	controls	($0.7	million).

Other	expense,	net,	decreased	$6.2	million,	or	50.0%,	for	the	year	ended	December	31,	2004	compared	to	the	year	ended	December	31,	2003.	The	decrease	was primarily	due	to	a	reduction	in	charges	on	disposal	and	transfer	costs	of	fixed	assets	and	facility	closure	costs	of	$3.3	million,	reduced	legal	charges	of	$1.5	million,	and a	reduction	in	expenses	of	$1.4	million	consisting	of	individually	insignificant	items.

Interest	expense,	net	of	interest	income,	decreased	in	2004	by	$92.2	million,	or	75.7%,	from	2003.	This	decrease	included	$73.3	million	of	expenses	related	to	the Company's	debt	refinancing	in	July	2003.	The	$73.3	million	of	expenses	consisted	of	$55.9	million	paid	in	premiums	for	the	tender	of	the	9 ¤8%	senior	subordinated notes,	and	a	$17.4	million	non-cash	charge	for	the	write-off	of	deferred	financing	fees	related	to	the	9 ¤8%	notes	and	PCA's	original	revolving	credit	facility.	Excluding the	$73.3	million	charge,	interest	expense	in	2004	was	$18.9	million	lower	than	in	2003	as	a	result	of	lower	interest	rates	attributable	to	the	Company's	July	2003 refinancing	and	lower	debt	levels.

PCA's	effective	tax	rate	was	38.0%	for	the	year	ended	December	31,	2004	and	42.3%	for	the	year	ended	December	31,	2003.	The	higher	tax	rate	in	2003	is	due	to stable	permanent	items	over	a	lower	level	of	book	income	(loss).	For	both	years	2004	and	2003,	tax	rates	are	higher	than	the	federal	statutory	rate	of	35.0%	due	to	state income	taxes.

# Liquidity	and	Capital	Resources

|  | For	the	Year	Ended	December	31, | For	the	Year	Ended	December	31, | For	the	Year	Ended	December	31, |
| :--- | :--- | :--- | :--- |
| (In\tmillions) | 2005 | 2004 | 2003 |
| Net\tcash\tprovided\tby\t(used\tfor): |  |  |  |
| Operating\tactivities | $242.7 | $215.3 | $243.7 |
| Investing\tactivities | (161.5) | (116.8) | (116.8) |
| Financing\tactivities | (181.9) | (57.2) | (86.2) |
| Net\tincrease\t(decrease)\tin\tcash | $ (100.7) | $41.3 | $40.7 |

# Operating	Activities

Net	cash	provided	by	operating	activities	increased	$27.4	million,	or	12.7%,	to	$242.7	million	for	the	year	ended	December	31,	2005	compared	to	the	year	ended December	31,	2004.	The	increase	in	net	cash	provided	by	operating	activities	was	primarily	the	result	of	lower	requirements	for	operating	assets	and	liabilities	of $50.5	million,	partially	offset	by	lower	deferred	taxes	of	$25.5	million.	The	decrease	in	deferred	taxes	was	due	primarily	to	the	elimination	of	bonus	depreciation	which resulted	in	substantially	lower	tax	depreciation	in	2005	than	in	2004,	partially	offset	by	the	use	of	a	Federal	net	operating	loss	carry	forward.	During	2005,	PCA's	cash taxes	paid	for	both	Federal	and	state	income	taxes	were	$10.1	million,	or	11.5%	of	book	income	before	income	taxes	of	$88.0	million,	compared	to	PCA's	effective	tax rate	of	40.2%	in	2005.	The	lower	cash	tax	rate	compared	to	the	effective	tax	rate	was	primarily	the	result	of	reducing	current	year	taxable	income	by	$68.6	million through	available	Federal	net	operating	loss	carry	forwards.		As	of	December	31,	2005,	all	Federal	net	operating	loss	carry	forwards	have	been	used.		Without	the Federal	net	operating	loss	carry	forwards,	PCA	would	have	owed	an	additional	$24.0	million	in	Federal	tax	cash	payments	in	2005.	The	Company	expects	the	2006	cash tax	rate	for	both	Federal	and	state	income	tax	payments	to	be	between	32.0%	and	35.0%.

The	lower	requirements	for	operating	assets	and	liabilities	in	2005	were	driven	by	a	$13.0	million	payment	to	Pactiv	in	January	2004	for	a	fourth	quarter	2003 negotiated	settlement	of	pension	benefits	and	workers'	compensation	liabilities	dating	back	to	April	12,	1999,	the	date	Tenneco	Packaging	(now	Pactiv)	sold	us	to	PCA Holdings	LLC.	Additionally,	PCA	paid	Pactiv	$10.0	million	in	April	2004	as	final	payment	for	PCA's	participation	in	Pactiv's	salaried	pension	plan.	The	lower requirements	in	2005	were	also	driven	by	favorable	changes	in	accounts	receivable	($33.7	million)	in	2005	primarily	due	to	lower	selling	prices	in	both	corrugated products	and	containerboard	at	the	end	of	2005	compared	to	the	end	of	2004.

Net	cash	provided	by	operating	activities	decreased	$28.4	million,	or	11.6%,	to	$215.3	million	for	the	year	ended	December	31,	2004,	compared	to	the	comparable period	in	2003.	The	decrease	was	the	result	of	higher	requirements	for	operating	assets	and	liabilities	of	$51.4	million,	partially	offset	by	higher	net	income	and increased	deferred	taxes	as	a	result	of	the	higher	income	levels	in	2004.	The	higher	requirements	for	operating	assets	and	liabilities	were	driven	by	the	$13.0	million payment	to	Pactiv	in	January	2004,	as	previously	described,	that	was	accrued	in	the	fourth	quarter	of	2003,	and	the	$10.0	million	payment	to	Pactiv	for	participation	in their	salaried	pension	plan	in	April	2004,	as	previously	described,	of	which	$7.5	million	was	accrued	at	December	31,	2003.	The	higher	requirements	in	2004	were	also driven	by	unfavorable	changes	in	accounts	payable	($13.1	million),	prepaid	expenses	and	other	current	assets	($12.1	million)	primarily	due	to	a	Federal	income	tax refund	received	in	2003,	as	well	as	higher	levels	of	accounts	receivable	($11.1	million)	in	2004	primarily	due	to	improved	sales	volumes	and	pricing	previously

# described.

# Investing	Activities

Net	cash	used	for	investing	activities	increased	by	$44.7	million,	or	38.2%,	to	$161.5	million	for	the	year	ended	December	31,	2005	compared	to	the	year	ended December	31,	2004.	The	increase	was	primarily	related	to	an	increase	in	additions	to	property,	plant	and	equipment	of	$16.7	million	in	2005	compared	to	the	same period	in	2004,	lower	joint	venture	dividends	received	from	STV	of	$14.3	million	in	2005	compared	to	2004,	higher	cost	of	acquisitions	of	$10.3	million	in	2005	and lower	proceeds	from	disposals	of	property,	plant	and	equipment	and	investments	of	$3.1	million	received	in	2005.	See	Note	15	to	our	consolidated	financial	statements included	elsewhere	in	this	report	for	additional	information	regarding	acquisitions.

Net	cash	used	for	investing	activities	was	unchanged	for	the	year	ended	December	31,	2004	compared	to	the	year	ended	December	31,	2003.	Expenditures	for property,	plant	and	equipment	were	lower	by	$4.6	million	in	2004	compared	to	2003,	joint	venture	dividends	received	from	STV	were	higher	by	$28.1	million

in	2004	compared	to	2003,	and	proceeds	received	from	the	2004	sale	of	a	small	portion	of	PCA's	investment	in	STV	were	offset	by	higher	acquisitions	in	2004	of	$34.6 million.

As	of	December	31,	2005,	PCA	had	commitments	for	capital	expenditures	of	$33.1	million.	PCA	believes	operating	cash	flow	from	continuing	operations	will	be sufficient	to	fund	these	commitments.

# Financing	Activities

Net	cash	used	for	financing	activities	totaled	$181.9	million	for	the	year	ended	December	31,	2005,	an	increase	of	$124.7	million,	or	217.9%,	from	the	comparable period	in	2004.	The	increase	was	primarily	attributable	to	the	repurchase	of	4,500,000	shares	of	PCA	common	stock	from	PCA	Holdings	LLC	for	a	total	of $93.1	million	in	December	2005,	and	$33.1	million	in	additional	dividends	paid	on	PCA's	common	stock	during	2005	compared	to	the	same	period	in	2004.

Net	cash	used	for	financing	activities	decreased	$29.0	million,	or	33.6%,	to	$57.2	million	for	the	year	ended	December	31,	2004	compared	to	the	year	ended December	31,	2003.	The	decrease	was	primarily	attributable	to	$4.0	million	in	debt	prepayments	in	2004	compared	to	$94.1	million	in	debt	prepayments	made	during the	comparable	period	in	2003	and	stock	repurchases	of	$17.5	million	made	in	2003.	This	was	partially	offset	by	dividend	payments	on	PCA's	common	stock	of $63.7	million	in	2004	and	the	$13.8	million	in	proceeds	that	PCA	netted	from	the	debt	refinancing	in	2003	described	below.

In	connection	with	the	debt	refinancing	in	July	2003,	PCA	received	proceeds,	net	of	discount,	of	$596.0	million	from	its	notes	offering	and	new	senior	credit facility	and	$27.0	million	from	settlement	of	the	Treasury	lock,	which	it	used	to	complete	the	tender	offer	of	its	9 ¤8%	senior	subordinated	notes	in	the	amount	of $602.3	million,	including	the	premium.	PCA	also	incurred	financing	costs	in	the	amount	of	$6.9	million	in	connection	with	the	debt	refinancing.

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.	On	October	31,	2003,	PCA	renewed	the	receivables	credit	facility	for	an	additional	three-year	term,	expiring on	October	10,	2006.	As	of	December	31,	2005,	$109.0	million	was	outstanding	and	$41.0	million	was	available	for	additional	borrowing	under	the	receivables	credit facility.	The	highest	outstanding	principal	balance	under	the	receivables	credit	facility	during	fiscal	2005	was	$109.0	million.

On	July	7,	2003,	PCA	repaid	all	borrowings	under	its	then-existing	senior	credit	facility.	This	facility	was	replaced	with	a	senior	unsecured	credit	facility	that provides	for	a	$100.0	million	revolving	credit	facility,	including	a	$35.0	million	subfacility	for	letters	of	credit,	and	a	$50.0	million	term	loan.	The	senior	credit	facility closed	on	July	21,	2003,	and	it	expires	in	2008.	PCA's	total	borrowings	under	the	senior	credit	facility	as	of	December	31,	2005	consisted	of	$39.0	million	of	term	loans.

# Off-Balance	Sheet	Arrangements

The	Company	does	not	have	any	off-balance	sheet	arrangements	as	of	December	31,	2005	that	would	require	disclosure	under	SEC	FR-67,	"Disclosure	in Management's	Discussion	and	Analysis	About	Off-Balance	Sheet	Arrangements	and	Aggregate	Contractual	Obligations."

# Contractual	Obligations

The	following	table	summarizes	PCA's	contractual	obligations	at	December	31,	2005:

|  |  | Less	than | Payments	Due	by	Period |  | More	than |
| :--- | :--- | :--- | :--- | :--- | :--- |
| (In\tthousands) | Total | 1\tYear | 1-3\tYears | 3-5\tYears | 5\tYears |
| Term\tloan | $39,000 | $9,000 | $30,000 | $— $— | $— $— |
| Receivables\tcredit\tfacility | 109,000 | 109,000 | — | — | — |
| 4 ¤8%\tfive-year\tnotes\t(due\tAugust\t1,\t2008) | 150,000 | — | 150,000 | — | — |
| 5 ¤4%\tten-year\tnotes\t(due\tAugust\t1,\t2013) |  |  |  |  |  |
|  | 400,000 | — | — | — | 400,000 |
| Other\tlong-term\tdebt | 116 | 30 | 86 | — | — |
| Total\tshort-term\tand\tlong-term\tdebt | 698,116 | 118,030 | 180,086 | — | 400,000 |

| Operating	leases | 113,972 | 24,569 | 35,802 | 16,471 | 37,130 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Pension\tcontributions. | 74,985 | 22,284 | 34,590 | 18,111 | — |
| Capital\tcommitments | 33,141 | 33,141 | — | — | — |
| Purchase\tcommitments | 3,772 | 2,408 | 1,364 | — | — |
| Letters\tof\tcredit | 19,373 | 19,373 | — | — | — |
| Total | $943,359 | $ 219,805 | $251,842 | $34,582 | $ 437,130 |

The	above	table	excludes	unamortized	debt	discount	of	$2.9	million	at	December	31,	2005	and	interest	payments	on	debt	outstanding.	PCA	currently	does	not	have any	projections	for	future	pension	contributions	beyond	2010.

The	lease	commitments,	purchase	commitments	and	letters	of	credit	are	not	reflected	on	PCA's	consolidated	balance	sheet	as	of	December	31,	2005.	See	Notes	7 and	10	to	the	audited	consolidated	financial	statements	for	additional	information.

PCA's	primary	sources	of	liquidity	are	net	cash	provided	by	operating	activities,	borrowings	under	PCA's	revolving	credit	facility,	and	additional	borrowings	under PCA's	receivables	credit	facility.	As	of	December	31,	2005,	PCA	had	$121.6	million	in	unused	borrowing	capacity	under	its	existing	credit	agreements	due	to	the impact	on	this	borrowing	capacity	of	$19.4	million	of	outstanding	letters	of	credit.

PCA's	primary	uses	of	cash	are	for	capital	expenditures,	debt	service	and	declared	common	stock	dividends,	which	it	expects	to	be	able	to	fund	from	these	sources.

The	following	table	provides	the	outstanding	balances	and	the	weighted	average	interest	rates	as	of	December	31,	2005	for	PCA's	outstanding	term	loan,	the revolving	credit	facility,	the	receivables	credit	facility	and	the	five-	and	ten-year	senior	notes:

| Borrowing	Arrangement	(in	thousands) | Balance	at<br>December	31,	2005 | Weighted	Average<br>Interest	Rate | Projected	Annual<br>Cash	Interest<br>Payments |
| :--- | :--- | :--- | :--- |
| Senior\tCredit\tFacility: |  |  |  |
| Term\tloan | $39,000 | 5.78% | $2,254 |
| Revolving\tcredit\tfacility | — | N/A | N/A |
| Receivables\tCredit\tFacility | 109,000 | 4.72 | 5,145 |
| 4 ¤8%\tFive-Year\tNotes\t(due |  |  |  |
| August\t1,\t2008) | 150,000 | 4.38 | 6,570 |
| 5 ¤4%\tTen-Year\tNotes\t(due |  |  |  |
| August\t1,\t2013) | 400,000 | 5.75 | 23,000 |
| Total | $ 698,000 | 5.30% | $ 36,969 |

The	above	table	excludes	unamortized	debt	discount	of	$2.9	million	at	December	31,	2005.	It	also	excludes	from	the	projected	annual	cash	interest	payments,	the non-cash	income	from	the	annual	amortization	of	the	$27.0	million	received	in	July	2003	from	the	settlement	of	the	Treasury	locks	related	to	the	five-	and	ten-	year notes.	The	amortization	is	being	recognized	over	the	terms	of	the	five-	and	ten-year	notes	and	is	included	in	interest	expense,	net.

The	revolving	credit	facility	is	available	to	fund	PCA's	working	capital	requirements,	capital	expenditures	and	other	general	corporate	purposes.	The	term	loan must	be	repaid	in	annual	installments	from	July	2006	through	2008.	The	revolving	credit	facility	will	terminate	in	July	2008.	The	receivables	credit	facility	will terminate	in	October	2006.

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

·							enter	into	sale	and	leaseback	transactions,

·							enter	into	certain	transactions	with	affiliates,	or

These	limitations	could	limit	corporate	and	operating	activities.

In	addition,	we	must	maintain	minimum	net	worth,	maximum	leverage	and	minimum	EBITDA	to	interest	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	indentures	and	the	receivables	credit	facility.

PCA	currently	expects	to	incur	capital	expenditures	of	$95.0	million	to	$105.0	million	in	2006.	These	capital	expenditures	will	be	used	primarily	for	maintenance capital,	cost	reduction,	business	growth,	and	environmental	compliance.

PCA	believes	that	its	net	cash	generated	from	operating	activities,	available	cash	reserves	and,	as	required,	borrowings	under	its	committed	credit	facilities	will	be adequate	to	meet	its	current	and	future	liquidity	and	capital	requirements,	including	payments	of	any	declared	common	stock	dividends.	As	its	debt	or	credit	facilities become	due,	PCA	will	need	to	repay,	extend	or	replace	such	facilities,	which	will	be	subject	to	future	economic	conditions	and	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.	The	most	significant	of	these	laws	affecting	us	are:

·							Resource	Conservation	and	Recovery	Act	(RCRA)

·							The	Emergency	Planning	and	Community	Right-to-Know-Act	(EPCRA)

·							Toxic	Substance	Control	Act	(TSCA)

We	believe	that	we	are	currently	in	material	compliance	with	these	and	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	these	and	other	environmental	laws.	For	the	year	ended December	31,	2005,	we	spent	approximately	$15.8	million	to	comply	with	the	requirements	of	these	and	other	environmental	laws.	For	the	years	ended	December	31, 2004	and	2003,	the	costs	of	environmental	compliance	were	approximately	$15.1	million	and	$12.4	million,	respectively.

In	addition,	the	EPA	finalized	the	Cluster	Rules	which	govern	pulp	and	paper	mill	operations,	including	those	at	the	Counce,	Filer	City,	Valdosta	and	Tomahawk mills.	The	Cluster	Rules	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	1994	through	2005,	remediation	costs	at	our	mills	and	corrugated	plants	totaled	approximately	$3.2	million.	As	of	December	31,	2005,	we	maintained	an environmental	reserve	of	$5.5	million	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	$12.9	million	for	2005	and	we	currently	estimate	2006	environmental	capital	expenditures	will	be $5.5	million,	of	which	$1.9	million	of	the	expenditures	are	to	meet	Cluster	Rule	requirements.	As	of	this

filing,	we	believe	that	it	is	not	reasonably	possible	that	future	environmental	expenditures	above	the	$5.5	million	accrued	as	of	December	31,	2005,	will	have	a	material impact	on	our	financial	condition,	results	of	operations	and	cash	flows.

# 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	and	Customer	Deductions

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	recorded	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	their	contractual	terms	and	30%	for	amounts	more	than	90	days	past	due	their	contractual	terms	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.

The	customer	deductions	reserve	represents	the	estimated	amount	required	for	customer	returns,	allowances	and	earned	discounts.	Based	on	our	experience, customer	returns,	allowances	and	earned	discounts	have	averaged	1.0%	of	our	gross	selling	price.	Accordingly,	we	reserve	1.0%	of	our	open	customer	accounts receivable	balance	for	these	items.

As	of	December	31,	2005,	the	balance	in	the	allowance	for	doubtful	accounts	and	customer	deductions	reserve	was	$5.4	million,	compared	to	$4.6	million	at December	31,	2004.	Bad	debt	expense	in	2005	was	$2.6	million,	compared	to	$0.4	million	in	2004.	The	$2.2	million	increase	was	primarily	attributable	to	increased expense	of	$1.2	million	related	to	accounts	receivable	amounts	that	were	deemed	uncollectable	and	an	increase	of	$0.7	million	recorded	in	connection	with	specific customers	that	were	reserved	for	at	the	90%	level	of	their	accounts	receivable	balance	as	of	December	31,	2005.	For	the	year	ended	December	31,

2004,	bad	debt	expense	was	$0.4	million	compared	to	$1.8	million	in	2003.	The	decrease	of	$1.4	million	was	primarily	attributable	to	a	reduction	of	$0.8	million	related to	specific	customers	that	were	reserved	for	at	90%	of	their	outstanding	accounts	receivable	balances	and	a	reduction	of	$0.3	million	in	expense	due	to	accounts receivable	that	were	deemed	uncollectable	in	2004	compared	to	2003.

# Inventories

We	record	our	inventories	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	carrying	value	of	inventory	may	be	required.	Raw	materials,	work	in	process and	finished	goods	valued	using	the	last-in,	first-out	("LIFO")	cost	method	comprised	66%	of	inventories	at	current	cost	at	both	December	31,	2005	and	2004.	Supplies and	materials	inventories	are	valued	using	a	moving	average	cost.

# Pension	and	Postretirement	Benefits

The	Company	accounts	for	defined	benefit	pension	plans	in	accordance	with	SFAS	No.	87,	"Employers'	Accounting	for	Pensions"	and	postretirement	benefits	in accordance	with	SFAS	No.	106,	"Employers'	Accounting	for	Postretirement	Benefits	Other	than	Pensions."

One	of	the	principal	assumptions	used	to	calculate	net	periodic	pension	cost	is	the	expected	long-term	rate	of	return	on	plan	assets.	The	expected	long-term	rate	of return	on	plan	assets	may	result	in	recognized	returns	that	are	greater	or	less	than	the	actual	returns	on	those	plan	assets	in	any	given	year.	Over	time,	however,	the expected	long-term	rate	of	return	on	plan	assets	is	designed	to	approximate	the	actual	long	term	returns.

The	discount	rate	assumptions	used	to	account	for	pension	and	postretirement	benefit	plans	reflect	the	rates	available	on	high-quality,	fixed-income	debt	instruments on	December	31	of	each	year.	The	rate	of	compensation	increase	is	another	significant	assumption	used	for	pension	accounting	and	is	determined	by	the	Company	based upon	annual	reviews.

For	postretirement	health	care	plan	accounting,	our	Company	reviews	external	data	and	our	own	historical	trends	for	health	care	costs	to	determine	the	health	care cost	trend	rate	assumption.

# Environmental	Liabilities

PCA	accounts	for	its	retirement	obligations	related	to	its	landfills	under	SFAS	No.	143,	"Accounting	for	Asset	Retirement	Obligations,"	which	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	is	capitalized	as	part	of	the	related	long-lived	asset	and	amortized	to	expense	over	the	useful	life	of	the	asset.

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	the	environmental	liability	for	a	closed	landfill located	near	the	Filer	City	mill.

# Revenue	Recognition

PCA	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	are	included	in	net	sales.	In	addition,	PCA	offers	volume	rebates	to	certain	of	its	customers.	The	total	cost	of	these	programs	is	estimated	and	accrued	as	a reduction	to	net	sales	at	the	time	of	the	respective	sale.

# Impairment	of	Goodwill	and	Long-Lived	Assets

Goodwill	is	tested	for	impairment	annually	in	the	fourth	quarter	or	sooner	if	events	or	changes	in	circumstances	indicate	that	the	carrying	amount	may	exceed	fair value.	Recoverability	of	goodwill	is	determined	by	comparing	the	fair	value	of	the	reporting	unit	with	its	carrying	value,	including	goodwill.	If	the	carrying	amount	of the	reporting	unit	exceeds	the	fair	value,	the	implied	fair	value	of	the	reporting	unit's	goodwill	is	compared	to	the	carrying	amount	of	its	goodwill	to	determine	if	a	write- down	to	fair	value	is	necessary.

Long-lived	assets	other	than	goodwill	are	reviewed	for	impairment	whenever	events	or	changes	in	circumstances	indicate	that	the	carrying	amount	of	any	long- lived	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	(or	group	of assets)	would	be	compared	to	the	asset's	(or	group	of	assets')	carrying	amount	to	determine	if	a	write-down	to	fair	value	is	required.

# Stock-Based	Compensation

The	Company	has	one	stock-based	employee	compensation	plan.	The	Company's	stock-based	employee	compensation	plan	is	accounted	for	under	the	recognition and	measurement	principles	of	Accounting	Principles	Board	(APB)	Opinion	No.	25,	"Accounting	for	Stock	Issued	to	Employees,''	and	related	interpretations.	Because the	number	of	shares	is	fixed	and	the	exercise	price	of	the	stock	options	equals	the	market	price	of	the	underlying	stock	on	the	date	of	grant,	no	cost	is	reflected	in	net income	for	stock	options	granted	under	the	plan.	The	Company	amortizes	restricted	stock	awards	to	net	earnings	over	the	vesting	period	based	on	the	fair	value	of	the stock	at	the	date	of	grant.	Note	2	to	the	Consolidated	Financial	Statements	provide	supplemental	information,	including	pro	forma	income	and	earnings	per	share,	as	if the	Company	had	accounted	for	options	based	on	the	fair	value	method	prescribed	by	SFAS	No.	123,	"Accounting	for	Stock-Based	Compensation.''	The	estimate	of	fair value	requires	a	number	of	assumptions,	including	estimated	option	life	and	future	volatility	of	the	underlying	stock	price.	Changes	in	these	assumptions	could significantly	impact	the	estimated	fair	value	of	the	stock	options.

# Income	Taxes

The	Company's		annual	tax	rate	is	determined	based	on	income,	statutory	tax	rates	and	the	tax	impacts	of	items	treated	differently	for	tax	purposes	than	for financial	reporting	purposes.	Tax	law	requires	some	items	to	be	included	in	the	tax	return	at	different	times	than	the	items	reflected	in	the	financial	statements.	As	a result,	the	annual	tax	rate	in	the	financial	statements	is	different	than	the	rate	reported	on	the	Company's	tax	return.	Some	of	these	differences	are	permanent,	such	as expenses	that	are	not	deductible	in	the	tax	return,	and	some	differences	are	temporary,	reversing	over	time,	such	as	depreciation	expense.	These	temporary	differences create	deferred	tax	assets	and	liabilities.

Inherent	in	determining	the	annual	tax	rate	are	judgments	regarding	business	plans,	planning	opportunities	and	expectations	about	future	outcomes.	Significant management	judgments	are	required	for	the	following	items:

·			Management	reviews	the	Company's	deferred	tax	assets	for	realizability.	Valuation	allowances	are	established	when	management	believes	that	it	is	more likely	than	not	that	some	portion	of

the	deferred	tax	assets	will	not	be	realized.	Changes	in	valuation	allowances	from	period	to	period	are	included	in	the	tax	provision.

·			The	Company	establishes	accruals	for	certain	tax	contingencies	when,	despite	the	belief	that	the	Company's	tax	return	positions	are	fully	supported,	the Company	believes	that	certain	positions	may	be	challenged.	The	tax	contingency	accruals	are	adjusted	in	light	of	changing	facts	and	circumstances,	such	as the	progress	of	tax	audits,	the	expiration	of	the	statute	of	limitations	for	the	relevant	taxing	authority	to	examine	a	tax	return,	case	law	and	emerging legislation.	While	it	is	difficult	to	predict	the	final	outcome	or	timing	of	resolution	for	any	particular	tax	matter,	the	Company	believes	that	the	accruals reflect	the	likely	outcome	of	known	tax	contingencies.

# 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.	As	of	December	31,	2005,	PCA	was	not	party	to	any	derivative	instruments.

As	the	interest	rates	on	approximately	79%	of	PCA's	debt	are	fixed,	a	one	percent	increase	in	interest	rates	related	to	variable	rate	debt	would	have	resulted	in	an increase	in	interest	expense	and	a	corresponding	decrease	in	income	before	taxes	of	$1.5	million	annually	for	the	years	ended	December	31,	2005	and	2004.	As	of December	31,	2005	and	2004,	the	weighted	average	LIBOR	was	4.53%	and	2.56%,	respectively,	and	the	weighted	average	commercial	paper	rate	was	4.32%	and

2.33%,	respectively.	In	the	event	of	a	change	in	interest	rates,	management	could	take	actions	to	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.

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	2005	or	2004.

# Controls	and	Procedures

PCA's	management,	under	the	supervision	and	with	the	participation	of	the	Chief	Executive	Officer	and	Chief	Financial	Officer,	evaluated	the	effectiveness	of	the design	and	operation	of	PCA's	disclosure	controls	and	procedures	(as	defined	in	Rules	13a-15(e)	and	15d-15(e)	of	the	Securities	Exchange	Act	of	1934,	as	amended)	as of	December	31,	2005.	The	evaluation	of	PCA's	disclosure	controls	and	procedures	included	a	review	of	the	controls'	objectives	and	design,	PCA's	implementation	of the	controls	and	the	effect	of	the	controls	on	the	information	generated	for	use	in	this	Annual	Report	on	Form	10-K.

Based	upon	their	evaluation	as	of	December	31,	2005,	PCA's	Chief	Executive	Officer	and	Chief	Financial	Officer	have	concluded	that	PCA's	disclosure	controls and	procedures	are	effective	to	ensure	that	material	information	relating	to	PCA	is	made	known	to	management,	including	the	Chief	Executive	Officer	and	Chief Financial	Officer,	particularly	during	the	periods	when	PCA's	periodic	reports	are	being	prepared.

During	the	quarter	ended	December	31,	2005,	there	were	no	changes	in	internal	controls	over	financial	reporting	that	have	materially	affected,	or	are	reasonably likely	to	materially	affect,	PCA's	internal	control	over	financial	reporting.

# Management's	Report	on	Internal	Control	Over	Financial	Reporting

PCA's	management	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting,	as	such	term	is	defined	in	Exchange	Act Rules	13a-15(f).	Internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	Internal	control	over	financial	reporting	includes those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the Company's	assets;	(2)	provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	are	being	made	only	with	proper	authorizations;	and	(3)	provide	reasonable	assurance regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	Company's	assets	that	could	have	a	material	effect	on	the	financial statements.

Because	of	its	inherent	limitations,	PCA's	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	A	control	system,	no	matter	how	well conceived	and	operated,	can	provide	only	reasonable,	not	absolute,	assurance	that	objectives	of	the	control	system	are	met.	Because	of	the	inherent	limitations	in	all control	systems,	no	evaluation	of	controls	can	provide	absolute	assurance	that	all	control	issues	and	instances	of	fraud,	if	any,	have	been	detected.	Also,	projections	of any	evaluation	of	effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of compliance	with	the	policies	and	procedures	may	deteriorate.

PCA's	management,	under	the	supervision	of	and	with	the	participation	of	the	Chief	Executive	Officer	and	Chief	Financial	Officer,	assessed	the	Company's internal	control	over	financial	reporting	as	of	December	31,	2005,	based	on	criteria	for	effective	control	over	financial	reporting	described	in	"Internal	Control— Integrated	Framework"	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway

Commission.	Based	on	this	assessment,	PCA's	management	concluded	that	its	internal	control	over	financial	reporting	was	effective	as	of	December	31,	2005,	based	on the	specified	criteria.

Management's	assessment	of	the	effectiveness	of	internal	control	over	financial	reporting	has	been	audited	by	Ernst	&	Young	LLP,	an	independent	registered public	accounting	firm,	as	stated	in	their	report	which	is	included	herein	at	page	F-3.

# PART	III

Information	regarding	the	Company's	executive	officers	is	included	in	Item	4	of	Part	I	of	this	report.	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.	Information	about our	code	of	ethics	policies	is	included	under	the	caption	"Board	of	Directors—Code	of	Ethics"	in	PCA's	Proxy	Statement,	and	is	incorporated	herein	by	reference. Information	about	PCA's	Audit	Committee	and	financial	experts	is	included	under	the	captions	"Board	of	Directors—Audit	Committee"	and	"Ratification	of Appointment	of	Independent	Auditors"	in	PCA's	Proxy	Statement,	and	is	incorporated	herein	by	reference.

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	"Executive	Compensation— Compensation	of	Executive	Officers—Authorization	of	Securities	under	Equity	Compensation	Plans"	in	PCA's	Proxy	Statement	and	is	incorporated	herein	by	reference.

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.

Information	with	respect	to	fees	and	services	of	the	principal	accountant	is	included	under	the	caption	"Ratification	of	Appointment	of	Independent	Auditors—Fees to	Independent	Auditors"	in	PCA's	Proxy	Statement	and	is	incorporated	herein	by	reference.

# PART	IV

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

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

The	financial	statements	of	Southern	Timber	Venture	for	the	years	ended	December	31,	2004	and	2003	are	required	by	Rule	3-09	of	Regulation	S-X	and	are included	herein.

# (2)									Financial	Statement	Schedule

The	following	consolidated	financial	statement	schedule	of	PCA	for	the	years	ended	December	31,	2005,	2004	and	2003	is	included	in	this	report.

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

| Allowance	for	doubtful<br>accounts	receivable/customer	deductions | Balance<br>Beginning	of<br>Year | Provision | Additions/<br>Deductions<br>from	Reserves* | Translation<br>Adjustments | Balance<br>End	of<br>Year |
| :--- | :--- | :--- | :--- | :--- | :--- |
| (dollars\tin\tthousands) |  |  |  |  |  |
| 2005 | $ 4,639 | $ 2,606 | $ (1,841) | $— | $ 5,404 |
| 2004 | 5,303 | 397 | (1,061) | — | 4,639 |
| 2003 | 5,821 | 1,764 | (2,282) | — | 5,303 |

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.

4.6 First	Supplemental	Indenture,	dated	as	of	July	21,	2003,	between	PCA	and	U.S.	Bank	National	Association. (Incorporated	herein	by	reference	to	Exhibit	4.3	to	PCA's	Quarterly	Report	on	Form	10-Q	for	the	period ended	June	30,	2003.)

4.7 Form	of	Rule	144A	Global	Note.	(Incorporated	herein	by	reference	to	Exhibit	4.5	to	PCA's	Quarterly

10.1 Five	Year	Credit	Agreement,	dated	as	of	July	21,	2003,	by	and	among	PCA,	the	banks,	financial	institutions and	other	institutional	lenders	and	the	initial	issuing	banks	party	thereto,	Citigroup	Global	Markets	Inc.,

J.P.	Morgan	Securities	Inc.,	Citicorp	North	America,	Inc.	and	JPMorgan	Chase	Bank.	(Incorporated	herein

by	reference	to	Exhibit	10.2	to	PCA's	Quarterly	Report	on	Form	10-Q	for	the	period	ended	June	30,	2003.)

10.2 Credit	and	Security	Agreement,	dated	as	of	November	29,	2000,	among	Packaging	Receivables	Company, LLC	("PRC"),	Packaging	Credit	Company,	LLC	("PCC"),	Blue	Ridge	Asset	Funding	Corporation	("Blue Ridge"),	and	Wachovia	Bank,	N.A.	("Wachovia").	(Incorporated	herein	by	reference	to	Exhibit	10.23	to PCA's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	2001.)

10.3 Receivables	Sale	Agreement,	dated	as	of	November	29,	2000,	between	PCC	and	PCA.	(Incorporated	herein by	reference	to	Exhibit	10.24	to	PCA's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended December	31,	2001.)

Powers	of	Attorney.

31.1 Certification	of	Chief	Executive	Officer,	As	Adopted	Pursuant	to	Section	302	of	the	Sarbanes-Oxley	Act	of 2002.

31.2 Certification	of	Chief	Financial	Officer,	As	Adopted	Pursuant	to	Section	302	of	the	Sarbanes-Oxley	Act	of 2002.

32.1 Certification	of	Chief	Executive	Officer	Pursuant	to	18	U.S.C.	§1350,	As	Adopted	Pursuant	to	Section	906 of	the	Sarbanes-Oxley	Act	of	2002.

32.2 Certification	of	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-4	(Registration	No.	333-79511).

# 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	February	21,	2006.

# Name: Paul	T.	Stecko

Title: Chairman	and	Chief	Executive	Officer

By: /s/	RICHARD	B.	WEST

Name: Richard	B.	West

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	February	21,	2006.

Louis	A.	Holland

Richard	B.	West

(Attorney-In-Fact)

# INDEX	TO	FINANCIAL	STATEMENTS

Packaging	Corporation	of	America	Consolidated	Financial	Statements	as	of	December	31,	2005,	2004 and	2003

Report	of	independent	registered	public	accounting	firm

Report	of	independent	registered	public	accounting	firm	on	internal	control	over	financial	reporting

Consolidated	balance	sheets	as	of	December	31,	2005	and	2004

# Board	of	Directors	and	Shareholders

We	have	audited	the	accompanying	consolidated	balance	sheets	of	Packaging	Corporation	of	America	(the	"Company")	as	of	December	31,	2005	and	2004,	and	the related	consolidated	statements	of	operations,	changes	in	shareholders'	equity	and	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2005.	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	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement.	An	audit	includes	examining,	on	a test	basis,	evidence	supporting	the	amounts	and	disclosures	in	the	financial	statements.	An	audit	also	includes	assessing	the	accounting	principles	used	and	significant estimates	made	by	management,	as	well	as	evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinion.

In	our	opinion,	the	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	consolidated	financial	position	of	Packaging	Corporation	of America	at	December	31,	2005	and	2004,	and	the	consolidated	results	of	its	operations	and	its	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31, 2005,	in	conformity	with	U.S.	generally	accepted	accounting	principles.	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.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	effectiveness	of	Packaging Corporation	of	America's	internal	control	over	financial	reporting	as	of	December	31,	2005,	based	on	criteria	established	in	Internal	Control—Integrated	Framework issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	and	our	report	dated	February	10,	2006	expressed	an	unqualified	opinion	thereon.

Chicago,	Illinois

Ernst	&	Young	LLP

# ON	INTERNAL	CONTROL	OVER	FINANCIAL	REPORTING

We	have	audited	management's	assessment,	included	in	the	accompanying	Management's	Report	on	Internal	Control	Over	Financial	Reporting,	that	Packaging Corporation	of	America	maintained	effective	internal	control	over	financial	reporting	as	of	December	31,	2005,	based	on	criteria	established	in	Internal	Control— Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(the	COSO	criteria).	Packaging	Corporation	of	America's management	is	responsible	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control	over	financial reporting.	Our	responsibility	is	to	express	an	opinion	on	management's	assessment	and	an	opinion	on	the	effectiveness	of	the	company's	internal	control	over	financial reporting	based	on	our	audit.

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

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

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the policies	or	procedures	may	deteriorate.

In	our	opinion,	management's	assessment	that	Packaging	Corporation	of	America	maintained	effective	internal	control	over	financial	reporting	as	of	December	31, 2005,	is	fairly	stated,	in	all	material	respects,	based	on	the	COSO	criteria.	Also,	in	our	opinion,	Packaging	Corporation	of	America	maintained,	in	all	material	respects, effective	internal	control	over	financial	reporting	as	of	December	31,	2005,	based	on	the	COSO	criteria.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	balance	sheets	of

Packaging	Corporation	of	America	as	of	December	31,	2005	and	2004,	and	the	related	consolidated	statements	of	operations,	changes	in	shareholders'	equity,	and	cash flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2005,	and	our	report	dated	February	10,	2006,	expressed	an	unqualified	opinion	thereon.

# Ernst	&	Young

# Consolidated	Balance	Sheets

| (In	thousands,	except	share	and	per	share	amounts) | 2005 | 2004 |
| :--- | :--- | :--- |
| Assets |  |  |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | $112,669 | $213,321 |
| Accounts\tand\tnotes\treceivable,\tnet\tof\tallowance\tfor\tdoubtful\taccounts/customer |  |  |
| deductions\tof\t$5,404\tand\t$4,639\tas\tof\tDecember\t31,\t2005\tand\t2004, |  |  |
| respectively | 213,181 | 216,594 |
| Inventories | 191,828 | 179,348 |
| Prepaid\texpenses\tand\tother\tcurrent\tassets | 6,836 | 8,685 |
| Deferred\tincome\ttaxes | 28,975 | 59,113 |
| Total\tcurrent\tassets | 553,489 | 677,061 |
| Property,\tplant\tand\tequipment,\tnet | 1,320,511 | 1,345,154 |
| Goodwill | 34,187 | 3,691 |
| Other\tintangible\tassets,\tnet\tof\taccumulated\tamortization\tof\t$3,837\tand\t$2,840\tas\tof |  |  |
| December\t31,\t2005\tand\t2004,\trespectively | 29,526 | 18,417 |
| Other\tlong-term\tassets | 35,585 | 38,451 |
| Total\tassets | $ 1,973,298 | $ 2,082,774 |
| Liabilities\tand\tshareholders'\tequity |  |  |
| Current\tliabilities: |  |  |
| Short-term\tdebt\tand\tcurrent\tmaturities\tof\tlong-term\tdebt | $118,030 | $109,168 |
| Accounts\tpayable | 124,851 | 112,905 |
| Dividends\tpayable | 27,045 | 16,048 |
| Accrued\tinterest | 12,774 | 12,591 |
| Accrued\tliabilities | 89,394 | 84,392 |
| Total\tcurrent\tliabilities | 372,094 | 335,104 |
| Long-term\tliabilities: |  |  |
| Long-term\tdebt | 577,173 | 585,724 |
| Deferred\tincome\ttaxes | 292,710 | 306,569 |
| Other\tliabilities | 49,901 | 37,807 |
| Total\tlong-term\tliabilities | 919,784 | 930,100 |
| Shareholders'\tequity: |  |  |
| Common\tstock\t(par\tvalue\t$.01\tper\tshare,\t300,000,000\tshares\tauthorized, |  |  |
| 103,686,284\tand\t106,993,028\tshares\tissued\tas\tof\tDecember\t31,\t2005\tand\t2004, |  |  |
| respectively) | 1,037 | 1,070 |
| Additional\tpaid\tin\tcapital | 418,621 | 492,661 |
| Retained\tearnings | 248,404 | 303,662 |
| Accumulated\tother\tcomprehensive\tincome: |  |  |
| Unrealized\tgain\ton\tderivatives,\tnet | 19,367 | 22,475 |
| Cumulative\tforeign\tcurrency\ttranslation\tadjustments | (4) | (6) |
| Total\taccumulated\tother\tcomprehensive\tincome | 19,363 | 22,469 |
| Unearned\tcompensation\ton\trestricted\tstock | (6,005) | (2,292) |
| Total\tshareholders'\tequity | 681,420 | 817,570 |
| Total\tliabilities\tand\tshareholders'\tequity | $ 1,973,298 | $ 2,082,774 |

See	notes	to	consolidated	financial	statements.

# Consolidated	Statements	of	Operations

| (In	thousands,	except	per	share	amounts) | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $1,993,658 | $1,890,085 | $1,735,534 |
| Cost\tof\tsales | (1,686,847) | (1,592,371) | (1,437,667) |
| Gross\tprofit | 306,811 | 297,714 | 297,867 |
| Selling\tand\tadministrative\texpenses | (146,521) | (136,179) | (127,620) |

| Corporate	overhead | (47,520) | (44,645) | (46,241) |
| :--- | :--- | :--- | :--- |
| Joint\tventure\tdividends,\tnet\tof\texpenses | 14,032 | 27,754 | 1,167 |
| Gain\ton\tsale\tof\tinvestment | — | 2,000 | — |
| Pactiv\tCorporation\tbenefits\tsettlement\tcharge | — | — | (16,000) |
| Other\texpense,\tnet | (10,676) | (6,153) | (12,317) |
| Income\tfrom\toperations | 116,126 | 140,491 | 96,856 |
| Interest\texpense,\tnet | (28,092) | (29,576) | (121,730) |
| Income\t(loss)\tbefore\ttaxes | 88,034 | 110,915 | (24,874) |
| (Provision)\tbenefit\tfor\tincome\ttaxes | (35,430) | (42,185) | 10,516 |
| Net\tincome\t(loss) | $52,604 | $68,730 | $(14,358) |
| Weighted\taverage\tcommon\tshares\toutstanding |  |  |  |
| Basic | 107,334 | 106,358 | 104,628 |
| Diluted | 108,098 | 107,570 | 104,628 |
| Net\tincome\t(loss)\tper\tcommon\tshare |  |  |  |
| Basic | $0.49 | $0.65 | $(0.14) |
| Diluted | $0.49 | $0.64 | $(0.14) |
| Dividends\tdeclared\tper\tcommon\tshare | $1.00 | $0.60 | $0.15 |

# Consolidated	Statements	of	Changes	in	Shareholders'	Equity

|  |  |  |  |  | Accumulated | Compensation |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Common\tStock | Common\tStock | Additional\nPaid\tIn | Retained | Other\nComprehensive | on\nRestricted | Treasury\tStock | Treasury\tStock | Total\nShareholders' |
| (In\tthousands\texcept\tshare\tdata) | Shares | Amount | Capital | Earnings | Income\t(Loss) | Stock | Shares | Amount | Equity |
| Balance\tat\tJanuary\t1,\t2003 | 104,510,094 | $ 1,045 | $ 466,911 | $329,065 | $(812) | — | (18,800) | $(334) | $795,875 |
| Net\tloss | — | — | — | (14,358) | — | — | — | — | (14,358) |
| Settlement\tof\tTreasury\tlock | — | — | — | — | 26,965 | — | — | — | 26,965 |
| Amortization\tof\tTreasury\tlock | — | — | — | — | (1,381) | — | — | — | (1,381) |
| Gain\ton\tderivatives,\tnet\tof\t$523\tof\tincome\ttaxes | — | — | — | — | 811 | — | — | — | 811 |
| Foreign\tcurrency\ttranslation\tadjustment | — | — | — | — | 24 | — | — | — | 24 |
| Total\tcomprehensive\tincome |  |  |  |  |  |  |  |  | 12,061 |
| Exercise\tof\tstock\toptions | 2,071,029 | 21 | 22,674 | — | — | — | — | — | 22,695 |
| Common\tstock\trepurchases\tand\tretirements | (1,003,500) | (10) | (17,841) | — | — | — | 18,800 | 334 | (17,517) |
| Common\tstock\tdividends | — | — | — | (15,838) | — | — | — | — | (15,838) |
| Restricted\tstock\tgrants | 73,500 | — | 1,353 | — | — | (1,353) | — | — | — |
| Amortization\tof\tunearned\tcompensation | — | — | — | — | — | 204 | — | — | 204 |
| Balance\tat\tDecember\t31,\t2003 | 105,651,123 | 1,056 | 473,097 | 298,869 | 25,607 | (1,149) | — | — | 797,480 |
| Net\tincome | — | — | — | 68,730 | — | — | — | — | 68,730 |
| Amortization\tof\tTreasury\tlock | — | — | — | — | (3,109) | — | — | — | (3,109) |
| Foreign\tcurrency\ttranslation\tadjustment | — | — | — | — | (29) | — | — | — | (29) |
| Total\tcomprehensive\tincome |  |  |  |  |  |  |  |  | 65,592 |
| Exercise\tof\tstock\toptions | 1,265,905 | 13 | 17,758 | — | — | — | — | — | 17,771 |
| Common\tstock\tdividends | — | — | — | (63,937) | — | — | — | — | (63,937) |
| Restricted\tstock\tgrants | 76,000 | 1 | 1,806 | — | — | (1,806) | — | — | 1 |
| Amortization\tof\tunearned\tcompensation | — | — | — | — | — | 663 | — | — | 663 |
| Balance\tat\tDecember\t31,\t2004 | 106,993,028 | \t1,070 | \t492,661 | \t\t\t303,662 | \t22,469 | \t\t(2,292) | — | — | \t\t\t817,570 |
| Net\tincome | — | — | — | 52,604 |  | — | — | — | 52,604 |
| Amortization\tof\tTreasury\tlock | — | — | — | — | (3,108) | — | — | — | (3,108) |
| Foreign\tcurrency\ttranslation\tadjustment | — | — | — | — | 2 | — | — | — | 2 |
| Total\tcomprehensive\tincome |  |  |  |  |  |  | — | — | 49,498 |
| Exercise\tof\tstock\toptions | 943,126 | 9 | 13,555 | — | — | — |  |  | 13,564 |
| Common\tstock\trepurchases\tand\tretirements | (4,500,000) | (45) | (93,060) | — | — | — | — | — | (93,105) |
| Common\tstock\tdividends | — | — | — | (107,862) | — | — | — | — | (107,862) |
| Restricted\tstock\tgrants\tand\tcancellations | 250,130 | 3 | 5,465 | — | — | (5,390) | — | — | 78 |
| Amortization\tof\tunearned\tcompensation | — | — | — | — | — | 1,677 | — | — | 1,677 |
| Balance\tat\tDecember\t31,\t2005 | 103,686,284 | $ 1,037 | $ 418,621 | $248,404 | $19,363 | $(6,005) | — | $— | $681,420 |

# Consolidated	Statements	of	Cash	Flows

| Depreciation,	depletion	and	amortization | 159,096 | 158,908 | 156,669 |
| :--- | :--- | :--- | :--- |
| Amortization\tof\tfinancing\tcosts | 687 | 684 | 2,153 |
| Amortization\tof\tTreasury\tlock | (3,108) | (3,109) | (1,381) |
| Amortization\tof\tunearned\tcompensation\ton\trestricted\tstock | 1,677 | 663 | 204 |
| Loss\ton\tearly\textinguishment\tof\tdebt | — | 174 | 76,887 |
| Deferred\tincome\ttax\tprovision\t(benefit) | 15,788 | 41,290 | (10,202) |
| Loss\ton\tdisposals\tof\tproperty,\tplant\tand\tequipment | 7,227 | 2,021 | 4,520 |
| Gain\tfrom\tjoint\tventure\tdividends | (15,038) | (29,294) | (1,167) |
| Tax\tbenefit\tassociated\twith\tstock\toptions\tand\trestricted\tstock | 5,417 | 7,373 | 11,057 |
| Changes\tin\toperating\tassets\tand\tliabilities\t(net\tof\teffects\tof\tacquisitions): |  |  |  |
| (Increase)\tdecrease\tin\tassets— |  |  |  |
| Accounts\treceivable | 7,476 | (26,253) | (15,105) |
| Inventories | (10,149) | (9,072) | (5,507) |
| Prepaid\texpenses\tand\tother\tcurrent\tassets | 1,711 | 2,686 | 14,746 |
| Increase\t(decrease)\tin\tliabilities— |  |  |  |
| Accounts\tpayable | 10,664 | (1,008) | 25,095 |
| Accrued\tliabilities | 6,708 | (7,437) | 5,110 |
| Other,\tnet | 1,986 | 8,987 | (5,011) |
| Net\tcash\tprovided\tby\toperating\tactivities | 242,746 | 215,343 | 243,710 |
| Cash\tFlows\tfrom\tInvesting\tActivities: |  |  |  |
| Additions\tto\tproperty,\tplant\tand\tequipment | (125,331) | (108,614) | (113,216) |
| Acquisitions\tof\tbusinesses | (48,671) | (38,376) | (3,819) |
| Additions\tto\tother\tlong\tterm\tassets | (2,728) | (2,415) | (1,910) |
| Proceeds\tfrom\tdisposals\tof\tproperty,\tplant\tand\tequipment | 214 | 1,297 | 1,016 |
| Proceeds\tfrom\tsale\tof\tinvestment | — | 2,000 | — |
| Joint\tventure\tdividends | 15,038 | 29,294 | 1,167 |
| Net\tcash\tused\tfor\tinvesting\tactivities | (161,478) | (116,814) | (116,762) |
| Cash\tFlows\tfrom\tFinancing\tActivities: |  |  |  |
| Proceeds\tfrom\tlong-term\tdebt | — | 68 | 595,964 |
| Payments\ton\tlong-term\tdebt | (169) | (3,967) | (696,425) |
| Financing\tcosts\tpaid |  |  |  |
|  | — | — | (6,856) |
| Proceeds\tfrom\tsettlement\tof\tTreasury\tlock | — | — | 26,965 |
| Repurchases\tof\tcommon\tstock | (93,105) | — | (17,517) |
| Common\tstock\tdividends\tpaid | (96,867) | (63,729) | — |
| Proceeds\tfrom\texercise\tof\tstock\toptions | 8,221 | 10,398 | 11,638 |
| Net\tcash\tused\tfor\tfinancing\tactivities | (181,920) | (57,230) | (86,231) |
| Net\tincrease\t(decrease)\tin\tcash\tand\tcash\tequivalents | (100,652) | 41,299 | 40,717 |
| Cash\tand\tcash\tequivalents,\tbeginning\tof\tyear | 213,321 | 172,022 | 131,305 |
| Cash\tand\tcash\tequivalents,\tend\tof\tyear | $112,669 | $213,321 | $172,022 |

# Notes	to	Consolidated	Financial	Statements

# 1.			BASIS	OF	PRESENTATION	AND	NATURE	OF	BUSINESS

Packaging	Corporation	of	America	("PCA"	or	the	"Company")	was	incorporated	on	January	25,	1999.	On	April	12,	1999,	PCA	acquired	the	containerboard	and corrugated	packaging	products	business	of	Pactiv	Corporation	("Pactiv''),	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.

The	Company	is	comprised	of	mills	and	corrugated	manufacturing	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	Company	leases	the	cutting	rights	to approximately	108,000	acres	of	timberland	as	of	December	31,	2005.	The	Mills	transfer	the	majority	of	their	containerboard	produced	to	PCA's	corrugated	products operations	plants.

PCA's	corrugated	manufacturing	operations	consist	of	68	plants,	with	40	operating	as	combining	operations,	or	corrugated	plants,	and	28	as	sheet	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	the	continental	United	States.	Corrugated	plants	combine	linerboard	and	medium	into	sheets	that	are	converted	into	corrugated	shipping	containers, point-of-sale	graphics	packaging,	point-of-purchase	displays	and	other	specialized	packaging.	Sheet	plants	purchase	sheets	primarily	from	PCA	corrugated	products plants	to	use	in	the	finished	corrugated	products	converting	process.	The	corrugated	products	manufacturing	plants	sell	to	diverse	customers	primarily	in	North	America.

As	of	December	31,	2005,	we	had	approximately	8,300	employees.	Approximately	2,300	of	these	employees	were	salaried	and	approximately	6,000	were	hourly. Approximately	75%	of	our	hourly	employees	are	represented	by	unions.	Our	unionized	employees	are	represented	primarily	by	the	United	Steel	Workers	(USW),	the International	Brotherhood	of	Teamsters	(IBT),	and	the	International	Association	of	Machinists	(IAM).

# 2.			SUMMARY	OF	SIGNIFICANT	ACCOUNTING	POLICIES

# Basis	of	Consolidation

The	accompanying	consolidated	financial	statements	of	PCA	include	all	majority-owned	subsidiaries.	All	intercompany	transactions	have	been	eliminated.	The Company	has	one	joint	venture	that	is	accounted	for	under	the	equity	method.

# Use	of	Estimates

The	preparation	of	financial	statements	in	conformity	with	U.S.	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.

# Notes	to	Consolidated	Financial	Statements	(Continued)

# 2.			SUMMARY	OF	SIGNIFICANT	ACCOUNTING	POLICIES	(Continued)

# Cash	and	Cash	Equivalents

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

# Accounts	Receivable

The	collectibility	of	our	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 recorded	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	their	contractual	terms	and	30%	for	amounts	more	than	90	days	past	due	their	contractual	terms	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.

At	December	31,	2005	and	2004,	the	allowance	for	doubtful	accounts	was	$3.3	million	and	$2.4	million,	respectively.	Also	included	in	the	accounts	receivable balance	at	December	31,	2005	and	2004,	were	reserves	for	customer	deductions	of	$2.1	million	and	$2.2	million,	respectively.

With	the	exception	of	inventories	at	Acorn	Corrugated	Box	Co.	("Acorn'')	raw	materials,	work	in	process	and	finished	goods	are	valued	using	the	last-in,	first-out ("LIFO")	cost	method.	Inventories	at	Acorn	are	valued	at	the	first-in,	first-out	("FIFO'')	cost	method.	Supplies	and	materials	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	66%,	or	$153.6	million	and	$141.8	million	of	the	total inventory	before	the	LIFO	reserve	of	$232.1	million	and	$214.6	million	as	of	December	31,	2005	and	2004,	respectively

The	components	of	inventories	are	as	follows:

| (In	thousands) | December	31,<br>2005 | 2004 |
| :--- | :--- | :--- |
| Raw\tmaterials | $88,809 | $79,753 |
| Work\tin\tprocess | 5,119 | 5,988 |
| Finished\tgoods | 61,994 | 60,936 |
| Supplies\tand\tmaterials | 76,197 | 67,894 |
| Inventories\tat\tFIFO\tor\taverage\tcost | 232,119 | 214,571 |
| Excess\tof\tFIFO\tor\taverage\tover\tLIFO\tcost | (40,291) | (35,223) |
| Inventories,\tnet | $ 191,828 | $ 179,348 |

# Property,	Plant	and	Equipment

Property,	plant	and	equipment	are	recorded	at	cost,	and	consist	of	the	following:

| (In	thousands) | 2005 | 2004 |
| :--- | :--- | :--- |
| Land\tand\tland\timprovements | $87,495 | $85,757 |
| Buildings | 327,223 | 314,780 |
| Machinery\tand\tequipment | 2,401,395 | 2,310,828 |
| Construction\tin\tprogress | 34,054 | 35,583 |
| Other | 34,706 | 35,267 |
| Property,\tplant\tand\tequipment,\tat\tcost | 2,884,873 | 2,782,215 |
| Less\taccumulated\tdepreciation | (1,564,362) | (1,437,061) |
| Property,\tplant\tand\tequipment,\tnet | $1,320,511 | $1,345,154 |

The	amount	of	interest	capitalized	related	to	construction	in	progress	was	$0.8	million,	$0.5	million	and	$0.3	million	for	the	years	ended	December	31,	2005,	2004 and	2003,	respectively.

Depreciation	is	computed	on	the	straight-line	basis	over	the	estimated	useful	lives	of	the	related	assets.	Assets	under	capital	leases	are	depreciated	on	the	straight- line	method	over	the	term	of	the	lease.	The	following	lives	are	used	for	the	various	categories	of	assets:

# Leasehold	improvements

# Period	of	the	lease	or

useful	life,	if	shorter

Expenditures	for	repairs	and	maintenance	are	expensed	as	incurred.

# Goodwill	and	Intangible	Assets

The	Company	has	capitalized	certain	intangible	assets,	primarily	customer	lists	and	relationships,	covenants	not	to	compete,	and	goodwill,	based	on	their	estimated fair	value	at	the	date	of	acquisition.	Amortization	is	provided	for	customer	lists	and	relationships	on	a	straight-line	basis	over	periods	ranging	from	six	to	40	years. Covenants	not	to	compete	are	amortized	on	a	straight-line	basis	over	the	terms	of	the	respective	agreements.	Goodwill,	which	amounted	to	$34.2	million	and $3.7	million	as	of	December	31,	2005	and	2004,	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."	The	Company	performs	the	impairment	tests	in	the	fourth	quarter	or	sooner	if	events or	changes	in	circumstances	indicate	that	the	carrying	amount	may	exceed	fair	value.	Recoverability	of	goodwill	is	determined	by	comparing	the	fair	value	of	the reporting	unit	with	its	carrying	value,	including	goodwill.	If	the	carrying	amount	of	the	reporting	unit	exceeds	the	fair	value,	the	implied	fair	value	of	the

reporting	unit's	goodwill	is	compared	to	the	carrying	amount	of	its	goodwill	to	determine	if	a	write-down	to	fair	value	is	necessary.	The	Company	concluded	that	no impairment	of	goodwill	existed	at	the	time	of	the	annual	impairment	tests	in	2005,	2004	and	2003.

# 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	notes,	which	range	from	five	to	ten	years.	Unamortized	deferred	financing	costs	were	$3.3	million	and	$4.0	million	as	of December	31,	2005	and	2004,	respectively.

PCA	leases	the	cutting	rights	to	approximately	108,000	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	or	sold	to	customers.	Capitalized	long-term	lease	costs were	$19.1	million	and	$19.5	million	as	of	December	31,	2005	and	2004,	respectively.	The	amount	of	depletion	expense	was	$3.3	million,	$2.3	million	and	$5.1	million for	the	years	ended	December	31,	2005,	2004	and	2003,	respectively.

PCA	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.	Net capitalized	software	costs	were	$1.4	million	and	$3.6	million	as	of	December	31,	2005	and	2004,	respectively.	Software	amortization	expense	was	$2.4	million, $4.0	million	and	$4.6	million	for	the	years	ended	December	31,	2005,	2004	and	2003,	respectively.

# Impairment	of	Long-Lived	Assets

Long-lived	assets	other	than	goodwill	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	(or	group	of	assets)	would	be compared	to	the	asset's	(or	group	of	assets')	carrying	amount	to	determine	if	a	write-down	to	fair	value	is	required.

The	discount	rate	assumptions	used	to	account	for	pension	and	postretirement	benefit	plans	reflect	the	rates	available	on	high-quality,	fixed-income	debt	instruments on	December	31st	of	each	year.	The	rate	of	compensation	increase	is	another	significant	assumption	used	for	pension	accounting	and	is	determined	by	the	Company based	upon	annual	reviews.

For	postretirement	health	care	plan	accounting,	the	Company	reviews	external	data	and	our	own	historical	trends	for	health	care	costs	to	determine	the	health	care cost	trend	rate	assumption.

# Asset	Retirement	Obligations

The	Company	accounts	for	its	retirement	obligations	related	to	its	landfills	under	SFAS	No.	143,	"Accounting	for	Asset	Retirement	Obligations,"	which	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	is	capitalized	as	part	of	the	related	long-lived	asset	and	amortized	to	expense	over	the	useful	life	of	the	asset.

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	are	included	in	net	sales.	In	addition,	the	Company	offers	volume	rebates	to	certain	of	its	customers.	The	total	cost	of	these	programs	is estimated	and	accrued	as	a	reduction	to	net	sales	at	the	time	of	the	respective	sale.

# Research	and	Development

Research	and	development	costs	are	expensed	as	incurred.	The	amount	charged	to	expense	was	$6.8	million,	$6.1	million,	and	$6.1	million	for	the	years	ended December	31,	2005,	2004	and	2003,	respectively.

# Interest	expense,	net

# Industry	Agreements

PCA	regularly	trades	containerboard	with	other	manufacturers	primarily	to	reduce	shipping	costs.	Containerboard	trade	agreements	are	a	long	standing	industry practice.	These	agreements	are	entered	into	on	an	annual	basis,	in	which	both	parties	agree	to	ship	an	identical	number	of	tons	to	each	other	within	the	agreement	period. These	agreements	minimize	transportation	cost	by	allowing	each	party's	containerboard	mills	to	ship	containerboard	to	the	other	party's	closest	corrugated	products plant.	We	track	each	shipment	to	ensure	that	the	other	party's	shipments	to	us	match	our	shipments	to	them	during	the	agreement	period.	Such	transfers	are	possible because	containerboard	is	a	commodity	product	with	no	distinguishing	product

characteristics.	These	transactions	are	accounted	for	at	carrying	value,	and	sales	are	not	recorded	as	the	transactions	do	not	represent	the	culmination	of	an	earnings process.	The	transactions	are	recorded	into	inventory	accounts,	and	no	income	is	recorded	until	such	inventory	is	converted	to	a	finished	product	and	sold	to	an	end-use customer.

# Segment	Information

PCA	is	engaged	in	one	line	of	business:	the	integrated	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.

# Derivative	Instruments	and	Hedging	Activities

The	Company	records	its	derivatives	in	accordance	with	SFAS	No.	133,	"Accounting	for	Derivative	Instruments	and	Hedging	Activities."	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	has	historically	used	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.	As	of	December	31,	2005,	2004 and	2003,	the	Company	was	not	party	to	any	derivative	instruments.

On	June	12,	2003,	PCA	entered	into	two	interest	rate	protection	agreements	with	a	counterparty	to	lock	in	then	current	interest	rates	on	5-year	and	10-year	U.S. Treasury	notes.	PCA	entered	into	these	agreements	to	protect	it	against	increases	in	the	five-year	U.S.	Treasury	note	rate,	which	served	as	a	reference	in	determining	the interest	rate	applicable	to	the	five-year	notes	due	2008,	and	the	ten-year	U.S.	Treasury	note	rate,	which	served	as	a	reference	in	determining	the	interest	rate	applicable	to the	ten-year	notes	due	2013.	As	a	result	of	increases	in	the	interest	rates	on	the	five-year	U.S.	Treasury	notes	and	ten-year	U.S.	Treasury	notes,	PCA	received	a	payment of	$27.0	million	from	the	counterparty	upon	settlement	of	the	agreements,	which	occurred	on	July	21,	2003.	PCA	recorded	the	settlement	in	OCI	and	is	amortizing	this amount	against	interest	expense	over	the	respective	lives	of	the	notes.

PCA	entered	into	management	equity	agreements	in	June	1999	with	125	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	acquired	the	business	from	Pactiv Corporation.	The	agreements	called	for	these	options	to	vest	ratably	over	a	five-year	period,	or,	upon	completion	of	an	initial	public	offering,	vest	fully	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	in	August	2001.

In	October	1999,	the	Company	adopted	a	long-term	equity	incentive	plan,	which	provides	for	grants	of	stock	options,	stock	appreciation	rights,	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,	employees	and directors	have	contractual	lives	of	seven	or	ten	years.	Options	granted	to	officers	and	employees	vest	ratably	over	a	three-	or	four-year	period,	whereas	option	awards granted	to	directors	vest	immediately.	The	plan,	which	will	terminate	on	October	19,	2009,	provides	for	the	issuance	of	up	to	4,400,000	shares	of	common	stock.	On May	4,	2005,	the	plan	was	amended	to	provide	for	the	issuance	of	an	additional	2,150,000	shares	of	common	stock,	or	6,550,000	shares	in	total.	As	of		December	31, 2005,	4,846,722	shares	have	been	granted.	Forfeitures	are	added	back	to	the	pool	of	shares	of	common	stock	to	be	granted	again	at	a	future	date.

During	2003,	the	Company	began	granting	shares	of	restricted	stock	to	certain	of	its	employees	and	directors.	Restricted	share	awards	granted	to	employees	vest	at the	end	of	a	three-	or		four-year	period,	whereas	restricted	share	awards	granted	to	directors	vest	at	the	end	of	a	six-month	period.	The	Company	is	recognizing compensation	expense	associated	with	these	shares	ratably	over	their	vesting	periods.	A	summary	of	the	Company's	restricted	share	activity	follows:

| (dollars	in	thousands) | Shares | Fair	Value	at<br>Date	of	Grant |
| :--- | :--- | :--- |
| Balance,\tJanuary\t1,\t2003 | — | $— |
| Granted | 73,500 | 1,353 |
| Balance,\tDecember\t31,\t2003 | 73,500 | 1,353 |
| Granted | 76,000 | 1,806 |
| Balance,\tDecember\t31,\t2004 | 149,500 | 3,159 |
| Granted | 250,755 | 5,403 |
| Cancellations | (625) | (13) |
| Balance,\tDecember\t31,\t2005 | 399,630 | $ 8,549 |

The	number	of	shares	of	restricted	stock	that	were	vested	at	December	31,	2005	and	2004	were	12,000	shares	and	4,500	shares,	respectively.	No	shares	were	vested at	December	31,	2003.

A	summary	of	the	Company's	stock	option	activity,	and	related	information	for	the	years	ended	December	31,	2005,	2004	and	2003	follows:

|  | Options | Exercise	Price |
| :--- | :--- | :--- |
| Balance,\tJanuary\t1,\t2003 | 6,474,102 | $9.10 |
| Granted | 754,850 | 18.35 |
| Exercised | (2,071,029) | 5.62 |
| Forfeited | (31,375) | 16.42 |
| Balance,\tDecember\t31,\t2003 | 5,126,548 | 11.83 |
| Granted | 676,770 | 23.87 |
| Exercised | (1,265,905) | 8.15 |
| Forfeited | (47,687) | 18.33 |
| Balance,\tDecember\t31,\t2004 | 4,489,726 | 14.59 |
| Granted | 334,590 | 21.34 |
| Exercised | (943,126) | 8.72 |
| Forfeited | (38,081) | 19.88 |
| Balance,\tDecember\t31,\t2005 | 3,843,109 | $ 16.57 |

The	following	table	summarizes	information	for	options	outstanding	and	exercisable	at	December	31,	2005:

|  |  |  | Options	Outstanding |  | Options	Exercisable | Options	Exercisable |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Year | Weighted-\nAverage | Weighted-\nAverage | Weighted-\nAverage | Weighted-\nAverage |
| Range\tof\tExercise\tPrice | Number | Granted | Remaining\tLife | Exercise\tPrice | Number | Exercise\tPrice |
| $4.55 | 592,105 | 1999 | 3.4 | $4.55 | 592,105 | $4.55 |
| $10.44-$12.00 | 387,175 | 2000 | 4.3 | 11.92 | 387,175 | 11.92 |
| $13.38-$15.50 | 563,085 | 2001 | 5.4 | 15.46 | 563,085 | 15.46 |
| $19.55-$19.59 | 667,149 | 2002 | 6.4 | 19.55 | 294,899 | 19.55 |
| $17.59-$18.36 | 641,110 | 2003 | 7.3 | 18.34 | 474,129 | 18.34 |
| $21.62-$23.90 | 659,995 | 2004 | 8.4 | 23.88 | 171,793 | 23.82 |
| $21.27-$25.03 | 332,490 | 2005 | 6.6 | 21.34 | 7,500 | 24.52 |
|  | 3,843,109 |  |  | $ 16.57 | 2,490,686 | $ 12.87 |

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	elected	through	December	31,	2005	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-Merton	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	(loss)	and	earnings	(loss)	per	share	for	the	years	ended	December	31,	2005,	2004	and	2003.

|  | Year	Ended	December	31, | Year	Ended	December	31, | Year	Ended	December	31, |
| :--- | :--- | :--- | :--- |
| (In\tthousands,\texcept\tper\tshare\tdata) | 2005 | 2004 | 2003 |
| Net\tincome\t(loss)\tas\treported | $ 52,604 | $ 68,730 | $(14,358) |
| Add:\tAmortization\tof\tunearned\tcompensation\ton\trestricted\tstock,\tnet\tof\ttax | 1,003 | 411 | 123 |
| Less:\tStock-based\tcompensation\texpense\tdetermined\tusing\tfair\tvalue\tmethod,\nnet\tof\ttax | (3,211) | (3,583) | (3,194) |
| Net\tincome\t(loss)—pro\tforma | $ 50,396 | $ 65,558 | $(17,429) |
| Basic\tearnings\t(loss)\tper\tcommon\tshare—as\treported | $0.49 | $0.65 | $(0.14) |
| Diluted\tearnings\t(loss)\tper\tcommon\tshare—as\treported | $0.49 | $0.64 | $(0.14) |
| Basic\tearnings\t(loss)\tper\tcommon\tshare—pro\tforma | $0.47 | $0.62 | $(0.17) |
| Diluted\tearnings\t(loss)\tper\tcommon\tshare—pro\tforma | $0.47 | $0.61 | $(0.17) |

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

|  | 2005 | Year	of	Grant<br>2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Actuarial\tassumptions |  |  |  |
| Risk-free\tinterest\trate\t(%) | 3.77 | 4.45 | 3.34 |
| Expected\tlife\t(years) | 5 | 5 | 5 |
| Volatility\t(%) | 27.15 | 29.50 | 31.80 |
| Dividend\tyield\t(%) | 4.70 | 2.51 | 0.00 |
| Weighted-average\tfair\tvalue\t($) | 3.72 | 6.16 | 6.22 |

The	Black-Scholes-Merton	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.

# New	Accounting	Pronouncements

In	May	2005,	the	Financial	Accounting	Standards	Board	("FASB'')	issued	SFAS	No.	154,	"Accounting	Changes	and	Error	Corrections—a	replacement	of	APB Opinion	No.	20	and	SFAS	No.	3.''	The	pronouncement	requires	that	all	voluntary	changes	in	accounting	principle	be	reported	by	retrospectively	applying	the	principle to	all	prior	periods	that	are	presented	in	the	financial	statements.	The	statement	is	effective	for	fiscal	years	beginning	after	December	15,	2005.	The	Company's	financial position,	results	of	operations	or	cash	flows	will	only	be	impacted	by	SFAS	No.	154	if	it	implements	changes	in	accounting	principles	that	are	addressed	by	the	standard or	corrects	accounting	errors	in	future	periods.

In	December	2004,	the	FASB	issued	SFAS	No.	153,	"Exchanges	of	Nonmonetary	Assets,	an	amendment	of	APB	Opinion	No.	29,	Accounting	for	Nonmonetary Transactions.''	This	statement	amends	APB	Opinion	No.	29	to	eliminate	the	exception	for	nonmonetary	exchanges	of	similar	productive	assets	and	replaces	it	with	a general	exception	for	exchanges	of	nonmonetary	assets	that	do	not	have	commercial	substance.	Under	SFAS	No.	153,	if	a	nonmonetary	exchange	of	similar	productive assets	meets	a	commercial-substance	criterion	and	fair	value	is	determinable,	the	transaction	must	be	accounted	for	at	fair	value	resulting	in	recognition	of	any	gain	or loss.	SFAS	No.	153	is	effective	for	nonmonetary	transactions	in	fiscal	periods	that	begin	after	June	15,	2005.	The	Company	does	not	anticipate	that	the	implementation of	this	standard	will	have	a	material	impact	on	its	financial	position,	results	of	operations	or	cash	flows.

In	December	2004,	the	FASB	issued	SFAS	No.	123(R),	"Share-Based	Payment,"	which	requires	that	compensation	cost	related	to	share-based	payment transactions	be	recognized	in	the	financial	statements	based	on	fair	value.	Share-based	payment	transactions	within	the	scope	of	SFAS	No.	123(R)	include	stock	options, restricted	stock	awards,	performance-based	awards,	stock	appreciation	rights,	and	employee	share	purchase	plans.	The	provisions	of	SFAS	No.	123(R)	are	effective	as	of the	first	interim	period	of	fiscal	years	beginning	after	June	15,	2005.	The	Company	plans	to	adopt	the	standard	using	the	modified	prospective	method	on	January	1, 2006.	The	Company	currently	accounts	for	its	share-based	payment	transactions	under	the	provisions	of	APB	Opinion	No.	25,	which	generally	does	not	require	the recognition	of	compensation	cost	for	employee	stock	options	in	the	financial	statements.	Management	believes	that	the	current	required	disclosures	in	Note	2	under Stock-Based	Compensation	materially	reflect	the	impact	this	standard	is	expected	to	have	on	reported	net	income	and	earnings	per	share,	if	adopted	at	the	beginning	of the	periods	presented.	Based	upon	restricted	stock	grants	and	unvested	stock	options	as	of	December	31,	2005	and	on	current	Black-Scholes-Merton	values,	the	impact of	recording	compensation	cost	related	to	share-based	payment	transactions	is	currently	expected	to	be	$3.0	million	and	$0.03	per	share	for	full	year	2006.

In	November	2004,	the	FASB	issued	SFAS	No.	151,	"Inventory	Costs''.	The	Statement	requires	abnormal	amounts	of	inventory	costs	related	to	amounts	of	idle freight,	handling	costs	and	spoilage	be	recognized	as	current	period	expenses.	The	standard	is	effective	for	fiscal	years	beginning	after	June	15,	2005	with	early application	permitted.	The	Company's	policy	has	always	been	to	handle	inventory	costs	in	a	manner	consistent	with	the	provisions	of	this	statement.

Notes	to	Consolidated	Financial	Statements	(Continued) December	31,	2005

Reclassification

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.

| (In	thousands,	except	per	share	data) | 2005 | Year	Ended	December	31,<br>2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Numerator: |  |  |  |
| Net\tincome\t(loss) | $52,604 | $68,730 | $(14,358) |
| Denominator: |  |  |  |
| Basic\tcommon\tshares\toutstanding | 107,334 | 106,358 | 104,628 |
| Effect\tof\tdilutive\tsecurities: |  |  |  |
| Stock\toptions | 684 | 1,184 | — |
| Unvested\trestricted\tstock | 80 | 28 | — |
| Dilutive\tcommon\tshares\toutstanding | 108,098 | 107,570 | 104,628 |
| Basic\tincome\t(loss)\tper\tcommon\tshare | $0.49 | $0.65 | $(0.14) |
| Diluted\tincome\t(loss)\tper\tcommon\tshare | $0.49 | $0.64 | $(0.14) |

In	2003,	if	the	effect	of	options	and	restricted	stock	had	been	dilutive,	it	would	have	increased	dilutive	common	shares	outstanding	by	1,701,000	shares.

# 4.			ACCRUED	LIABILITIES

The	components	of	accrued	liabilities	are	as	follows:

| (In	thousands) | December	31,<br>2005 | 2004 |
| :--- | :--- | :--- |
| Bonuses\tand\tincentives | $21,895 | $20,811 |
| Medical\tinsurance\tand\tworkers'\tcompensation | 18,339 | 17,835 |
| Vacation\tand\tholiday\tpay | 14,159 | 13,536 |
| Customer\tvolume\tdiscounts\tand\trebates | 13,232 | 11,424 |
| Franchise\tand\tproperty\ttaxes | 8,539 | 9,146 |
| Payroll\tand\tpayroll\ttaxes | 4,772 | 4,085 |
| Other | 8,458 | 7,555 |
| Total | $89,394 | $84,392 |

# 5.			EMPLOYEE	BENEFIT	PLANS	AND	OTHER	POSTRETIREMENT	BENEFITS

In	connection	with	the	acquisition	from	Pactiv,	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	acquisition	for	an	agreed	upon	fee.	For	salaried	employees, PCA	paid	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	acquisition.	For	hourly	employees,	PCA	paid	Pactiv	$1.2	million	per	year	through	December	31,	2000	and	then	$4.5	million	per	year	for	two additional	years,	ending	on	December	31,	2002.	The	amounts	paid	to	Pactiv	for	continued	participation	in	the	Pactiv	pension	plans	were	stipulated	in	the	original	human resources	agreement	or	the	extension	negotiated	for	hourly	employee	participation	after	December	31,	2000.	The	fees	paid	to	Pactiv	were	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	hourly employees	had	participated	though	December	31,	2002.	The	PCA	pension	plan	for	hourly	employees	recognizes	service	earned	under	both	the	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.

Effective	May	1,	2004,	PCA	adopted	a	grandfathered	pension	plan	for	certain	salaried	employees	who	had	previously	participated	in	the	Pactiv	pension	plan pursuant	to	the	above	mentioned	human	resource	agreement.	The	benefit	formula	for	the	new	PCA	pension	plan	for	salaried	employees	is	comparable	to	that	of	the Pactiv	plan	except	that	the	PCA	plan	uses	career	average	base	pay	in	the	benefit	formula	in	lieu	of	final	average	base	pay.	The	PCA	pension	plan	for	salaried	employees recognizes	service	earned	under	both	the	PCA	plan	and	the	prior	Pactiv	plan.	Benefits	earned	under	the	PCA	plan	are	reduced	by	retirement	benefits	earned	under	the Pactiv	plan	through	April	30,	2004.	All	assets	and	liabilities	associated	with	benefits	earned	through	April	30,	2004	for	salaried	employees	and	retirees	of	PCA	were retained	by	the	Pactiv	plan.

PCA	has	a	supplemental	executive	retirement	plan	for	its	CEO	which	will	provide	a	supplemental	pension	benefit	calculated	on	the	basis	of	the	following	formula: (annual	salary	+	bonus)	x	(years	of	service)	x	(0.167),	where	"years	of	service"	equals	years	of	service	with	PCA	+	five	years.	The	benefit	is	payable	in	a	lump	sum.

PCA	also	maintains	a	supplemental	executive	retirement	plan	("SERP"),	which	augments	pension	benefits	for	eligible	executives	(excluding	the	CEO)	earned under	the	PCA	pension	plan	for	salaried	employees.	Benefits	are	determined	using	the	same	formula	as	the	PCA	pension	plan	but	in	addition	to	counting	career	average base	pay,	the	SERP	also	recognizes	bonuses	and	any	pay	earned	in	excess	of	IRS	qualified	plan	compensation	limits.	Benefits	earned	under	the	SERP	are	reduced	by benefits	paid	from	the	PCA	pension	plan	and	any	prior	qualified	pension	and	SERP	benefits	earned	under	the	Pactiv	plan.

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	benefits	for	PCA	employees	who	had retired	on	or	before	April	12,	1999	or	who	were	eligible	to	retire	within	two	years	of	that	date.	On	January	1,	2003,	the	Company	adopted	a	new	plan	design	for	salaried employees	incorporating	annual	dollar	caps	in	determining	the	maximum	amount	of	employer	contributions	made	towards	the	total	cost	of	postretirement	medical coverage.

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

The	following	table	summarizes	activity	of	the	Company's	pension	plan	and	postretirement	benefit	plans.

|  |  | Pension	Plans |  | Postretirement	Plans | Postretirement	Plans |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (In\tthousands) | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 |
| Change\tin\tBenefit\tObligation |  |  |  |  |  |  |
| Benefit\tobligation\tat\tbeginning\tof\tperiod | $45,017 | $15,242 | $2,489 | $9,804 | $7,872 | $5,790 |
| Service\tcost | 15,275 | 11,290 | 5,454 | 889 | 836 | 680 |
| Interest\tcost | 2,693 | 1,953 | 646 | 585 | 489 | 387 |
| Plan\tinitiation | — | 17,150 | 7,086 | — | — | — |
| Plan\tamendments | 7,732 | 1,283 | — | 62 | 7 | 53 |
| Actuarial\tloss\t(gain) | 10,998 | (1,648) | (423) | (322) | 804 | 1,249 |
| Participant\tcontributions | — | — | — | 234 | 211 | 131 |
| Benefits\tpaid | (220) | (253) | (10) | (523) | (415) | (418) |
| Benefit\tobligation\tat\tSeptember\t30 | $81,495 | $45,017 | $15,242 | $10,729 | $9,804 | $7,872 |
| Accumulated\tbenefit\tobligation\tportion\tof\tabove | $55,092 | $24,766 | $10,496 |  |  |  |
| Change\tin\tFair\tValue\tof\tPlan\tAssets |  |  |  |  |  |  |
| Plan\tassets\tat\tfair\tvalue\tat\tbeginning\tof\tperiod | $7,894 | $30 | $— | $— | $— | $— |
| Actual\treturn\ton\tplan\tassets | 1,146 | 173 | — | — | — | — |
| Company\tcontributions | 15,784 | 7,944 | 40 | 289 | 204 | 287 |
| Participant\tcontributions | — | — | — | 234 | 211 | 131 |
| Benefits\tpaid | (220) | (253) | (10) | (523) | (415) | (418) |
| Fair\tvalue\tof\tplan\tassets\tat\tSeptember\t30 | $24,604 | $7,894 | $30 | $— | $— | $— |
| Development\tof\tNet\tAmount\tRecognized |  |  |  |  |  |  |
| Funded\tstatus\tat\tSeptember\t30 | $ (56,891) | $(37,123) | $(15,212) | $ (10,729) | $ (9,804) | $ (7,872) |
| Fourth\tquarter\tcontributions | 3,125 | 1,355 | 50 | 66 | 37 | 63 |
| Unrecognized\tcosts: |  |  |  |  |  |  |
| Prior\tservice\tcost | 29,089 | 23,539 | 7,159 | (4,175) | (4,712) | (5,196) |
| Actuarial\tloss\t(gain) | 8,874 | (2,003) | (186) | 4,276 | 4,898 | 4,363 |
| Accrued\tbenefit\trecognized\tat\tDecember\t31 | $ (15,803) | $(14,232) | $(8,189) | $ (10,562) | $ (9,581) | $ (8,642) |
| Components\tof\tthe\tabove\tamount: |  |  |  |  |  |  |
| Accrued\tliability | $ (29,764) | $(18,487) | $(10,526) | $ (10,562) | $ (9,581) | $ (8,642) |
| Intangible\tasset | 13,961 | 4,255 | 2,337 | — | — | — |
| Accrued\tbenefit\trecognized\tat\tDecember\t31 | $ (15,803) | $(14,232) | $(8,189) | $ (10,562) | $ (9,581) | $ (8,642) |
| Weighted-Average\tAssumptions\tUsed\tto\nDetermine\tBenefit\tObligations\tat\tDecember\t31 |  |  |  |  |  |  |
| Discount\trate | 5.50% | 6.00% | 6.25% | 5.50% | 6.00% | 6.25% |
| Rate\tof\tcompensation\tincrease | 4.00% | 3.00-4.00% | 3.00% | N/A | N/A | N/A |
| Weighted-Average\tAssumptions\tUsed\tto |  |  |  |  |  |  |
| Determine\tNet\tPeriodic\tBenefit\tCost\tfor\tthe |  |  |  |  |  |  |
| Years\tEnded\tDecember\t31 |  |  |  |  |  |  |
| Discount\trate | 6.00% | 6.00-6.25% | 6.25-6.75% | 6.00% | 6.25% | 6.75% |
| Expected\treturn\ton\tplan\tassets | 8.25% | 8.25-8.50% | 8.50% | N/A | N/A | N/A |
| Rate\tof\tcompensation\tincrease | 4.00% | 3.00-4.00% | 3.00% | N/A | N/A | N/A |

No	pay-related	benefits	are	provided	under	the	hourly	pension	plan.	PCA	uses	a	September	30	measurement	date	for	all	of	its	benefit	plans.

During	the	year	ended	December	31,	2005,	PCA	recorded	pension	plan	expense	of	$19.1	million	and	made	pension	contributions	of	$17.6	million.	PCA	currently expects	to	record	pension	plan	expense	of	$22.8	million	in	2006	and	make	pension	contributions	of	$22.3	million.

| (In	thousands) | 2005 | Pension	Plans<br>2004 | 2003 | 2005 | Postretirement	Plans<br>2004 | 2003 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Components\tof\tNet\tPeriodic\tBenefit\tCost |  |  |  |  |  |  |
| Service\tcost\tfor\tbenefits\tearned\tduring\tthe\tyear | $15,275 | $11,289 | $ 5,454 | $889 | $836 | $680 |
| Interest\tcost\ton\taccumulated\tbenefit\tobligation | 2,693 | 1,953 | 646 | 585 | 489 | 387 |
| Expected\treturn\ton\tplan\tassets | (1,030) | (4) | — | — | — | — |
| Net\tamortization\tof\tunrecognized\tamounts | 2,186 | 2,054 | 580 | (175) | (208) | (260) |
| Net\tperiodic\tbenefit\tcost | $19,124 | $15,292 | $ 6,680 | $ 1,299 | $ 1,117 | $807 |

Our	funding	policy	is	to	contribute	to	the	plans	amounts	necessary	to	satisfy	the	funding	requirements	of	applicable	laws	and	regulations.	Pension	plans'	assets	were invested	in	the	following	classes	of	securities	at	September	30,	2005	and	2004:

|  | Percentage<br>of	Fair	Value | Percentage<br>of	Fair	Value |
| :--- | :--- | :--- |
|  | 2005 | 2004 |
| Equity\tsecurities | 61% | 60% |
| Debt\tsecurities | 38% | 39% |
| Other | 1% | 1% |

Our	investment	policy	is	to	invest	more	heavily	in	equity	securities	than	debt	securities,	with	a	liquidity	requirement	sufficient	to	cover	at	least	three	months	of benefit	payment	obligations.

The	return	on	plan	assets	reflects	the	expected	long-term	rates	of	return	for	the	categories	of	investments	currently	held	in	the	plan	as	well	as	anticipated	returns	for additional	contributions	made	in	the	future.	The	expected	long-term	rate	of	return	is	adjusted	when	there	are	fundamental	changes	in	expected	returns	on	the	plan investments.

In	determining	net	pension	and	other	postretirement	benefit	costs,	we	have	elected	to	amortize	prior	service	cost	on	a	straight-line	basis	over	the	average	remaining service	period	of	employees	expected	to	receive	benefits	under	the	plans.	A	10%	corridor	is	used	to	determine	the	amount	of	the	unrecognized	net	gain	or	loss	to	be amortized.	The	excess,	if	any,	of	the	unrecognized	net	gain	or	loss	over	10%	of	the	greater	of	the	projected	benefit	obligation	or	the	market-related	value	of	plan	assets	is amortized	over	the	average	remaining	service	period	until	retirement	for	active	participants	and	included	in	the	net	periodic	benefit	cost.

Increasing	the	assumed	health	care	cost	trend	rate	by	one	percentage	point	would	increase	the	2005	postretirement	benefit	obligation	by	approximately	$1.1	million and	would	increase	the	2005	net	postretirement	benefit	cost	by	approximately	$0.2	million.	Decreasing	the	assumed	health	care	cost	trend	rate	by	one	percentage	point would	decrease	the	2005	postretirement	benefit	obligation	by	approximately	$1.0	million	and	would	decrease	the	2005	net	postretirement	benefit	cost	by	approximately $0.2	million.

The	following	benefit	payments	are	expected	to	be	paid	to	current	plan	participants:

| (In	thousands) | Pension	Plans | Postretirement	Plans |
| :--- | :--- | :--- |
| 2006 | $406 | $330 |
| 2007 | 841 | 399 |
| 2008 | 1,275 | 465 |
| 2009 | 1,774 | 543 |
| 2010 | 8,496 | 670 |
| 2011\t-\t2015 | 23,152 | 5,265 |

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 $7.9	million,	$7.4	million	and	$7.0	million	for	employer	contributions	during	the	years	ended	December	31,	2005,	2004	and	2003,	respectively.

# 6.			GOODWILL	AND	OTHER	INTANGIBLE	ASSETS

# Goodwill

Changes	in	the	carrying	amount	of	goodwill	for	the	periods	ended	December	31,	2005	and	2004	are	as	follows:

| (In	thousands) |  |
| :--- | :--- |
| Balance\tas\tof\tJanuary\t1,\t2004 | $2,286 |
| Acquisition. | 1,514 |
| Other | (109) |
| Balance\tas\tof\tDecember\t31,\t2004. | 3,691 |
| Acquistion | 30,496 |

For	additional	information	regarding	the	acquisitions,	see	Note	15.

# 6.			GOODWILL	AND	OTHER	INTANGIBLE	ASSETS	(Continued)

# Other	Intangible	Assets

The	components	of	other	intangible	assets	are	as	follows:

| (In	thousands) | Weighted<br>Average<br>Life | As	of	December	31,	2005<br>Gross	Carrying<br>Amount | Accumulated<br>Amortization | As	of	December	31,	2004<br>Gross	Carrying<br>Amount | Accumulated<br>Amortization |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Intangible\tassets\tsubject\tto\tamortization: |  |  |  |  |  |
| Customer\tlists\tand\trelations | 31\tyears | $17,660 | $2,414 | $15,360 | $1,690 |
| Covenants\tnot\tto\tcompete | 8\tyears | 1,742 | 1,423 | 1,642 | 1,150 |
|  | 29\tyears | 19,402 | 3,837 | 17,002 | 2,840 |
| Intangible\tassets\tnot\tsubject\tto |  |  |  |  |  |
| amortization: |  |  |  |  |  |
| Intangible\tpension\tasset |  | 13,961 | — | 4,255 | — |
| Total\tother\tintangible\tassets |  | $ 33,363 | $ 3,837 | $ 21,257 | $ 2,840 |

The	amount	of	amortization	expense	was	$1.0	million,	$0.8	million,	and	$0.4	million	for	the	years	ended	December	31,	2005,	2004	and	2003,	respectively. Estimated	amortization	of	intangible	assets	over	the	next	five	years	is	expected	to	approximate	$1.0	million	per	year.

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

| (In	thousands) | December	31,<br>2005 | 2004 |
| :--- | :--- | :--- |
| Senior\tcredit\tfacility— |  |  |
| December\t31,\t2005\tand\t2004,\tdue\tin\tvarying\tannual |  |  |
| installments\tbeginning\tJuly\t21,\t2006\tthrough\t2008 | $39,000 | $39,000 |
| Receivables\tcredit\tfacility,\teffective\tinterest\trate\tof\t4.72%\tand\t2.73% |  |  |
| as\tof\tDecember\t31,\t2005\tand\t2004,\trespectively,\tdue\tOctober\t10, |  |  |
| 2006 | 109,000 | 109,000 |
| Senior\tnotes,\tnet\tof\tdiscount\tof\t$342\tand\t$479\tas\tof\tDecember\t31, |  |  |
| 2005\tand\t2004,\trespectively,\tinterest\tat\t4.38%\tpayable\tsemi- |  |  |
| annually,\tdue\tAugust\t1,\t2008 | 149,658 | 149,521 |
| Senior\tnotes,\tnet\tof\tdiscount\tof\t$2,571\tand\t$2,914\tas\tof |  |  |
| December\t31,\t2005\tand\t2004,\trespectively\tinterest\tat\t5.75% |  |  |
| payable\tsemi-annually,\tdue\tAugust\t1,\t2013. | 397,429 | 397,086 |
| Other | 116 | 285 |
| Total | 695,203 | 694,892 |
| Less\tcurrent\tportion | 118,030 | 109,168 |
| Total\tlong-term\tdebt | $ 577,173 | $ 585,724 |

On	July	7,	2003,	PCA	repaid	all	borrowings	under	its	then-existing	senior	secured	credit	facility.	This	facility	was	replaced	with	a	senior	unsecured	credit	facility that	provides	for	a	$100.0	million	revolving	credit	facility,	including	a	$35.0	million	subfacility	for	letters	of	credit,	and	a	$50.0	million	term	loan.	The	senior	credit facility	expires	in	2008.

On	July	21,	2003,	PCA	closed	its	offering	and	private	placement	of	$150.0	million	of	4¤8%	five-year	senior	notes	and	$400.0	million	of	5 ¤4%	ten-year	senior notes.	On	July	22,	2003,	PCA	used	the	net	proceeds	from	the	offering,	together	with	the	borrowings	under	the	senior	credit	facility	and	cash	on	hand,	to	repurchase $546.4	million,	or	99.3%,	of	its	then	outstanding	9 ¤8%	senior	subordinated	notes.	As	a	result	of	these	transactions,	PCA	recorded	a	one-time	charge	of	approximately $76.6	million	($46.7	million	after-tax)	in	the	third	quarter	of	2003.	The	$76.6	million	charge	includes	the	tender	offer	premium	of	$55.9	million	and	a	$17.4	million non-cash	charge	for	the	write-off	of	deferred	financing	fees	due	to	the	early	extinguishment	of	debt,	both	included	in	interest	expense,	and	fees	and	expenses	of	$3.3 million,	included	in	corporate	overhead.	The	remaining	senior	subordinated	notes	were	repurchased	on	April	1,	2004	at	a	premium	of	$0.2	million.

The	instruments	governing	PCA's	indebtedness	contain	covenants	that	limit	the	ability	of	PCA	and	its	subsidiaries	to	enter	into	sale	and	leaseback	transactions, incur	liens,	enter	into	certain	transactions	with	affiliates,	merge	or	consolidate	with	any	other	person	or	sell	or	otherwise	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	to interest	expense,	the	ratio	of	debt	to	total	capitalization,	and	minimum	net	worth	levels.	A	failure	to	comply	with	these	restrictions	could	lead	to	an	event	of	default, which	could	result	in	an	acceleration	of	such	indebtedness.	At	December	31,	2005,	the	Company	was	in	compliance	with	these	covenants.

Additional	information	regarding	PCA's	variable	rate	debt	is	shown	below:

|  | Rate | Rate | Applicable	Margin | Applicable	Margin |
| :--- | :--- | :--- | :--- | :--- |
| LIBOR\tbased\tdebt: | December\t31,\n2005 | 2004 | December\t31,\n2005 | 2004 |
| Term\tloan | 4.53% | 2.56% | 1.25% | 1.25% |
| Commercial\tpaper\tbased\tdebt: |  |  |  |  |
| Receivables\tcredit\tfacility | 4.32% | 2.33% | 0.40% | 0.40% |

Interest	payments	in	connection	with	the	Company's	debt	obligations	for	the	years	ended	December	31,	2005,	2004	and	2003,	amounted	to	$35.8	million, $34.2	million,	and	$104.5	million,	respectively.	Included	in	the	$104.5	million	in	interest	paid	for	2003	is	the	tender	offer	premium	of	$55.9	million	paid	in	connection with	the	July	2003	tender	offer.

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,	2005,	$109.0	million	was outstanding	 and	 $41.0	 million	 was	 available	 for	 additional	 borrowing	 under	 the	 receivables	 credit	 facility.	 The	 highest	 outstanding	 principal	 balance	 under	 the receivables	credit	facility	during	fiscal	2005	was	$109.0	million.	On	October	10,	2003,	PCA	renewed	the	receivables	credit	facility	for	an	additional	three-year	term, expiring	on	October	10,	2006.

A	summary	of	the	Company's	drawings	under	credit	facilities,	including	the	impact	of	$19.4	million	of	outstanding	letters	of	credit,	as	of	December	31,	2005 follows:

| (In	thousands) | Commitments | Utilized | Available |
| :--- | :--- | :--- | :--- |
| Receivables\tcredit\tfacility | $150,000 | $ 109,000 | $41,000 |
| Senior\trevolving\tcredit\tfacility | 100,000 | 19,373 | 80,627 |
|  | $250,000 | $ 128,373 | $ 121,627 |

PCA	is	required	to	pay	commitment	fees	on	the	unused	portions	of	the	credit	facilities.

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

| (In	thousands) | December	31,<br>2005 | 2004 |
| :--- | :--- | :--- |
| Workers'\tcompensation | $19,373 | $19,373 |
| Environmental | — | 1,113 |
| Total | $19,373 | $20,486 |

# 8.			FINANCIAL	INSTRUMENTS

The	carrying	and	estimated	fair	values	of	PCA's	financial	instruments	at	December	31,	2005	and	2004	were	as	follows:

| (In	thousands) | Carrying<br>Amount | Fair	Value | Carrying<br>Amount | Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| Cash\tand\tcash\tequivalents | $112,669 | $112,669 | $213,321 | $213,321 |
| Accounts\tand\tnotes\treceivable | 213,181 | 213,181 | 216,594 | 216,594 |
| Accounts\tpayable\t(including\tdividends\tpayable) | (151,896) | (151,896) | (128,953) | (128,953) |
| Long-term\tdebt— |  |  |  |  |
| Term\tloan | (39,000) | (39,000) | (39,000) | (39,000) |
| 4.38%\tfive-year\tsenior\tnotes |  |  |  |  |
| (due\tAugust\t1,\t2008) | (149,658) | (146,534) | (149,521) | (149,580) |
| 5.75%\tten-year\tsenior\tnotes |  |  |  |  |
| (due\tAugust\t1,\t2013) | (397,429) | (394,172) | (397,086) | (411,710) |
| Receivables\tcredit\tfacility | (109,000) | (109,000) | (109,000) | (109,000) |
| Other | (116) | (116) | (285) | (285) |

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

The	fair	value	of	the	term	loan	and	the	receivables	credit	facility	approximates	their	carrying	amount	due	to	the	variable	interest-rate	feature	of	the	instruments.	The fair	values	of	the	senior	notes	are	based	on	quoted	market	prices.	The	fair	value	of	the	other	debt	was	determined	to	not	be	materially	different	from	the	carrying	amount.

# 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	management	equity	agreements	also	provide	for	the	grant of	options	(see	Note	2).

On	May	16,	2001,	the	Company	announced	a	$100.0	million	common	stock	repurchase	program.	PCA	may	continue	to	repurchase	shares	from	time	to	time	under this	program.	Through	December	31,	2003,	the	Company	repurchased	5,195,600	shares	of	common	stock	for	$88.8	million.	All	repurchased	shares	were	retired	prior	to December	31,	2003.	No	shares	of	common	stock	were	repurchased	under	this	program	in	2005	or	2004.

On	December	21,	2005,	the	Company	completed	a	secondary	offering	of	its	common	stock	pursuant	to	a	registration	statement	filed	with	the	Securities	and Exchange	Commission	on	December	9,	2005.	The	selling	stockholder,	PCA	Holdings	LLC,	sold	17,825,000	shares	of	common	stock	of	the	Company,	which	included 2,325,000	shares	pursuant	to	the	underwriters'	exercise	in	full	of	their	over-allotment	option.	All	of	these	shares	were	sold	at	an	initial	price	to	the	public	market	of $21.50	per	share,	and	the	selling

# 9.			SHAREHOLDERS'	EQUITY	(Continued)	(Continued)

stockholder	received	proceeds,	net	of	the	underwriting	discount,	of	$20.69	per	share.	The	Company	did	not	sell	any	shares	in,	or	receive	any	proceeds	from,	the secondary	offering.

# 10.			COMMITMENTS	AND	CONTINGENCIES

# Capital	Commitments

The	Company	had	authorized	capital	expenditures	of	approximately	$33.1	million	and	$55.2	million	as	of	December	31,	2005	and	2004,	respectively,	in	connection with	the	expansion	and	replacement	of	existing	facilities	and	equipment.

# Operating	Leases

PCA	leases	space	for	certain	of	its	facilities	and	cutting	rights	to	approximately	108,000	acres	of	timberland	under	long-term	leases.	The	Company	also	leases equipment,	primarily	vehicles	and	rolling	stock,	and	other	assets	under	long-term	leases	of	a	duration	generally	of	three	years.	The	minimum	lease	payments	under	non- cancelable	operating	leases	with	lease	terms	in	excess	of	one	year	are	as	follows:

| (In	thousands) |  |
| :--- | :--- |
| 2006 | $24,569 |
| 2007 | 21,086 |
| 2008 | 14,716 |
| 2009 | 9,801 |
| 2010 | 6,670 |
| Thereafter | 37,130 |
| Total | $ 113,972 |

Capital	lease	obligations	were	not	significant	to	the	accompanying	financial	statements.	Total	lease	expense,	including	base	rent	on	all	leases	and	executory	costs, such	as	insurance,	taxes,	and	maintenance,	for	the	years	ended	December	31,	2005,	2004	and	2003	was	$35.8	million,	$33.0	million	and	$31.6	million,	respectively. These	costs	are	included	in	cost	of	goods	sold	and	selling	and	administrative	expenses.

# 10.			COMMITMENTS	AND	CONTINGENCIES	(Continued)	(Continued)

# Purchase	Commitments

The	Company	has	entered	into	various	purchase	agreements	to	buy	minimum	amounts	of	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	$12.8	million	during	the	year	ended	December	31,	2005,	$17.6	million	during	the year	ended	December	31,	2004,	and	$19.3	million	during	the	year	ended	December	31,	2003	under	these	purchase	agreements.

# Litigation

On	May	14,	1999,	PCA	was	named	as	a	defendant	in	two	Consolidated	Class	Action	Complaints	which	alleged	a	civil	violation	of	Section	1	of	the	Sherman	Act. The	suits,	then	captioned	Winoff	Industries,	Inc.	v.	Stone	Container	Corporation,	MDL	No.	1261	(E.D.	Pa.)	and	General	Refractories	Co.	v.	Gaylord	Container Corporation,	MDL	No.	1261	(E.D.	Pa.),	name	PCA	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	suits,	along	with	nine	other	linerboard	and	corrugated	sheet	manufacturers.	The	complaints	allege	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	to	artificially	increase	prices	of	corrugated	containers	and	corrugated	sheets,	respectively.	On	November	3,	2003,	Pactiv	(formerly	known	as	Tenneco Packaging),	Tenneco	and	PCA	entered	into	an	agreement	to	settle	the	class	action	lawsuits.	The	settlement	agreement	provided	for	a	full	release	of	all	claims	against PCA	as	a	result	of	the	class	action	lawsuits	and	was	approved	by	the	Court	in	an	opinion	issued	on	April	21,	2004.	Approximately	160	plaintiffs	opted	out	of	the	class and	together	filed	about	ten	direct	action	complaints	in	various	federal	courts	across	the	country.	All	of	the	opt-out	complaints	make	allegations	against	the	defendants, including	PCA,	substantially	similar	to	those	made	in	the	class	actions.	The	settlement	agreement	does	not	cover	these	direct	action	cases.	These	actions	have	almost	all been	consolidated	as	In	re	Linerboard,	MDL	1261	(E.D.	Pa.)	for	pretrial	purposes.	Pactiv,	Tenneco	and	PCA	have	reached	an	agreement	to	settle	all	of	the	opt-out	cases. These	agreements	provide	for	a	full	release	of	all	claims	against	PCA	as	a	result	of	litigation.	PCA	has	made	no	payments	to	the	plaintiffs	as	a	result	of	the	settlement	of any	of	the	opt-out	suits.	As	of	the	date	of	this	filing,	we	believe	it	is	not	reasonably	possible	that	the	outcome	of	any	pending	litigation	related	to	these	matters	will	have a	material	adverse	effect	on	our	financial	position,	results	of	operations	or	cash	flows.

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.	As	of	the	date	of	this	filing,	we	believe	it	is

not	reasonably	possible	that	the	resolution	of	these	legal	actions	will,	individually	or	in	the	aggregate,	have	a	material	adverse	effect	on	our	financial	position,	or	results of	operations	or	cash	flows.

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.	The	Cluster	Rules	affect	our	allowable	discharges	of	air	and	water	pollutants.	PCA	and	its competitors	are	required	to	incur	costs	to	ensure	compliance	with	these	new	rules.	From	1997	through	2005,	we	spent	approximately	$37.5	million	on	Cluster Rule	compliance	to	meet	Clean	Air	Act	requirements.	Total	capital	costs	for	environmental	matters,	including	Cluster	Rule	compliance,	were	$12.9	million	for	2005.	We currently	estimate	2006	environmental	capital	expenditures	will	be	$5.5	million,	of	which	$1.9	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	$1.9	million,	which	will	be	spent	in	2006.

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	2005,	remediation	costs	at	our	mills	and	corrugated	plants	totaled	about	$3.2	million.	As	of	December	31,	2005,	we	maintained	an environmental	reserve	of	$5.5	million	relating	to	onsite	landfills	(see	Note	11)	and	surface	impoundments	as	well	as	on-going	and	anticipated	remedial	projects. Liabilities	recorded	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.	As	of	the	date	of	this	filing,	we	believe	that	it	is	not	reasonably	possible	that	future	environmental	expenditures above	the	$5.5	million	accrued	as	of	December	31,	2005,	will	have	a	material	impact	on	our	financial	condition	and	results	of	operations.

In	connection	with	the	sale	to	PCA	of	its	containerboard	and	corrugated	products	business,	Pactiv	agreed	to	retain	all	liability	for	all	former	facilities	and	all	sites associated	with	pre-closing	offsite	waste	disposal	and	all	environmental	liabilities	related	to	a	closed	landfill	located	near	our	Filer	City	mill.

Asset	retirement	obligations	consist	primarily	of	landfill	capping	and	closure	and	post-closure	costs.	PCA	is	legally	required	to	perform	capping	and	closure and	post-closure	care	on	the	landfills.	In	accordance	with	SFAS	No.	143,	"Accounting	for	Asset	Retirement	Obligations,"	PCA	recognizes	the	fair	value	of	a	these liabilities	as	an	asset	retirement	obligation	for	each	landfill	and	capitalizes	that	cost	as	part	of	the	cost	basis	of	the	related	asset.	The	liability	is	accreted	to	its	estimated value	over	time,	and	the	related	assets	are	depreciated	on	a	straight-line	basis	over	their	useful	lives.	Upon	settlement	of	the	liability,	PCA	will	recognize	a	gain	or	loss for	any	difference	between	the	settlement	amount	and	the	recorded	liability.

# 11.			ASSET	RETIREMENT	OBLIGATIONS	(Continued)

The	following	table	describes	changes	to	PCA's	asset	retirement	obligation	liability:

| (In	thousands) | 2005 | 2004 |
| :--- | :--- | :--- |
| Asset\tretirement\tobligation,\tJanuary\t1 | $3,788 | $3,327 |
| Accretion\texpense | 241 | 235 |
| Revisions\tin\testimated\tcash\tflows | (116) | 243 |
| Payments | (601) | (17) |
| Asset\tretirement\tobligation,\tDecember\t31 | $3,312 | $3,788 |

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

| (In	thousands) | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Current— |  |  |  |
| U.S. | $20,741 | $— | $(282) |
| State\tand\tlocal | (1,099) | 895 | (32) |
| Total\tcurrent\tprovision\t(benefit)\tfor\ttaxes | 19,642 | 895 | (314) |
| Deferred— |  |  |  |
| U.S. | 11,746 | 37,534 | (9,224) |
| State\tand\tlocal | 4,042 | 3,756 | (978) |
| Total\tdeferred\tprovision\t(benefit)\tfor\ttaxes | 15,788 | 41,290 | (10,202) |
| Total\tprovision\t(benefit)\tfor\ttaxes | $35,430 | $42,185 | $ (10,516) |

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

| (In	thousands) | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- |
| Provision\tcomputed\tat\tU.S.\tFederal\tstatutory\trate\tof\t35% | $30,812 | $38,820 | $(8,711) |
| State\tand\tlocal\ttaxes,\tnet\tof\tfederal\tbenefit | 2,548 | 4,666 | (1,018) |
| Adjustments\tto\tprior\tyear's\taccrual. | 2,138 | — | — |
| Other | (68) | (1,301) | (787) |
| Total | $35,430 | $42,185 | $ (10,516) |

# 12.			INCOME	TAXES	(Continued)

Deferred	income	tax	assets	and	liabilities	at	December	31	are	summarized	as	follows:

| (In	thousands) | December	31,<br>2005 | 2004 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets: |  |  |
| Accrued\tliabilities | $2,150 | $1,096 |
| Employee\tbenefits\tand\tcompensation | 9,506 | 15,041 |
| Reserve\tfor\tdoubtful\taccounts | 1,091 | 2,356 |
| Inventories | 2,140 | 8,448 |
| Investment\tin\tjoint\tventure | 155 | 125 |
| Pension\tand\tpostretirement\tbenefits | 10,889 | 2,177 |
| General\tbusiness\tcredits | 2,242 | 1,554 |
| Alternative\tminimum\ttax\tcredits | 13,545 | 13,545 |
| Net\toperating\tloss\tcarry\tforwards | 3,767 | 32,536 |
| Gross\tdeferred\ttax\tassets | 45,485 | 76,878 |
| Valuation\tallowance | — | (1,129) |
| Total\tdeferred\ttax\tassets | $45,485 | $75,749 |
| Deferred\ttax\tliabilities:\nProperty,\tplant\tand\tequipment\tdifferences | $ (309,220) | $ (323,205) |
| Net\tdeferred\ttax\tliability | $ (263,735) | $ (247,456) |

The	net	deferred	tax	liability	at	December	31	is	classified	in	the	balance	sheet	as	follows:

| (In	thousands) | December	31,<br>2005 | 2004 |
| :--- | :--- | :--- |
| Current\tnet\tdeferred\ttax\tassets | $28,975 | $59,113 |
| Non-current\tnet\tdeferred\ttax\tliabilities | (292,710) | (306,569) |
| Total\tnet\tdeferred\ttax\tliability | $ (263,735) | $ (247,456) |

As	of	December	31,	2005,	the	Company	had	$13.5	million	in	alternative	minimum	tax	credits	available	for	income	tax	purposes	that	may	be	used	to	offset	future taxable	income.	As	of	December	31,	2005,	the	Company	had	$2.2	million	in	general	business	credit	carry	forwards	available	for	income	tax	purposes	which	will	expire between	2019	through	2024.

As	of	December	31,	2005,	the	Company	had	available	gross	state	and	local	net	operating	loss	carry	forwards	of	approximately	$84.9	million	with	various	expiration dates.	The	entire	valuation	allowance	in	2004	relates	to	state	and	local	net	operating	loss	carry	forwards.	In	2005,	a	valuation	allowance	for	state	and	local	net	operating loss	carry	forwards	is	no	longer	required	because	we	believe	it	is	more	likely	than	not	that	we	will	realize	in	full	the	benefit	of	all	state	and	local	net	operating	loss	carry forwards.

# 13.			RESTRUCTURING	CHARGES	AND	OTHER	SEVERANCE

In	August	2005,	the	Company	announced	that	it	would	close	a	corrugated	products	plant	by	the	end	of	the	year.	The	charges	related	to	this	plan	were	recorded	in accordance	with	SFAS	No.	146,	"Accounting	for	Costs	Associated	with	Exit	or	Disposal	Activities,"	which	requires	that	a	liability	for	costs	associated	with	an	exit	or disposal	activity	be	recognized	when	the	liability	is	incurred.

In	connection	with	the	shutdown	of	the	corrugated	products	plant,	the	Company	recorded	pre-tax	restructuring	charges	of	$1.7	million	during	the	third	and	fourth quarters	of	2005,	which	are	included	in	other	expense,	net	and	cost	of	sales	in	the	statement	of	operations.	The	pre-tax	restructuring	charges	are	composed	of:

| (dollars	in	thousands) | Restructuring<br>Charges | Non-Cash<br>Charges | Cash<br>Payments | Balance	at<br>December	31,	2005 |
| :--- | :--- | :--- | :--- | :--- |
| Severance\tand\tbenefit\tcosts | $805 | $— | $ (308) | $497 |
| Asset\timpairments | 619 | (619) | — | — |
| Equipment\tdisposal\tcosts | 256 | — | (256) | — |
| Total | $ 1,680 | $ (619) | $ (564) | $497 |

All	restructuring	charges,	except	for	the	asset	impairments,	will	result	in	cash	outflows.	The	severance	and	benefit	costs	relate	to	a	reduction	in	workforce	of approximately	58	employees	located	at	the	plant.	Asset	impairments	relate	to	the	write-down	of	property,	plant	and	equipment	at	the	closed	plant	to	fair	value	in accordance	with	SFAS	No.	144,	"Accounting	for	the	Impairment	or	Disposal	of	Long-Lived	Assets."	The	Company	expects	to	incur	$0.2	million	in	pre-tax	disposal costs	related	to	the	property,	plant	and	equipment	during	2006.

The	Company	also	recorded	$0.9	million	in	pre-tax	severance	and	benefit	costs	related	to	other	facilities	during	2005.	These	costs	are	included	in	cost	of	sales	in	the statement	of	operations.

# 14.			RELATED	PARTY	TRANSACTIONS

PCA	owns	a	31 ¤3%	interest	in	Southern	Timber	Venture,	LLC	("STV").	At	December	31,	2005,	PCA	had	not	guaranteed	the	debt	of	STV	and	has	no	future

funding	requirements.	At	December	31,	2005	and	2004,	the	carrying	value	of	the	Company's	investment	in	STV	under	the	equity	method	is	zero.	PCA	received dividends	from	STV	of	$15.0	million	($14.0	million	net	of	direct	expenses),	$29.3	million	($27.8	million	net	of	direct	expenses)	and	$1.2	million	in	2005,	2004	and 2003,	respectively.

In	April	2005	and	December	2004,	STV	sold	to	other	parties	approximately	90,000	acres	and	150,000	acres,	respectively,	of	timberland	previously	owned	and managed	by	STV	that	were	under	the	supply	agreement	with	PCA.	STV	will	continue	to	manage	the	timberlands	for	the	new	buyers.	In	connection	with	the	sale,	PCA entered	into	new	supply	agreements	with	the	buyers	related	to	the	acreage	sold	and	continues	to	buy	pulpwood	from	both	STV	and	the	buyers.	After	both	sales,	STV currently	owns	approximately	53,000	acres	of	land,	including	timberlands	and	higher	beneficial	use	(HBU)	properties,	located	primarily	in	southern	Georgia	and northern	Florida.

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	is	adjusted	annually	for	any	changes	in	market	value.

# 14.			RELATED	PARTY	TRANSACTIONS	(Continued)

PCA	purchased	$4.1	million,	$22.6	million	and	$19.3	million	of	pulpwood	for	its	Counce,	Tennessee	and	Valdosta,	Georgia	mills	from	STV	during	the	years	ended December	31,	2005,	2004	and	2003,	respectively.

In	June	2004,	PCA	sold	a	portion	of	its	interest	in	STV	for	$2.0	million	and	recognized	a	pre-tax	gain	of	$2.0	million.

Financial	information	for	STV	is	as	follows:

|  | 2005 | Year	Ended	December	31,<br>2004 | 2003 |
| :--- | :--- | :--- | :--- |
| (In\tthousands) | (unaudited) |  |  |
| Net\tsales | $8,757 | $ 33,785 | $ 36,847 |
| Gross\tprofit\t(loss) | (545) | 8,693 | 6,798 |
| Gain\tfrom\tsale\tof\ttimberlands | 53,944 | 86,579 | 3,622 |
| Net\tincome\t(loss) | 41,972 | 70,750 | (6,149) |

The	audited	financial	statements	for	STV	for	the	years	ended	December	31,	2004	and	2003	are	included	as	part	of	this	filing	in	accordance	with	Rule	3-09	of Regulation	S-X.	This	requirement	does	not	apply	for	STV's	financial	statements	for	the	year	ended	December	31,	2005.

# 15.			ACQUISITIONS

During	the	second	quarter	of	2005,	PCA	acquired	a	full	line	corrugated	plant	in	Jackson,	Mississippi,	a	specialty	sheet	plant	in	St.	Louis,	Missouri,	and	a	graphics packaging	and	display	manufacturing	plant	in	Olive	Branch,	Mississippi	for	$48.7	million.	These	plants	expanded	PCA's	presence	in	geographic	markets	where	PCA	did not	have	any	plant	locations.	The	purchase	method	of	accounting	was	used	to	account	for	the	acquisition	of	these	plants.	Approximately	$30.5	million	of	goodwill	(which is	deductible	for	income	tax	purposes)	and	$2.4	million	of	intangible	assets	were	recorded	in	connection	with	the	acquisition.	Sales	and	total	assets	of	the	plants	acquired were	not	material.	Operating	results	of	the	plants	subsequent	to	the	date	of	acquisition	are	included	in	the	Company's	operating	results.

During	the	first	quarter	of	2004,	Packaging	Corporation	of	Illinois,	a	wholly	owned	subsidiary	of	PCA,	acquired	a	corrugated	plant	in	Chicago,	Illinois	for $38.4	million.	This	acquisition	expands	PCA's	capabilities	in	high	quality	graphics	packaging	and	displays	and	increases	PCA's	presence	in	the	Chicago	market.	The purchase	method	of	accounting	was	used	to	account	for	the	acquisition.	Approximately	$1.5	million	of	goodwill	(which	is	deductible	for	income	tax	purposes)	and $13.8	million	of	intangible	assets	were	recorded	in	connection	with	the	acquisition.	The	intangible	assets	include	customer	lists	and	relations.	Sales	and	total	assets	of	the acquisition	were	not	material.	Operating	results	of	the	plant	subsequent	to	the	date	of	acquisition	are	included	in	the	Company's	operating	results.

During	the	second	quarter	of	2003,	Dixie	Container	Corporation,	a	wholly	owned	subsidiary	of	PCA,	acquired	the	assets	of	a	corrugated	products	facility	located	in Fairfield,	Ohio,	for	$3.1	million.	The	purchase	method	of	accounting	was	used	to	account	for	the	acquisition.	Sales	and	total	assets	of	the	acquisition	were	not	material. Operating	results	of	the	plant	subsequent	to	the	date	of	acquisition	are	included	in	the	Company's	operating	results.

# 16.			DIVESTITURES

In	February	2004,	PCA	sold	its	hardwood	sawmill	in	Selmer,	Tennessee	and	received	$1.0	million	in	proceeds	and	recognized	a	$0.2	million	pre-tax	gain.	The Selmer	sawmill	had	net	sales	of	$0.1	million	and	$4.5	million	for	the	years	ended	December	31,	2004	and	2003,	respectively.

# 17.			QUARTERLY	FINANCIAL	DATA	(UNAUDITED)

| (In	thousands,	except	per	share	amounts) | First | Second | Fiscal	Quarter<br>Third | Fourth | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 2005: |  |  |  |  |  |
| Net\tsales | $ 489,437 | $ 519,325 | $ 512,187 | $ 472,709 | $ 1,993,658 |
| Gross\tprofit | 73,266 | 95,915 | 80,501 | 57,129 | 306,811 |
| Income\tfrom\toperations | 27,532 | 54,280 | 26,302 | 8,012 | 116,126 |
| Net\tincome | 12,619 | 27,760 | 10,566 | 1,659 | 52,604 |
| Basic\tearnings\tper\tshare | 0.12 | 0.26 | 0.10 | 0.02 | 0.49 |
| Diluted\tearnings\tper\tshare | 0.12 | 0.26 | 0.10 | 0.02 | 0.49 |

| Stock	price—high | 25.63 | 24.91 | 22.43 | 24.17 | 25.63 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Stock\tprice—low | 21.87 | 20.09 | 19.13 | 18.24 | 18.24 |
| 2004: |  |  |  |  |  |
| Net\tsales | $ 431,267 | $ 467,415 | $ 498,753 | $ 492,650 | $ 1,890,085 |
| Gross\tprofit | 40,629 | 70,700 | 97,979 | 88,406 | 297,714 |
| Income\t(loss)\tfrom\toperations | (3,198) | 28,044 | 48,103 | 67,542 | 140,491 |
| Net\tincome\t(loss) | (6,585) | 12,334 | 24,607 | 38,374 | 68,730 |
| Basic\tearnings\t(loss)\tper\tshare | (0.06) | 0.12 | 0.23 | 0.36 | 0.65 |
| Diluted\tearnings\t(loss)\tper\tshare | (0.06) | 0.11 | 0.23 | 0.36 | 0.64 |
| Stock\tprice—high | 23.97 | 25.21 | 24.79 | 24.60 | 25.21 |
| Stock\tprice—low | 21.10 | 20.99 | 22.07 | 21.28 | 20.99 |

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.

For	the	three	months	ended	June	30,	2005,	net	income	included	a	$7.0	million	(or	$0.06	per	share)	dividend	payment	net	of	taxes	and	expenses	from	Southern	Timber Venture,	LLC	("STV"),	a	timberlands	joint	venture	in	which	PCA	owns	a	31 ¤3%	interest.	The	dividend	resulted	from	STV's	sale	of	a	portion	of	their	timberland holdings.

For	the	three	months	ended	December	31,	2004,	net	income	included	a	$16.9	million	(or	$0.16	per	share)	dividend	payment	net	of	taxes	and	expenses	from	STV.	The dividend	resulted	from	STV's	sale	of	a	portion	of	their	timberland	holdings.

# INDEPENDENT	AUDITORS'	REPORT

The	Members

Southern	Timber	Venture,	LLC

# Jackson,	Mississippi

We	have	audited	the	accompanying	balance	sheets	of	Southern	Timber	Venture,	LLC	as	of	December	31,	2004	and	2003	and	the	related	statements	of	operations, members'	equity	and	cash	flows	for	the	years	ended	December	31,	2004	and	2003.	These	financial	statements	are	the	responsibility	of	the	Company's	management.	Our responsibility	is	to	express	an	opinion	on	these	financial	statements	based	on	our	audits.

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

In	our	opinion,	the	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	financial	position	of	Southern	Timber	Venture,	LLC	as	of December	31,	2004	and	2003	and	the	results	of	its	operations	and	its	cash	flows	for	the	years	then	ended	in	conformity	with	accounting	principles	generally	accepted	in the	United	States	of	America.

# /s/	GRANTHAM,	POOLE,	RANDALL,	REITANO,	ARRINGTON	&	CUNNINGHAM	PLLC

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Cash | $23,660,670 | $4,762,185 |
| Receivables | 581,062 | 617,749 |
| Timber\treceivables\tfrom\tPCA | 193,957 | — |
| Total\tcurrent\tassets | 24,435,689 | 5,379,934 |
| Timber\tand\tTimberlands |  |  |
| Timberlands | 37,147,698 | 63,684,611 |
| Timber,\tnet\tof\taccumulated\tdepletion\tof\t$49,282,649\tand\t$40,746,875, |  |  |
| respectively | 46,889,915 | 79,904,542 |
| Young\tgrowth | 15,203,502 | 33,220,418 |
| Total\ttimber\tand\ttimberlands | 99,241,115 | 176,809,571 |
| Property\tand\tequipment,\tnet\tof\taccumulated\tdepreciation\tof\t$33,053\tand |  |  |
| $21,820,\trespectively | 63,899 | 57,950 |
| Other\tassets | 16,414 | 237,660 |
| Total\tassets | $ 123,757,117 | $ 182,485,115 |
| LIABILITIES\tAND\tMEMBERS'\tEQUITY |  |  |
| Accrued\tmember\tdistributions | $20,589,450 | $— |
| Timber\tadvances\tfrom\tPCA | — | 21,004 |
| Accounts\tpayable | 633,090 | 737,088 |
| Accrued\tinterest\tpayable | 669,752 | 955,573 |
| Accrued\tliabilities | 365,912 | 1,142,529 |

| Current	maturities	of	long-term	debt | 1,200,000 | — |
| :--- | :--- | :--- |
| Total\tcurrent\tliabilities | 23,458,204 | 2,856,194 |
| Long-term\tdebt,\tless\tcurrent\tmaturities | 83,800,000 | 140,380,000 |
| Total\tliabilities | 107,258,204 | 143,236,194 |
| Members'\tequity | 16,498,913 | 39,248,921 |
| Total\tliabilities\tand\tmembers'\tequity | $ 123,757,117 | $ 182,485,115 |

See	accompanying	notes	to	financial	statements.

# Statements	of	Operations

# Statement	of	Members'	Equity

| SOUTHERN	TIMBER	VENTURE,	LLC |  |  |
| :--- | :--- | :--- |
| Statements\tof\tCash\tFlows |  |  |
| For\tthe\tYears\tEnded\tDecember\t31,\t2004\tand\t2003 |  |  |
| Cash\tflows\tfrom\toperating\tactivities— | 2004 | 2003 |
| Net\tearnings\t(loss) | $70,749,992 | $(6,148,981) |

Adjustments	to	reconcile	net	earnings	(loss)	to	cash	provided	by	operations:

Notes	to	Financial	Statements

# NOTE	1			SUMMARY	OF	SIGNIFICANT	ACCOUNTING	POLICIES

The	Company—Southern	Timber	Venture,	LLC,	a	Delaware	limited	liability	company,	was	formed	during	2000	immediately	prior	to	the	acquisition	of approximately	388,000	acres	of	timberland	in	the	Southeastern	United	States	for	$275	million.	Its	primary	purpose	is	to	manage	the	timberlands	and	to	grow	and	harvest the	timber	using	state	of	the	art	forest	and	timber	management	principles.

Revenue	Recognition—Timber	sales	are	recognized	when	legal	ownership	or	the	risk	of	loss	passes	to	the	purchaser	and	the	quantity	sold	is	determinable.	For delivered	sales,	the	risk	of	loss	passes	when	the	timber	is	delivered	to	the	customer.	Revenues	are	determined	by	multiplying	actual	harvest	volumes	by	contractually agreed-upon	prices	negotiated	with	the	purchasers.	Other	sales	are	recognized	when	earned.

Revenue	from	Packaging	Corporation	of	America,	a	related	party	with	whom	the	Company	has	a	supply	agreement,	represented	68%	of	timber	sales	in	2004	and 55%	in	2003	(see	Note	7).

The	Company	also	generates	income	from	the	leasing	of	hunting	rights	on	the	land	it	owns.	Leases	are	renewed	annually	by	the	lessees	and	income	is	recognized	in the	period	in	which	it	is	earned.

Cash	Equivalents—For	purposes	of	the	statement	of	cash	flows,	the	Company	considers	all	highly	liquid	debt	instruments	purchased	with	a	maturity	of	three months	or	less	to	be	cash	equivalents.

Allowance	for	Doubtful	Accounts—In	the	normal	course	of	business,	the	Company	extends	credit	to	its	customers	on	a	short-term	basis.	Based	upon	management's assessment	of	the	Company's	aging	of	receivable	balances	and	each	customer's	individual	credit	quality,	no	allowance	for	doubtful	accounts	has	been	made	at	either fiscal	year	end	2004	or	2003.	If	circumstances	change	(i.e.	an	unexpected	material	adverse	change	in	major	customer's	ability	to	meet	its	financial	obligations	to	us),	our estimates	of	the	recoverability	of	amounts	due	could	be	reduced	by	a	material	amount	and	the	allowance	for	doubtful	accounts	and	related	bad	expense	would	increase by	the	same	amount.

Estimates—The	preparation	of	financial	statements	in	conformity	with	generally	accepted	accounting	principles	requires	management	to	make	estimates	and assumptions.	These	estimates	and	assumptions	affect	the	reported	amounts	of	assets	and	liabilities	and	disclosure	of	contingent	assets	and	liabilities	at	the	date	of	the financial	statements	as	well	as	reported	amounts	of	revenues	and	expenses	during	the	reporting	period.	Actual	results	could	differ	from	these	estimates.

Timber	and	Timberlands—Timber	and	timberlands	are	stated	at	cost	less	accumulated	depletion	for	timber	previously	harvested.	The	company	capitalizes	timber and	timberland	purchases	and	reforestation	costs	and	other	costs	associated	with	the	planting	and	growing	of	timber,	such	as	site	preparation,	growing	or	purchases	of seedlings,	planting,	fertilization,	herbicide	application	and	the	thinning	of	tree	stands	to	improve	growth.	Timber	carrying	costs,	such	as	real	estate	taxes,	insect	control, wildlife	control	are	expensed	as	incurred.

Costs	attributable	to	timber	harvested,	or	depletion,	are	charged	against	income	as	trees	are	harvested.	Depletion	rates	are	determined	based	on	the	relationship between	net	carrying	value	of	the	timber	and	total	timber	volume	estimated	to	be	available	over	the	harvest	cycle.	Net	carrying	value	of	the	timber	and	timberlands	is used	to	compute	the	gain	or	loss	in	connection	with	real	estate	sales.

# Notes	to	Financial	Statements	(Continued)

# NOTE	1			SUMMARY	OF	SIGNIFICANT	ACCOUNTING	POLICIES	(Continued)

Concentrations	of	Credit	Risk—At	December	31,	2004	and	2003,	the	Company	had	cash	deposits	on	hand	in	financial	institutions	which	exceeded	the	financial institution	insurable	limit	provided	by	the	applicable	guarantee	agency	by	$4.6	million	and	$4.5	million,	respectively.

Fair	Value	of	Financial	Statements—The	carrying	amounts	for	cash	and	temporary	cash	investments	approximate	their	fair	values.	The	carrying	amounts	of	the Company's	borrowings	under	its	credit	facilities	and	long-term	debt	also	approximate	the	fair	values	based	on	current	rates	for	similar	debt.

# NOTE	2			FACTORS	AFFECTING	THE	COMPANY'S	BUSINESS

Factors	Affecting	Supply	and	Demand—The	results	of	operations	of	the	Company	are	and	will	continue	to	be	affected	by	cyclical	supply	and	demand	factors related	to	the	forest	products	industry.	The	supply	of	timber	is	significantly	affected	by	land	use	management	policies	of	the	U.S.	government,	which	in	recent	years have	limited,	and	are	likely	to	continue	to	limit,	the	amount	of	timber	offered	for	sale	by	certain	U.S.	government	agencies.	Such	government	agencies	historically	have been	major	suppliers	of	timber	to	the	U.S.	forest	products	industry,	but	timber	sales	by	such	government	agencies	currently	are	at	historically	low	levels.	Any	reversal	of government	land	use	management	policies	that	substantially	increases	sales	of	timber	by	U.S.	government	agencies	could	significantly	reduce	prices	for	logs,	lumber	and other	forest	products.	The	demand	for	logs	and	manufactured	wood	products	also	has	been,	and	in	the	future	can	be	expected	to	be,	subject	to	cyclical	fluctuations.	Such demand	is	primarily	affected	by	the	level	of	housing	starts,	repair	and	remodeling	activity,	industrial	wood	product	use,	competition	from	nonwood	products,	and	the demand	for	pulp	and	paper	products.	These	factors	are	subject	to	fluctuations	due	to	changes	in	economic	conditions,	interest	rates,	population	growth,	weather conditions,	competitive	pressures	and	other	factors.	Any	decrease	in	the	level	of	industry	demand	for	logs	and	wood	products	generally	can	be	expected	to	result	in lower	net	sales,	operating	income	and	cash	flow	of	the	Company.

Harvesting	Limitation—Net	sales,	operating	income	and	cash	flow	of	the	Company	are	dependent	on	the	confirmed	ability	of	the	Company	to	harvest	timber	at adequate	levels.	Weather	conditions,	timber	growth	cycles,	and	regulatory	requirements	associated	with	protection	of	wildlife	and	water	resources	may	restrict harvesting	of	the	Company's	timberlands.	From	time	to	time,	proposals	have	been	made	in	state	legislatures	that	would	regulate	the	level	of	timber	harvesting.	Timber harvests	also	may	be	affected	by	various	natural	factors,	including	damage	by	fire,	insect	infestation,	disease,	prolonged	drought,	severe	weather	conditions	and	other causes.	The	effects	of	such	natural	disasters	may	be	particularly	damaging	to	young	timber.	Although	damage	from	such	natural	causes	usually	is	localized	and	affects only	a	limited	percentage	of	the	timber,	there	can	be	no	assurance	that	any	damage	affecting	the	Company's	timberlands	will	in	fact	be	so	limited.	Consistent	with industry	practice,	the	Company	does	not	maintain	insurance	coverage	with	respect	to	damage	to	its	timberlands.	Any	of	the	above	factors	that	materially	limits	the ability	of	the	Company	to	harvest	timber	could	have	a	significant	adverse	impact	on	the	net	sales,	operating	income	and	cash	flow	of	the	Company.

Committed	Product	Purchases	by	Packaging	Corporation	of	America;	Possible	inability	to	develop	new	markets—The	Company	derived	approximately	68%	of	its net	sales	for	2004	from	sales	of	timber	directly	to	the	Packaging	Corporation	of	America.	For	a	description	of	the	terms	of	sales	of	timber	by	the

# NOTE	2			FACTORS	AFFECTING	THE	COMPANY'S	BUSINESS	(Continued)

Company	to	the	Packaging	Corporation	of	America,	see	Note	7.	While	management	of	the	Company	believes	that	there	is	significant	demand	for	the	Company's	timber products	from	users	other	than	the	Packaging	Corporation	of	America,	no	assurance	can	be	given	that	such	demand	will	be	equivalent	to	the	Company's	planned	annual harvests.	Any	excess	supply	of	timber	that	results	from	the	inability	of	the	Company	to	sell	its	products	to	users	other	than	the	Packaging	Corporation	of	America	could result	in	lower	prices	for	the	Company's	products,	which	could	have	a	material	adverse	effect	on	the	net	sales,	operating	income	and	cash	flow	of	the	Company.

Environmental	Regulations—The	Company	is	subject	to	extensive	and	changing	federal,	state	and	local	environmental	laws	and	regulations,	the	provisions	and enforcement	of	which	are	expected	to	become	more	stringent	in	the	future.	The	Company	is	subject	to	regulation	under	the	Endangered	Species	Act	(the	ESA),	the	Clean Water	Act,	the	Clean	AirAct,	the	Resource	Conservation	and	Recovery	Act,	the	Comprehensive	Environmental	Response,	Compensation	and	Liability	Act	of	1980,	and the	Federal	Insecticide,	Fungicide	and	Rodenticide	Act,	as	well	as	similar	state	laws	and	regulations.	Violations	of	various	statutory	and	regulatory	programs	that	apply to	the	Company's	operations	can	result	in	civil	penalties,	remediation	expenses,	natural	resource	damages,	potential	injunctions,	cease	and	desist	orders,	and	criminal penalties.

Some	environmental	statutes	impose	strict	liability,	rendering	a	person	liable	for	environmental	damage	without	regard	to	negligence	or	fault	on	the	part	of	such person.	There	can	be	no	assurance	that	such	laws	or	future	legislation	or	administrative	or	judicial	action	with	respect	to	protection	of	the	environment	will	not	adversely affect	the	Company.

The	ESA	and	counterpart	state	legislation	protect	species	threatened	with	possible	extinction.	A	number	of	species	indigenous	to	the	Company's	timberlands	have been	and	in	the	future	may	be	protected	under	these	laws.	Protection	of	endangered	and	threatened	species	may	include	restrictions	on	timber	harvesting,	road	building and	other	silvicultural	activities	on	private,	federal	and	state	land	containing	the	affected	species.

# NOTE	3			DIVESTITURES

During	the	year	ended	December	31,	2003,	the	Company	sold	approximately	8,000	acres	of	land	for	approximately	$10.3	million	resulting	in	a	recognized	gain	of approximately	$3.6	million.

In	December	2004,	the	Company	sold	approximately	153,000	acres	of	timber	lands	in	Mississippi,	Tennessee	and	Alabama	for	approximately	$158.4	million, resulting	in	a	gain	of	approximately	$86.6	million.	Approximately	$55.4	million	of	the	proceeds	of	the	sales	were	used	to	reduce	the	Company's	debt.	See	Note	7	for discussion	of	the	affect	of	the	divestiture	on	the	company's	supply	agreement.

# NOTE	4			INDEBTEDNESS

During	2001	in	connection	with	the	original	purchase	of	the	timberlands	by	Southern	Timber	Venture,	LLC,	the	Company	borrowed	$120	million	of	fixed	rate notes	payable	and	$80	million	of	variable	rate

# NOTE	4			INDEBTEDNESS	(Continued)

Scheduled	maturities	are	as	follows:

| Year | Scheduled	Maturity |
| :--- | :--- |
| 2005 | $1,200,000 |
| 2006 | 1,200,000 |
| 2007 | 1,200,000 |
| 2008 | 1,200,000 |
| 2009 | 1,200,000 |
| Thereafter | 79,000,000 |
| Total | $ 85,000,000 |

The	Company's	outstanding	debt	at	December	31,	2004,	bears	interest	at	a	fixed	rate	of	8.98%.

The	Company	also	has	a	revolving	line	of	credit	of	$2	million.	At	December	31,	2004	and	2003,	the	Company	had	no	outstanding	balance	on	the	revolving	line.

The	Company	is	not	required	to	pay	a	commitment	fee	for	unused	portions	of	the	line	of	credit.

All	of	the	notes	payable	and	the	line	of	credit	referred	to	above	are	secured	by	the	Company's	timber	and	timberlands	located	in	Alabama,	Florida,	Georgia,

Mississippi	and	Tennessee.

# NOTE	5			INCOME	TAXES

The	Company	is	a	limited	liability	company	for	income	tax	purposes.	As	such,	no	provision	has	been	made	in	the	financial	statements	for	income	taxes	as	the income	or	loss	and	other	tax	items	are	reportable	by	the	owners	in	their	separate	tax	returns.

# NOTE	6			COMMITMENTS	AND	CONTINGENCIES

The	Company	is	subject	to	a	variety	of	environmental	and	pollution	control	laws	and	regulations	in	all	jurisdictions	in	which	it	operates.	As	is	the	case	with	other companies	in	similar	industries,	the	Company	faces	exposure	from	actual	or	potential	claims	and	legal	proceedings	involving	environmental	matters.	Liability	insurance in	effect	during	the	year	provides	very	limited	coverage	for	environmental	matters.

The	Company	has	entered	into	a	commitment	to	sell	approximately	90,000	acres	of	timber	land	in	Mississippi,	Alabama	and	Tennessee	for	approximately	$91.4 million	in	March	2005.	This	sale	will	reduce	the	Company's	obligations	under	a	supply	agreement	which	is	discussed	in	the	Note	7.	The	amount	of	the	reduction	in supply	agreement	has	not	been	determined.

# NOTE	7			RELATED	PARTY	TRANSACTIONS

During	2001,	the	Company	entered	into	a	supply	agreement	with	Packaging	Corporation	of	America	(PCA)	which	was	a	33.3%	and	31.3%	owner	of	the	Company as	of	December	31,	2003	and	2004,	respectively.	As	discussed	above,	in	December	2004,	the	Company	sold	153,000	acres	of	timber	lands	which	substantially	reduced the	Company's	obligation	under	the	agreement	to	supply	PCA's	Counce,	Tennessee

mill.	Subsequent	to	the	sale,	the	Company	is	obligated	to	supply	PCA's	mill	in	Counce,	Tennessee	with	a	minimum	of	160,000	tons	of	softwood	per	year	and	a minimum	of	10,800	tons	of	hardwood	per	year.	The

# NOTE	7			RELATED	PARTY	TRANSACTIONS	(Continued)

Company's	obligation	to	supply	100,000	tons	of	softwood	per	year	to	PCA's	mill	in	Valdosta,	Georgia	did	not	change.

Prior	to	the	sale	in	December	2004,	the	Company	was	obligated	to	supply	PCA's	mill	in	Counce,	Tennessee	with	400,000	to	500,000	tons	of	softwood	per	year	and 35,000	to	112,000	tons	of	hardwood	per	year.

Based	on	the	terms	of	the	supply	agreement,	PCA	advances	the	Company	funds	quarterly	on	anticipated	purchases	from	the	Company.	The	amount	of	this	advance is	40%	of	anticipated	sales	for	pine	and	25%	for	hardwood.	Amounts	advanced	to	the	Company	are	reflected	in	the	accompanying	balance	sheet	as	a	current	liability. The	supply	agreement	also	provides	a	predetermined	price	for	logs	delivered	to	PCA	mills.

The	Company	has	also	entered	into	a	management	agreement	with	Claw	Forestry	Services,	LLC	(Claw),	which	is	owned	by	a	member	of	one	of	the	Company's members.	Under	the	terms	of	the	management	agreement,	the	Company	is	obligated	to	pay	Claw	a	management	fee	based	on	$8	per	acre	per	year	for	timberland	under management.	The	fee	is	paid	in	monthly	increments	based	on	one	twelfth	of	the	annual	amounts	expected	to	be	earned.	In	exchange	for	such	payment,	Claw	provides	the Company	certain	timberland	management	services	including,	but	not	limited	to,	the	management	and	marketing	of	the	Company's	timber	products.	The	Company	paid Claw	$2,616,291	in	2004	and	$2,666,600	in	2003	for	management	fees.

The	Company's	primary	lender,	John	Hancock	Financial	Services,	is	also	a	partial	owner	in	the	Company.	All	indebtedness	discussed	in	Note	4	is	owed	to	John Hancock.	Also,	interest	expense	and	early	payment	fees	paid	in	2004	and	2003	were	paid	to	John	Hancock.



Question: what percentage of total purchase commitments for energy are currently in 2007?
Calculation: commitments_2007 = 1364
commitments_total = 3772
percent_2007 = commitments_2007 / commitments_total
answer = percent_2007 * 100
Answer: 36%