SEC Filing | Packaging Corporation of America

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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 1-15399
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PACKAGING CORPORATION OF AMERICA

(Exact Name of Registrant as Specified in its Charter)

DELAWARE 36-4277050
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1900 WEST FIELD COURT, LAKE FOREST, ILLINOIS 60045
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code (847) 482-3000
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Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE
------------------------------------------------ ON WHICH REGISTERED
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COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK
EXCHANGE

Securities registered pursuant to Section 12(g) of the Act:
NONE
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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 / /

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. / /

At March 16, 2001, the aggregate market value of the Registrant's common
equity held by nonaffiliates was approximately $754,324,812. 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.

On March 16, 2001, there were 106,534,892 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the Proxy Statement for the Registrant's 2001 Annual
Meeting of Shareholders are incorporated by reference to the extent indicated in
Part III of this Form 10-K.

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INDEX

PAGE
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PART I

Item 1. Business.................................................... 3
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 11

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 20
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 21

PART III

Item 10. Directors and Executive Officers of the Registrant.......... 21
Item 11. Executive Compensation...................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 22
Item 13. Certain Relationships and Related Transactions.............. 22

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 23

SIGNATURES......................................................................... 27

INDEX TO FINANCIAL STATEMENTS...................................................... F-1

PART I

ITEM 1. BUSINESS

GENERAL

PCA is the sixth largest producer of containerboard and corrugated products
in the United States, based on production capacity as reported in the Pulp &
Paper 2000 North American Fact Book. With 2000 net sales of $1.9 billion, PCA
produced about 2.2 million tons of containerboard, about 80% of which was
consumed in our corrugated products manufacturing plants, and shipped about
26.5 billion square feet of corrugated products.

In 2000, we produced over 1.3 million tons of kraft linerboard at our mills
located in Counce, Tennessee and Valdosta, Georgia. We also produced more than
800,000 tons of semi-chemical corrugating medium at our mills located in
Tomahawk, Wisconsin and Filer City, Michigan. We currently lease the cutting
rights to approximately 140,000 acres of timberland located near our Counce and
Valdosta mills. We also have supply agreements on about 600,000 of the 800,000
acres of timberland we sold during 1999 and 2000.

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

CORPORATE DEVELOPMENTS

On April 12, 1999, Pactiv Corporation, formerly known as Tenneco
Packaging Inc., a wholly owned subsidiary of Tenneco Inc., sold its
containerboard and corrugated products business to PCA, an entity formed by
Madison Dearborn Partners, LLC, a private equity investment firm, in
January 1999, for $2.2 billion, consisting of $246.5 million in cash, the
assumption of $1.76 billion of debt incurred by Pactiv immediately prior to the
contribution, and a 45% common equity interest in PCA valued at $193.5 million.
PCA Holdings LLC, an entity organized and controlled by Madison Dearborn,
acquired the remaining 55% common equity interest in PCA for $236.5 million in
cash, which was used to finance in part the transactions.

The financing of the transactions consisted of (1) borrowings under a new
$1,469.0 million senior credit facility for which J.P. Morgan Securities Inc.
and BT Alex. Brown Incorporated (the predecessor to Deutsche Banc Alex. Brown)
were co-lead arrangers, (2) the offering of $550.0 million of 9 5/8% senior
subordinated notes due 2009, and $100.0 million of 12 3/8% senior exchangeable
preferred stock due 2010, (3) a cash equity investment of $236.5 million by PCA
Holdings 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 Term Loan C, and reduced PCA's average
effective interest rate on its senior secured term debt by approximately 100
basis points. PCA's total borrowings under the senior credit facility as of
December 31, 2000 consisted of $177.0 million of term loans. No amounts were
outstanding under the senior revolving credit facility as of that date.

On November 29, 2000, PCA entered into a three-year $150.0 million revolving
credit facility, of which $142.0 million was initially drawn, in connection with
the securitization of its trade receivables. The facility is secured by PCA's
receivables and bears interest at a floating rate based on commercial paper plus
an allowed margin under the agreement.

INDUSTRY OVERVIEW

According to the Fibre Box Association, the value of industry shipments of
corrugated products was over $24 billion in 2000.

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

Food, beverages and agricultural products................... 41.3%
Paper and fiber products.................................... 20.9%
Petroleum, plastic, synthetic and rubber products........... 9.1%
Glass, pottery, fabricated metal and metal containers....... 5.9%
Electrical and electronic machinery and appliances.......... 3.8%

Corrugated products are generally delivered by truck. Compared to many other
products, the amount of corrugated products that can fit into a truckload weighs
much less. This, coupled with the relatively low price per ton of corrugated
products, make shipping costs account for a relatively high portion of total
costs. As a result, converting plants tend to be located in close proximity to
customers to minimize freight costs. The corrugated products industry consists
of an estimated 683 companies in the United States.

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

Containerboard may be manufactured from both softwood and hardwood fibers,
as well as from recycled fibers from used corrugated and waste from converting
operations. Kraft linerboard is made predominantly from softwoods like pine.
Semi-chemical corrugating medium is made from hardwoods such as oak. Wood may be
brought to the mill as logs to be chipped, or as already-chipped wood. The chips
are chemically treated and cooked to form virgin fiber, also known as wood pulp.
This pulp can be processed alone or blended with some percentage of recycled
fiber on paper machines. The pulp is mixed with water and flows onto a moving
wire screen, which allows the water to drain and concentrates the fibers. What
remains is a paper mat that is compressed by a series of presses and then dried.
The paper 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 common
basis weight for linerboard is 42 lb., although linerboard is produced in
weights that vary from under 26 lb. to over 90 lb. Basis weight represents the
weight in pounds per thousand square feet of linerboard. Producers

also market linerboard by performance characteristics, appearance and color. The
following table describes different product weight, performance and color
characteristics:

CATEGORY PRODUCTS DESCRIPTION
- -------- ------------------- ----------------------------

Weights (lb./1,000 sq. 26-38 lb. Lightweights
ft.)......................
41-56 Middleweights
61-90 Heavyweights
>90 Super heavyweights
Performance................. High ring crush Stacking or compression
strength
Tare weight Minimal variations in basis
weight
Wet strength Strength while wet
Color....................... Mottled white Bleached pulp applied to
unbleached sheet; mottled
appearance
White top Even, white surface
appearance
Full bleached Solid white throughout

Historically, pricing for containerboard has reflected changes in
containerboard supply that resulted from major capacity additions, as well as
changes in demand.

PCA OPERATIONS AND PRODUCTS

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

COUNCE. Our Counce, Tennessee mill is one of the largest linerboard mills
in the United States. Its production capacity is approximately 1,003,000 tons
per year. In 2000, we produced approximately 930,000 tons of kraft linerboard on
two paper machines at Counce. We produced a broad range of basis weights from
31 lb. to 96 lb. The mill also produces a variety of performance and specialty
grades of linerboard including high-ring crush and wet strength.

VALDOSTA. Our Valdosta, Georgia mill is a kraft linerboard mill that has a
production capacity of approximately 457,000 tons per year. In 2000, our single
paper machine at Valdosta produced approximately 414,800 tons of linerboard.
Valdosta primarily produces light- to middleweight linerboard ranging from
35 lb. to 56 lb., and heavyweight/super heavyweight linerboard ranging from
61 lb. to 96 lb.

TOMAHAWK. Our Tomahawk, Wisconsin mill is the second largest corrugating
medium mill in the United States with production capacity of 548,000 tons per
year. In 2000, we produced approximately 535,100 tons of semi-chemical
corrugating medium at Tomahawk using three paper machines, one of which is among
the largest corrugating medium machines in the world. These machines produce a
broad range of basis weights from 23 lb. to 47 lb. Our Tomahawk mill also
produces a variety of performance and specialty grades of corrugating medium.
This includes high ring crush, wet strength, tare weight and super heavyweight.

FILER CITY. Our Filer City, Michigan mill is a semi-chemical corrugating
medium mill. In 2000, we produced approximately 285,100 tons of corrugating
medium on two paper machines at Filer City. In July 1998, we shut down one
machine at Filer City. Mill production capacity at Filer City is

367,000 tons a year if we run all three paper machines. Filer City produces a
range of corrugating medium grades in basis weights from 21 lb. to 40 lb.

We operate 65 corrugated products plants, a supply services group, a
technical and development center and five graphic design centers. Of the
65 corrugated products plants, 38 have a corrugator on site and manufacture both
combined sheets and finished products. The remaining 27 corrugated products
plants purchase combined sheets and create finished products. Two other small
specialty facilities include a collating and distribution packaging center, as
well as a machine rebuild facility. The five graphic design centers are located
in Westmont, Illinois; Cincinnati, Ohio; Dallas, Texas; North Brunswick, New
Jersey; and Southgate, California.

These graphic design centers were established in response to customers'
increasing need for sophisticated, high impact graphics on their corrugated
products. Customers are increasingly using special in-store corrugated displays
to market their products and are requiring more intricate packaging designs. Our
graphic design centers offer state-of-the-art computers and equipment that are
capable of 24-hour design turnaround and reduced product delivery times.

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

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

TIMBERLAND

We currently lease the cutting rights to approximately 140,000 acres of
timberland located near our Counce and Valdosta mills. All of the acres under
cutting rights agreements are located within 100 miles of our mills, which
results in lower wood transportation costs and provides a secure source of wood
fiber. Virtually all of these leased cutting rights agreements have terms with
over 20 years remaining.

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

In addition to the timberland we manage ourselves, our Forest Management
Assistance Program provides professional forestry assistance to private
timberland owners to improve harvest yields and to optimize their harvest
schedule. We have managed the regeneration of approximately 100,000 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 200,000 acres of timberland. We expect to harvest over 150,000 cords of
wood from these forests annually.

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

SOLID WOOD AND RECYCLING FACILITIES

We own three sawmills located in Ackerman and Fulton, Mississippi and
Selmer, Tennessee. During 2000, these three sawmills sold approximately
150.0 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. Finally, we have a 50% interest in a wood
chipping joint venture in Fulton, Mississippi.

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

SALES AND MARKETING

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

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

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

DISTRIBUTION

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

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

CUSTOMERS

About 75% of our corrugated products customers are regional and local
accounts, which are broadly diversified across industries and geographic
locations. The remaining 25% 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.

Our 65 corrugated products plants consume approximately 80% of our mills'
containerboard production. Of the remaining 20% of our containerboard production
that we do not consume at our own converting operations, about 14% is sold to
domestic customers, and about 6% is sold to export customers.

MAJOR RAW MATERIALS USED

FIBER SUPPLY. Fiber is the single largest cost in the manufacture of
containerboard. 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.

ENERGY SUPPLY. Energy at the mills is obtained through purchased
electricity or through various fuels which are then converted to steam or
electricity on-site. Fuel sources include coal, natural gas, oil, 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.

Our two kraft linerboard mills at Counce and Valdosta generate approximately
65% to 70% of their energy requirements from their own by-products. Presently,
an average of 50% of our electricity consumption for the four mills is generated
on-site.

COMPETITION

Corrugated products are produced by nearly 700 U.S. companies operating
approximately 1,500 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 Four M
Corporation, Gaylord Container Corporation, Georgia-Pacific Corporation,
International Paper Company, Smurfit-Stone Container Corporation,
Temple-Inland Inc., Weyerhaeuser Company and Willamette Industries, Inc.
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.

The competition relative to PCA's containerboard produced but not consumed
at our own corrugated products plants are a number of large, diversified paper
companies, including Georgia-Pacific Corporation, International Paper Company,
Smurfit-Stone Container Corporation, Temple-Inland Inc., Weyerhaeuser Company
and Willamette Industries, Inc., 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, 2000, we had approximately 7,900 employees. Approximately
2,100 of these employees were salaried and approximately 5,800 were hourly.
Approximately 75% of our hourly employees are represented by unions. Our
unionized employees are represented primarily by the Paper, Allied Industrial,
Chemical, Energy Workers International Union, the Graphic Communications
International Union and the United Steel Workers of America.

Contracts for our unionized mill employees expire between May 2001 and
October 2005. Contracts for unionized converting plant employees expire between
June 2001 and November 2006. We are currently in negotiations to renew or extend
any union contracts expiring in the near future.

There have been no instances of significant work stoppages in the past
15 years. We believe we have satisfactory relations with our employees.

ENVIRONMENTAL MATTERS

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

In April 1998, the United States Environmental Protection Agency (EPA)
finalized a new Clean Air and Water Act commonly referred to as the Cluster
Rules, which govern all pulp and paper mill operations, including those at our
mills. Over the next several years, the Cluster Rules will affect our allowable
discharges of air and water pollutants. As a result, PCA and its competitors are
required to incur costs to ensure compliance with these new rules. From 1997
through 2000, we spent approximately $28.2 million on Cluster Rule compliance to
meet 2001 Clean Air Act requirements. Total capital costs for environmental
matters, including Cluster Rule compliance, were $24.0 million for 2000 and we
currently estimate that they will be $8.1 million for 2001 of which
$2.1 million is for 2002 to 2005 Cluster Rule requirements. Our current spending
projections to complete Cluster Rule compliance implementation at our four mills
is about $25.7 million from 2001 to 2005.

As is the case with any industrial operation, we have in the past incurred
costs associated with the remediation of soil or groundwater contamination. From
January 1994 through December 2000, remediation costs at our mills and
converting plants totaled about $2.6 million. We do not believe that any
on-going remedial projects are material in nature. As of December 31, 2000, we
maintained a reserve of $0.3 million for environmental remediation liability as
well as a general overall environmental reserve of $2.6 million, which includes
funds relating to onsite landfill and surface impoundments as well as on-going
and anticipated remedial projects. We believe these reserves are adequate.

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

In the 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.

ITEM 2. PROPERTIES

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

LOCATION FUNCTION CAPACITY (TONS)
- -------- -------- ---------------

Counce, TN.................... Kraft linerboard mill 1,003,000
Valdosta, GA.................. Kraft linerboard mill 457,000
Tomahawk, WI.................. Semi-chemical medium mill 548,000
Filer City, MI................ Semi-chemical medium mill 367,000*
---------
Total....................... 2,375,000
=========

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

* We have operated only two of our three paper machines at Filer City since
July 1998, reducing the total productive capacity by 70,000 tons to
297,000 tons.

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

In addition to our mills, we own 43 corrugated products plants. We also own
three sawmills, an air-drying yard, one recycling facility, one warehouse and
miscellaneous other property, which includes sales offices and woodlands forest
management offices. These sales offices and woodlands forest management offices
generally have one to four employees and serve as administrative offices. We
lease 22 corrugated products plants, five regional design centers, two recycling
facilities and numerous other distribution centers, warehouses and facilities.
PCA has no owned or leased properties outside of the continental United States.
All of our owned real property is subject to a first priority mortgage held by
Morgan Guaranty Trust Company of New York on behalf of the lenders under the
senior credit facility.

We lease the cutting rights to approximately 140,000 acres of timberland
located near our Counce and Valdosta mills. Virtually all of these cutting
rights agreements have terms with over 20 years remaining.

We currently lease our executive and administrative offices in Lake Forest,
Illinois from Pactiv under a lease expiring in January 2003. We currently
believe that our facilities and properties are sufficient to meet our operating
requirements for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

On May 14, 1999, we were named as a defendant in a Consolidated
Class Action Complaint which alleged a civil violation of Section 1 of the
Sherman Act. The suit, captioned WINOFF INDUSTRIES, INC. V. STONE CONTAINER
CORPORATION, MDL No. 1261 (E.D. Pa.), names us as a defendant based solely on
the allegation that we are a successor to the interests of Tenneco Packaging
Inc. and Tenneco Inc., both of which were also named as defendants in the suit,
along with nine other linerboard manufacturers. The complaint alleges that the
defendants, during the period October 1, 1993 through November 30, 1995,
conspired to limit the supply of linerboard, and that the purpose and effect of
the alleged conspiracy was artificially to increase prices of corrugated
containers. The plaintiffs have moved to certify a class of all persons in the
United States who purchased corrugated containers directly from any defendant
during the above period, and seek treble damages and attorneys' fees on behalf
of the purported class. The Court has yet to rule on the plaintiffs' motion for
class certification, and the case is currently set for trial in June, 2002. We
believe that the plaintiffs' allegations have no merit and intend to defend
against the suit vigorously. We do not believe that the outcome of this
litigation should have a material adverse effect on our financial position,
results of operations, or cash flow.

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

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

No matters were submitted to a vote of security holders in the fourth
quarter of 2000.

PART II

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

MARKET FOR COMMON STOCK; DIVIDENDS

As a result of PCA's initial public offering on January 28, 2000, PCA's
common stock is listed on the New York Stock Exchange under the symbol "PKG".
The following table sets forth the high and low sale prices as reported by the
New York Stock Exchange during the last year.

FISCAL YEAR 2000
----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------

Stock sale prices per share:
High............................ $12.19 $12.75 $13.19 $16.81 $16.81
Low............................. $ 9.25 $ 9.88 $10.25 $10.88 $ 9.25

As of March 16, 2001, there were 124 holders of record of PCA's common
stock.

PCA has never paid dividends on the common stock. PCA currently has no plans
to pay dividends on the common stock. The payment of any future dividends will
be determined by PCA's Board of Directors in light of conditions then existing,
including PCA's earnings, financial condition and capital requirements,
restrictions in financing agreements, business conditions and other factors.
Under the terms of the agreements governing our outstanding indebtedness, we are
restricted in the amount of dividends we can pay on our common stock. In
addition, under Delaware law, we are prohibited from paying any dividends unless
we have "capital surplus" or "net profits" available for this purpose, as these
terms are defined under Delaware law.

No equity securities of PCA were sold by PCA during fiscal year 2000 which
were not registered under the Securities Act of 1933.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth the selected historical financial and other
data of PCA and the containerboard and corrugated products business of Pactiv
Corporation (the "Group"). The selected historical financial and other data as
of and for the years ended December 31, 1996, 1997 and 1998, and for the period
from January 1, 1999 to April 11, 1999, was derived from the audited combined
financial statements of the Group and the related notes thereto included
elsewhere in this report. The historical financial data as of December 31, 1999
and for the period from April 12, 1999 to December 31, 1999 and for the year
ended December 31, 2000 has been derived from the audited consolidated financial
statements of PCA included elsewhere in this report. The information contained
in the following table also should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
historical combined financial statements of the Group including the notes
thereto and the historical consolidated financial statements of PCA including
the notes thereto, contained elsewhere in this report.

GROUP PCA(1)
------------------------------------------------------ -------------------------------
YEAR ENDED DECEMBER 31, JAN. 1, 1999 APRIL 12, 1999 YEAR ENDED
------------------------------------ THROUGH THROUGH DECEMBER 31,
1996 1997 1998 APRIL 11, 1999 DEC. 31, 1999 2000
---------- ---------- ---------- --------------- --------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF INCOME DATA:
Net sales(2).............. $1,645,948 $1,482,889 $1,643,823 $ 453,207 $1,317,342 $1,921,868
========== ========== ========== ========== ========== ==========
Income (loss) before
extraordinary item...... $ 90,366 $ 27,390 $ 71,439 $ (128,599) $ 47,397 $ 172,961
Extraordinary Item........ -- -- -- (6,327) (6,897) (11,060)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)......... 90,366 27,390 71,439 (134,926) 40,500 161,901
Preferred dividends and
accretion of preferred
stock issuance costs.... -- -- -- -- (9,296) (18,637)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)
available to common
stockholders............ $ 90,366 $ 27,390 $ 71,439 $ (134,926) $ 31,204 $ 143,264
========== ========== ========== ========== ========== ==========

Basic earnings per
share(3):
Income (loss) before
extraordinary item.... $ .96 $ .29 $ .76 $ (1.36) $ .41 $ 1.47
Extraordinary item...... -- -- -- (.07) (.07) (.10)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) per
common share.......... $ .96 $ .29 $ .76 $ (1.43) $ .34 $ 1.37
========== ========== ========== ========== ========== ==========

Diluted earnings per
share(3):
Income (loss) before
extraordinary item.... $ .96 $ .29 $ .76 $ (1.36) $ .39 $ 1.43
Extraordinary item...... -- -- -- (.07) (.07) (.10)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) per
common share.......... $ .96 $ .29 $ .76 $ (1.43) $ .32 $ 1.33
========== ========== ========== ========== ========== ==========
Weighted average common
shares outstanding...... 94,600 94,600 94,600 94,600 92,108 104,890
BALANCE SHEET DATA:
Total assets.............. $1,261,051 $1,317,263 $1,367,403 $2,391,089 $2,153,208 $1,942,112
Total long-term
obligations(4).......... 20,316 27,864 17,552 1,760,466 1,432,553 869,414
Shareholders equity/
interdivision account... 784,422 854,060 908,392 156,697 416,699 687,424

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

1) There was no activity for PCA from January 25, 1999, its date of inception,
through April 11, 1999.

2) Net sales amounts have been restated in accordance with EITF 00-10. See
Note 2 "Summary of Accounting Policies" in the 2000 Annual Report on
Form 10-K for further information.

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

For all periods presented through April 11, 1999, basic and diluted earnings
per share are the same because there are no potentially dilutive other
securities. For the PCA historical period from April 12, 1999 to
December 31, 1999, and for the year ended December 31, 2000, diluted
earnings per share includes the dilutive effect of the portion of the
6,576,460 options granted in June 1999 that remained unexercised, and the
dilutive effect of the 1,099,700 options granted in 2000. This dilutive
effect is calculated using the treasury stock method.

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

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

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements about us within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are subject
to risks and uncertainties. Forward-looking statements include information
concerning our future financial condition and business strategy. Statements that
contain words such as "believes," "expects," "anticipates," "intends,"
"prospects," "estimates," "should," "may" or similar expressions are
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events. While we believe
these expectations and projections are reasonable, forward-looking statements
are inherently subject to risks, uncertainties and assumptions about us.

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

OVERVIEW

In connection with the transactions, PCA acquired The Containerboard Group
of Pactiv Corporation, formerly known as Tenneco Packaging Inc., a wholly owned
subsidiary of Tenneco Inc., which consisted of its containerboard and corrugated
products business and which we refer to in this report as the Group. From its
formation in January 1999 and through the closing of the acquisition on
April 12, 1999, PCA did not have any significant operations. Accordingly, the
historical financial results for periods prior to April 12, 1999 described below
are those of the Group.

The Group operated prior to April 12, 1999 as a division of Pactiv, and not
as a separate, stand-alone entity. As a result, the historical financial
information included in this report does not necessarily reflect what the
Group's financial position and results of operations would have been had the
Group been operated as a separate, stand-alone entity during the periods prior
to April 12, 1999.

The 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.

GENERAL

Historically, prices for containerboard have reflected changes in
containerboard supply that result from capacity additions and reductions, as
well as changes in demand. Containerboard demand is dependent upon both domestic
demand for corrugated products and linerboard export activity.

According to Pulp & Paper Week, after giving effect to price increases in
2000, average prices in December 2000 for linerboard and corrugating medium were
12% and 11% higher, respectively, than December 1999 prices.

Pulp & Paper Week, in its January 22, 2001 publication, reported that prices
for linerboard and corrugating medium decreased $15 per ton, or 3%, and $20 per
ton, or 4%, respectively, compared to December 2000 levels. The March 19, 2001
Pulp & Paper Week publication reported that prices remained unchanged from
January 2001 levels.

RESULTS OF OPERATIONS

The historical results of operations of the Group and PCA are set forth
below:

GROUP PCA
------------------------------- -----------------------------------------------
FOR THE FOR THE
PERIOD FROM PERIOD FROM FOR THE PRO
FOR THE YEAR JANUARY 1, APRIL 12, 1999 FORMA FOR THE YEAR
ENDED 1999 THROUGH YEAR ENDED ENDED
DECEMBER 31, THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 APRIL 11, 1999 1999 1999 2000
(IN MILLIONS) ------------- --------------- --------------- ------------- -------------

Net Sales....................... $1,643.8 $453.2 1$,317.3 1$,770.5 $1,921.9
======== ======== ======== ======== ========
Operating Income (Loss)......... $ 121.7 $(212.1 ) $192.2 $218.2 $ 404.8
Interest Expense................ (2.8) (0.2 ) (107.6 ) (151.7 ) (117.6)
-------- -------- -------- -------- --------
Income (Loss) Before Taxes and
Extraordinary Item............ 118.9 (212.3 ) 84.6 66.5 287.2
Provision for Income Taxes...... (47.5) 83.7 (37.2 ) (30.3 ) (114.2)
-------- -------- -------- -------- --------
Income (Loss) Before
Extraordinary Item............ 71.4 (128.6 ) 47.4 36.2 173.0
Extraordinary Item.............. -- (6.3 ) (6.9 ) (6.9 ) (11.1)
-------- -------- -------- -------- --------
Net Income (Loss)............... 71.4 (134.9 ) 40.5 29.3 161.9
Preferred Dividends and
Accretion of Preferred Stock
Issuance Costs................ -- -- (9.3 ) (12.8 ) (18.6)
-------- -------- -------- -------- --------
Net Income (Loss) Available to
Common Shareholders........... $ 71.4 $(134.9 ) $ 31.2 $ 16.5 $ 143.3
======== ======== ======== ======== ========

Note: Net sales amounts have been restated in accordance with EITF 00-10. See
Note 2 "Summary of Accounting Policies" in the 2000 Annual Report on
Form 10-K for further information.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO PRO FORMA YEAR ENDED DECEMBER 31, 1999

NET SALES

Net sales increased by $151.3 million, or 8.5%, for the year ended
December 31, 2000 from the pro forma year ended December 31, 1999. The increase
was primarily the result of increased sales prices of corrugated products and
containerboard to third parties.

Corrugated products volume was essentially flat in 2000 compared to record
volume in 1999 of 26.6 billion square feet. Containerboard volume to external
domestic and export customers increased

2.6% to 586,000 tons for the year ended December 31, 2000 from 572,000 tons in
the comparable period of 1999.

According to Pulp & Paper Week, average industry linerboard and
semi-chemical medium prices for 42 lb. Liner-East and 26 lb. Medium-East, which
are representative benchmark grades, were $468 and $446, respectively, per ton
in 2000. This compares to $401 and $361, respectively, per ton in 1999.
Acccording to the Fibre Box Association, average industry sale prices for
corrugated products increased by 13.7% in 2000 from 1999.

INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)

Operating income increased by $138.4 million, or 67.2%, for the year ended
December 31, 2000 compared to pro forma 1999. The increase was the result of
increased sales prices of corrugated products and containerboard to third
parties and reduced corporate overhead expenses. Operating income results for
both years exclude fourth quarter gains on timberland sales of $60.4 million and
$12.2 million for 2000 and 1999, respectively.

Gross profit increased $140.1 million, or 39.0%, for the year ended
December 31, 2000 from the pro forma year ended December 31, 1999. Gross profit
as a percentage of sales improved from 20.3% of sales in 1999 to 26.0% of sales
in the current year primarily due to the sales price increases described above.

Corporate overhead for the year ended December 31, 2000, decreased by
$2.5 million, or 5.8%, from the pro forma year ended December 31, 1999. The
reduction primarily reflects the difference in cost between the overhead charged
to the Group by Tenneco and Pactiv and overhead expenses incurred by PCA as a
stand-alone entity. Corporate overhead for the pro forma year ended
December 31, 1999 included three and one-half months of corporate overhead,
through April 11, 1999, charged by Tenneco and Pactiv and eight and one-half
months of corporate overhead expenses incurred by PCA as a stand-alone entity.

Selling and administrative expenses increased $4.6 million, or 4.2%, for the
year ended December 31, 2000 from the comparable period in 1999. The increase
was primarily the result of increased salary and other general selling related
expenses.

INTEREST EXPENSE AND INCOME TAXES

Interest expense decreased by $34.0 million, or 22.4%, for the year ended
December 31, 2000 from the comparable pro forma period in 1999, primarily due to
voluntary prepayments PCA made on its term loans under the senior credit
facility.

PCA's effective tax rate was 39.8% for the year ended December 31, 2000 and
45.5% for the pro forma year ended December 31, 1999. The tax rate is higher
than the federal statutory rate of 35.0% due to state income taxes.

PRO FORMA YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

NET SALES

Net sales increased by $126.7 million, or 7.7%, for the pro forma year ended
December 31, 1999 from the comparable period in 1998. The increase was the
result of increased sales volume of both corrugated products and containerboard
and the increased sales prices of corrugated products and outside sales of
containerboard.

Corrugated products volume increased by 6.4% to 26.6 billion square feet in
1999, from 25.0 billion square feet in 1998. Containerboard volume to external
domestic and export customers increased 8.5% to 572,000 tons in 1999 from
527,000 tons in 1998.

According to Pulp & Paper Week, average linerboard and semi-chemical medium
prices for 42 lb. Liner-East and 26 lb. Medium-East, which are representative
benchmark grades, were $401 and $361, respectively, per ton in 1999. This
compares to $373 and $315, respectively, per ton in 1998. Acccording

to the Fibre Box Association, average sale prices for corrugated products
increased by 5.0% in 1999 from 1998.

INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)

Operating income increased by $87.1 million or 73.2% for the pro forma year
ended December 31, 1999 compared to 1998. This increase excludes a
$12.2 million gain on a 1999 fourth quarter timberlands sale and for the
comparable period in 1998 a $16.9 million gain on the sale of non-strategic
woodlands, a $15.1 million gain on the sale of a 20% interest in a recycled
paperboard joint venture, a $14.4 million restructuring charge, and a
$14.8 million charge for factored receivables financing. The increase was the
result of increased sales volume of both corrugated products and containerboard,
the increased sales prices of corrugated products and containerboard to third
parties and reduced corporate overhead expenses.

Gross profit increased $78.0 million, or 27.7% for the pro forma year ended
December 31, 1999 from the comparable period in 1998. Gross profit as a
percentage of sales improved from 17.1% of sales in 1998 to 20.3% of sales in
1999 primarily due to the sales price and volume increases described above.

Corporate overhead for the pro forma year ended December 31, 1999, decreased
by $20.5 million, or 32.4% from the comparable period in 1998. The reduction
primarily reflects the difference in cost between the overhead charged to the
Group by Tenneco and Pactiv and overhead expenses incurred by PCA as a
stand-alone entity. Corporate overhead for the pro forma year ended
December 31, 1999 included three and one-half months of corporate overhead,
through April 11, 1999, charged by Tenneco and Pactiv and eight and one-half
months of corporate overhead expenses incurred by PCA as a stand-alone entity.
Corporate overhead for the comparable period in 1998 consisted exclusively of
corporate overhead charged by Tenneco and Pactiv.

Selling and administrative expenses increased $0.9 million, or 0.8% for the
pro forma year ended December 31, 1999 from the comparable period in 1998. The
increase was primarily the result of Year 2000 remediation expenses (Y2K).

INTEREST EXPENSE AND INCOME TAXES

Interest expense increased by $148.9 million, or 5,353.3%, for the pro forma
year ended December 31, 1999 from the comparable period in 1998, primarily due
to borrowings under the senior credit facility and the issuance of
$550.0 million of the senior subordinated notes. This indebtedness was incurred
to finance the transactions.

PCA's effective tax rate was 45.5% for the pro forma year ended
December 31, 1999 and 40.0% for the comparable period in 1998. The tax rate is
higher than the federal statutory rate of 35.0% due to state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

PRIOR TO THE TRANSACTIONS

As a division of Pactiv, the Group did not maintain separate cash accounts
other than for petty cash. The Group's disbursements for payroll, capital
projects, operating supplies and expenses were processed and funded by Pactiv
through centrally managed accounts. In addition, cash receipts from the
collection of accounts receivable and the sales of assets were remitted directly
to bank accounts controlled by Pactiv.

Because of Pactiv's centrally managed cash system, in which the cash
receipts and disbursements of Pactiv's various divisions were commingled, it was
not feasible to segregate cash received from Pactiv, such as financing for the
business, from cash transmitted to Pactiv, such as a distribution. Accordingly,
the net effect of these cash transactions with Pactiv is represented as a single
line item within the financing section of the statement of cash flows.
Similarly, the activity of the interdivision account presents the net transfer
of funds and charges between Pactiv and the Group as a single line item.

Since April 12, 1999, PCA has maintained its own cash accounts.

OPERATING ACTIVITIES

Cash flow provided by operating activities increased $127.8 million, or
60.5%, for the year ended December 31, 2000 from the comparable pro forma period
in 1999. The increase was primarily due to an increase in net income.

Cash flow provided by operating activities increased by $15.8 million, or
8.1%, from 1998 to 1999. The increase was primarily due to the replacement of
leased assets with owned, depreciable assets in connection with the April 12,
1999 transactions.

INVESTING ACTIVITIES

Cash used for investing activities increased by $31.5 million, or 20.9%, for
the year ended December 31, 2000 compared to the pro forma year ended
December 31, 1999. The increase was primarily attributable to increased capital
expenditures and a reduction in proceeds from timberland sales.

Net cash used for investing activities decreased $328.1 million, or 184.6%,
for the pro forma year ended December 31, 1999 from the comparable period in
1998, primarily attributable to a prepaid lease payment made in December 1998 to
acquire timberland as part of a lease buy-out and timberlands sale proceeds
received in the fourth quarter of 1999.

As of December 31, 2000, PCA had commitments for capital expenditures of
$37.9 million. PCA believes operating cash flow from continuing operations will
be sufficient to fund these commitments.

FINANCING ACTIVITIES

Cash used for financing activities increased by $29.4 million, or 6.8%, for
the year ended December 31, 2000 compared to the pro forma year ended
December 31, 1999, primarily reflecting increased voluntary prepayments made by
PCA on its term loans under the senior credit facility.

Cash used for financing activities increased $413.3 million, or 2,339.0%,
for the pro forma year ended December 31, 1999 from the comparable period in
1998. The increase was primarily attributable to the voluntary prepayments PCA
has made on its term loans under the senior credit facility.

AFTER THE TRANSACTIONS

Following the transactions, PCA's primary sources of liquidity are cash flow
from operations and borrowings under PCA's new revolving credit facility. PCA's
primary uses of cash are for debt service and capital expenditures. PCA expects
to be able to fund its debt service and capital expenditures from these sources.

PCA incurred substantial indebtedness in connection with the transactions.
On April 12, 1999, PCA had approximately $1,769.0 million of indebtedness
outstanding which included $1,219.0 million of senior secured bank debt,
$550.0 million of 9 5/8% subordinated notes and $100.0 million of 12 3/8%
preferred stock.

Concurrently with the transactions, PCA issued the notes and preferred stock
and entered into the senior credit facility. The senior credit facility
initially provided for three term loans in an aggregate amount of
$1,219.0 million and a revolving credit facility with up to $250.0 million in
availability. Upon the closing of the acquisition, PCA borrowed the full amount
available under the term loans and $9.0 million under the senior revolving
credit facility, the latter of which was repaid immediately thereafter.

In October and November 1999, PCA completed the sales of approximately
405,000 acres of timberland. Total proceeds received from the sales were
$263.3 million, resulting in a pre-tax gain of $12.2 million.

Effective December 14, 1999, PCA elected to reduce its availability under
the revolving credit facility from $250.0 million to $150.0 million. On
June 29, 2000, PCA completed the refinancing of its $885.0 million senior credit
facility.

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

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

The following table provides the weighted average interest rate as of
December 31, 2000 for each of the term loans and the revolving credit facility:

WEIGHTED AVERAGE
BORROWING ARRANGEMENT INTEREST RATE
- --------------------- ----------------

Term Loan A 8.26 %
Term Loan B 8.67 %

Senior Revolving Credit Facility:
Revolver--Eurodollar N/A
Revolver--Base Rate N/A

Three-year Revolving Credit Facility: 6.95 %

The borrowings under the senior revolving credit facility are available to
fund PCA's working capital requirements, capital expenditures and other general
corporate purposes. The Term Loan A must be repaid in quarterly installments
from December 2002 through 2006. The Term Loan B must be repaid in quarterly
installments from December 2002 through 2007. The senior revolving credit
facility will terminate in 2006. The three-year revolving credit facility will
terminate in 2003.

In 1999 and 2000, PCA made voluntary prepayments totaling approximately
$440.0 million and $460.0 million, respectively, using free cash flow from
operations of $389.0 million and proceeds from the sales of timberland of
$511.0 million to permanently reduce its borrowings under the term loans.

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

- incur additional indebtedness,

- pay dividends or make certain other restricted payments,

- consummate certain asset sales,

- incur liens,

- enter into certain transactions with affiliates, or

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

These limitations could limit corporate and operating activities.

PCA estimates that it will make approximately $135.0 million in capital
expenditures in 2001. These expenditures will be used primarily for cost
reduction, business growth, and environmental compliance.

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

ENVIRONMENTAL MATTERS

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

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

Because liability for remediation costs under environmental laws is strict,
meaning that liability is imposed without fault, joint and several, meaning that
liability is imposed on each party without regard to contribution, and
retroactive, we could receive notifications of cleanup liability in the future
and this liability could be material. From January 1994 through December 2000,
remediation costs at our mills and converting plants totaled about
$2.6 million. As of December 31, 2000, we maintained a reserve of $0.3 million
for environmental remediation liability as well as a general overall
environmental reserve of $2.6 million, which includes funds relating to onsite
landfills and surface impoundments as well as on-going and anticipated remedial
projects. Total capital costs for environmental matters, including Cluster Rule
compliance, were $24.0 million for 2000 and we currently estimate that they will
be $8.1 million for 2001, of which $2.1 million is for 2002 to 2005 Cluster Rule
requirements.

IMPACT OF INFLATION

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

NEW ACCOUNTING STANDARDS

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

ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Historically, PCA has not had any material market risk due to the fact that
its debt financing and risk management activities were conducted by Pactiv or
Tenneco. As a result of the transactions, 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.

Under the terms of the senior credit agreement dated as of April 12, 1999,
PCA was required to maintain for at least two years after the closing of the
transactions interest rate protection agreements establishing a fixed maximum
interest rate with respect to at least 50% of the outstanding term loans under
the senior credit agreement. Upon the refinancing of the senior credit agreement
on June 29, 2000, this requirement was deleted.

PCA currently has interest rate collar agreements that protect against
rising interest rates and simultaneously guarantee a minimum interest rate. The
original notional amount of these collar agreements was $720.0 million. As PCA
has made debt prepayments, the need for these collar agreements has diminished.
Accordingly, PCA has reduced the notional amount of the collars to
$250.0 million as of December 31, 2000. The weighted average floor of the
interest rate collar agreements is 5.00% and the weighted average ceiling of the
interest rate collar agreements is 6.83%. The interest rate on approximately 78%
of PCA's variable-rate debt at December 31, 2000 is capped. PCA receives
payments under the collar agreements if the applicable interest rate (LIBOR or
commercial paper) exceeds the ceiling. Correspondingly, PCA makes payments under
the collar agreements if the applicable interest rate drops below the floor. In
both cases, the amounts received or paid are based upon the notional amount and
the difference between the actual interest rate and the ceiling or floor rate.
The weighted average duration of the interest rate collar agreements is
approximately two and one quarter years.

PCA's earnings are affected by changes in short-term interest rates as a
result of borrowings under its variable-rate debt instruments. If interest rates
(LIBOR or commercial paper) for these borrowings increase one percent, PCA's
interest expense would increase, and income before income taxes would decrease,
by approximately $3.2 million and $7.8 million annually as of December 31, 2000
and 1999, respectively, until the applicable interest rate exceeds the ceiling
rate. At that point, only 22% and 35% of the variable-rate debt as of
December 31, 2000 and 1999, respectively, would result in additional interest
expense. As of December 31, 2000, the weighted average LIBOR rate was 6.73% and
the weighted average commercial paper rate was 6.60%. As of December 31, 1999,
the interest rate on the term loans was based on a weighted average LIBOR rate
of 5.95%. The effect of an interest rate change to the fair market value of the
outstanding debt is insignificant. This analysis does not consider any other
impact on fair value that could exist in such an interest rate environment. In
the event of a change in interest rates, management could take actions to
further mitigate its exposure to the change. However, due to the uncertainty of
the specific actions that would be taken and their possible effects, the
sensitivity analysis assumes no changes in PCA's financial structure.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

There were no changes in or disagreements with PCA's accountants during
2000.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

EXECUTIVE OFFICERS

Brief statements setting forth the age at March 20, 2001, 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 executive
officer appears below.

PAUL T. STECKO is 56 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 that time, Mr. Stecko served as
Chief Operating Officer of Tenneco. From December 1993 through January 1997,
Mr. Stecko served as President and Chief Executive Officer of Tenneco Packaging
Inc. Prior to joining Tenneco Packaging, Mr. Stecko spent 16 years with
International Paper Company. Mr. Stecko is a member of the board of directors of
Pactiv Corporation, Tenneco Automotive Inc., State Farm Mutual Insurance
Company, American Forest and Paper Association and Cives Corporation.

WILLIAM J. SWEENEY is 60 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 that time, 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 that time, as Sales Manager and General
Manager of Boise Cascade Corporation.

MARK W. KOWLZAN is 46 years old and has served as Vice
President--Containerboard of PCA since April 1999. 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 48 years old and has served as Chief Financial Officer of
PCA since March 1999, as Corporate Secretary since April 1999 and also as Vice
President since July 1999. 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.

ANDREA L. DAVEY is 44 years old and has served as Vice President--Human
Resources of PCA since April 1999. From 1994 to April 1999, Ms. Davey was
employed principally by Tenneco Packaging Inc. where she held the positions of
Director of Field Employee Relations, Director of Training and Development,
Director of Compensation and Benefits, and Project Manager of HRIS project and
also served in the capacity of Vice President--Human Resources, Paperboard
Packaging from May 1997 to April 1999. From 1992 until joining Tenneco Packaging
in 1994, Ms. Davey served as Director of Human Resources for the Bakery division
of Sara Lee Corporation. From 1989 to that time, she served as Human Resource
Manager for the Converting Group of International Paper Company. Prior to that
time, Ms. Davey spent five years with ITT Corporation, where she served in
several human resources positions.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to executive compensation is included under the
caption "Executive Compensation" in PCA's Proxy Statement and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

PART IV

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

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

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

(2) Financial Statement Schedules

The following consolidated financial statement schedules of the Group for
the three years ended December 31, 1998 and for the period from January 1, 1999
through April 11, 1999 are included in this report.

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

ADDITIONS/
BALANCE DEDUCTIONS BALANCE
ALLOWANCE FOR DOUBTFUL BEGINNING PROVISION FROM TRANSLATION END OF
ACCOUNTS RECEIVABLE OF YEAR (BENEFIT) RESERVES* ADJUSTMENTS YEAR
- ------------------- --------- --------- ---------- ----------- --------

January 1, 1999 through
April 11, 1999........... 5,220 (412) (861) -- 3,947
1998....................... 5,023 2,710 (2,513) -- 5,220
1997....................... 5,010 611 (598) -- 5,023
1996....................... 5,239 1,018 (1,247) -- 5,010

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

* Consists primarily of write-offs and recoveries of bad debts.

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.

We have audited in accordance with generally accepted auditing standards the
financial statements of The Containerboard Group (a division of Tenneco
Packaging Inc., which is a Delaware corporation and a wholly owned subsidiary of
Tenneco Inc.), included in this report and have issued our report on the
December 31, 1998, 1997 and 1996 financial statements dated February 26, 1999
and our report on the April 11, 1999 financial statements dated July 16, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed above is the responsibility of
the company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

Chicago, Illinois
August 26, 1999

(2) FINANCIAL STATEMENT SCHEDULES (CONTINUED)

The following consolidated financial statement schedule of PCA for the year
ended December 31, 2000 and for the period from April 12, 1999 through
December 31, 1999 is included in this report.

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

2000....................... 4,681 5,820 (4,107) -- 6,394
April 12, 1999 through
December 31, 1999........ 3,947 1,833 (1,099) -- 4,681

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

* Consists primarily of write-offs and recoveries of bad debts.

(b) REPORTS ON FORM 8-K

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

EXHIBIT
NUMBER DESCRIPTION
-------- -----------

2.1 Contribution Agreement, dated as of January 25, 1999, among
Pactiv Corporation (formerly known as Tenneco
Packaging Inc.) ("Pactiv"), PCA Holdings LLC
("PCA Holdings") and Packaging Corporation of America
("PCA").(2)

2.2 Letter Agreement Amending the Contribution Agreement, dated
as of April 12, 1999, among Pactiv, PCA Holdings and PCA.(2)

3.1 Restated Certificate of Incorporation of PCA.(2)

3.2 Form of Certificate of Amendment to Restated Certificate of
Incorporation of PCA.(1)

3.3 Form of Second Amended and Restated By-laws of PCA.(1)

4.1 Indenture, dated as of April 12, 1999, by and among PCA,
Dahlonega Packaging Corporation ("Dahlonega"), Dixie
Container Corporation ("Dixie"), PCA Hydro Inc. ("PCA
Hydro"), PCA Tomahawk Corporation ("PCA Tomahawk"), PCA
Valdosta Corporation ("PCA Valdosta") and United States
Trust Company of New York.(2)

4.2 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of 12 3/8% Senior Exchangeable
Preferred Stock due 2010 and 12 3/8% Series B Senior
Exchangeable Preferred Stock due 2010 of PCA.(2)

4.3 Exchange Indenture, dated as of April 12, 1999, by and among
PCA and U.S. Trust Company of Texas, N.A.(2)

4.4 Intentionally omitted.

4.5 Preferred Stock Registration Rights Agreement, dated as of
April 12, 1999, by and among PCA, J.P. Morgan and BT.(2)

EXHIBIT
NUMBER DESCRIPTION
-------- -----------

4.6 Form of Rule 144A Global Note and Subsidiary Guarantee.(2)

4.7 Intentionally omitted.

4.8 Form of Rule 144A Global Certificate.(2)

4.9 Form of certificate representing shares of common stock.(1)

10.1 Purchase Agreement, dated as of March 30, 1999, by and among
PCA, Dahlonega, Dixie, PCA Hydro, PCA Tomahawk,
PCA Valdosta, J.P. Morgan and BT.(2)

10.2 Credit Agreement, dated as of April 12, 1999, among Pactiv,
the lenders party thereto from time to time, J.P. Morgan,
BT, Bankers Trust Company and Morgan Guaranty Trust Company
of New York ("Morgan Guaranty").(2)

10.3 Subsidiaries Guaranty, dated as of April 12, 1999, made by
Dahlonega, Dixie, PCA Hydro, PCA Tomahawk, PCA Valdosta and
Morgan Guaranty.(2)

10.4 Pledge Agreement, dated as of April 12, 1999, among PCA,
Dahlonega, Dixie, PCA Hydro, PCA Tomahawk, PCA Valdosta and
Morgan Guaranty.(2)

10.5 TPI Security Agreement, dated as of April 12, 1999, between
Pactiv and Morgan Guaranty.(2)

10.6 PCA Security Agreement, dated as of April 12, 1999, among
PCA, Dahlonega, Dixie, PCA Hydro, PCA Tomahawk,
PCA Valdosta and Morgan Guaranty.(2)

10.7 Intentionally omitted.

10.8 Registration Rights Agreement, dated as of April 12, 1999,
by and among Pactiv, PCA Holdings and PCA.(2)

10.9 Holding Company Support Agreement, dated as of April 12,
1999, by and between PCA Holdings and PCA.(2)

10.10 Facility Use Agreement, dated as of April 12, 1999, by and
between Pactiv and PCA.(2)

10.11 Human Resources Agreement, dated as of April 12, 1999, by
and among Tenneco Automotive Inc. (formerly known as
Tenneco Inc.), Pactiv and PCA.(2)

10.12 Purchase/Supply Agreement, dated as of April 12, 1999,
between PCA and Tenneco Packaging Speciality and Consumer
Products Inc.(2)

10.13 Purchase/Supply Agreement, dated as of April 12, 1999,
between PCA and Pactiv.(2)

10.14 Purchase/Supply Agreement, dated as of April 12, 1999,
between PCA and Tenneco Automotive Inc.(2)

10.15 Technology, Financial and Administrative Transition Services
Agreement, dated as of April 12, 1999, between Pactiv and
PCA.(2)

10.16 Letter Agreement Regarding Terms of Employment, dated as of
January 25, 1999, between PCA and Paul T. Stecko.*(2)

10.17 Letter Agreement Regarding Terms of Employment, dated as of
May 19, 1999, between PCA and Paul T. Stecko.*(2)

10.18 1999 Long-Term Equity Incentive Plan, effective as of
October 19, 1999.*(1)

10.19 Management Equity Agreement, dated as of June 1, 1999, among
PCA, Paul T. Stecko and the Paul T. Stecko 1999 Dynastic
Trust.*(2)

10.20 Form of Management Equity Agreement, dated as of June 1,
1999, among PCA and the members of management party
thereto.*(2)

10.21 Memorandum Regarding Special Retention Bonus, dated as of
April 16, 1999, from PCA to William J. Sweeney.*(2)

EXHIBIT
NUMBER DESCRIPTION
-------- -----------

10.22 Amended and Restated 1999 Management Equity Compensation
Plan, effective as of June 2, 1999.*(2)

10.23 First Amendment and Consent, dated as of August 26, 1999,
among PCA, the lenders party thereto, J.P. Morgan, BT,
Bankers Trust Company and Morgan Guaranty.(1)

10.24 Second Amendment and Consent, dated as of January 6, 2000,
among PCA, the lenders party thereto, J.P. Morgan, BT,
Bankers Trust Company and Morgan Guaranty.(1)

21.1 Subsidiaries of the Registrant.(1)

23.1 Consent of Arthur Andersen LLP.

23.2 Consent of Ernst & Young LLP.

24.1 Powers of Attorney.

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

* Management contract or compensatory plan or arrangement.

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

(2) 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 March 27, 2001.

Packaging Corporation of America

By: /s/ RICHARD B. WEST
--------------------------------------------
Name: Richard B. West
Title: Chief Financial Officer, Vice
President and Corporate Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 2001.

SIGNATURE TITLE
--------- -----

/s/ PAUL T. STECKO* Chairman of the Board and Chief Executive
------------------------------------------- Officer (Principal Executive Officer)
Paul T. Stecko

/s/ RICHARD B. WEST Chief Financial Officer, Vice President and
------------------------------------------- Corporate Secretary (Principal Financial and
Richard B. West Accounting Officer)

/s/ HENRY F. FRIGON*
------------------------------------------- Director
Henry F. Frigon

/s/ LOUIS A. HOLLAND*
------------------------------------------- Director
Louis A. Holland

/s/ JUSTIN S. HUSCHER*
------------------------------------------- Director
Justin S. Huscher

/s/ SAMUEL M. MENCOFF*
------------------------------------------- Director
Samuel M. Mencoff

/s/ THOMAS S. SOULELES*
------------------------------------------- Director
Thomas S. Souleles

/s/ RAYFORD K. WILLIAMSON*
------------------------------------------- Director
Rayford K. Williamson

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

*By: /s/ RICHARD B. WEST
--------------------------------------
Richard B. West
(ATTORNEY-IN-FACT)

INDEX TO FINANCIAL STATEMENTS

PACKAGING CORPORATION OF AMERICA CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2000 AND 1999
Report of Ernst & Young LLP, independent public
accountants............................................. F-2
Consolidated balance sheets as of December 31, 2000 and
1999.................................................... F-3
Consolidated statements of income for the year ended
December 31, 2000 and the period from January 25, 1999
(date of incorporation) through December 31, 1999....... F-4
Consolidated statements of changes in stockholders' equity
for the year ended December 31, 2000 and the period
from January 25, 1999 (date of incorporation) through
December 31, 1999....................................... F-5
Consolidated statements of cash flows for the year ended
December 31, 2000 and the period from January 25, 1999
(date of incorporation) through December 31, 1999....... F-6
Notes to consolidated financial statements................ F-7
THE CONTAINERBOARD GROUP (A DIVISION OF TENNECO
PACKAGING INC.) COMBINED FINANCIAL STATEMENTS AS OF APRIL
11, 1999
Report of Arthur Andersen LLP, independent public
accountants............................................. F-27
Combined statement of assets, liabilities and
interdivision account as of April 11, 1999.............. F-28
Combined statement of revenues, expenses and interdivision
account for the period January 1, 1999 through April 11,
1999.................................................... F-29
Combined statement of cash flows for the period January 1,
1999 through April 11, 1999............................. F-30
Notes to combined financial statements.................... F-31
THE CONTAINERBOARD GROUP (A DIVISION OF TENNECO PACKAGING
INC.) COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31,
1998, 1997 AND 1996
Report of Arthur Andersen LLP, independent public
accountants............................................. F-47
Combined statements of assets, liabilities and
interdivision account as of December 31, 1998, 1997 and
1996.................................................... F-48
Combined statements of revenues, expenses and
interdivision account for the years ended December 31,
1998, 1997 and 1996..................................... F-49
Combined statements of cash flows for the years ended
December 31, 1998, 1997 and 1996........................ F-50
Notes to combined financial statements.................... F-52

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Board of Directors and Shareholders of Packaging Corporation of America:

We have audited the accompanying consolidated balance sheets of Packaging
Corporation of America as of December 31, 2000 and 1999 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year ended December 31, 2000 and the period from January 25, 1999
(date of incorporation) to December 31, 1999. Our audit also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of Packaging Corporation of
America management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Packaging
Corporation of America at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for the year ended December 31,
2000 and the period from January 25, 1999 to December 31, 1999 in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

Ernst & Young LLP

Chicago, Illinois
January 19, 2001

F-2

PACKAGING CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999

2000 1999
---------- ----------

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,892 $ 10,300
Accounts receivable, net of allowance for doubtful
accounts of $6,394 and $4,681 as of December 31, 2000
and 1999, respectively.................................. 215,389 208,356
Notes receivable.......................................... 605 698
Inventories............................................... 159,712 164,919
Prepaid expenses and other current assets................. 5,755 8,802
Deferred income taxes..................................... 14,356 8,411
---------- ----------
TOTAL CURRENT ASSETS.................................... 403,709 401,486
Timber and timberlands, at cost, less depletion............. 3,339 187,896
Property, plant and equipment, net.......................... 1,452,651 1,460,024
Intangible assets, net of accumulated amortization of $1,380
and $1,154 as of December 31, 2000 and 1999,
respectively.............................................. 1,758 1,532
Other long-term assets...................................... 80,655 102,270
---------- ----------
TOTAL ASSETS............................................ $1,942,112 $2,153,208
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 239 $ 829
Accounts payable.......................................... 113,701 127,365
Accrued interest.......................................... 15,438 13,633
Accrued liabilities....................................... 89,170 85,643
---------- ----------
TOTAL CURRENT LIABILITIES............................... 218,548 227,470
Long-term liabilities:
Long-term debt............................................ 869,175 1,329,202
Deferred income taxes..................................... 151,728 69,804
Other liabilities......................................... 15,237 7,511
---------- ----------
TOTAL LONG-TERM LIABILITIES............................. 1,036,140 1,406,517
Mandatorily redeemable preferred stock (liquidation
preference $100 per share, 3,000,000 shares authorized, 0
shares and 1,058,094 shares issued and outstanding as of
December 31, 2000 and 1999, respectively)................. -- 102,522
Shareholders' equity:
Junior preferred stock (liquidation preference $1.00 per
share, 100 shares authorized, 0 shares and 100 shares
issued and outstanding as of December 31, 2000 and 1999,
respectively)........................................... -- --
Common stock (par value $.01 per share, 300,000,000 shares
authorized, 106,248,138 shares and 94,600,000 shares
issued and outstanding as of December 31, 2000 and 1999,
respectively)........................................... 1,062 946
Additional paid in capital.................................. 512,208 384,549
Retained earnings........................................... 174,468 31,204
Common stock held in treasury, at cost (27,470 shares at
December 31, 2000)........................................ (314) --
---------- ----------
TOTAL SHAREHOLDERS' EQUITY.............................. 687,424 416,699
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $1,942,112 $2,153,208
========== ==========

See notes to consolidated financial statements.

F-3

PACKAGING CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME

TWELVE MONTHS JAN. 25, 1999
ENDED THROUGH
DEC. 31, 2000 DEC. 31, 1999
------------- -------------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales................................................... $1,921,868 $1,317,342
Cost of sales............................................... (1,422,390) (1,028,582)
---------- ----------
Gross profit.............................................. 499,478 288,760
Selling and administrative expenses......................... (114,448) (79,794)
Other income, net........................................... 59,996 11,020
Corporate overhead.......................................... (40,192) (27,756)
---------- ----------
Income before interest, taxes and extraordinary item...... 404,834 192,230
Interest expense, net....................................... (117,683) (107,594)
---------- ----------
Income before taxes and extraordinary item................ 287,151 84,636
Provision for income taxes.................................. (114,190) (37,239)
---------- ----------
Income before extraordinary item.......................... 172,961 47,397
Extraordinary item, net of tax.............................. (11,060) (6,897)
---------- ----------
Net income.................................................. 161,901 40,500
Preferred dividends and accretion of preferred stock
issuance costs............................................ (18,637) (9,296)
---------- ----------
Net income available to common shareholders................. $ 143,264 $ 31,204
========== ==========

Weighted average common shares outstanding
Basic..................................................... 104,890 92,108
Diluted................................................... 107,518 96,549

Basic earnings per common share:
Income before extraordinary item.......................... $ 1.47 $ 0.41
Extraordinary item........................................ (0.10) (0.07)
---------- ----------

Net income per common share............................... $ 1.37 $ 0.34
---------- ----------

Diluted earnings per common share:
Income before extraordinary item.......................... $ 1.43 $ 0.39
Extraordinary item........................................ (0.10) (0.07)
---------- ----------

Net income per common share............................... $ 1.33 $ 0.32
========== ==========

See notes to consolidated financial statements.

F-4

PACKAGING CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 25, 1999 (DATE OF INCORPORATION)
THROUGH DECEMBER 31, 2000

JUNIOR
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL
--------------------- ---------------------- ------------------- PAID RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT IN CAPITAL EARNINGS
(IN THOUSANDS EXCEPT SHARE DATA) -------- ---------- ----------- -------- -------- -------- ------------- ---------

Balance at January 25, 1999.... -- $ -- -- $ -- -- $ -- $ -- $ --
Pactiv contribution of assets
to PCA..................... -- -- 193,500 2 -- -- 399,323 --
Payment to Pactiv............ -- -- -- -- -- -- (246,500) --
Investment by PCA Holdings... -- -- 236,500 2 -- -- 236,500 --
Issuance of junior preferred
stock...................... 100 -- -- -- -- -- -- --
Non-financing transaction
costs...................... -- -- -- -- -- -- (23,832) --
Post-closing adjustment to
contribution of assets..... -- -- -- -- -- -- 20,000 --
220-for-one common stock
split...................... -- -- 94,170,000 942 -- -- (942) --
Net income................... -- -- -- -- -- -- -- 40,500
Dividends declared on
preferred stock............ -- -- -- -- -- -- -- (9,084)
Accretion of preferred stock
costs...................... -- -- -- -- -- -- -- (212)
---- ---------- ----------- ------ ------- ----- --------- ---------
Balance at December 31, 1999... 100 $ -- 94,600,000 $ 946 -- $ -- $ 384,549 $ 31,204
---- ---------- ----------- ------ ------- ----- --------- ---------
Net income................... -- -- -- -- -- -- -- 161,901
Initial public offering...... -- -- 11,250,000 112 -- -- 125,852 --
Redemption of preferred
stock...................... -- -- -- -- -- -- -- (16,266)
Dividends declared on
preferred stock............ -- -- -- -- -- -- -- (2,291)
Accretion of preferred stock
costs...................... -- -- -- -- -- -- -- (80)
Stock options................ -- -- 398,138 4 -- -- 1,807 --
Treasury stock............... -- -- -- -- (27,470) (314) -- --
Buyout of preferred stock.... (100) -- -- -- -- -- -- --
---- ---------- ----------- ------ ------- ----- --------- ---------
Balance at December 31, 2000... -- $ -- 106,248,138 $1,062 (27,470) $(314) $ 512,208 $ 174,468
==== ========== =========== ====== ======= ===== ========= =========

TOTAL
SHAREHOLDERS'
EQUITY
(IN THOUSANDS EXCEPT SHARE DATA) --------------

Balance at January 25, 1999.... $ --
Pactiv contribution of assets
to PCA..................... 399,325
Payment to Pactiv............ (246,500)
Investment by PCA Holdings... 236,502
Issuance of junior preferred
stock...................... --
Non-financing transaction
costs...................... (23,832)
Post-closing adjustment to
contribution of assets..... 20,000
220-for-one common stock
split...................... --
Net income................... 40,500
Dividends declared on
preferred stock............ (9,084)
Accretion of preferred stock
costs...................... (212)
---------
Balance at December 31, 1999... $ 416,699
---------
Net income................... 161,901
Initial public offering...... 125,964
Redemption of preferred
stock...................... (16,266)
Dividends declared on
preferred stock............ (2,291)
Accretion of preferred stock
costs...................... (80)
Stock options................ 1,811
Treasury stock............... (314)
Buyout of preferred stock.... --
---------
Balance at December 31, 2000... $ 687,424
=========

See notes to consolidated financial statements.

F-5

PACKAGING CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS

TWELVE MONTHS JAN. 25, 1999
ENDED THROUGH
DEC. 31, 2000 DEC. 31, 1999
------------- -------------

(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $161,901 $ 40,500
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization.................. 140,841 105,935
Amortization of financing costs........................... 7,375 6,299
Extraordinary loss--early debt extinguishment............. 11,060 6,897
Increase in deferred income taxes......................... 83,276 33,228
Undistributed earnings of affiliated companies............ (444) 597
Gain on sale of timberlands............................... (60,414) (12,157)
Gain on disposal of property, plant and equipment......... (1,895) (947)
Other, net................................................ 2,811 1,320
Changes in components of working capital:
(Increase) decrease in current assets--
Accounts receivable..................................... (6,940) (30,007)
Inventories............................................. 5,207 (5,625)
Prepaid expenses and other.............................. 2,443 (3,379)
Increase (decrease) in current liabilities--
Accounts payable........................................ (13,663) 54,738
Accrued liabilities..................................... 7,490 57,049
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 339,048 254,448
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (128,991) (88,938)
Additions to other long term assets....................... (4,748) (5,302)
Proceeds from disposals of property, plant and
equipment............................................... 3,249 1,347
Proceeds from timberlands sales........................... 247,936 263,255
Payment to Pactiv for contribution of assets.............. -- (246,500)
Investments in joint venture.............................. (500) --
Other, net................................................ 1,955 (230)
-------- --------
NET CASH PROVIDED BY (USED FOR) INVESTING
ACTIVITIES.......................................... 118,901 (76,368)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock............................. -- 96,500
Redemption of preferred stock............................. (124,432) --
Proceeds from long-term debt issued....................... 142,605 9,619
Payments on long-term debt................................ (602,826) (440,075)
Proceeds from initial public offering..................... 126,364 --
Financing costs........................................... (3,565) (90,324)
Proceeds from post-closing adjustment..................... -- 20,000
Proceeds from issuance of common stock to PCA Holdings.... -- 236,500
Purchases of treasury stock............................... (314) --
Issuance of common stock upon exercise of stock options... 1,811 --
-------- --------
NET CASH USED FOR FINANCING ACTIVITIES................ (460,357) (167,780)
-------- --------
NET INCREASE (DECREASE) IN CASH............................. (2,408) 10,300
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 10,300 --
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 7,892 $ 10,300
======== ========

See notes to consolidated financial statements.

F-6

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2000

1. BASIS OF PRESENTATION

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

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

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

The Company is comprised of mills and corrugated products operations. The
mill operations (the "Mills") consist of two Kraft linerboard mills located in
Counce, Tennessee, and Valdosta, Georgia, and two medium mills located in Filer
City, Michigan, and Tomahawk, Wisconsin. The Mills also include two recycling
centers located in Nashville, Tennessee, and a recycling center located in
Jackson, Tennessee. The Company leases the cutting rights to approximately
140,000 acres of timberland as of December 31, 2000. The Mills transfer the
majority of their output to PCA's corrugated products operations ("Corrugated").

PCA's corrugated operations consist of 65 corrugated products plants, a
supply services group, a technical and development center, and five graphic
design centers. All plants are located in North America. Corrugated combines
linerboard and medium (primarily from the Mills) into sheets that are converted
into corrugated shipping containers, point-of-sale graphics packaging,
point-of-purchase displays and other specialized packaging. Corrugated sells to
diverse customers primarily in North America.

2. SUMMARY OF ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

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

F-7

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts in the financial statements and the
accompanying notes. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

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

INVENTORIES

Raw materials, work in process and finished goods are valued using the lower
of last-in, first-out ("LIFO") cost or market method. Supplies and materials
inventories are valued using a moving average cost. All inventories are stated
at the lower of cost or market. Inventories valued using the LIFO method
comprised 77% and 76% of inventories at current cost at December 31, 2000 and
December 31, 1999, respectively.

The components of inventories are as follows:

DECEMBER 31
-------------------
2000 1999
-------- --------

(IN THOUSANDS)
Raw materials........................................... $ 71,256 $ 74,881
Work in process......................................... 5,908 5,021
Finished goods.......................................... 56,157 56,049
Supplies and materials.................................. 51,222 50,666
-------- --------
Inventories at FIFO cost................................ 184,543 186,617
Excess of FIFO over LIFO cost........................... (24,831) (21,698)
-------- --------
Inventory, net........................................ $159,712 $164,919
======== ========

PROPERTY, PLANT AND EQUIPMENT

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

F-8

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Property, plant and equipment by major classification are as follows:

DECEMBER 31
-----------------------
2000 1999
---------- ----------

(IN THOUSANDS)
Land................................................. $ 64,348 $ 62,303
Buildings............................................ 296,842 287,404
Machinery and equipment.............................. 1,964,340 1,873,156
Other, including construction in progress............ 82,106 79,693
---------- ----------
Property, plant and equipment, at cost............... 2,407,636 2,302,556
Less: Accumulated depreciation....................... (954,985) (842,532)
---------- ----------
Property, plant and equipment, net................. $1,452,651 $1,460,024
========== ==========

The amount of interest capitalized related to construction in progress was
approximately $0.6 million for the year ended December 31, 2000 and
$0.1 million for the period April 12, 1999 through December 31, 1999.

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

Buildings and land improvements.......................... 5 to 40 years
Machinery and equipment.................................. 3 to 25 years
Trucks and automobiles................................... 3 to 10 years
Furniture and fixtures................................... 3 to 20 years
Computers and hardware................................... 3 to 7 years
Leasehold improvements................................... Period of the lease

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

Expenditures for repairs and maintenance are expensed as incurred.

INTANGIBLE ASSETS

The Company has capitalized certain intangible assets based on their
estimated fair value at the date of acquisition. Amortization is provided for
these intangible assets on a straight-line basis over periods ranging from three
to ten years. Covenants not to compete are amortized on a straight-line basis
over the terms of the respective agreements.

OTHER LONG-TERM ASSETS

PCA has capitalized certain costs related to obtaining its financing. These
costs are amortized to interest expense using the effective interest rate method
over the terms of the senior credit facility and senior subordinated notes,
which range from seven years to nine years. Deferred financing costs were
$29.0 million and $50.6 million as of December 31, 2000 and December 31, 1999,
respectively.

F-9

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
PCA also capitalizes certain costs related to the purchase and development
of software which is used in its business operations. The costs attributable to
these software systems are amortized over their estimated useful lives based on
various factors such as the effects of obsolescence, technology and other
economic factors.

IMPAIRMENT OF LONG-LIVED ASSETS

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

FINANCIAL INSTRUMENTS

The Company uses interest rate collar agreements to manage interest costs
and the risk associated with changing interest rates. As interest rates change,
the differential paid or received is recognized in interest expense of the
period.

INCOME TAXES

PCA utilizes the liability method of accounting for income taxes whereby it
recognizes deferred tax assets and liabilities for the future tax consequences
of temporary differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements. Deferred tax assets are
reduced by a valuation allowance when, 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.

REVENUE RECOGNITION

The Company recognizes revenue as title to the products is transferred to
customers. In 2000, the Company adopted EITF 00-10, "Accounting for Shipping and
Handling Fees and Costs."

Shipping and handling costs are included in cost of sales. Shipping and
handling billings to a customer in a sales transaction are included in revenue.
Prior year amounts have been reclassed to conform to this treatment.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. The amount charged
was $3.4 million and $2.5 million for the year ended December 31, 2000 and for
the period from April 12, 1999 through December 31, 1999, respectively.

F-10

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
FREIGHT TRADES

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

SEGMENT INFORMATION

The Company is primarily engaged in one line of business: the manufacture
and sale of packaging materials, boxes and containers for industrial and
consumer markets. No single customer accounts for more than 10% of total
revenues. PCA has no foreign operations.

NEW ACCOUNTING PRONOUNCEMENTS

In June, 1998, Financial Accounting Standards No. 133 ("FAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities" was issued and is
effective for the Company January 1, 2001. FAS No. 133, as amended by FAS
No. 138, requires the Company to recognize all derivatives as either assets or
liabilities and to measure those instruments 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. Upon
adoption, the Company will be required to adjust hedging instruments to fair
value in the balance sheet and recognize the offsetting gains or losses as
adjustments to be reported in net income or other comprehensive income, as
appropriate. The adoption of FAS No. 133 on January 1, 2001, did not have a
material impact on the Company's consolidated financial position or results of
operations.

RECLASSIFICATIONS

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

3. EARNINGS PER SHARE

All share and per share data included in the accompanying consolidated
financial statements have been adjusted to reflect a 220-for-one-split of the
Company's common stock which became effective on October 19, 1999.

F-11

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

3. EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computation of basic and diluted income
per common share for the periods presented.

JAN. 1, 2000 APRIL 12, 1999
THROUGH THROUGH
DEC. 31, 2000 DEC. 31, 1999
------------- --------------

(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income available to common stockholders..... $143,264 $31,204
Denominator:
Basic common shares outstanding................. 104,890 92,108
Effect of dilutive securities:
Stock options................................... 2,397 1,949
Non-vested stock................................ 231 2,492
-------- -------
Dilutive common shares outstanding................ 107,518 96,549
Basic income per common share..................... $ 1.37 $ 0.34
Diluted income per common share................... $ 1.33 $ 0.32

4. ACCRUED LIABILITIES

The components of accrued liabilities are as follows:

DECEMBER 31
-------------------
2000 1999
-------- --------

(IN THOUSANDS)
Benefits.................................................. $21,695 $21,318
Vacation and holiday pay.................................. 11,586 11,399
Other..................................................... 55,889 52,926
------- -------
Total................................................... $89,170 $85,643
======= =======

5. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS

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

The Company adopted a supplemental executive retirement plan in 2000 that
provides supplemental pension benefits for certain executive officers of the
Company. Benefits are based upon

F-12

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

5. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
years of service and the highest three year average of compensation. The benefit
obligation and pension costs were not significant.

PCA also provides certain medical benefits for retired employees and certain
medical and life insurance benefits for certain terminated employees. For
salaried employees, the plan covers employees retiring from PCA on or after
attaining age 55 who have had at least 10 years service with PCA after attaining
age 45. 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 the closing date of the
Transactions or who will retire within two years of that date. Any
postretirement liability recorded on PCA's balance sheet relates to active
employees only.

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

POSTRETIREMENT PLAN
-------------------------
APRIL 12,
JAN. 1, 2000 1999
THROUGH THROUGH
DEC. 31, DEC. 31,
2000 1999
------------ ----------

(IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of period................. $ 4,044 $ 4,007
Service cost.............................................. 587 441
Interest cost............................................. 304 210
Plan amendments........................................... -- --
Actuarial loss (gain)..................................... 341 (614)
------- -------
Benefit obligation at September 30........................ $ 5,276 $ 4,044
------- -------
Plan assets at fair value at September 30................... $ -- $ --
======= =======

Development of net amount recognized:
Funded status at September 30............................. $(5,276) $(4,044)
Unrecognized cost:
Actuarial loss (gain)................................... (479) (849)
Prior service cost...................................... -- --
Transition liability (asset)............................ -- --
------- -------
Accrued benefit recognized at December 31................. $(5,755) $(4,893)
======= =======
Components of net periodic benefit cost:
Service cost for benefits earned during the year.......... $ 587 $ 441
Interest cost on accumulated postretirement benefit
obligation.............................................. 304 210
Net amortization of unrecognized amounts.................. (29) (2)
------- -------
Net periodic pension and postretirement benefit cost...... $ 862 $ 649
======= =======

F-13

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

5. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The accrued postretirement benefit cost has been recorded based upon certain
actuarial estimates as of September 30, 2000 and 1999, as shown below. These
estimates are subject to revision in future periods given new facts or
circumstances.

POSTRETIREMENT PLAN
---------------------------
2000 1999
-------- --------

Discount rate............................................. 7.5% 7.5%
Health care cost trend rate............................... 5.0% 5.0%

Increasing the assumed health care cost trend rate by one percentage point
would increase the 2000 postretirement benefit obligation by approximately
$0.4 million and would increase the net postretirement benefit cost by
approximately $0.1 million.

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

6. LONG-TERM DEBT

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

DECEMBER 31
---------------------
2000 1999
-------- ----------

(IN THOUSANDS)
Senior credit facility--
Term Loan A, effective interest rate of 8.26% and 8.70% at
December 31, 2000 and 1999, respectively, due in varying
quarterly installments through June 30, 2006............ $122,371 $ 296,148
Term Loan B, effective interest rate of 8.67% and 9.20% as
of December 31, 2000 and 1999, respectively, due in
varying quarterly installments through June 30, 2007.... 54,629 241,426
Term Loan C, effective interest rate of 9.45% as of
December 31, 1999, due in varying quarterly
installments through April 12, 2008..................... -- 241,426
Three-year revolving credit agreement, effective interest
rate of 6.95% as of December 31, 2000, due November 29,
2003...................................................... 142,000 --
Senior subordinated notes, interest at 9.625% payable
semi-annually, due April 1, 2009.......................... 550,000 550,000
Other....................................................... 414 1,031
-------- ----------
Total..................................................... 869,414 1,330,031
Less: Current portion....................................... 239 829
-------- ----------
Total long-term debt...................................... $869,175 $1,329,202
======== ==========

F-14

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

6. LONG-TERM DEBT (CONTINUED)
Additional information regarding PCA's variable rate debt is shown below:

WEIGHTED-AVERAGE
INTEREST RATE APPLICABLE MARGIN
---------------------- ----------------------
DECEMBER 31 DECEMBER 31
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------

LIBOR based debt:
Senior credit facility
Term Loan A.......................................... 6.76% 5.95% 1.50% 2.75%
Term Loan B.......................................... 6.67% 5.95% 2.00% 3.25%
Term Loan C.......................................... N/A 5.95% N/A 3.50%
Commercial paper based debt:
Three-year revolving credit agreement.................. 6.60% N/A 0.35% N/A

Since April 12, 1999, PCA has made voluntary prepayments totaling
approximately $900.0 million using excess cash and proceeds from the sale of
certain timberlands to permanently reduce its borrowings under the term loans.
As a result of these prepayments, PCA recorded a charge of $18.4 million
($11.1 million after tax) and $11.4 million ($6.9 million after tax),
respectively, as an early extinguishment of debt in December, 2000 and 1999. No
quarterly installments will be required under any of the term loans until
December 31, 2002.

As of December 31, 2000, annual principal payments for debt during the next
five years are: $0.2 million (2001), $7.6 million (2002), $175.4 million (2003),
$36.4 million (2004), $37.5 million (2005), and $612.1 million (2006 and
thereafter).

Interest payments in connection with the Company's debt obligations for the
year ended December 31, 2000 and for the period from April 12, 1999 through
December 31, 1999 amounted to $112.6 million and $89.5 million, respectively.

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

On November 29, 2000, PCA entered into a three-year, $150.0 million
revolving credit facility in connection with the securitization of trade
receivables. The facility is secured by the Company's receivables and bears
interest at a floating rate based upon commercial paper plus an allowed margin
under the agreement. Proceeds received of $142.0 million were used to repay the
Term Loans. In connection with the securitization transaction, PCA established
Packaging Credit Company, LLC. This entity services PCA's receivables.

The senior credit facility is (1) jointly and severally guaranteed by each
of PCA's existing subsidiaries and (2) secured by a first priority lien covering
substantially all of the owned timberland, mills, plants and other facilities
and substantially all tangible and intangible personal property of PCA and its
domestic subsidiaries and by a pledge of all of the capital stock of PCA's
domestic subsidiaries. In addition, the senior credit facility will also be
secured by a pledge of 65% of the capital stock of any

F-15

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

6. LONG-TERM DEBT (CONTINUED)
first tier foreign subsidiaries that PCA may acquire or form in the future.
PCA's future domestic subsidiaries will guarantee the senior credit facility and
secure that guarantee with certain of their real property and substantially all
of their tangible and intangible personal property.

PCA's various debt agreements contain various covenants that restrict the
ability of PCA and its subsidiaries to incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, incur liens, enter into certain transactions with affiliates, or merge or
consolidate with any other person or sell or dispose of all or substantially all
of the assets of the Company. They also require PCA to comply with certain
financial covenants, including the ratio of earnings before interest, taxes,
depreciation, and amortization (EBITDA) to cash interest expense, the ratio of
debt to EBITDA, and minimum net worth levels. At December 31, 2000, the Company
was in compliance with all of its covenants.

The Company maintains interest rate collar agreements for its variable rate
debt. The interest rate collar agreements protect against rising interest rates
while simultaneously guaranteeing minimum interest rates. The notional amount of
these collars is $250.0 million and $510.0 million at December 31, 2000 and
December 31, 1999, respectively. Approximately 80% of PCA's term loan
obligations are capped. The weighted average floor of the interest rate collar
agreements is 5.00% and the weighted average ceiling is 6.83%. On November 29,
1999, PCA terminated $180.0 million of interest rate collar agreements and
received $1.2 million. On January 14, 2000, PCA terminated $110.0 million of
interest rate collar agreements and received $1.9 million. The senior credit
facility provides PCA with the right to lock-in LIBOR interest rates for any
amount of term loans for one, two, three, or six-month periods. With the
approval of the lenders, PCA can lock-in LIBOR interest rates for either a
two-week or twelve-month period. The three-year revolving credit facility also
provides PCA with the right to lock-in commercial paper interest rates for a
one, two, or three-month period.

A summary of the Company's drawings under credit facilities as of
December 31, 2000 follows:

TERM COMMITMENTS UTILIZED AVAILABLE
-------- ----------- -------- ---------

(IN THOUSANDS)
Three-year revolving credit agreement..... 2003 $150,000 $142,000 $ 8,000
Senior revolving credit facility.......... 2006 150,000 -- 150,000
-------- -------- --------
$300,000 $142,000 $158,000
======== ======== ========

PCA is required to pay commitment fees on the unused portions of the
revolving credit facilities. In December of 1999, PCA reduced the availability
under the senior revolving credit facility from $250.0 million to
$150.0 million.

At December 31, 2000 and December 31, 1999, letters of credit amounting to
approximately $21.9 million and $19.7 million were outstanding which relate
primarily to various environmental obligations, including landfills and solid
waste programs, management equity loans, workers' compensation, and equipment
leases.

F-16

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

7. FINANCIAL INSTRUMENTS

The carrying and estimated fair values of PCA's financial instruments at
December 31, 2000 and December 31, 1999 were as follows:

2000 1999
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- --------- ----------

(IN THOUSANDS)
Short-term assets................................ $ 223,886 $ 223,886 $ 219,354 $ 219,354
Short-term liabilities........................... (113,701) (113,701) (127,365) (127,365)
Long-term debt--
Senior credit facility......................... (177,000) (177,000) (779,000) (779,000)
9.625% Senior subordinated notes............... (550,000) (558,250) (550,000) (563,750)
Three-year revolving credit agreement.......... (142,000) (142,000) -- --
Other.......................................... (414) (414) (1,031) (1,031)
Redeemable preferred stock....................... -- -- (102,552) (116,390)
Interest rate collars............................ -- (816) -- 5,638

SHORT-TERM ASSETS AND LIABILITIES

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

LONG-TERM DEBT

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

REDEEMABLE PREFERRED STOCK

The fair value of the redeemable preferred stock is based on amounts
obtained from investment advisors.

INTEREST RATE COLLARS

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

8. MANDATORY REDEEMABLE PREFERRED STOCK

On April 12, 1999, PCA issued 1,000,000 shares of 12.375% senior
exchangeable preferred stock, liquidation preference of $100 per share. Holders
of the preferred shares are entitled to receive cumulative dividends paid in
cash or in kind at a rate of 12.375% which are paid semi-annually. If PCA fails
to pay dividends, holders of the preferred stock will be entitled to elect two
additional members to PCA's Board of Directors. Holders of the preferred stock
have no voting rights. The preferred stock

F-17

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

8. MANDATORY REDEEMABLE PREFERRED STOCK (CONTINUED)
ranks senior to the common stock. 3,000,000 shares were authorized, and
1,058,094 shares were issued and outstanding as of December 31, 1999. PCA
incurred $3.5 million of issuance costs, which are being amortized through 2010
at which time the preferred stock is required to be redeemed.

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

9. SHAREHOLDERS' EQUITY

On April 12, 1999, PCA issued 100 shares of Junior Preferred Stock,
liquidation preference of $1.00 per share. Holders of the Junior Preferred Stock
are not entitled to receive any dividends or distributions and had, prior to
February 2, 2000, the right to elect one director to PCA's Board of Directors.
Shares of Junior Preferred Stock may not be reissued after being reacquired in
any manner by PCA. On December 20, 2000, PCA redeemed the Junior Preferred
Stock.

In June 1999, PCA entered into management equity agreements with 125 of its
management-level employees. Under these agreements, PCA Holdings and Pactiv
Corporation sold 3,132,800 shares of common stock to 113 of these employees at
$4.55 per share. The stock purchased under the management equity agreements is
subject to vesting. The management equity agreements also provide for the grant
of options (see Note 16).

On October 19, 1999, PCA effected a 220-for-one stock split of its common
stock which resulted in an increase in the number of shares outstanding from
430,000 to 94,600,000. All historical share numbers for PCA contained in the
financial statements and related notes reflect the 220-for-one split.

On January 28, 2000, PCA became a publicly traded company through the
initial public offering of its common stock in which Pactiv Corporation sold
35,000,000 of its 41,160,240 shares of common stock in PCA, and PCA issued an
additional 11,250,000 shares. The net proceeds to PCA were approximately
$126.4 million, after deducting underwriting discounts and offering expenses at
an initial public offering price of $12.00 per share. PCA utilized these
proceeds to redeem its senior exchangeable preferred stock (see Note 8).

10. COMMITMENTS AND CONTINGENCIES

CAPITAL COMMITMENTS

The Company had authorized capital expenditures of approximately
$37.9 million and $66.3 million as of December 31, 2000 and December 31, 1999,
respectively, in connection with the expansion and replacement of existing
facilities and equipment.

F-18

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS

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

(IN THOUSANDS)

2001........................................................ $ 20,832
2002........................................................ 17,747
2003........................................................ 11,888
2004........................................................ 7,481
2005........................................................ 5,787
Thereafter.................................................. 38,214
--------
Total............................................... $101,949
========

Commitments under capital leases were not significant to the accompanying
financial statements. Total rental expense for the year ended December 31, 2000
and for the period from April 12, 1999 through December 31, 1999 was
$22.3 million and $15.0 million, respectively. These costs are included
primarily in cost of goods sold.

PURCHASE COMMITMENTS

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

(IN THOUSANDS)

2001........................................................ $ 8,299
2002........................................................ 2,597
2003........................................................ 2,597
2004........................................................ 2,597
2005........................................................ --
-------
Total............................................... $16,090
=======

The Company purchased approximately $9.3 million during the year ended
December 31, 2000 and $7.8 million during the period from April 12, 1999 through
December 31, 1999 under these purchase agreements.

LITIGATION

The Company is involved in various legal proceedings and litigation arising
in the ordinary course of business. In the opinion of management and in-house
legal counsel, the outcome of such proceedings and litigation will not
materially affect the Company's financial position or results of operations.

F-19

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ENVIRONMENTAL LIABILITIES

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

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

11. INCOME TAXES

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

JAN. 1, 2000 APRIL 12, 1999
THROUGH THROUGH
DEC. 31, 2000 DEC. 31, 1999
------------- --------------

(IN THOUSANDS)
Current--
U.S............................................... $ 30,273 $(16,207)
State and local................................... 4,074 (1,083)
Deferred--
U.S............................................... 70,948 44,976
State and local................................... 8,895 9,553
-------- --------
Total provision for taxes................... $114,190 $ 37,239
======== ========

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

JAN. 1, 2000 APRIL 12, 1999
THROUGH THROUGH
DEC. 31, 2000 DEC. 31, 1999
(IN THOUSANDS) ------------- --------------

Provision computed at U.S. Federal statutory rate of
35%............................................... $100,503 $29,623
State and local taxes............................... 12,963 4,855
Other............................................... 724 2,761
-------- -------
Total....................................... $114,190 $37,239
======== =======

F-20

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

11. INCOME TAXES (CONTINUED)
The components of the deferred tax assets (liabilities) were as follows:

DECEMBER 31
-----------------------
2000 1999
---------- ----------

(IN THOUSANDS)
Current deferred taxes--
Accrued liabilities............................... $ 2,313 $ 2,255
Employee benefits and compensation................ 8,976 3,777
Reserve for doubtful accounts..................... 1,675 1,002
Inventory......................................... 1,307 (223)
Pensions and postretirement benefits.............. 85 1,600
--------- --------
Total current deferred taxes........................ $ 14,356 $ 8,411
========= ========
Noncurrent deferred taxes--
Pension and postretirement benefits............... $ 2,279 $ 1,933
Excess of financial reporting over tax basis in
plant and equipment............................. (181,071) (97,706)
Accrued liabilities............................... 11,536 4,734
Asset for alternative minimum tax credits......... 15,528 21,235
--------- --------
Total noncurrent deferred taxes............. $(151,728) $(69,804)
========= ========

Cash payments for income taxes were $23.7 million for the year ended
December 31, 2000 and $4.1 million for the period April 12, 1999 through
December 31, 1999. As of December 31, 2000, the Company has available for income
tax purposes approximately $15.5 million in alternative minimum tax credits
which may be used to offset future taxable income. As of December 31, 1999, the
Company had available approximately $39.0 million in net operating loss carry
forwards and minimum tax credits.

12. RELATED PARTY TRANSACTIONS

PCA purchases pulpwood from Southern Timber Venture, LLC 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 the
fair market value of pulpwood. PCA purchased $1.7 million of pulpwood for its
Counce, Tennessee and Valdosta, Georgia mills from Southern Timber Venture, LLC
during the period from November 16, 2000, through December 31, 2000.

PCA's sales to Pactiv Corporation are included in the accompanying
consolidated financial statements. The net sales to Pactiv Corporation for the
year ended December 31, 2000 were $100.5 million. The net sales to Pactiv
Corporation for the period April 12, 1999 through December 31, 1999 were
approximately $57.4 million. The accounts receivable relating to these sales as
of December 31, 2000 and December 31, 1999 were $13.3 million and
$12.3 million, respectively.

PCA entered into a transition services agreement with Pactiv which provided
for the performance of transitional services by Pactiv and its affiliates to PCA
that PCA required to operate its business. These services included: payroll,
general accounting, tax support, treasury/cash management, insurance/

F-21

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

12. RELATED PARTY TRANSACTIONS (CONTINUED)
risk management, procurement, human resources, telecommunications and
information services. The initial term of the transition services agreement was
for one year, but was extended by PCA for an additional six month term. During
the period April 12, 1999 through December 31, 1999, PCA paid Pactiv
$6.5 million for these services. For the year 2000, PCA paid Pactiv
$2.6 million. As of October 2000, the transition services agreement was
terminated.

Pactiv also agreed to reimburse PCA for up to $5.4 million in expenditures
incurred by PCA relating to system enhancement and year 2000 compliance in the
transition services agreement. The full $5.4 million was received by PCA during
1999.

PCA and Pactiv entered into a facility use agreement which provides for
PCA's use of a portion of Pactiv's headquarters located in Lake Forest, Illinois
and certain building and business services for up to four years following the
closing of the transactions. PCA paid Pactiv $2.4 million for the year ended
December 31, 2000 and $1.5 million for the period April 12, 1999 through
December 31, 1999.

13. RESTRUCTURING AND OTHER CHARGES

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

The following table reflects the components of this assumed accrual:

BALANCE BALANCE BALANCE
APRIL 12, 1999 ACTIVITY DEC. 31, 1999 ACTIVITY DEC. 31, 2000
-------------- -------- ------------- -------- -------------

(IN THOUSANDS)
Severance....................... $1,087 $ 819 $ 268 $ 268 $ --
Facility exit costs............. 1,920 278 1,642 1,489 153
------ ------ ------ ------ ----
Total accrual............. $3,007 $1,097 $1,910 $1,757 $153
====== ====== ====== ====== ====

The fixed assets at the closed facilities were written down to their
estimated fair value. No significant cash proceeds are expected from the
ultimate disposal of these assets. The remaining liability balance at
December 31, 2000 will be used for rent payments related to the two closed
facilities.

14. SALE OF TIMBERLANDS

In October and November, 1999, PCA completed the sales of approximately
405,000 acres of timberland. Total proceeds received from the sales were
$263.3 million, resulting in a pre-tax gain of $12.2 million.

F-22

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

15. SUMMARIZED COMBINED FINANCIAL INFORMATION ABOUT GUARANTOR SUBSIDIARIES

The following is summarized aggregated financial information for Packaging
Credit Company, LLC, Dahlonega Packaging Corporation, Dixie Container
Corporation, PCA Hydro, Inc., PCA Tomahawk Corporation and PCA Valdosta
Corporation, each of which was a wholly-owned subsidiary of PCA and included in
the Company's consolidated financial statements. Each of these subsidiaries
fully, unconditionally, jointly and severally guaranteed $550.0 million in
senior subordinated notes issued by PCA in connection with the Transactions.
Effective January 1, 2000, Dahlonega Packaging Corporation, PCA Tomahawk
Corporation and PCA Valdosta Corporation were merged into PCA. Separate
financial statements of the guarantor subsidiaries are not presented because, in
the opinion of management, such financial statements are not material to
investors.

NON-GUARANTOR
PCA GUARANTOR SUBS SUBS ELIMINATIONS TOTAL
---------- -------------- ------------- ------------ ----------

(IN THOUSANDS)
2000
Current assets............. $ 192,295 $ 63,501 $207,976 $ (60,063) $ 403,709
Non-current assets......... 1,663,269 65,883 -- (190,749) 1,538,403
---------- -------- -------- --------- ----------
Total assets............. 1,855,564 129,384 207,976 (250,812) 1,942,112
Current liabilities........ 278,581 1,983 754 (62,770) 218,548
Non-current liabilities.... 893,978 162 142,000 -- 1,036,140
---------- -------- -------- --------- ----------
Total liabilities........ 1,172,559 2,145 142,754 (62,770) 1,254,688
---------- -------- -------- --------- ----------
Net assets................. $ 683,005 $127,239 $ 65,222 $(188,042) $ 687,424
========== ======== ======== ========= ==========

Net sales.................. $1,921,868 $ -- $ -- $ -- $1,921,868
Pre-tax profit............. 280,075 3,907 1,630 1,539 287,151
Net income................. 155,432 3,884 1,630 955 161,901

F-23

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

15. SUMMARIZED COMBINED FINANCIAL INFORMATION ABOUT GUARANTOR SUBSIDIARIES
(CONTINUED)

NON-GUARANTOR
PCA GUARANTOR SUBS SUBS ELIMINATIONS TOTAL
---------- -------------- --------------- ------------ ----------

(IN THOUSANDS)
1999
Current assets............. $ 388,885 $ 12,703 $ -- $ (102) $ 401,486
Non-current assets......... 1,757,326 14,115 -- (19,719) 1,751,722
---------- -------- -------- --------- ----------
Total assets............. 2,146,211 26,818 -- (19,821) 2,153,208
Current liabilities...... 226,167 2,902 -- (1,599) 227,470
Non-current
liabilities............ 1,504,625 4,414 -- -- 1,509,039
---------- -------- -------- --------- ----------
Total liabilities........ 1,730,792 7,316 -- (1,599) 1,736,509
---------- -------- -------- --------- ----------
Net assets................. $ 415,419 $ 19,502 $ -- $ (18,222) $ 416,699
========== ======== ======== ========= ==========
Net sales.................. $1,273,401 $ 43,941 $ -- $ -- $1,317,342
Pre-tax profit............. 85,025 (389) -- -- 84,636
Net income................. 40,679 (179) -- -- 40,500

16. STOCK-BASED COMPENSATION

PCA entered into management equity agreements in June 1999 with 125 of its
management-level employees. These agreements provide for the grant of options to
purchase up to an aggregate of 6,576,460 shares of PCA's common stock at
approximately $4.55 per share, the same price per share at which PCA Holdings
purchased common stock in the Transactions. These options vest ratably over a
five-year period. Upon completion of an initial public offering, the options
become immediately exercisable. The option shares are subject to contractual
restrictions on transfer for a period of up to 18 months following completion of
the offering.

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

F-24

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

16. STOCK-BASED COMPENSATION (CONTINUED)
A summary of the Company's stock option activity, and related information
for the year ended December 31, 2000 and 1999 follows:

WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------- ---------------- ----------- ----------------

Balance, January 25, 1999................ -- $ -- -- $ --
Granted................................ 6,576,460 4.55 -- --
Exercised.............................. -- -- -- --
Forfeited.............................. (7,260) 4.55 -- --
--------- ------ --------- -----
Balance, December 31, 1999............... 6,569,200 $ 4.55 -- $ --
--------- ------ --------- -----
Granted................................ 1,099,700 11.92 -- --
Exercised.............................. (398,138) 4.55 -- --
Forfeited.............................. (26,560) 6.88 -- --
--------- ------ --------- -----
Balance, December 31, 2000............... 7,244,202 $ 5.66 6,152,802 $4.55
========= ====== ========= =====

Summarized below is information about stock options outstanding at
December 31, 2000:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------------
WEIGHTED-AVG WEIGHTED-AVG WEIGHTED-AVG
RANGE OF EXERCISE PRICE NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
----------------------- ------------- -------------- -------------- ------------- --------------

4.$55 6,152,802 8.50 $4.55 6,152,802 $4.55
$10.44-$12.00 1,091,400 9.42 11.92 -- --
------------- --------- ---- ------ --------- ------
$ 4.55-$12.00 7,244,202 8.64 $5.66 6,152,802 $4.55
============= ========= ==== ====== ========= ======

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

2000 1999
-------- --------

Actuarial assumptions
Risk-free interest rate (%)........................... 6.68 6.65
Expected life (years)................................. 5 5
Volatility (%)........................................ 39.00 NA
Dividend yield (%).................................... 0.00 NA
Weighted-average fair value ($)........................... 5.36 1.29

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

F-25

PACKAGING CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2000

16. STOCK-BASED COMPENSATION (CONTINUED)
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to account for its stock option plan under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and adopt the disclosure only provisions of SFAS No. 123. Under APB
No. 25, no compensation costs are recognized because the number of options is
fixed and the option exercise price is equal to the fair market price of the
common stock on the date of the grant. Under SFAS No. 123, stock options are
valued at the grant date using the Black-Scholes valuation model and
compensation costs are recognized ratably over the vesting period. Had
compensation costs been determined as prescribed by SFAS No. 123, the Company's
net earnings and diluted earnings per common share for the year ended
December 31, 2000, and the period January 25, 1999 through December 31, 1999,
would have been lower by $5.1 million or $0.05 per diluted common share, and
$0.6 million or $0.01 per diluted common share, respectively.

17. QUARTERLY FINANCIAL DATA (UNAUDITED)

FISCAL QUARTER
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- ----------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000:
Net sales(3)............................. $475,890 $492,372 $487,676 $465,930 $1,921,868
Income before interest, taxes and
extraordinary item..................... 72,741 88,537 96,568 146,988 404,834
Net income............................... 25,246 33,278 40,009 63,368 161,901
Net income available to common
shareholders........................... 6,609 33,278 40,009 63,368 143,264
Basic earnings per share................. 0.07 0.31 0.38 0.60 1.37
Diluted earnings per share............... 0.06 0.31 0.37 0.58 1.33
Stock price--high........................ 12.19 12.75 13.19 16.81 16.81
Stock price--low......................... 9.25 9.88 10.25 10.88 9.25

1999:(2)
Net sales(3)............................. N/A(1) $389,277(1) $462,910 $465,155 $1,317,342
Income before interest, taxes and
extraordinary item..................... N/A(1) 45,390(1) 63,824 83,016 192,230
Net income............................... N/A(1) 6,766(1) 14,167 19,567 40,500
Net income available to common
shareholders........................... N/A(1) 4,088 11,036 16,080 31,204
Basic earnings per share................. N/A(1) 0.04(1) 0.12 0.18 0.34
Diluted earnings per share............... N/A(1) 0.04(1) 0.11 0.17 0.32

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

Notes:

(1) PCA acquired the Group on April 12, 1999. As such, operating results for the
period prior to April 12, 1999 have been excluded from PCA's 1999 results.

(2) PCA became a publicly traded company on January 28, 2000, as such, there are
no stock prices for 1999.

(3) Net sales have been restated in accordance with EITF Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs".

F-26

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Tenneco Inc.:

We have audited the accompanying combined statements of assets, liabilities
and interdivision account of THE CONTAINERBOARD GROUP (a division of Tenneco
Packaging Inc., which is a Delaware corporation and a wholly owned subsidiary of
Tenneco Inc.) as of April 11, 1999, and the related combined statements of
revenues, expenses and interdivision account and cash flows for the period from
January 1, 1999, through April 11, 1999. These financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Containerboard
Group as of April 11, 1999, and the results of its operations and its cash flows
for the period from January 1, 1999, through April 11, 1999, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
July 16, 1999

F-27

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
COMBINED STATEMENT OF
ASSETS, LIABILITIES AND INTERDIVISION ACCOUNT
AS OF APRIL 11, 1999
(IN THOUSANDS)

ASSETS
Current assets:
Cash...................................................... $ 1
Accounts receivable (net of allowance for doubtful
accounts of $3,947)..................................... 171,710
Receivables from affiliated companies..................... 9,037
Notes receivable.......................................... 27,933
Inventories............................................... 158,233
Prepaid expenses and other current assets................. 32,950
----------
Total current assets.................................. 399,864
----------

Property, plant and equipment, at cost:
Land, timber, timberlands and buildings................... 701,922
Machinery and equipment................................... 1,864,962
Other, including construction in progress................. 110,842
Less--Accumulated depreciation and depletion.............. (757,476)
----------
Property, plant and equipment, net.................... 1,920,250
----------
Intangibles................................................. 1,942
----------
Investment.................................................. 1,388
----------
Other long-term assets...................................... 67,645
----------
Total assets................................................ $2,391,089
==========

LIABILITIES AND INTERDIVISION ACCOUNT
Current liabilities:
Accounts payable.......................................... $ 114,050
Payables to Tenneco affiliates............................ 7,652
Current portion of long-term debt......................... 31,841
Accrued liabilities....................................... 64,371
----------
Total current liabilities............................. 217,914
----------
Long-term liabilities:
Long-term debt, net of current portion.................... 1,728,625
Deferred taxes............................................ 263,936
Other..................................................... 23,917
----------
Total long-term liabilities........................... 2,016,478
----------
Interdivision account....................................... 156,697
----------
Total liabilities and interdivision account................. $2,391,089
==========

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

F-28

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
COMBINED STATEMENT OF REVENUES,
EXPENSES AND INTERDIVISION ACCOUNT
FOR THE PERIOD FROM JANUARY 1, 1999, THROUGH APRIL 11, 1999
(IN THOUSANDS)

Net sales................................................... $ 453,207
Cost of sales............................................... (387,508)
---------
Gross profit............................................ 65,699

Selling and administrative expenses......................... (30,584)

Impairment loss............................................. (230,112)

Other expense, net.......................................... (2,207)

Corporate allocations....................................... (14,890)
---------
Loss before interest, income taxes and extraordinary
loss.................................................. (212,094)
Interest expense, net....................................... (221)
---------
Loss before income taxes and extraordinary loss......... (212,315)

Benefit for income taxes.................................... 83,716

Extraordinary loss, net of income tax....................... (6,327)
---------
Net loss.................................................... (134,926)
---------

Interdivision account, beginning of period.................. 908,392

Interdivision account activity, net......................... (616,769)
---------
Interdivision account, end of period........................ $ 156,697
=========

Basic and diluted earnings per share (unaudited):
Loss before extraordinary item.............................. $ (1.36)
Extraordinary item.......................................... (.07)
---------
Net loss per common share................................... $ (1.43)
=========
Weighted average common shares outstanding.................. 94,600

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

F-29

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1999, THROUGH APRIL 11, 1999
(IN THOUSANDS)

Cash flows from operating activities:
Net loss.................................................. $ (134,926)
----------
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation, depletion and amortization................ 30,905
Extraordinary loss--early debt extinguishment........... 6,327
Loss on sale of assets.................................. 230,112
Amortization of deferred gain........................... (493)
Increase in deferred income taxes....................... 9,782
Undistributed earnings of affiliated companies.......... (106)
Increase in other noncurrent reserves................... 56
----------
Total charges to net income not involving cash...... 276,583
----------
Changes in noncash components of working capital--
Working capital transactions, excluding transactions with
Tenneco and working capital from acquired businesses--
Decrease (increase) in current assets--
Accounts and notes receivable......................... (8,183)
Inventories, net...................................... (7,514)
Prepaid expenses and other current assets............. 4,201
(Decrease) increase in current liabilities--
Accounts payable...................................... 26,996
Accrued liabilities................................... (3,508)
----------
Net decrease in noncash components of working
capital........................................... 11,992
----------
Net cash provided by operating activities........... 153,649
----------
Cash flows from investing activities:
Additions to property, plant and equipment................ (1,128,255)
Other long-term assets.................................... 2,284
Proceeds from disposals................................... 825
Other transactions, net................................... 4,001
----------
Net cash used for investing activities.............. (1,121,145)
----------
Cash flows from financing activities:
Proceeds from long-term debt issued....................... 1,760,000
Payments on long-term debt................................ (27,550)
Decrease in interdivision account......................... (616,769)
Working capital transactions with Tenneco and affiliated
companies--
Decrease in receivables from affiliated companies....... 1,353
Decrease in factored receivables........................ (150,099)
Increase in accounts payable to affiliated companies.... 561
----------
Net cash provided by financing activities........... 967,496
----------
Net change in cash
Cash, beginning of period................................... 1
----------
Cash, end of period......................................... $ 1
==========

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

F-30

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

APRIL 11, 1999

1. BUSINESS DESCRIPTION

The Containerboard Group (the "Group") is a division of Tenneco
Packaging Inc., ("Packaging") which is a wholly owned subsidiary of
Tenneco Inc. ("Tenneco"). The Group is comprised of mills and corrugated
products operations. Madison Dearborn Partners, LLC ("MDP"), is a private equity
investment firm.

The Mill operations ("The Mills") consist of two Kraft linerboard mills
located in Counce, Tennessee, and Valdosta, Georgia, and two medium mills
located in Filer City, Michigan, and Tomahawk, Wisconsin. The Mills also include
two recycling centers located in Nashville, Tennessee, and Jackson, Tennessee.
The Mills also control and manage approximately 950,000 acres of timberlands.
The Mills transfer the majority of their output to The Corrugated Products
operations ("Corrugated").

Corrugated operations consist of 39 corrugated combining plants, 28
specialty/sheet plants and 5 design centers. All plants are located in North
America. Corrugated combines linerboard and medium (primarily from The Mills)
into sheets that are converted into corrugated shipping containers,
point-of-sale graphics packaging, point-of-purchase displays and other
specialized packaging. Corrugated sells to diverse customers primarily in North
America.

On January 25, 1999, Packaging entered into a definitive agreement (the
"Contribution Agreement") to sell its containerboard and corrugated packaging
products business to Packaging Corporation of America ("PCA") for $2.2 billion.
Under the terms of the Contribution Agreement, PCA Holdings, an entity organized
and controlled by MDP and its coinvestors, acquired a 55% common equity interest
in PCA, and Packaging contributed the Group to PCA in exchange for cash, the
assumption of debt and a 45% common equity interest in PCA (in each case before
giving effect to issuances of common equity to management).

The sale was completed on April 12, 1999. The financing of the transaction
consisted of borrowings under a new $1.46 billion senior credit facility, the
offering of notes and preferred stock, the cash equity investment of
$236.5 million by PCA Holdings and a rollover equity investment by Packaging
valued at $193.5 million.

The Group's sales to other Packaging entities and other Tenneco entities are
included in the accompanying combined financial statements. The net sales to
other Packaging entities for the period from January 1, 1999, through April 11,
1999, were approximately $21,350,000. The net sales to other Tenneco entities
for the period from January 1, 1999, through April 11, 1999, were approximately
$3,298,000. The profit relating to these sales is included in the accompanying
combined financial statements.

As a result of the Group's relationship with Packaging, the combined
statements of assets, liabilities and interdivision account and the related
combined statements of revenues, expenses and interdivision account are not
necessarily indicative of what actually would have occurred had the Group been a
stand-alone entity. Additionally, these combined financial statements are not
necessarily indicative of the future financial position or results of operations
of the Group.

F-31

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

2. SUMMARY OF ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying combined financial statements include the selected assets
and liabilities of the Group as of April 11, 1999, and the revenues and expenses
of the Group for the period January 1, 1999, through April 11, 1999. All
significant intragroup accounts and transactions have been eliminated.

REVENUE RECOGNITION

The Group recognizes revenue as products are shipped to customers.

ACCOUNTS RECEIVABLE

Historically, a substantial portion of the Group's trade accounts receivable
were sold by Packaging, generally without recourse, to a financing subsidiary of
Tenneco Inc. Expenses relating to cash discounts, credit losses, pricing
adjustments and other allowances on these factored receivables are accrued and
charged to the Group. As part of the Containerboard transaction, these
receivables were purchased by Packaging from the financing subsidiary and
contributed to PCA. All purchase and sale transactions were consummated at fair
value, which was the same as the net book value of the receivables as reflected
on the Group's financial statements prior to the initial sale. Therefore, due to
the pending sale transaction, the amount of trade accounts receivable sold was
$0 at April 11, 1999.

INVENTORIES

Raw materials and finished goods are valued using the last-in, first-out
("LIFO") cost method and include material, labor and manufacturing-related
overhead costs. Supplies and materials inventories are valued using a moving
average cost. All inventories are stated at the lower of cost or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Interest costs relating
to construction in progress are capitalized based upon the total amount of
interest cost (including interest costs on notes payable to Tenneco) incurred by
Packaging.

The amount of interest capitalized related to construction in progress at
the Group was approximately $19,000 for the period ended April 11, 1999.

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

Buildings and land improvements.......................... 5 to 40 years
Machinery and equipment.................................. 3 to 25 years
Trucks and automobiles................................... 3 to 10 years
Furniture and fixtures................................... 3 to 20 years
Computers and software................................... 3 to 7 years
Leasehold improvements................................... Period of the lease

F-32

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Timber depletion is provided on the basis of timber cut during the period
related to the estimated quantity of recoverable timber. Assets under capital
leases are depreciated on the straight-line method over the term of the lease.

Expenditures for repairs and maintenance are expensed as incurred.

CHANGES IN ACCOUNTING PRINCIPLES

In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new accounting
and reporting standards requiring that all derivative instruments (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. This statement is effective for all
fiscal years beginning after June 15, 2000. The adoption of this new standard is
not expected to have a significant effect on the Group's financial position or
results of operations.

In April, 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires capitalized costs related to start-up
activities to be expensed as a cumulative effect of a change in accounting
principle when the statement is adopted. Tenneco adopted this new accounting
principle in the first quarter of 1999. The adoption of this new standard did
not have a significant effect on the Group's financial position or results of
operations.

In March, 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use. This statement will be applied prospectively and
is effective for fiscal years beginning after December 15, 1998. The adoption of
this new standard did not have a significant effect on the Group's financial
position or results of operations.

F-33

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
FREIGHT TRADES

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

ENVIRONMENTAL LIABILITIES

The potential costs related to the Group 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 by the Group for
environmental contingencies are estimates of the probable costs based upon
available information and assumptions relating to the Group. Because of these
uncertainties, however, the Group's estimates may change. The Group believes
that any additional costs identified as further information becomes available
would not have a material effect on the combined statements of assets,
liabilities and interdivision account or revenues, expenses and interdivision
account of the Group.

COMBINED STATEMENTS OF CASH FLOWS

As a division of Packaging, the Group does not maintain separate cash
accounts other than for petty cash. The Group's disbursements for payroll,
capital projects, operating supplies and expenses are processed and funded by
Packaging through centrally managed accounts. In addition, cash receipts from
the collection of accounts receivable and the sales of assets are remitted
directly to bank accounts controlled by Packaging. In this type of centrally
managed cash system in which the cash receipts and disbursements of Packaging's
various divisions are commingled, it is not feasible to segregate cash received
from Packaging (e.g., as financing for the business) from cash transmitted to
Packaging (e.g., as a distribution). Accordingly, the net effect of these cash
transactions with Packaging are presented as a single line item within the
financing section of the cash flow statements. Similarly, the activity of the
interdivision account presents the net transfer of funds and charges between
Packaging and the Group as a single line item.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. The amounts charged
were $1,015,000 from January 1, 1999, through April 11, 1999.

INTANGIBLE ASSETS

F-34

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
on a straight-line basis over periods ranging from 3 to 10 years. Covenants not
to compete are amortized on a straight-line basis over the terms of the
respective agreements. Such amortization amounted to $890,000 as of April 11,
1999.

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

USE OF ESTIMATES

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

SEGMENT INFORMATION

The Group adopted SFAS No. 131, "Disclosure About Segments of an Enterprise
and Related Information," in 1998 and determined that the Group is primarily
engaged in one line of business: the manufacture and sale of packaging
materials, boxes and containers for industrial and consumer markets. No single
customer accounts for more than 10% of total revenues. The Group has no foreign
operations.

EARNINGS PER SHARE (UNAUDITED)

Earnings per share has been calculated using the historical earnings of the
Group and the number of shares resulting from the April 12, 1999 transaction
(430,000 common shares), as adjusted to reflect the anticipated 220-for-one
stock split. For the period presented, basic and diluted earnings per share are
the same because there are not potentially dilutive securities.

3. INVESTMENT IN JOINT VENTURE

F-35

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

4. LONG-TERM DEBT

AS OF
APRIL 11, 1999
(IN THOUSANDS) --------------

Senior subordinated notes, interest at 9.625%, payable
semiannually, due in 2009................................. $ 550,000
Senior credit facility--
Term loan A, interest at LIBOR plus 2.75%, due in varying
quarterly installments through 2005..................... 460,000
Term loan B, interest at LIBOR plus 3.25%, due in varying
quarterly installments through 2007..................... 375,000
Term loan C, interest at LIBOR plus 3.50%, due in varying
quarterly installments through 2008..................... 375,000
Other obligations........................................... 466
----------
Total................................................. 1,760,466
Less--Current portion....................................... 31,841
----------
Total long-term debt.................................. $1,728,625
==========

As of April 11, 1999, the annual payments for debt during the next five
years and thereafter are (in thousands): $31,841 (1999), $35,699 (2000), $67,570
(2001), $97,570 (2002), $107,536 (2003) and $1,420,250 (2004 and thereafter).

In February, 1999, Tenneco Inc. paid off the remaining note payable as it
relates to the Counce Limited Partnership. The payment was $27,220,000,
including a $10,456,000 premium payment (net of tax $6,327,000) for the early
extinguishment of debt.

Going-forward, PCA's various debt agreements require that it comply with
certain covenants and restrictions, including specific financial ratios that
must be maintained on the last day at the end of each fiscal quarter. Under the
provisions of the credit agreement dated April 12, 1999 ("Credit Agreement"),
PCA must maintain a consolidated interest coverage ratio of a minimum of 1.5
beginning on September 30, 1999, increasing per the guidelines set forth in the
Credit Agreement to 2.5 as of March 31, 2005, and each fiscal quarter
thereafter. Also, PCA must not exceed a leverage ratio of 6.75 at September 30,
1999, decreasing per the guidelines set forth in the Credit Agreement to 4.0 as
of March 31, 2006, and each fiscal quarter thereafter. Lastly, PCA must maintain
a minimum consolidated net worth beginning on June 30, 1999 of $315,000,000,
increasing per the guidelines set forth in the Credit Agreement to $690,000,000
as of March 31, 2008.

In May through October of 1999, PCA made voluntary prepayments totaling
approximately $322,100,000 using excess cash and proceeds from the sale of
certain timberlands to permanently reduce its borrowings under the term loans.
As a result of this prepayment, no payments will be required under any of the
term loans until December, 2001.

F-36

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

5. PENSION AND OTHER BENEFIT PLANS

Substantially all of the Group's salaried and hourly employees are covered
by retirement plans sponsored by Packaging and Tenneco. Benefits generally are
based on years of service and, for most salaried employees, on final average
compensation. Packaging's funding policies are to contribute to the plans, at a
minimum, amounts necessary to satisfy the funding requirements of federal laws
and regulations. The assets of the plans consist principally of listed equity
and fixed and variable income securities, including Tenneco Inc. common stock.

The Group's eligible salaried employees participate in the Tenneco Inc.
Retirement Plan (the "Retirement Plan"), a defined benefit plan, along with
other Tenneco divisions and subsidiaries. The pension expense allocated to the
Group by Packaging for this plan was approximately $1,696,000 for the period
ended April 11, 1999. Amounts allocated are principally determined based on
payroll. This plan is overfunded and a portion of the prepaid pension costs has
not been allocated to the Group.

The Group's eligible hourly employees participate in the Tenneco Packaging
Pension Plan for Certain Hourly-Rated Employees, also a defined benefit plan,
along with other Packaging divisions. As stated, due to the fact that other
divisions within Packaging participate in the plan, certain of the disclosures
required by SFAS No. 132, "Employers' Disclosures About Pension and Other
Postretirement Benefits, such as a summary of the change in benefit obligation
and the change in plan assets, are not available. Actuarial information as of
April 11, 1999 is not available and in connection with the sale of the Group as
described in Note 1 to these financial statements, the pension asset allocated
to the Group will be excluded from the sale transaction and remain with Tenneco.
As such, the actuarial information below is reported as of December 31, 1998.

The net pension income allocated to the Group for this plan was $213,000 for
the period ended April 11, 1999. This plan is overfunded, and a portion of the
related pension asset of $41,965,000 for April 11, 1999, has been allocated to
the Group and is included in Other Long-Term Assets.

Actuarially allocated net pension cost for the Group's defined benefit
plans, excluding the Retirement Plan, consists of the following components for
the year ended December 31, 1998 (in thousands):

Service cost--benefits earned during the year............... $ 3,112
Interest cost on projected benefit obligations.............. 6,990
Expected return on plan assets.............................. (11,312)
Amortization of--
Transition liability...................................... (164)
Unrecognized loss......................................... --
Prior service cost........................................ 908
---------
Net pension income...................................... $ (466)
=========

F-37

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

5. PENSION AND OTHER BENEFIT PLANS (CONTINUED)
The funded status of the Group's allocation of defined benefit plans,
excluding the Retirement Plan, reconciles with amounts recognized in the 1998
statements of assets and liabilities and interdivision account as follows (in
thousands):

Actuarial present value at September 30, 1998--
Vested benefit obligation................................. $ (98,512)
Accumulated benefit obligation............................ (108,716)
=========
Projected benefit obligation................................ $(108,716)
Plan assets at fair value at September 30, 1998............. 146,579
Unrecognized transition liability........................... (1,092)
Unrecognized net gain....................................... (14,623)
Unrecognized prior service cost............................. 13,455
---------
Prepaid pension cost at December 31, 1998................... $ 35,603
=========

The weighted average discount rate used in determining the actuarial present
value of the benefit obligations was 7.00% for the year ended December 31, 1998.
The weighted average expected long-term rate of return on plan assets was 10%
for 1998.

Middle management employees participate in a variety of incentive
compensation plans. These plans provide for incentive payments based on the
achievement of certain targeted operating results and other specific business
goals. The targeted operating results are determined each year by senior
management of Packaging. The amounts charged to expense for these plans were
$1,599,000 for the period ended April 11, 1999.

In June, 1992, Tenneco initiated an Employee Stock Purchase Plan ("ESPP").
The plan allows U.S. and Canadian employees of the Group to purchase
Tenneco Inc. common stock through payroll deductions at a 15% discount. Each
year, an employee in the plan may purchase shares with a discounted value not to
exceed $21,250. The weighted average fair value of the employee purchase right,
which was estimated using the Black-Scholes option pricing model and the
assumptions described below except that the average life of each purchase right
was assumed to be 90 days, was $6.31 for the period ended December 31, 1998. The
ESPP was terminated as of September 30, 1996. Tenneco adopted a new employee
stock purchase plan effective April 1, 1997. Under the respective ESPPs, Tenneco
sold 36,883 shares to Group employees for the period ended April 11, 1999.

In December, 1996, Tenneco adopted the 1996 Stock Ownership Plan, which
permits the granting of a variety of awards, including common stock, restricted
stock, performance units, stock appreciation rights, and stock options to
officers and employees of Tenneco. Tenneco can issue up to 17,000,000 shares of
common stock under this plan, which will terminate December 31, 2001.

The April 11, 1999, fair market value of the options granted was calculated
using Tenneco's stock price at the grant date and multiplying the amount by the
historical percentage of past Black-Scholes pricing values fair value
(approximately 25%). The fair value of each stock option issued by Tenneco to
the Group in prior periods was estimated on the date of grant using the
Black-Sholes option pricing model using the following ranges of weighted average
assumptions for grants during the past three

F-38

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

5. PENSION AND OTHER BENEFIT PLANS (CONTINUED)
years: (a) risk-free interest rate ranging from 5.7% to 6.7%, (b) expected lives
ranging from 5.0 years to 19.7 years, (c) expected volatility ranging from 24.6%
to 27.8%, and (d) dividend yields ranging from $10.91 to $13.99.

The Group applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," to its stock-based compensation plans. The Group
recognized after-tax stock-based compensation expense of approximately $146,000
for the period ended April 11, 1999. Had compensation costs for the Group's
stock-based compensation plans been determined in accordance with SFAS 123,
"Accounting for Stock-Based Compensation," based on the fair value at the grant
dates for the awards under those plans, the Group's pro forma net income for the
year ended April 11, 1999, would have been lower by $734,000.

6. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

In addition to providing pension benefits, the Group provides certain health
care and life insurance benefits for certain retired and terminated employees. A
substantial number of the Group's employees may become eligible for such
benefits if they reach normal retirement age while working for the Group. The
cost of these benefits for salaried employees is allocated to the Group by
Packaging through a payroll charge and the interdivision account. Amounts
allocated are principally determined based on payroll. The net obligation for
these salaried benefits is maintained by Packaging and is not included in the
liabilities section of the accompanying combined statements of assets,
liabilities and interdivision account for the Group's share of the obligation.

Currently, the Group's postretirement benefit plans are not funded and a
portion of the related postretirement obligation has been allocated to the
Group. However, due to the fact that other divisions participate in the plan,
certain of the disclosures required by SFAS No. 132, such as a summary of the
change in benefit obligation, are not available. Actuarial information as of
April 11, 1999, is not available and in connection with the sale of the Group as
described in Note 1 to these financial statements, the long-term portion of the
postretirement liability will not be assumed by PCA but will remain with
Tenneco. As such, the actuarial information below is reported as of
December 31, 1998, and the portion of the liability allocated as of April 11,
1999, is the same as the allocated amount as of December 31, 1998.

F-39

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

6. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The obligation of the plans, related to hourly employees, reconciles with
amounts recognized in the combined statements of assets, liabilities and
interdivision account at December 31, 1998, and April 11, 1999, as follows (in
thousands):

Actuarial present value at September 30--
Accumulated postretirement benefit obligation--
Retirees and beneficiaries.............................. $ (8,401)
Fully eligible active plan participants................. (3,582)
Other active plan participants.......................... (2,950)
--------
Total................................................. (14,933)
Plan assets at fair value at September 30................. --
Funded status............................................. (14,933)
Claims paid during the fourth quarter..................... 473
Unrecognized prior service cost........................... --
Unrecognized net gain..................................... (1,764)
--------
Accrued postretirement benefit cost at December 31.......... $(16,224)
========

The net periodic postretirement benefit costs as determined by actuaries for
hourly employees for 1998 consist of the following components (in thousands):

Service cost................................................ $ 159
Interest cost............................................... 1,024
Amortization of net (gain) loss............................. (138)
Amortization of prior service cost.......................... (293)
-----
Net periodic postretirement benefit cost.................. $ 752
=====

The amounts expensed by the Group may be different because it was allocated
by Packaging.

The weighted average assumed health care cost trend rate used in determining
the 1998 accumulated postretirement benefit obligation was 5%.

Increasing the assumed health care cost trend rate by one percentage point
would increase the accumulated postretirement benefit obligation as of
September 30, 1998, by approximately $1,268,000, and would increase the net
postretirement benefit cost for 1998 by approximately $130,000.

The discount rate (which is based on long-term market rates) used in
determining the accumulated postretirement benefit obligation was 7% for 1998.

F-40

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

7. INVENTORIES

The components of inventories as of April 11, 1999, are as follows (in
thousands):

Raw materials............................................... $ 87,159
Work in process and finished goods.......................... 22,419
Materials and supplies...................................... 48,655
--------
$158,233
========

The amount by which current FIFO cost exceeded the stated LIFO inventory was
$22,588,000 as of April 11, 1999.

8. RESTRUCTURING AND OTHER CHARGES

In the fourth quarter of 1998, the Group recorded a pretax restructuring
charge of approximately $14 million. This charge was recorded following the
approval by Tenneco's Board of Directors of a comprehensive restructuring plan
for all of Tenneco's operations, including those of the Group. In connection
with this restructuring plan, the Group will close four corrugated facilities
and eliminate 109 positions.

The following table reflects components of this charge (in thousands):

BALANCE, BALANCE
DECEMBER 31, INTERIM APRIL 11,
COMPONENT 1998 ACTIVITY 1999
- --------- ------------ -------- ---------

Cash charges--
Severance.................................... $4,283 $1,290 $2,993
Facility exit costs and other................ 3,447 748 2,699
------ ------ ------
Total cash charges....................... 7,730 2,038 5,692
Noncash charges--
Asset impairments.......................... 1,596 1,510 86
------ ------ ------
$9,326 $3,548 $5,778
====== ====== ======

Asset impairments are comprised mainly of goodwill totaling approximately
$1,510,000 related to two of the facilities. The fixed assets at the closed
facilities were written down to their estimated fair value. No significant cash
proceeds are expected from the ultimate disposal of these assets. Of the
$5,692,000 remaining cash charges at April 11, 1999, approximately $4,514,000 is
expected to be spent in 1999. The actions contemplated by the restructuring plan
should be substantially completed during 1999.

9. IMPAIRMENT LOSS

As a result of the sale transaction (Note 1), Tenneco recognized a pretax
loss in the first quarter of 1999 of approximately $293 million. Part of that
loss consisted of an impairment charge relating to the Group's property, plant
and equipment and intangible assets, which was pushed down to the

F-41

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

9. IMPAIRMENT LOSS (CONTINUED)
accompanying combined financial statements. The amount of the impairment charge
was approximately $230.1 million.

The impairment charge of $230.1 million has been allocated to the following
financial statement line items (in thousands):

Intangibles................................................. $ 46,206
Machinery and equipment..................................... 183,906
--------
Total..................................................... $230,112
========

The impairment charge will first be applied against the goodwill
specifically attributable to the containerboard assets and the remaining amount
will be applied against plant, property and equipment.

10 INCOME TAXES

The Group's method of accounting for income taxes requires that a deferred
tax be recorded to reflect the tax expense (benefit) resulting from the
recognition of temporary differences. Temporary differences are differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements that will result in differences between income for tax
purposes and income for financial statement purposes in future years.

As a division, this Group is not a taxable entity. For purposes of these
combined financial statements, income taxes have been allocated to the Group and
represent liabilities to Packaging.

Following is an analysis of the components of combined income tax benefit
through April 11, 1999 (in thousands):

Current--
U.S....................................................... $82,867
State and local........................................... 10,630
-------
93,497
-------
Deferred--
U.S....................................................... (8,670)
State and local........................................... (1,111)
-------
(9,781)
-------
Income tax benefit...................................... $83,716
=======

The primary difference between income taxes computed at the statutory U.S.
federal income tax rate and the income tax benefit in the combined statement of
revenues, expenses and interdivision account is due to the effect of state
income taxes.

F-42

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

10 INCOME TAXES (CONTINUED)
The components of the deferred tax assets (liabilities) at April 11, 1999,
were as follows (in thousands):

Current deferred taxes--
Accrued liabilities....................................... $ 10,232
Employee benefits and compensation........................ (6,314)
Reserve for doubtful accounts............................. 1,148
Inventory................................................. 829
Pensions and postretirement benefits...................... (3,154)
State deferred tax........................................ 10,695
Other..................................................... (75)
---------
Total current deferred taxes............................ 13,361
---------
Noncurrent deferred taxes--
Pension and postretirement benefits....................... 13,945
Excess of financial reporting over tax basis in plant and
equipment............................................... (302,029)
Accrued liabilities....................................... 1,130
Capital leases............................................ 9,333
Other..................................................... 13,685
---------
Total noncurrent deferred taxes......................... (263,936)
---------
Net deferred tax liabilities............................ $(250,575)
=========

11. ASSETS, LIABILITIES AND OTHER EXPENSE, NET DETAIL

PREPAID EXPENSES AND OTHER CURRENT ASSETS

The components of prepaid expenses and other current assets include (in
thousands):

Prepaid stumpage............................................ $13,877
Deferred taxes.............................................. 13,361
Prepaid professional services............................... 2,392
Other....................................................... 3,320
-------
Total..................................................... $32,950
=======

F-43

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

11. ASSETS, LIABILITIES AND OTHER EXPENSE, NET DETAIL (CONTINUED)
OTHER LONG-TERM ASSETS

The components of the other long-term assets include (in thousands):

Prepaid pension cost........................................ $41,965
Deferred software........................................... 12,556
Timberland rights........................................... 11,739
Other....................................................... 1,385
-------
Total..................................................... $67,645
=======

ACCRUED LIABILITIES

The components of accrued liabilities include (in thousands):

Accrued payroll, vacation and taxes......................... $29,608
Accrued insurance........................................... 11,618
Accrued volume discounts and rebates........................ 5,414
Restructuring............................................... 5,778
Current portion of accrued postretirement benefit cost...... 1,460
Shutdown reserve............................................ 988
Other....................................................... 9,505
-------
Total..................................................... $64,371
=======

OTHER LONG-TERM LIABILITIES

The components of the other long-term liabilities include (in thousands):

Accrued postretirement benefit cost......................... $14,764
Environmental liabilities................................... 7,034
Other....................................................... 2,119
-------
Total..................................................... $23,917
=======

OTHER EXPENSE, NET

The components of other expense, net include (in thousands):

Discount on sale of factored receivables.................... $(2,369)
Other....................................................... 162
-------
Total..................................................... $(2,207)
=======

F-44

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

12 RELATED-PARTY TRANSACTIONS

FUNDING OF CASH REQUIREMENTS

As discussed in Note 2, Packaging provides centralized treasury functions
and financing for the Group including funding of its cash requirements for
processing of accounts payable and payroll requirements.

CORPORATE ALLOCATIONS

Packaging and Tenneco provide various services to the Group, including
legal, human resources, data processing systems support, training, finance and
treasury, public relations and insurance management. These expenses are
allocated based on a combination of factors such as actual usage of the service
provided, revenues, gross salaries and fixed assets and may not reflect actual
costs the Group would incur if it were a stand-alone entity.

Certain receivables and transactions resulting from the financing
relationship between Packaging and Tenneco are not reflected in the accompanying
financial statements.

INSURANCE AND BENEFITS

The Group is self-insured for medical benefits and workers' compensation.
Expenses related to workers' compensation, health care claims for hourly and
salaried workers and postretirement health care benefits for hourly and salaried
workers are determined by Packaging and are allocated to the Group. The Group
incurred charges of $9,337,000 for health care and $1,801,000 for workers'
compensation for the period ended April 11, 1999.

In general, all costs and expenses incurred and allocated are based on the
relationship the Group has with Tenneco. If the Group had been a stand-alone
entity, the costs and expenses would differ.

13. COMMITMENTS AND CONTINGENCIES

The Group had authorized capital expenditures of approximately $55,358,000
as of April 11, 1999, in connection with the expansion and replacement of
existing facilities.

The Group is involved in various legal proceedings and litigation arising in
the ordinary course of business. In the opinion of management and in-house legal
counsel, the outcome of such proceedings and litigation will not materially
affect the Group's financial position or results of operations.

14. LEASES

Rental expense included in the accompanying combined financial statements
was $25,411,000 for the period ended April 11, 1999. These costs are primarily
included in cost of goods sold.

As a result of the sale of the Group, Packaging received total consideration
of $2.2 billion, which includes the $1.1 billion used to buy out certain timber
and mill operating leases prior and concurrent

F-45

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

APRIL 11, 1999

14. LEASES (CONTINUED)
to the sale transaction on April 12, 1999. Therefore, the remaining outstanding
aggregate minimum rental commitments under noncancelable operating leases are as
follows:

(IN THOUSANDS)

Remainder of 1999........................................... $ 7,606
2000........................................................ 7,583
2001........................................................ 4,891
2002........................................................ 3,054
2003........................................................ 1,415
Thereafter.................................................. 1,178
-------
Total..................................................... $25,727
=======

15. SALE OF ASSETS

In the second quarter of 1996, Packaging entered into an agreement to
form a joint venture with Caraustar Industries whereby Packaging sold its two
recycled paperboard mills and a fiber recycling operation and brokerage business
to the joint venture in return for cash and a 20% equity interest in the joint
venture. Proceeds from the sale were approximately $115 million and the Group
recognized a $50 million pretax gain ($30 million after taxes) in the second
quarter of 1996.

In June, 1998, Packaging sold its remaining 20% equity interest in the joint
venture to Caraustar Industries for cash and a note of $26,000,000. The Group
recognized a $15 million pretax gain on this transaction. At April 11, 1999, the
balance of the note with accrued interest is $27,122,000. The note was paid in
June, 1999.

16. SUBSEQUENT EVENTS

On August 25, 1999, PCA and Packaging agreed that the acquisition
consideration should be reduced as a result of a postclosing price adjustment by
an amount equal to $20 million plus interest through the date of payment by
Packaging. The Group recorded $11.9 million of this amount as part of the
impairment charge on the accompanying financial statements, representing the
amount that was previously estimated by Packaging. PCA intends to record the
remaining amount in September, 1999.

In August, 1999, PCA signed purchase and sales agreements with various
buyers to sell approximately 405,000 acres of timberland. PCA has completed the
sale of approximately 260,000 of these acres and expects to complete the sale of
the remaining acres by mid-November, 1999.

F-46

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Tenneco Inc.:

We have audited the accompanying combined statements of assets, liabilities
and interdivision account of THE CONTAINERBOARD GROUP (a division of Tenneco
Packaging Inc., which is a Delaware corporation and a wholly owned subsidiary of
Tenneco Inc.) as of December 31, 1998, 1997 and 1996, and the related combined
statements of revenues, expenses and interdivision account and cash flows for
the years then ended. These financial statements are the responsibility of the
Group's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Containerboard
Group as of December 31, 1998, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 26, 1999

F-47

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
COMBINED STATEMENTS OF
ASSETS, LIABILITIES AND INTERDIVISION ACCOUNT

DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------

ASSETS
(IN THOUSANDS)
Current assets:
Cash................................................... $ 1 $ 1 $ 1,027
Accounts receivable (net of allowance for doubtful
accounts of $5,220 in 1998, $5,023 in 1997 and $5,010
in 1996)............................................. 13,971 27,080 16,982
Receivables from affiliated companies.................. 10,390 19,057 10,303
Notes receivable....................................... 27,390 573 547
Inventories:
Raw materials.......................................... 86,681 100,781 99,459
Work in process and finished goods..................... 48,212 38,402 36,995
Materials and supplies................................. 44,310 42,043 35,834
---------- ---------- ----------
Inventory, gross................................... 179,203 181,226 172,288
Excess of FIFO over LIFO cost.......................... (28,484) (25,445) (28,308)
---------- ---------- ----------
Inventory, net..................................... 150,719 155,781 143,980
---------- ---------- ----------
Prepaid expenses and other current assets.............. 41,092 35,019 35,536
---------- ---------- ----------
Total current assets............................... 243,563 237,511 208,375
---------- ---------- ----------
Property, plant and equipment, at cost:
Land, timber, timberlands and buildings................ 287,510 280,060 269,134
Machinery and equipment................................ 1,289,459 1,175,805 1,082,912
Other, including construction in progress.............. 100,136 130,696 140,522
Less-Accumulated depreciation and depletion............ (735,749) (656,915) (582,437)
---------- ---------- ----------
Property, plant and equipment, net................. 941,356 929,646 910,131
---------- ---------- ----------
Intangibles.............................................. 50,110 56,470 55,660
---------- ---------- ----------
Other long-term assets................................... 131,092 77,312 72,076
---------- ---------- ----------
Investments.............................................. 1,282 16,324 14,809
---------- ---------- ----------
Total assets............................................. $1,367,403 $1,317,263 $1,261,051
========== ========== ==========

LIABILITIES AND INTERDIVISION ACCOUNT
Current liabilities:
Accounts payable....................................... $ 87,054 $ 124,633 $ 111,588
Payables to Tenneco affiliates......................... 7,091 6,164 29,402
Current portion of long-term debt...................... 617 3,923 1,603
Current portion of deferred gain....................... -- 1,973 1,973
Accrued liabilities.................................... 69,390 70,426 166,663
---------- ---------- ----------
Total current liabilities............................ 164,152 207,119 311,229
---------- ---------- ----------
Long-term liabilities:
Long-term debt......................................... 16,935 23,941 18,713
Deferred taxes......................................... 254,064 174,127 87,165
Deferred gain.......................................... -- 34,262 36,235
Other.................................................. 23,860 23,754 23,287
---------- ---------- ----------
Total long-term liabilities........................ 294,859 256,084 165,400
---------- ---------- ----------
Interdivision account.................................... 908,392 854,060 784,422
---------- ---------- ----------
Total liabilities and interdivision account.............. $1,367,403 $1,317,263 $1,261,051
========== ========== ==========

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

F-48

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
COMBINED STATEMENTS OF
REVENUES, EXPENSES AND INTERDIVISION ACCOUNT

YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------

(IN THOUSANDS)
Net sales.............................................. $ 1,643,823 $ 1,482,889 $ 1,645,948
Cost of sales.......................................... (1,362,448) (1,313,498) (1,401,136)
----------- ----------- -----------
Gross profit......................................... 281,375 169,391 244,812
Selling and administrative expenses.................... (108,944) (102,891) (95,283)
Restructuring, impairment and other.................... (14,385) -- --
Other income, net...................................... 26,818 44,681 56,243
Corporate allocations.................................. (63,114) (61,338) (50,461)
----------- ----------- -----------
Income before interest, and taxes.................... 121,750 49,843 155,311
Interest expense, net.................................. (2,782) (3,739) (5,129)
----------- ----------- -----------
Income before taxes.................................. 118,968 46,104 150,182
Provision for income taxes............................. (47,529) (18,714) (59,816)
----------- ----------- -----------
Net income........................................... 71,439 27,390 90,366
Interdivision account, beginning of period........... 854,060 784,422 640,483
Interdivision account activity, net.................. (17,107) 42,248 53,573
----------- ----------- -----------
Interdivision account, end of period................. $ 908,392 $ 854,060 $ 784,422
=========== =========== ===========

Basic and diluted earnings per share (unaudited):

Net income per common share.......................... .76 .29 .96
=========== =========== ===========

Weighted average common shares outstanding........... 94,600 94,600 94,600

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

F-49

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
COMBINED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------

(IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 71,439 $ 27,390 $ 90,366
-------- -------- --------
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation, depletion and amortization................ 96,950 87,752 78,730
Extraordinary loss-early debt extinguishment
Restructuring and other................................. 14,385 -- --
Gain on sale of joint venture interest.................. (15,060) -- --
Gain on sale of timberlands............................. (16,944) -- --
Gain on sale of assets.................................. -- -- (51,268)
Gain on lease refinancing............................... -- (37,730) --
Gain on Willow Flowage.................................. -- (4,449) --
Gain on sale of mineral rights.......................... -- (1,646) --
Amortization of deferred gain........................... (1,973) (1,973) (1,973)
Increase (decrease) in deferred income taxes............ 71,342 85,070 8,318
Undistributed earnings of affiliated companies.......... 302 (2,264) (536)
Increase (decrease) in other noncurrent reserves........ 107 467 (27,287)
Changes in noncash components of working capital,
excluding transactions with Tenneco
Decrease (increase) in current assets--
Accounts receivable................................. 12,100 (26,092) 38,261
Inventories, net.................................... 5,062 (10,932) 1,287
Prepaid expenses and other.......................... 4,572 782 (8,070)
(Decrease) increase in current liabilities--
Accounts payable.................................... (37,580) 13,045 (47,930)
Accrued liabilities................................. (9,301) (22,207) (24,041)
-------- -------- --------
Net cash provided by operating activities......... 195,401 107,213 55,857
-------- -------- --------

Cash flows from investing activities:
Additions to property, plant and equipment................ (103,429) (110,186) (168,642)
Prepaid Meridian Lease.................................... (84,198) -- --
Acquisition of businesses................................. -- (5,866) --
Other long-term assets.................................... (10,970) (6,983) (23,478)
Proceeds from disposals................................... 26,214 10,460 122,654
Other transactions, net................................... (5,350) 690 (4,766)
-------- -------- --------
Net cash used for investing activities............ (177,733) (111,885) (74,232)
-------- -------- --------

F-50

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
COMBINED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- -------- ---------

(IN THOUSANDS)
Cash flows from financing activities:
Proceeds from long-term debt issued....................... $ -- $ 1,146 $ 430
Payments on long-term debt................................ (10,346) (1,618) (1,886)
(Decrease) increase in interdivision account.............. (17,109) 19,907 168,074
Working capital transactions with Tenneco and affiliated
companies--
Decrease (increase) in receivables from affiliated
companies............................................. 8,667 (8,754) (1,781)
Decrease (increase) in factored receivables............. 192 16,204 (25,563)
Increase (decrease) in accounts payable to affiliated
companies............................................. 928 (23,239) (8,007)
Dividends paid to Tenneco............................... -- -- (114,500)
-------- -------- ---------
Net cash (used for) provided by financing
activities.......................................... (17,668) 3,646 16,767
-------- -------- ---------
Net decrease in cash........................................ -- (1,026) (1,608)
Cash, beginning of period................................... 1 1,027 2,635
-------- -------- ---------
Cash, end of period......................................... $ 1 $ 1 $ 1,027
======== ======== =========

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

F-51

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS

DECEMBER 31, 1998, 1997 AND 1996

1. BUSINESS DESCRIPTION

The Containerboard Group (the "Group") is a division of Tenneco
Packaging Inc. ("Packaging") which is a wholly owned subsidiary of Tenneco Inc.
("Tenneco"). The Group is comprised of mills and corrugated products operations.

Corrugated operations consist of 39 corrugated combining plants, 28
specialty/sheet and other plants and 5 design centers. All plants are located in
North America. Corrugated combines linerboard and medium (primarily from The
Mills) into sheets that are converted into corrugated shipping containers,
point-of-sale graphics packaging, point-of-purchase displays and other
specialized packaging. Corrugated sells to diverse customers primarily in North
America.

The Group's sales to other Packaging entities and other Tenneco entities are
included in the accompanying combined financial statements. The net sales to
other Packaging entities for the years ended December 31, 1998, 1997 and 1996,
were approximately $76,906,000, $69,981,000 and $76,745,000, respectively. The
net sales to other Tenneco entities for the years ended December 31, 1998, 1997
and 1996, were approximately $14,251,000, $13,108,000 and $10,376,000,
respectively. The profit relating to these sales are included in the
accompanying combined financial statements.

2. SUMMARY OF ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying combined financial statements include the selected assets,
liabilities, revenues and expenses of the Group. All significant intragroup
accounts and transactions have been eliminated.

REVENUE RECOGNITION

The Group recognizes revenue as products are shipped to customers.

ACCOUNTS RECEIVABLE

A substantial portion of the Group's trade accounts receivable are sold by
Packaging, generally without recourse, to a financing subsidiary of
Tenneco Inc. Expenses relating to cash discounts, credit losses, pricing
adjustments and other allowances on these factored receivables are accrued and
charged to the Group. The amount of trade accounts receivable sold was
approximately $150,099,000, $149,907,000 and $133,703,000 at December 31, 1998,
1997 and 1996, respectively.

F-52

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
INVENTORIES

Inventories for raw materials and finished goods are valued using the
last-in, first-out ("LIFO") cost method and include material, labor and
manufacturing-related overhead costs. Supplies and materials inventories are
valued using a moving average cost. All inventories are stated at the lower of
cost or market.

PROPERTY, PLANT AND EQUIPMENT

The amount of interest capitalized related to construction in progress at
the Group was approximately $576,000, $975,000 and $5,207,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.

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

Buildings and land improvements.......................... 5 to 40 years
Machinery and equipment.................................. 3 to 25 years
Trucks and automobiles................................... 3 to 10 years
Furniture and fixtures................................... 3 to 20 years
Computers and software................................... 3 to 7 years
Leasehold improvements................................... Period of the lease

Expenditures for repairs and maintenance are expensed as incurred.

DEFERRED GAIN

In 1992, Packaging entered into a sale-leaseback transaction for financial
reporting purposes involving certain of its timberlands. The deferred gain
recognized upon sale is being amortized on a straight-line basis over the
initial lease term.

F-53

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
This deferred gain relates to a lease which was prepaid by the Group in
December, 1998 (Note 12). The 1998 financial statements have reclassed the
current and long-term portions of the deferred gain against the prepaid payment
in Prepaid Expenses and Other Current Assets and Other Long-Term Assets.

CHANGES IN ACCOUNTING PRINCIPLES

In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new accounting
and reporting standards requiring that all derivative instruments (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. This statement is effective for all
fiscal years beginning after June 15, 1999. The adoption of this new standard is
not expected to have a significant effect on the Group's financial position or
results of operations.

In April, 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires capitalized costs related to start-up
activities to be expensed as a cumulative effect of a change in accounting
principle when the statement is adopted. Tenneco currently expects to adopt this
new accounting principle in the first quarter of 1999. The adoption of this new
standard is not expected to have a significant effect on the Group's financial
position or results of operations.

In March, 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use. This statement will be applied prospectively and
is effective for fiscal years beginning after December 15, 1998. The adoption of
this new standard is not expected to have a significant effect on the Group's
financial position or results of operations.

FREIGHT TRADES

F-54

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
ENVIRONMENTAL LIABILITIES

COMBINED STATEMENTS OF CASH FLOWS

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. The amounts charged
were $3,728,000, $4,345,000 and $4,789,000 in 1998, 1997 and 1996, respectively.

INTANGIBLE ASSETS

Goodwill and intangibles, net of amortization, by major category are as
follows:

1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Goodwill................................................. $48,046 $52,958 $51,721
Intangibles.............................................. 2,064 3,512 3,939
------- ------- -------
$50,110 $56,470 $55,660
======= ======= =======

F-55

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Goodwill is being amortized on a straight-line basis over 40 years. Such
amortization amounted to $1,449,000, $1,452,000 and $1,440,000 for 1998, 1997
and 1996, respectively. Goodwill totaling approximately $3,463,000 was written
off in 1998 related to a closed facility (Note 7).

The Group has capitalized certain intangible assets, primarily trademarks
and patents, based on their estimated fair value at the date of acquisition.
Amortization is provided for these intangible assets on a straight-line basis
over periods ranging from 3 to 10 years. Covenants not to compete are amortized
on a straight-line basis over the terms of the respective agreements. Such
amortization amounted to $1,127,000, $1,234,000 and $1,416,000 in 1998, 1997 and
1996, respectively.

USE OF ESTIMATES

RECLASSIFICATIONS

The prior years' financial statements have been reclassified, where
appropriate, to conform to the 1998 presentation.

SEGMENT INFORMATION

EARNINGS PER SHARE (UNAUDITED)

Earnings per share has been calculated using the historical earnings of the
Group and the number of common shares resulting from the April 12, 1999
transaction (430,000 common shares), as adjusted to reflect the anticipated
220-for-one stock split. For all periods presented, basic and diluted earnings
per share are the same because there are no potentially dilutive other
securities.

F-56

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

3. INVESTMENTS IN JOINT VENTURES

The Group has a 50% U.S. joint venture with American Cellulose Corporation
to manufacture and market hardwood chips. The net investment, which was
accounted for under the equity method, was $1,282,000, $1,310,000 and $1,519,000
as of December 31, 1998, 1997 and 1996, respectively. In the second quarter of
1996, Packaging entered into an agreement to form a joint venture with Caraustar
Industries whereby Packaging sold its two recycled paperboard mills and a fiber
recycling operation and brokerage business to the joint venture in return for
approximately $115 million and a 20% equity interest in the joint venture. In
June, 1998, Packaging sold its remaining 20% equity interest in the joint
venture to Caraustar Industries. The net investment, which was accounted for
under the equity method, was $0, $15,014,000 and $13,290,000 as of December 31,
1998, 1997 and 1996, respectively.

4. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS

1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Capital lease obligations, interest at 8.5% for 1998 and
1997 and a weighted average interest rate of 8.2% for
1996 due in varying amounts through 2000................ $ 18 $ 32 $18,658
Non-interest-bearing note, due in annual installments of
$70,000 through July 1, 2004, net of discount imputed at
10.0% of $182,000, $216,000 and $249,000 in 1998, 1997
and 1996, respectively.................................. 308 344 381
Notes payable, interest at an average rate of 13.5%, 13.3%
and 8.8% for 1998, 1997 and 1996, respectively, with
varying amounts due through 2010........................ 16,553 26,187 680
Other obligations......................................... 673 1,301 597
------- ------- -------
Total............................................... 17,552 27,864 20,316
Less--Current portion..................................... 617 3,923 1,603
------- ------- -------
Total long-term debt................................ $16,935 $23,941 $18,713
======= ======= =======

In January, 1997, the General Electric Capital Corporation ("GECC")
operating leases were refinanced. Through this refinancing, several capital
lease obligations were extinguished as the assets were incorporated into the new
operating lease (Note 12).

Annual payments for debt during the next five years and thereafter are:
$617,000 (1999), $214,000 (2000), $3,569,000 (2001), $4,387,000 (2002),
$4,240,000 (2003) and $4,525,000 (2004 and thereafter).

In 1997, Tenneco contributed the Counce Limited Partnership to Packaging
which included notes payable totaling approximately $26,187,000.

F-57

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

5. PENSION AND OTHER BENEFIT PLANS

The Group's eligible salaried employees participate in the Tenneco
Retirement Plan (the "Retirement Plan"), a defined benefit plan, along with
other Tenneco divisions and subsidiaries. The pension expense allocated to the
Group by Packaging for this plan was approximately $5,595,000, $3,197,000 and
$3,111,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Amounts allocated are principally determined based on payroll. This plan is
overfunded and a portion of the prepaid pension costs has not been allocated to
the Group.

The Group's eligible hourly employees participate in the Tenneco Packaging
Pension Plan for Certain Hourly Rated Employees, also a defined benefit plan,
along with other Packaging divisions. As stated, due to the fact that other
divisions within Packaging participate in the plan, certain of the disclosures
required by SFAS No. 132, "Employers' Disclosures About Pension and Other
Postretirement Benefits", such as a summary of the change in benefit obligation
and the change in plan assets, are not available. The net pension (income) cost
actuarially allocated to the Group for this plan was $(466,000), $144,000 and
$2,373,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
This plan is overfunded, and a portion of the related pension asset of
$35,603,000, $35,137,000 and $34,429,000 for December 31, 1998, 1997 and 1996,
respectively, has been actuarially allocated to the Group and is included in
Other Long-Term Assets.

However, in connection with the pending sale of the Group as described in
Note 14 to these financial statements, the pension asset allocated to the Group
will be excluded from the sale transaction and remain with Tenneco.

Actuarially allocated net pension cost for the Group's defined benefit
plans, excluding the Retirement Plan, consists of the following components:

FOR THE YEARS ENDED
DECEMBER 31
------------------------------
1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Service cost-benefits earned during the year.............. $ 3,112 $ 3,652 $ 4,021
Interest cost on projected benefit obligations............ 6,990 6,675 6,174
Expected return on plan assets............................ (11,312) (10,819) (8,389)
Amortization of--
Transition liability.................................. (164) (164) (164)
Unrecognized loss..................................... -- -- 10
Prior service cost.................................... 908 800 721
-------- -------- -------
Net pension (income) cost........................... $ (466) $ 144 $ 2,373
======== ======== =======

F-58

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

5. PENSION AND OTHER BENEFIT PLANS (CONTINUED)
The funded status of the Group's allocation of defined benefit plans,
excluding the Retirement Plan, reconciles with amounts recognized in the
statements of assets and liabilities and interdivision account as follows:

1998 1997 1996
(IN THOUSANDS) --------- -------- --------

Actuarial present value at September 30--
Vested benefit obligation............................. $ (98,512) $(86,865) $(79,818)
Accumulated benefit obligation........................ (108,716) (95,711) (87,481)
========= ======== ========
Projected benefit obligation.............................. $(108,716) $(96,118) $(88,555)
Plan assets at fair value at September 30................. 146,579 141,961 118,968
Unrecognized transition liability......................... (1,092) (1,256) (1,420)
Unrecognized net gain..................................... (14,623) (21,573) (5,111)
Unrecognized prior service cost........................... 13,455 12,123 10,547
--------- -------- --------
Prepaid pension cost at December 31................. $ 35,603 $ 35,137 $ 34,429
========= ======== ========

The weighted average discount rate used in determining the actuarial present
value of the benefit obligations was 7.00% for the year ended December 31, 1998,
and 7.75% for the years ended December 31, 1997 and 1996. The weighted average
expected long-term rate of return on plan assets was 10% for 1998, 1997 and
1996.

In June, 1992, Tenneco initiated an Employee Stock Purchase Plan ("ESPP").
The plan allows U.S. and Canadian employees of the Group to purchase
Tenneco Inc. common stock through payroll deductions at a 15% discount. Each
year, an employee in the plan may purchase shares with a discounted value not to
exceed $21,250. The weighted average fair value of the employee purchase right,
which was estimated using the Black-Sholes option pricing model and the
assumptions described below except that the average life of each purchase right
was assumed to be 90 days, was $6.31, $11.09 and $10.77 in 1998, 1997 and 1996,
respectively. The ESPP was terminated as of September 30, 1996. Tenneco adopted
a new employee stock purchase plan effective April 1, 1997. Under the respective
ESPPs, Tenneco sold 133,223 shares, 85,024 shares and 73,140 shares to Group
employees in 1998, 1997 and 1996, respectively.

F-59

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

5. PENSION AND OTHER BENEFIT PLANS (CONTINUED)
The fair value of each stock option issued by Tenneco to the Group during
1998, 1997 and 1996 is estimated on the date of grant using the Black-Sholes
option pricing model using the following weighted average assumptions for grants
in 1998, 1997 and 1996, respectively: (a) risk-free interest rate of 5.7%, 6.7%
and 6.0%, (b) expected lives of 10.0 years, 19.7 years and 5.0 years;
(c) expected volatility of 25.6%, 27.8% and 24.6%; and (d) dividend yield of
3.2%, 2.9% and 3.2%. The weighted-average fair value of options granted during
the year is $10.91, $13.99 and $11.51 for 1998, 1997 and 1996, respectively.

The Group applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," to its stock-based compensation plans. The Group
recognized after-tax stock-based compensation expense of approximately $210,000
in 1998, 1997 and 1996. Had compensation costs for the Group's stock-based
compensation plans been determined in accordance with SFAS 123, "Accounting for
Stock-Based Compensation," based on the fair value at the grant dates for the
awards under those plans, the Group's pro forma net income for the years ended
December 31, 1998, 1997 and 1996, would have been lower by $7,828,000,
$8,205,000 and $1,874,000, respectively.

6. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

Currently, the Group's postretirement benefit plans are not funded and a
portion of the related postretirement obligation has been actuarially allocated
to the Group. However, due to the fact that other divisions participate in the
plan, certain of the disclosures required by SFAS No. 132, such as a summary of
the change in benefit obligation, are not available. The obligation of the
plans, related to

F-60

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

6. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
hourly employees, reconciles with amounts recognized on the accompanying
combined statements of assets, liabilities and interdivision account at
December 31, 1998, 1997 and 1996, as follows:

1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Actuarial present value at September 30--
Accumulated postretirement benefit obligation--
Retirees and beneficiaries............................ $ (8,401) $ (7,199) $ (8,213)
Fully eligible active plan participants............... (3,582) (4,081) (4,283)
Other active plan participants........................ (2,950) (2,426) (1,738)
-------- -------- --------
Total............................................... (14,933) (13,706) (14,234)
Plan assets at fair value at September 30............... -- -- --
Funded status........................................... (14,933) (13,706) (14,234)
Claims paid during the fourth quarter................... 473 178 142
Unrecognized prior service cost......................... -- (293) (797)
Unrecognized net gain................................... (1,764) (2,861) (2,205)
-------- -------- --------
Accrued postretirement benefit cost at December 31.......... $(16,224) $(16,682) $(17,094)
======== ======== ========

The net periodic postretirement benefit costs as determined by actuaries for
hourly employees for the years 1998, 1997 and 1996 consist of the following
components:

1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Service cost.............................................. $ 159 $ 105 $ 144
Interest cost............................................. 1,024 1,065 1,012
Amortization of net (gain) loss........................... (138) (80) 55
Amortization of prior service cost........................ (293) (504) (643)
------ ------ ------
Net periodic postretirement benefit cost............ $ 752 $ 586 $ 568
====== ====== ======

The amounts expensed by the Group may be different because it was allocated
by Packaging.

The weighted average assumed health care cost trend rate used in determining
the 1998 and 1997 accumulated postretirement benefit obligation was 5% in 1997,
remaining at that level thereafter.

The weighted average assumed health care cost trend rate used in determining
the 1996 accumulated postretirement benefit obligation was 6.0% in 1996
declining to 5.0% in 1997 and remaining at that level thereafter.

Increasing the assumed health care cost trend rate by one percentage point
in each year would increase the accumulated postretirement benefit obligation as
of September 30, 1998, 1997 and 1996, by approximately $1,268,000, $868,000 and
$1,103,000, respectively, and would increase the net postretirement benefit cost
for 1998, 1997 and 1996 by approximately $130,000, $75,000 and $102,000,
respectively.

F-61

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

6. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)
The discount rate (which is based on long-term market rates) used in
determining the accumulated postretirement benefit obligations was 7.00% for
1998 and 7.75% for 1997 and 1996.

7. RESTRUCTURING AND OTHER CHARGES

DECEMBER 31,
FOURTH-QUARTER 1998
COMPONENT RESTRUCTURING CHARGE ACTIVITY BALANCE
--------- -------------------- -------------- ------------
(IN THOUSANDS)

Cash charges--
Severance................................. $ 5,135 $ 852 $4,283
Facility exit costs and other............. 3,816 369 3,447
------- ------ ------
Total cash charges.................... 8,951 1,221 7,730
Noncash charges--
Asset impairments......................... 5,434 3,838 1,596
------- ------ ------
$14,385 $5,059 $9,326
======= ====== ======

Asset impairments include goodwill totaling approximately $5,043,000 related
to two of the facilities. The fixed assets at the closed facilities were written
down to their estimated fair value. No significant cash proceeds are expected
from the ultimate disposal of these assets. Of the $7,730,000 remaining cash
charges at December 31, 1998, approximately $7,300,000 is expected to be spent
in 1999. The actions contemplated by the restructuring plan should be completed
during the second quarter of 1999.

8. INCOME TAXES

As a division, this Group is not a taxable entity. For purposes of these
combined financial statements, income taxes have been allocated to the Group and
computed on a separate return basis. These income taxes represent liabilities to
Packaging and do not reflect any tax attributes of the Tenneco consolidated tax
group.

F-62

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

8. INCOME TAXES (CONTINUED)
Following is an analysis of the components of combined income tax expense
(benefit):

1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Current--
U.S..................................................... $(21,105) $(58,813) $45,641
State and local......................................... (2,708) (7,545) 5,855
-------- -------- -------
(23,813) (66,358) 51,496
-------- -------- -------
Deferred--
U.S..................................................... 63,230 75,399 7,374
State and local......................................... 8,112 9,673 946
-------- -------- -------
71,342 85,072 8,320
-------- -------- -------
Income tax expense.................................. $ 47,529 $ 18,714 $59,816
======== ======== =======

The primary difference between income taxes computed at the statutory U.S.
federal income tax rate and the income tax expense in the combined statements of
revenues, expenses and interdivision account is due to the effect of state
income taxes.

The components of the deferred tax assets (liabilities) at December 31,
1998, 1997 and 1996, were as follows:

1998 1997 1996
(IN THOUSANDS) --------- --------- ---------

Current deferred taxes--
Accrued liabilities..................................... $ 10,232 $ 6,374 $ 7,046
Employee benefits and compensation...................... (5,969) (4,946) (929)
Reserve for doubtful accounts........................... 1,275 1,230 1,261
Inventory............................................... 707 614 38
Pensions and postretirement benefits.................... (2,994) (4,196) (5,053)
State deferred tax...................................... 10,096 5,724 511
Other................................................... (76) (123) (89)
--------- --------- ---------
Total current deferred taxes........................ 13,271 4,677 2,785
--------- --------- ---------
Noncurrent deferred taxes--
Pension and postretirement benefits..................... 13,898 7,934 8,012
Excess of financial reporting over tax basis in plant
and equipment......................................... (293,830) (210,797) (121,707)
Accrued liabilities..................................... 1,336 1,701 1,947
Capital leases.......................................... 9,333 7,517 24,672
Other................................................... 15,199 19,518 (89)
--------- --------- ---------
Total noncurrent deferred taxes..................... (254,064) (174,127) (87,165)
--------- --------- ---------
Net deferred tax liabilities........................ $(240,793) $(169,450) $ (84,380)
========= ========= =========

F-63

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

9. ASSETS, LIABILITIES AND OTHER INCOME, NET DETAIL

PREPAID EXPENSES AND OTHER CURRENT ASSETS

The components of prepaid expenses and other current assets include:

1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Prepaid stumpage.......................................... $15,189 $19,231 $15,595
Prepaid taxes............................................. 13,272 7,549 7,044
Current portion--Meridian Lease, net of deferred gain..... 5,193 -- --
Prepaid professional services/leases...................... 2,356 1,918 5,506
Other..................................................... 5,082 6,321 7,391
------- ------- -------
Total............................................... $41,092 $35,019 $35,536
======= ======= =======

OTHER LONG-TERM ASSETS

The components of the other long-term assets include:

1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Prepaid pension cost...................................... $ 35,603 $35,137 $34,429
Leased timberlands and mills.............................. 14,636 11,857 9,510
Long-term portion--Meridian Lease, net of deferred gain... 44,743 -- --
Deferred software......................................... 15,864 11,088 6,047
Timberland rights......................................... 10,919 9,775 8,615
Capitalized fees.......................................... -- 474 3,962
Other..................................................... 9,327 8,981 9,513
-------- ------- -------
Total............................................... $131,092 $77,312 $72,076
======== ======= =======

ACCRUED LIABILITIES

The components of accrued liabilities include:

1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Accrued payroll, vacation and taxes....................... $42,282 $48,119 $ 49,162
Accrued insurance......................................... 6,012 5,248 4,296
Accrued volume discounts and rebates...................... 5,727 4,428 3,515
Restructuring............................................. 9,326 -- --
Current portion of accrued postretirement benefit cost.... 1,460 875 892
Deferred lease credits.................................... 1,918 1,014 94,360
Other..................................................... 2,665 10,742 14,438
------- ------- --------
Total............................................... $69,390 $70,426 $166,663
======= ======= ========

F-64

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

9. ASSETS, LIABILITIES AND OTHER INCOME, NET DETAIL (CONTINUED)
As part of the refinancing of the GECC leases in January, 1997 (Note 12),
certain deferred lease credits were eliminated.

OTHER LONG-TERM LIABILITIES

The components of the other long-term liabilities include:

1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Accrued postretirement benefit cost....................... $14,764 $15,807 $16,202
Environmental liabilities................................. 6,599 5,421 6,673
Other..................................................... 2,497 2,526 412
------- ------- -------
Total............................................... $23,860 $23,754 $23,287
======= ======= =======

OTHER INCOME, NET

The components of other income (expense), net include:

1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Discount on sale of factored receivables.................. $(14,774) $(12,006) $(12,351)
Gain on sale of timberlands............................... 16,944 -- --
Gain on sale of joint venture interest.................... 15,060 -- --
Gain on operating lease refinancing....................... -- 37,730 --
Gain on Willow Flowage.................................... -- 4,449 --
Gain on sale of mineral rights............................ -- 1,646 --
Capitalization of barter credits.......................... -- 1,563 --
Sylva Mill rebate income.................................. -- -- 4,500
Gain on sale of recycled mills............................ -- -- 50,000
Other..................................................... 9,588 11,299 14,094
-------- -------- --------
Total............................................... $ 26,818 $ 44,681 $ 56,243
======== ======== ========

10. RELATED-PARTY TRANSACTIONS

FUNDING OF CASH REQUIREMENTS

CORPORATE ALLOCATIONS

Packaging and Tenneco affiliates provide services to the Group which are
typical of a consolidated entity with operations in several businesses. These
services included general management, investor and

F-65

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

10. RELATED-PARTY TRANSACTIONS (CONTINUED)
media relations, legal, human resources, accounting, public company reporting,
data processing systems, support, training, finance, treasury, and insurance
management. These expenses were allocated to the Group in the aggregate, not
individually, from Packaging and Tenneco affiliates, based upon the relative
level of effort and time spent on Group activities. This was generally measured
using a formula based upon the Group's percentage of Tenneco's fixed assets,
revenues and payroll. The Group believes the method for the historical
allocations was reasonable.

As a stand-alone entity, the Group does not expect that it will incur a
similar level of costs due to a less complex corporate structure and a different
level of need for such services. The Group estimates it will incur approximately
$30 million in stand-alone overhead costs in the first year following the
acquisition and believes this is representative of what the costs would have
been as a stand-alone entity for historical periods.

Certain receivables and transactions resulting from the financing
relationship between Packaging and Tenneco are not reflected in the accompanying
financial statements.

INSURANCE AND BENEFITS

The Group is self-insured for medical benefits and workers' compensation.
Expenses related to workers' compensation, health care claims for hourly and
salaried workers and postretirement health care benefits for hourly and salaried
workers are determined by Packaging and are allocated to the Group. The Group
incurred charges of $32,151,000, $34,004,000 and $32,298,000 in 1998, 1997 and
1996, respectively, for health care and $5,109,000, $9,209,000 and $8,853,000 in
1998, 1997 and 1996, respectively, for workers' compensation.

In general, all costs and expenses incurred and allocated are based on the
relationship the Group has with Tenneco. If the Group had been a stand-alone
entity, the costs and expenses would differ.

11. COMMITMENTS AND CONTINGENCIES

The Group had authorized capital expenditures of approximately $49,392,000
as of December 31, 1998, in connection with the expansion and replacement of
existing facilities.

12. LEASES

Rental expense included in the combined financial statements was
$96,193,340, $95,284,000 and $118,821,000 for 1998, 1997 and 1996, respectively.
These costs are primarily included in cost of goods sold.

On January 31, 1997, Packaging executed an operating lease agreement with
Credit Suisse Leasing 92A, L.P., and a group of financial institutions led by
Citibank, N.A. The agreement refinanced the previous operating leases between
GECC and Packaging which were entered into at the same time as GECC's purchase
of certain assets from Georgia-Pacific in January, 1991. Through this
refinancing,

F-66

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

12. LEASES (CONTINUED)
several capital lease obligations were extinguished as the assets were
incorporated into the new operating lease. Also with this refinancing, certain
fixed assets and deferred credits were eliminated resulting in a net gain of
approximately $38 million in the first quarter of 1997.

Aggregate minimum rental commitments under noncancelable operating leases
are as follows (in thousands):

1999............................. $ 83,804
2000............................. 81,368
2001............................. 79,428
2002............................. 686,390
2003............................. 26,975
Thereafter....................... 113,154
----------
Total.................... $1,071,119
==========

Minimum rental commitments under noncancelable operating leases include
$68 million for 1999, $68 million for 2000, $68 million for 2001, $676 million
for 2002, $18 million for 2003 and $34 million for years thereafter, payable to
credit Suisse Leasing 92A, L.P. and Citibank, N.A., along with John Hancock,
Metropolitan Life and others (the "Lessors") for certain mill and timberland
assets. The remaining terms of such leases extend over a period of up to five
years.

Following the initial lease period, Packaging may, under the provision of
the lease agreements, extend the leases on terms mutually negotiated with the
Lessors or purchase the leased assets under conditions specified in the lease
agreements. If the purchase options are not exercised or the leases are not
extended, Packaging will make a residual guarantee payment to the Lessors of
approximately $653 million, included in the schedule above, which will be
refunded up to the total amount of the residual guarantee payment based on the
Lessors' subsequent sales price for the leased assets. Throughout the lease
period, Packaging is required to maintain the leased properties which includes
reforestation of the timberlands harvested.

Packaging's various lease agreements require that it comply with certain
covenants and restrictions, including financial ratios that, among other things,
place limitations on incurring additional "funded debt" as defined by the
agreements. Under the provisions of the lease agreements, in order to incur
funded debt, Packaging must maintain a pretax cash flow coverage ratio, as
defined, on a cumulative four quarter basis of a minimum of 2.0, subsequently
modified to 1.75 as of December 31, 1998. Packaging was in compliance with all
of its covenants at December 31, 1998.

In December, 1998, the Group made a payment of $84 million to acquire the
Meridian timberlands utilized by the Group. This transaction was undertaken in
preparation for the separation of the Group's assets from Tenneco. Subsequent to
year end, the Group paid a fee of $50,000 to effect the conveyance of the
Meridian timberlands to the Group.

In connection with the pending sale of the Group described in Note 14 to
these financial statements, Tenneco may purchase the Tomahawk and Valdosta mills
and selected timberland assets currently under lease prior to the sale.

F-67

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

13. SALE OF ASSETS

At December 31, 1998, the balance of the note with accrued interest is
$26,756,000.

14. SALE OF COMPANY AND RELATED IMPAIRMENT (UNAUDITED)

On January 26, 1999, Tenneco announced that it had entered into an agreement
to contribute a majority interest in the Group to a new joint venture with
Madison Dearborn Partners, in exchange for cash and debt assumption totaling
approximately $2 billion, and a 45% common equity interest in the joint venture.
The owned and leased assets to be contributed included the Group's four
linerboard and medium mills, 67 plants, three sawmills, an air-drying yard,
three recycling facilities, miscellaneous other property, which includes sales
offices and woodlands forest management offices, numerous distribution centers,
warehouses and five design centers and an ownership or controlling interest in
approximately 950,000 acres of timberland. The transactions closed on April 12,
1999.

In connection with the transactions, Packaging borrowed approximately
$1.8 billion, most of which was used to acquire assets used by the Group
pursuant to operating leases and timber cutting rights, with the remainder
remitted to Tenneco for corporate debt reduction.

Tenneco then contributed the Group's assets (subject to the new indebtedness
and the Group's liabilities) to a joint venture, Packaging Corporation of
America ("PCA") in exchange for (a) a 45% common equity interest in PCA valued
at approximately $200 million and (b) approximately $240 million in cash. As a
result of the sale transaction, Tenneco recognized a pretax loss in the first
quarter of 1999 of approximately $293 million. Part of that loss consisted of an
impairment charge relating to the Group's property, plant and equipment and
intangible assets, which was pushed down to the Group's March 31, 1999 financial
statements. The amount of the impairment charge is approximately
$230.1 million.

The impairment charge of $230.1 million recorded in the Group's financial
statements has been allocated to the following financial statement line items
(in thousands):

The impairment charge will first be applied against the goodwill
specifically attributable to the containerboard assets and the remaining amount
will be applied against plant, property and equipment.

F-68

THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998, 1997 AND 1996

14. SALE OF COMPANY AND RELATED IMPAIRMENT (UNAUDITED) (CONTINUED)
The Group's financial statements reflect $230.1 million of the
$293.0 million charge representing the impairment attributable to the assets
reflected in the Group's financial statements.

15. SUMMARIZED COMBINED FINANCIAL INFORMATION ABOUT GUARANTOR SUBSIDIARIES

The following is summarized aggregated financial information for Dahlonega
Packaging Corporation, Dixie Container Corporation, PCA Hydro, Inc., PCA
Tomahawk Corporation and PCA Valdosta Corporation, each of which was a
wholly-owned subsidiary of Packaging and included in the Group's combined
financial statements. In conjunction with the sale of the Group as described in
Note 14, each of these companies became subsidiaries of PCA and fully,
unconditionally, jointly and severally guaranteed $550 million in subordinated
debt issued by PCA in conjunction with the transaction. Separate financial
statements of the guarantor subsidiaries are not presented because, in the
opinion of management, such financial statements are not material to investors.

DECEMBER 31,
------------------------------
1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Current assets............................................ $49,463 $42,844 $42,664
Non-current assets........................................ 13,985 46,399 45,051
------- ------- -------
Total assets........................................ 63,448 89,243 87,715
Current liabilities....................................... 13,826 12,687 10,542
Non-current liabilities................................... 7,264 4,785 4,559
------- ------- -------
Total liabilities................................... 21,090 17,472 15,101
------- ------- -------
Interdivision Account..................................... $42,358 $71,771 $72,614
======= ======= =======

YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
(IN THOUSANDS) -------- -------- --------

Net sales................................................. $32,970 $25,758 $24,666
Gross profit.............................................. 1,172 3,253 4,719
Net loss.................................................. (866) (1,217) (351)

F-69



                                                                  EXHIBIT 23.1



                      CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent public accountants, we hereby consent to the inclusion in this
Form 10-K and the incorporation by reference in the Form S-8 (Registration
Statement File No. 333-33176) of our report dated July 16, 1999 for the
period ended April 11, 1999 and our report dated February 26, 1999 for the
years ended December 31, 1998, 1997, and 1996. It should be noted that we
have not audited any financial statements of Packaging Corporation of America
subsequent to April 11, 1999 or performed any audit procedures subsequent to
the date of our report.

                                               ARTHUR ANDERSEN LLP




Chicago, Illinois
March 23, 2001



                                                                   EXHIBIT 23.2


                       CONSENT OF INDEPENDENT AUDITORS


We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-33176) pertaining to the Packaging Corporation of America
Thrift Plan for Hourly Employees, Packaging Corporation of America Retirement
Savings Plan for Salaried Employees and Packaging Corporation of America 1999
Long-Term Equity Incentive Plan of our report dated January 19, 2001, with
respect to the consolidated financial statements and schedule of Packaging
Corporation of America included in its Annual Report (Form 10-K) for the year
ended December 31, 2000, filed with the Securities and Exchange Commission.


                                                     ERNST & YOUNG LLP

Chicago, Illinois
March 22, 2001




                           SPECIAL POWER OF ATTORNEY

     The undersigned constitutes and appoints Paul T. Stecko, Richard B. West
and Samuel M. Mencoff, and each of them, his true and lawful attorney-in-fact
and agent with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, for filing
with the Securities and Exchange Commission by Packaging Corporation of
America, a Delaware corporation, together with any and all amendments to such
Form 10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.

     DATED:         3/20           , 2001
           ------------------------

         /s/ THOMAS S. SOULELES
     ---------------------------------
     Thomas S. Souleles





                           SPECIAL POWER OF ATTORNEY

     The undersigned constitutes and appoints Paul T. Stecko, Richard B. West
and Samuel M. Mencoff, and each of them, his true and lawful attorney-in-fact
and agent with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, for filing
with the Securities and Exchange Commission by Packaging Corporation of
America, a Delaware corporation, together with any and all amendments to such
Form 10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.

     DATED:         3/20           , 2001
           ------------------------

         /s/ PAUL T. STECKO
     ---------------------------------
     Paul T. Stecko





                           SPECIAL POWER OF ATTORNEY

     The undersigned constitutes and appoints Paul T. Stecko, Richard B. West
and Samuel M. Mencoff, and each of them, his true and lawful attorney-in-fact
and agent with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, for filing
with the Securities and Exchange Commission by Packaging Corporation of
America, a Delaware corporation, together with any and all amendments to such
Form 10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.

     DATED:         3/20           , 2001
           ------------------------

         /s/ RICHARD B. WEST
     ---------------------------------
     Richard B. West





                           SPECIAL POWER OF ATTORNEY

     The undersigned constitutes and appoints Paul T. Stecko, Richard B. West
and Samuel M. Mencoff, and each of them, his true and lawful attorney-in-fact
and agent with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, for filing
with the Securities and Exchange Commission by Packaging Corporation of
America, a Delaware corporation, together with any and all amendments to such
Form 10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.

     DATED:         3/3            , 2001
           ------------------------

         /s/ HENRY F. FRIGON
     ---------------------------------
     Henry F. Frigon





                           SPECIAL POWER OF ATTORNEY

     The undersigned constitutes and appoints Paul T. Stecko, Richard B. West
and Samuel M. Mencoff, and each of them, his true and lawful attorney-in-fact
and agent with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, for filing
with the Securities and Exchange Commission by Packaging Corporation of
America, a Delaware corporation, together with any and all amendments to such
Form 10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.

     DATED:         3/20           , 2001
           ------------------------

         /s/ LOUIS A. HOLLAND
     ---------------------------------
     Louis A. Holland





                           SPECIAL POWER OF ATTORNEY

     The undersigned constitutes and appoints Paul T. Stecko, Richard B. West
and Samuel M. Mencoff, and each of them, his true and lawful attorney-in-fact
and agent with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, for filing
with the Securities and Exchange Commission by Packaging Corporation of
America, a Delaware corporation, together with any and all amendments to such
Form 10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.

     DATED:         3/20           , 2001
           ------------------------

         /s/ JUSTIN S. HUSCHER
     ---------------------------------
     Justin S. Huscher





                           SPECIAL POWER OF ATTORNEY

     The undersigned constitutes and appoints Paul T. Stecko, Richard B. West
and Samuel M. Mencoff, and each of them, his true and lawful attorney-in-fact
and agent with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, for filing
with the Securities and Exchange Commission by Packaging Corporation of
America, a Delaware corporation, together with any and all amendments to such
Form 10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.

     DATED:         3/20           , 2001
           ------------------------

         /s/ SAMUEL M. MENCOFF
     ---------------------------------
     Samuel M. Mencoff





                           SPECIAL POWER OF ATTORNEY

     The undersigned constitutes and appoints Paul T. Stecko, Richard B. West
and Samuel M. Mencoff, and each of them, his true and lawful attorney-in-fact
and agent with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, for filing
with the Securities and Exchange Commission by Packaging Corporation of
America, a Delaware corporation, together with any and all amendments to such
Form 10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting
to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.

     DATED:         3/19           , 2001
           ------------------------

         /s/ RAYFORD K. WILLIAMSON
     ---------------------------------
     Rayford K. Williamson