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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2002

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                             

Commission file number 1-15399

PACKAGING CORPORATION OF AMERICA
(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or other Jurisdiction
of Incorporation or Organization)		   36-4277050
(IRS Employer Identification No.)

1900 West Field Court
Lake Forest, Illinois
(Address of Principal Executive Offices)
 
60045
(Zip Code)

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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

        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 ý No o

        As of May 9, 2002, the Registrant had outstanding 105,581,993 shares of common stock, par value $0.01 per share.


PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

Packaging Corporation of America
Condensed Consolidated Balance Sheets

 
   March 31, 2002
   December 31, 2001
  
 
   (unaudited)

    
  
(In thousands, except share and per share amounts)              
Assets              
Current assets:              
  Cash and cash equivalents   $ 77,418   $ 82,465  
  Accounts and notes receivable, net of allowance for doubtful accounts of $4,867 and $5,232 as of March 31, 2002 and December 31, 2001, respectively     188,396     170,175  
  Inventories     160,389     170,173  
  Prepaid expenses and other current assets     18,174     12,058  
  Deferred income taxes     14,987     13,346  
   
 
 
    Total current assets     459,364     448,217  
Property, plant and equipment, net     1,440,268     1,451,224  
Intangible assets, net of accumulated amortization of $1,731 and $1,647 as of March 31, 2002 and December 31, 2001, respectively     4,097     4,037  
Other long-term assets     64,950     68,302  
   
 
 
    Total assets   $ 1,968,679   $ 1,971,780  
   
 
 
Liabilities and shareholders' equity              
Current liabilities:              
  Current portion of long-term debt   $ 81   $ 54  
  Accounts payable     96,225     93,873  
  Accrued interest     26,932     13,590  
  Accrued liabilities     67,013     84,378  
   
 
 
    Total current liabilities     190,251     191,895  
Long-term liabilities:              
  Long-term debt     777,170     795,163  
  Deferred income taxes     204,296     194,452  
  Other liabilities     19,957     20,436  
   
 
 
    Total long-term liabilities     1,001,423     1,010,051  
Shareholders' equity:              
  Common stock (par value $.01 per share, 300,000,000 shares authorized, 105,437,718 shares and 105,570,203 shares issued as of March 31, 2002 and December 31, 2001, respectively)     1,054     1,056  
  Additional paid in capital     486,792     490,915  
  Retained earnings     290,512     280,886  
  Accumulated other comprehensive loss     (1,353 )   (2,967 )
  Common stock held in treasury, at cost (3,000 shares at December 31, 2001)     —     (56 )
   
 
 
    Total shareholders' equity     777,005     769,834  
   
 
 
    Total liabilities and shareholders' equity   $ 1,968,679   $ 1,971,780  
   
 
 

See notes to condensed consolidated financial statements.

2

Packaging Corporation of America
Condensed Consolidated Statements of Income
(unaudited)

 
   Three Months Ended March 31,
  
 
   2002
   2001
  
(In thousands, except per share amounts)              
Net sales   $ 414,706   $ 454,666  
Cost of sales     (340,294 )   (347,488 )
   
 
 
  Gross profit     74,412     107,178  
Selling and administrative expenses     (31,972 )   (30,642 )
Other income (expense), net     470     (219 )
Corporate overhead     (9,740 )   (10,357 )
   
 
 
  Income before interest, taxes and cumulative effect of accounting change     33,170     65,960  
Interest expense, net     (17,186 )   (19,562 )
   
 
 
  Income before taxes and cumulative effect of accounting change     15,984     46,398  
Provision for income taxes     (6,358 )   (18,284 )
   
 
 
  Income before cumulative effect of accounting change     9,626     28,114  
Cumulative effect of accounting change, net of tax     —     (495 )
   
 
 
Net income   $ 9,626   $ 27,619  
   
 
 
Weighted average common shares outstanding:              
  Basic     105,476     106,414  
  Diluted     107,760     108,959  
Basic earnings per common share:              
  Income before cumulative effect of accounting change   $ 0.09   $ 0.26  
  Cumulative effect of accounting change     —     —  
   
 
 
  Net income per common share   $ 0.09   $ 0.26  
   
 
 
Diluted earnings per common share:              
  Income before cumulative effect of accounting change   $ 0.09   $ 0.25  
  Cumulative effect of accounting change     —     —  
   
 
 
  Net income per common share   $ 0.09   $ 0.25  
   
 
 

See notes to condensed consolidated financial statements.

3

Packaging Corporation of America
Condensed Consolidated Statements of Cash Flow
(unaudited)

 
   Three Months Ended March 31,
  
 
   2002
   2001
  
(In thousands)              
Cash Flows from Operating Activities:              
Net income   $ 9,626   $ 27,619  
   
 
 
Adjustments to reconcile net income to net cash provided by operating activities:              
  Depreciation, depletion and amortization     36,851     34,221  
  Amortization of financing costs     1,164     1,222  
  Cumulative effect of accounting change     —     495  
  Increase in deferred income taxes     8,203     16,234  
  Gain on disposal of property, plant and equipment     (497 )   (587 )
  Tax benefit associated with stock option exercises     1,327     —  
  Other, net     2,093     418  
Changes in components of working capital:              
  (Increase) decrease in current assets—              
    Accounts receivable     (18,268 )   12,015  
    Inventories     9,784     6,453  
    Prepaid expenses and other     (6,029 )   (5,618 )
  Increase (decrease) in current liabilities—              
    Accounts payable     2,352     (13,505 )
    Accrued liabilities     (3,427 )   (10,542 )
   
 
 
      Net cash provided by operating activities     43,179     68,425  
   
 
 
Cash Flows from Investing Activities:              
  Additions to property, plant and equipment     (26,158 )   (20,049 )
  Additions to other long term assets     (1,547 )   (1,346 )
  Proceeds from disposals of property, plant and equipment     2,573     878  
  Other, net     277     177  
   
 
 
      Net cash used for investing activities     (24,855 )   (20,340 )
   
 
 
Cash Flows from Financing Activities:              
Payments on long-term debt     (17,976 )   (11,169 )
Repurchases of common stock     (6,754 )   —  
Issuance of common stock upon exercise of stock options     1,359     1,463  
   
 
 
      Net cash used for financing activities     (23,371 )   (9,706 )
   
 
 
Net increase (decrease) in cash     (5,047 )   38,379  
Cash and cash equivalents, beginning of period     82,465     7,892  
   
 
 
Cash and cash equivalents, end of period   $ 77,418   $ 46,271  
   
 
 

See notes to condensed consolidated financial statements.

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Packaging Corporation of America

Notes to Condensed Consolidated Financial Statements

(unaudited)
March 31, 2002

1.    Basis of Presentation

        The consolidated financial statements as of March 31, 2002 and 2001 of Packaging Corporation of America ("PCA" or the "Company") are unaudited but include all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of such financial statements. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Operating results during the period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the period ending December 31, 2002.

2.    Summary of Accounting Policies

Basis of Consolidation

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

Use of Estimates

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

Segment Information

        PCA is primarily engaged in one line of business: the manufacture and sale of packaging materials, boxes and containers for industrial and consumer markets. No single customer accounts for more than 10% of total revenues. As a result of a recent acquisition, PCA now has a small warehouse and assembly operation in Nogales, Mexico.

New Accounting Pronouncements

        Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. Application of the provisions of the Statements did not have a material impact on the Company's consolidated financial position or results of operations. No goodwill amortization was incurred during the year ended December 31, 2001. On March 31, 2002, the Company had only $1.8 million of goodwill and $2.3 million of other intangible assets.

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

5


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

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

Revenue Recognition

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

Comprehensive Income

        For the three months ended March 31, 2002 and 2001, total comprehensive income was $1.6 million greater and $0.9 million less than net income due to changes in the fair value of derivatives, respectively.

Reclassifications

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

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3.    Earnings Per Share

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

 
   Three Months Ended
March 31,
 
   2002
   2001
(In thousands, except per share data)            
Numerator:            
  Net income   $ 9,626   $ 27,619
Denominator:            
  Basic common shares outstanding     105,476     106,414
Effect of dilutive securities:            
  Stock options     2,284     2,545
   
 
Dilutive common shares outstanding     107,760     108,959
Basic income per common share   $ 0.09   $ 0.26
Diluted income per common share   $ 0.09   $ 0.25

4.    Inventories

        The components of inventories are as follows:

 
   March 31, 2002
   December 31, 2001
  
 
    
   (audited)

  
(In thousands)              
Raw materials   $ 78,202   $ 82,540  
Work in progress     5,796     5,989  
Finished goods     46,233     46,942  
Supplies and materials     57,566     58,118  
   
 
 
Inventories at FIFO cost     187,797     193,589  
Excess of FIFO over LIFO cost     (27,408 )   (23,416 )
   
 
 
Inventory, net   $ 160,389   $ 170,173  
   
 
 

        An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many forces beyond management's control, interim results are subject to the final year-end LIFO inventory valuation.

5.    Shareholders' Equity

        On May 16, 2001, the Company announced a $100.0 million common stock repurchase program. PCA currently expects to continue to repurchase the shares from time to time. Through March 31, 2002, the Company repurchased 2,708,300 shares of common stock, of which 385,100 shares were

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repurchased during the first quarter of 2002, for approximately $45.1 million. The shares were retired prior to March 31, 2002.

6.    Summarized Combined Financial Information about Guarantor Subsidiaries

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

8


investors. Financial information for Packaging Receivables Company, LLC is reflected as a non-guarantor subsidiary.

 
   PCA
   Guarantor Subs
   Non-Guarantor
Sub
   Eliminations
   Total
(In thousands)                              
March 31, 2002                              
  Current assets   $ 300,555   $ 71,755   $ 177,711   $ (90,657 ) $ 459,364
  Non-current assets     1,634,846     123,405     —     (248,936 )   1,509,315
   
 
 
 
 
    Total assets     1,935,401     195,160     177,711     (339,593 )   1,968,679
  Current liabilities     306,576     2,945     177     (119,447 )   190,251
  Non-current liabilities     888,161     262     113,000     —     1,001,423
   
 
 
 
 
    Total liabilities     1,194,737     3,207     113,177     (119,447 )   1,191,674
   
 
 
 
 
  Net assets   $ 740,664   $ 191,953   $ 64,534   $ (220,146 ) $ 777,005
   
 
 
 
 

December 31, 2001
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Current assets   $ 274,300   $ 62,264   $ 190,643   $ (78,990 ) $ 448,217
  Non-current assets     1,649,244     114,932     —     (240,613 )   1,523,563
   
 
 
 
 
    Total assets     1,923,544     177,196     190,643     (319,603 )   1,971,780
  Current liabilities     288,009     2,651     100     (98,865 )   191,895
  Non-current liabilities     883,799     252     126,000     —     1,010,051
   
 
 
 
 
    Total liabilities     1,171,808     2,903     126,100     (98,865 )   1,201,946
   
 
 
 
 
  Net assets   $ 751,736   $ 174,293   $ 64,543   $ (220,738 ) $ 769,834
   
 
 
 
 
Three months ended March 31, 2002                        
  Net sales   $ 412,964   $ 1,742   $ —   $ —   $ 414,706
  Pre-tax profit     8,566     28,533     (756 )   (20,359 )   15,984
  Net income     5,111     17,658     (756 )   (12,387 )   9,626
Three months ended March 31, 2001                        
  Net sales   $ 454,666   $ —   $ —   $ —   $ 454,666
  Pre-tax profit     40,775     13,111     1,970     (9,458 )   46,398
  Net income     24,116     7,425     1,970     (5,892 )   27,619

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001

Net Sales

        Net sales decreased by $40.0 million, or 8.8%, for the three months ended March 31, 2002 from the comparable period in 2001. The decrease was primarily the result of decreased sales prices of containerboard and corrugated products.

        Total corrugated products volume decreased 0.7% for the three months ended March 31, 2002 from the comparable period in 2001. This decrease was due to the fact that the first quarter of 2002 had two less workdays, those days not falling on a weekend or holiday, than the first quarter of 2001. On a comparable shipments-per-workday basis, corrugated products volume was up 2.5% from the first quarter of 2001. Containerboard volume to external domestic and export customers increased 1.8%.

        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 $417 and $373, respectively, per ton for the three months ended March 31, 2002. This compares to $460 and $425, respectively, per ton for the three months ended March 31, 2001.

Income Before Interest Expense and Taxes

        Operating income decreased by $32.8 million, or 49.7%, for the three months ended March 31, 2002 compared to the three months ended March 31, 2001. The decrease in operating income was primarily attributable to the lower sales prices described above.

        Gross profit decreased $32.8 million, or 30.6%, for the three months ended March 31, 2002 from the comparable period in 2001. Gross profit as a percentage of sales declined from 23.6% of sales to 17.9% of sales in the current quarter due to the lower sales prices described above.

        Selling and administrative expenses increased $1.3 million, or 4.3%, for the three months ended March 31, 2002 compared to the three months ended March 31, 2001. The increase was primarily the result of increased salary and other general selling related expenses.

        Corporate overhead for the three months ended March 31, 2002 decreased by $0.6 million, or 6.0%, from the comparable period in 2001. The decrease was primarily due to lower bank service fees and reduced professional fees paid to third parties related to tax, legal and investor relations matters.

Interest Expense and Income Taxes

        Interest expense decreased by $2.4 million, or 12.1%, for the three months ended March 31, 2002 from the three months ended March 31, 2001, primarily as a result of voluntary prepayments PCA made in 2001 and during the first quarter of 2002 on the term loans under its senior credit facility.

        PCA's effective tax rate was 39.8% for the three months ended March 31, 2002 and 39.4% for the comparable period in 2001. The tax rate is higher than the federal statutory rate of 35% due to state income taxes.

Liquidity and Capital Resources

        Cash flow provided by operating activities decreased $25.2 million, or 36.9%, for the three months ended March 31, 2002 from the comparable period in 2001. The decrease was primarily due to decreases in net income and deferred income taxes offset by an increase in working capital.

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        Net cash used for investing activities increased $4.5 million, or 22.2%, for the three months ended March 31, 2002 compared to the three months ended March 31, 2001, primarily as a result of increased additions to property, plant and equipment.

        Net cash used for financing activities increased $13.7 million, or 140.8%, for the three months ended March 31, 2002 from the comparable period in 2001. The increase was primarily attributable to increased debt prepayments and expenditures to repurchase PCA common stock.

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

 
   Balance at
March 31,
2002
   Weighted
Average
Interest Rate
  
Borrowing Arrangement (in thousands)
            
Term Loan A   $ 78,815   6.22 %
Term Loan B     35,185   6.72 %
Senior Revolving Credit Facility:            
  Revolver—Eurodollar     —   N/A  
  Revolver—Base Rate     —   N/A  
Receivables Credit Facility     113,000   4.26 %
   
 
 
Total   $ 227,000   5.32 %
   
 
 

        In addition to the term loans and other borrowing arrangements noted above, PCA has $550 million of 95/8% senior subordinated notes due 2009.

        The borrowings under the senior revolving credit facility are available to fund PCA's working capital requirements, capital expenditures and other general corporate purposes. The senior revolving credit facility will terminate in 2006. The Term Loan A must be repaid in quarterly installments from March 2004 through June 2006. The Term Loan B must be repaid in quarterly installments from June 2004 through June 2007. The receivables credit facility will terminate in November 2003. As of March 31, 2002, PCA had $150.0 million in availability and no borrowings outstanding under the senior revolving credit facility. Under the receivables credit facility, PCA had $37.0 million in availability and $113.0 million outstanding as of March 31, 2002.

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

These limitations could limit corporate and operating activities.

        In addition, we must maintain minimum debt service, minimum net worth and maximum leverage ratios under the senior credit facility. A failure to comply with the restrictions contained in the senior credit facility could lead to an event of default, which could result in an acceleration of such

11


indebtedness. Such an acceleration would also constitute an event of default under the notes indenture and the receivables credit facility.

        PCA estimates that it will make approximately $105.0 million in capital expenditures in 2002. These expenditures will be used primarily for maintenance capital, cost reduction, business growth, and environmental compliance. As of March 31, 2002, PCA had spent $26.2 million for capital expenditures and had committed to spend an additional $37.8 million.

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

Market Risk and Risk Management Policies

        PCA currently has interest rate collar agreements that protect against rising interest rates and simultaneously guarantee a minimum interest rate. The notional amount of these collar agreements was $175.0 million as of March 31, 2002. The weighted average floor of the interest rate collar agreements is 5.02% and the weighted average ceiling of the interest rate collar agreements is 6.85%. The interest rate on approximately 77% of PCA's variable-rate debt as of March 31, 2002 was capped. PCA receives payments under the collar agreements if the applicable interest rate (LIBOR or commercial paper) exceeds the ceiling. Correspondingly, PCA makes payments under the collar agreements if the applicable interest rate drops below the floor. In both cases, the amounts received or paid are based upon the notional amount and the difference between the actual interest rate and the ceiling or floor rate. The weighted average duration of the interest rate collar agreements is approximately 13 months.

        As a result of the collar agreements noted above and the interest rate environment, a one percent increase in interest rates would result in an increase in interest expense and a corresponding decrease in income before taxes of approximately $0.5 million annually. As of March 31, 2002, the weighted average LIBOR rate was 2.05% and the weighted average commercial paper rate was 1.87%. 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.

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Environmental Matters

        PCA is 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, PCA has incurred, and will continue to incur, costs to maintain compliance with those laws. In particular, the United States Environmental Protection Agency recently finalized the Cluster Rules, which govern pulp and paper mill operations, including those at our Counce, Filer City, Valdosta and Tomahawk mills. Over the next several years, the Cluster Rules will affect PCA's allowable discharges of air and water pollutants, and require PCA to spend money to ensure compliance with those new rules.

Impact of Inflation

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

Critical Accounting Policies

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

        We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. For a detailed discussion on the application of these and other accounting policies, see Note 2 to our audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2001.

Accounts Receivable

        We evaluate the collectibility of our accounts receivable based upon a combination of factors. In circumstances where we are aware of a specific customer's inability to meet its financial obligations to us (e.g., bankruptcy filings, substantial downgrading of credit sources), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on the length of time the receivables are past due ranging from 0.1% for current amounts to 20% for amounts more than 90 days past due based on our historical experience. If collection experience deteriorates (i.e., higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations to us), our estimates of the recoverability of amounts due us could be reduced by a material amount.

Inventory

        We record our inventory at the lower of LIFO cost or market. The estimated market value is based on assumptions for future demand and related pricing. If actual market conditions are less favorable than those projected by management, reductions in the value of inventory may be required.

13


Derivatives

        We hold derivative financial instruments to hedge our interest rate risk associated with our variable rate long-term debt. These derivatives qualify for hedge accounting as discussed in Note 2 to our audited consolidated financial statements included in our most recent annual report on Form 10-K. We do not speculate in derivatives trading. Hedge accounting results when we designate and document the hedging relationships involving these derivative instruments. While we intend to continue to meet the conditions for hedge accounting, if hedges do not qualify as highly effective or if we did not believe that forecasted transactions would occur, the changes in the fair value of the derivatives used as hedges would be reflected in earnings.

        To hedge interest rate risk, interest rate collars are used to protect against rising interest rates and simultaneously guarantee minimum interest rates related to our variable rate debt. These instruments are valued using the market standard methodology of netting the discounted future cash receipts and cash payments. The cash receipts and cash payments are based on an expectation of future interest rates derived from observed market interest rate curves. We have not changed our methods of calculating these fair values or developing the underlying assumptions. The values of these derivatives will change over time as cash receipts and payments are made and as market conditions change. Information about the fair values, notional amounts, and contractual terms of these instruments can be found in Notes 6 and 7 to our audited consolidated financial statements included in our most recent annual report on Form 10-K and the section titled "Quantitative and Qualitative Disclosures About Market Risk" included elsewhere in this report.

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

Environmental Liabilities

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

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

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

14


Debt Covenants

        Our senior credit facility requires us to maintain minimum debt service, minimum net worth, and maximum leverage ratios as discussed in Note 6 to our audited consolidated financial statements included in our most recent annual report on Form 10-K. As of March 31, 2002, we were in compliance with these covenants. A failure to comply with the restrictions contained in the senior credit facility could lead to an event of default, which could result in an acceleration of such indebtedness. Due to cross-default provisions contained in the notes indenture and the receivables credit facility, all of our debt would become due in full if any of our debt is in default. Given our results of our operations for the three months ended March 31, 2002 and our projections for future operating results, defaulting on our debt covenants is unlikely absent any material negative event affecting the U.S. economy as a whole. We also believe our lenders would provide us waivers if necessary. However, our expectations of future operating results and continued compliance with our debt covenants cannot be assured and we cannot control our lenders. If our projections of future operating results are not achieved and our debt is placed in default, we would experience a material adverse impact on our reported financial position and results of operations.

Revenue Recognition

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

Impairment of Long-Lived Assets

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

Forward-Looking Statements

        Some of the statements in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements include statements about our future financial condition, our industry and our business strategy. Statements that contain words such as "anticipate", "believe", "expect", "intend", "estimate", "hope" or similar expressions, are forward-looking statements. These forward-looking statements are based on the current expectations of PCA. Because forward-looking statements involve inherent risks and uncertainties, the plans, actions and actual results of PCA could differ materially. Among the factors that could cause plans, actions and results to differ materially from PCA's current expectations are those identified under the caption "Risk Factors" in PCA's Registration Statements on Form S-4 and Form S-1, each filed with the Securities and Exchange Commission and available at the SEC's website at "www.sec.gov".


Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

        For a discussion of market risks related to PCA, see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Risk and Risk Management Policies" in this Quarterly Report on Form 10-Q.

15



PART II
OTHER INFORMATION

Item 1. Legal Proceedings.

        On May 14, 1999, PCA was named as a defendant in a Consolidated Class Action Complaint which alleged a civil violation of Section 1 of the Sherman Act. The suit, captioned Winoff Industries, Inc. v. Stone Container Corporation, MDL No. 1261 (E.D. Pa.), names PCA as a defendant based solely on the allegation that PCA is 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 from October 1, 1993 through November 30, 1995, conspired to limit the supply of linerboard, and that the purpose and effect of the alleged conspiracy was artificially to increase prices of corrugated containers. The plaintiffs have moved to certify a class of all persons in the United States who purchased corrugated containers directly from any defendant during the above period, and seek treble damages and attorneys' fees on behalf of the purported class. The Court granted plaintiffs' motion on September 4, 2001, but modified the proposed class to exclude those purchasers whose prices were "not tied to the price of linerboard." The defendants have appealed the Court's class certification decision, and that appeal is currently pending before the Court of Appeals for the Third Circuit. The case is currently set for trial in January 2003. PCA believes that the plaintiffs' allegations have no merit and intends to defend against the suit vigorously. PCA does not believe that the outcome of this litigation should have a material adverse effect on its financial position, results of operations, or cash flow.

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


Item 2.    Changes in Securities and Use of Proceeds.


Item 3.    Defaults Upon Senior Securities.


Item 4.    Submission of Matters to a Vote of Security Holders.


Item 5.    Other Information.

16


Item 6.    Exhibits and Reports on Form 8-K.


10.1   Second Amendment, dated as of March 8, 2002, to the Amended and Restated Credit Agreement dated as of June 29, 2000, among PCA, Various Lenders, J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc., as Co-Lead Arrangers and Joint Book Runners, Deutsche Bank Securities Inc., as Syndication Agent, Goldman Sachs Credit Partners L.P., as Documentation Agent, and JPMorgan Chase Bank, as Administrative Agent.

17


SIGNATURE

        Pursuant to the requirements 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.


 
 
PACKAGING CORPORATION OF AMERICA
    (Registrant)

 
 
By:
 
/s/  RICHARD B. WEST      
Senior Vice President, Chief Financial Officer,
and Corporate Secretary
(Principal Financial Officer and Authorized Officer)

Date: May 15, 2002
 
 
 
 

18



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PART I FINANCIAL INFORMATION
Packaging Corporation of America Notes to Condensed Consolidated Financial Statements (unaudited) March 31, 2002
PART II OTHER INFORMATION
SIGNATURE

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Exhibit 10.1


SECOND AMENDMENT

        SECOND AMENDMENT (this "Amendment"), dated as of March 8, 2002, among PACKAGING CORPORATION OF AMERICA, a Delaware corporation (the "Borrower"), the various lenders party to the Credit Agreement referred to below (the "Lenders"), J.P. MORGAN SECURITIES INC. and DEUTSCHE BANK SECURITIES INC., as Co-Lead Arrangers and Joint Book Runners (in such capacity, each a "Co-Lead Arranger" and, collectively, the "Co-Lead Arrangers"), DEUTSCHE BANK SECURITIES INC., as Syndication Agent (in such capacity, the "Syndication Agent"), GOLDMAN SACHS CREDIT PARTNERS L.P., as Documentation Agent (in such capacity, the "Documentation Agent") and JPMORGAN CHASE BANK as successor by merger to Morgan Guaranty Trust Company of New York, as Administrative Agent (in such capacity, the "Administrative Agent"). All capitalized terms used herein and not otherwise defined herein shall have the respective meanings provided such terms in the Credit Agreement (as defined below).

W I T N E S S E T H:

        WHEREAS, the Borrower, the Lenders, the Co-Lead Arrangers, the Syndication Agent, the Documentation Agent and the Administrative Agent are party to an Amended and Restated Credit Agreement, dated as of June 29, 2000 (as amended, the "Credit Agreement"); and

        WHEREAS, the parties hereto wish to amend the Credit Agreement as herein provided;

        NOW, THEREFORE, it is agreed:

I.    Amendment

        1.    Section 8.01 of the Credit Agreement is hereby amended by deleting in sub-paragraph (e) the text "the Available J.V. Basket Amount and".

        2.    Section 9.03 of the Credit Agreement is hereby amended by deleting in sub-paragraph (vii) the text ", provided that the aggregate amount of Dividends paid pursuant to this clause (vii), does not exceed $150,000,000 less the aggregate principal amount of Senior Subordinated Notes redeemed or repurchased pursuant to clause (z) of the proviso to Section 9.11(iii)".

        3.    Section 9.05 of the Credit Agreement is hereby amended by deleting sub-paragraph (xii) in its entirety and inserting in lieu thereof the following text:

        4.    Section 9.11 of the Credit Agreement is hereby amended in sub-paragraph (iii) by deleting the text "in an aggregate principal amount not to exceed $150,000,000 less the cash Dividends paid pursuant to Section 9.03(vii)".

        5.    Section 11.01 is hereby amended by (x) deleting the definition of "Available J.V. Basket Amount" in its entirety, and (y) deleting the definition of "Joint Venture" in its entirety and inserting in lieu thereof the following text:

1

        6.    Section 13.07 of the Credit Agreement is hereby amended by deleting in sub-paragraph (a)(i) the text "Available J.V. Basket Amount,".

II.    Miscellaneous

        1.    The Borrower hereby represents and warrants that (i) no Default or Event of Default exists as of the Amendment Effective Date (as defined below) after giving effect to this Amendment and (ii) on the Amendment Effective Date, both before and after giving effect to this Amendment, all representations and warranties (other than those representations made as of a specified date) contained in the Credit Agreement and in the other Credit Documents are true and correct in all material respects.

        2.    This Amendment shall become effective on the date (the "Amendment Effective Date") when the Required Lenders and the Borrower shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at its Notice Office.

        3.    This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document.

        4.    This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the Borrower and the Administrative Agent.

        5.    THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

* * *

2

        IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date hereof.

    PACKAGING CORPORATION OF AMERICA

 
 
By:
/s/  PAMELA A. BARNES      
Name: Pamela A. Barnes
Title: Treasurer

 
 
JPMORGAN CHASE BANK, as successor by
    merger to Morgan Guaranty Trust Company
    of New York, Individually and as
    Administrative Agent

 
 
By:
/s/  PETER S. PREDUN      
Name:
Title:

 
 
GOLDMAN SACHS CREDIT PARTNERS L.P.
    as Documentation Agent

 
 
By:
/s/  ELIZABETH FISCHER      
     
Name: Elizabeth Fischer
Title: Authorized Signatory

 
 
J.P. MORGAN SECURITIES INC., as Co-Lead
    Arranger and Joint Book Runner

 
 
By:
/s/  PETER S. PREDUN      
Name:
Title:

3

      DEUTSCHE BANK SECURITIES INC., as
    Co-Lead Arranger, Joint Book Runner and
    Syndication Agent

 
 
 
By:
 
       
Name:
Title:

ABN AMRO BANK N.V.
 
ABN AMRO BANK N.V.

By:
/s/  KENNETH E. KOZAR      
Name: Kenneth E. Kozar
Title: Assistant Vice President
 
By:
/s/  K. DANIEL STREIFF      
Name: K. Daniel Streiff
Title: Group Vice President
    AIMCO CLO SERIES 2001-A

 
 
By:
 
 
       
Name:
Title:

 
 
ALLSTATE LIFE INSURANCE CO.

 
 
By:
 
 
       
Name:
Title:

 
 
BANK ONE, NA

 
 
By:
 
/s/  KELLY T. COTTON      
Name: Kelly T. Cotton
Title: Managing Director

 
 
BANK OF AMERICA


 

 

By:

 

 
       
Name:
Title:

 
 
BANK OF CANTON OF CALIFORNIA


 

 

By:

 

/s/  WILKIE HUI      
Name: Wilkie Hui
Title: VP & Manager

 
 
THE GOVERNOR AND COMPANY OF THE
BANK OF IRELAND

 
 
By:
 
/s/  GERALDINE HANNON      
Name: Geraldine Hannon
Title: Associate Director

 
 
By:
 
/s/  MARY CONNOLLY      
Name: Mary Connolly
Title: Manager

 
 
 
 
 

4


 
 
BANK OF MONTREAL

 
 
By:
 
 
       
Name:
Title:

 
 
BANK OF NOVA SCOTIA

 
 
By:
 
 
       
Name:
Title:

 
 
BANKERS TRUST COMPANY

 
 
By:
 
/s/  MARCO A. ORLANDO      
Name: Marco A. Orlando
Title: Director

 
 
BAVARIA TRR CORPORATION

 
 
By:
 
 
       
Name:
Title:

 
 
COMPANGNIE FINANCIERE DE CIC

 
 
By:
 
 
       
Name:
Title:

 
 
DAI-ICHI KANGYO BANK

 
 
By:
 
 
       
Name:
Title:

 
 
ERSTE BANK

 
 
By:
 
/s/  BRANDON A. MEYERSON      
Name: Brandon A. Meyerson
Title: Vice President
        Erste Bank New York Branch

 
 
By:
 
/s/  JOHN S. RUNNION      
Name: John S. Runnion
Title: Managing Director
        Erste Bank New York Branch

 
 
FIRST UNION NATIONAL BANK N.C.

 
 
By:
 
/s/  SHAWN JANKO      
Name: Shawn Janko
Title: Vice President

 
 
FLEET NATIONAL BANK

 
 
By:
 
/s/  RICHARD D. HILL, JR.      
Name: Richard D. Hill, Jr.
Title: Managing Director

 
 
 
 
 

5


 
 
FUJI BANK, LIMITED

 
 
By:
 
/s/  NOBUOKI KOIKE      
Name: Nobuoki Koike
Title: SVP

 
 
GALAXY CLO 1999-1, LTD.

 
 
By:
 
 
       
Name:
Title:

 
 
Sankaty Advisors, LLC as Collateral
    Manager for GREAT POINT CLO 1999-1
    LTD., as Term Lender

 
 
By:
 
/s/  DIANE J. EXTER      
Name: Diane J. Exter
Title: Managing Director
        Portfolio Manager

 
 
HAMILTON CDO, LTD
    By: Stanfield Capital Partners LLC
    As its Collateral Manager

 
 
By:
 
/s/  CHRISTOPHER E. JANSEN      
Name: Christopher E. Jansen
Title: Managing Partner

 
 
INDOSUEZ CAPITAL FUNDING IIA, LTD.

 
 
By:
 
 
       
Name:
Title:

 
 
JPMORGAN CHASE BANK

 
 
By:
 
 
       
Name:
Title:

 
 
KZH WATERSIDE LLC

 
 
By:
 
/s/  SUSAN LEE      
Name: Susan Lee
Title: Authorized Agent

LLOYDS TSB BANK, PLC
LLOYDS TSB BANK, PLC


By:

/s/  CATHERINE HANKIN      
Name: Catherine Hankin
Title: Assistant Vice President,
          Corporate Banking, USA B027

By:

/s/  LISA MAGUIRE      
Name: Lisa Maguire
Title: Assistant Vice President M067

6


 
 
MAPLEWOOD (CAYMAN) LIMITED

 
 
By:
 
 
       
Name:
Title:

 
 
MITSUBISHI TRUST & BANKING CORP.

 
 
By:
 
 
       
Name:
Title:

 
 
MORGAN GUARANTY TRUST COMPANY

 
 
By:
 
 
       
Name:
Title:

 
 
NATEXIS BANQUE POPULAIRES

 
 
By:
 
 
       
Name:
Title:

 
 
NORTH AMERICAN SENIOR FLOATING RATE FUND INC.
By: Standfield Capital Partners, LLC
      As Subadvisor

 
 
By:
 
/s/  CHRISTOPHER E. JANSEN      
Name: Christopher E. Jansen
Title: Managing Partner

 
 
PEOPLES BANK

 
 
By:
 
/s/  DAVID K. SHERRILL      
Name: David K. Sherrill
Title: Vice President

 
 
RZB FINANCE LLC

 
 
By:
 
 
       
Name:
Title:

 
 
SEQUILS-PILGRAM I, LTD.

 
 
By:
 
 
       
Name:
Title:

 
 
SCUDDER FLOATING RATE FUND

 
 
By:
 
 
       
Name:
Title:

 
 
STEIN ROE & FARNHAM CLO I LTD.

 
 
By:
 
/s/  JAMES R. FELLOWS      
Name: James R. Fellows
Title: Sr. Vice President & Portfolio
        Manager

 
 
 
 
 

7


 
 
SUMITOMO TRUST & BANKING CO.

 
 
By:
 
 
       
Name:
Title:

 
 
SUMMIT BANK

 
 
By:
 
 
       
Name:
Title:

 
 
TCW SELECT LOAN FUND, LIMITED

 
 
By:
 
 
       
Name:
Title:

 
 
PINEHURST TRADING, INC.

 
 
By:
 
/s/  ANN E. MORRIS      
Name: Ann E. Morris
Title: Asst. Vice President

 
 
WINGED FOOT FUNDING TRUST

 
 
By:
 
/s/  DIANA L. MUSHILL      
Name: Diana L. Mushill
Title: Authorized Agent

 
 
SRF 2000 LLC

 
 
By:
 
/s/  DIANA L. MUSHILL      
Name: Diana L. Mushill
Title: Asst. Vice President

 
 
KZH CNC LLC

 
 
By:
 
/s/  SUSAN LEE      
Name: Susan Lee
Title: Authorized Agent

 
 
KZH CRESCENT LLC

 
 
By:
 
 
       
Name:
Title:

 
 
KZH CRESCENT-2 LLC

 
 
By:
 
 
       
Name:
Title:

 
 
KZH CRESCENT-3 LLC

 
 
By:
 
 
       
Name:
Title:

 
 
 
 
 

8


 
 
KZH PONDVIEW LLC

 
 
By:
 
/s/  SUSAN LEE      
Name: Susan Lee
Title: Authorized Agent

 
 
KZH SOLEIL LLC

 
 
By:
 
 
       
Name:
Title:

 
 
ATHENA CDO, LIMITED

 
 
By:
 
 
       
Name:
Title:

 
 
BANK OF SCOTLAND

 
 
By:
 
/s/  JOSEPH FRATUS      
Name: Joseph Fratus
Title: Vice President

 
 
COLUMBUS LOAN FUNDING, LTD

 
 
By:
 
 
       
Name:
Title:

 
 
CREDIT LYONNAIS

 
 
By:
 
 
       
Name:
Title:

 
 
ELC (CAYMAN) LTD. CDO SERIES 1999-I

 
 
By:
 
 
       
Name:
Title:

 
 
FIDELITY II: ADV. FL. RATE HIGH INC. FD.

 
 
By:
 
 
       
Name:
Title:

 
 
FORTIS CAPITAL CORP.

 
 
By:
 
 
       
Name:
Title:

 
 
GMAC COMMERCIAL CREDIT LLC

 
 
By:
 
 
       
Name:
Title:

 
 
 
 
 

9


 
 
IKB DEUTSCHE INDUSTRIEBANK
    Luxembourg Branch

 
 
By:
 
/s/  ANJA KEUCHEL      
Name: Anja Keuchel
Title: Manager

 
 
By:
 
/s/  MANFRED ZIWEY      
Name: Manfred Ziwey
Title: Director

 
 
NORTHERN TRUST COMPANY

 
 
By:
 
/s/  CRAIG L. SMITH      
Name: Craig L. Smith
Title: Vice President

 
 
SEQUILS I, LTD.

 
 
By:
 
 
       
Name:
Title:

 
 
JISSEKIKUN FUNDING, LTD.

 
 
By:
 
 
       
Name:
Title:

 
 
MASSACHUSETTS MUTUAL LIFE
    INSURANCE

 
 
By:
 
 
       
Name:
Title:

 
 
MICHIGAN NATIONAL BANK OF DETROIT

 
 
By:
 
 
       
Name:
Title:

 
 
NATIONAL CITY BANK

 
 
By:
 
/s/  JON R. HINARD      
Name: Jon R. Hinard
Title: Senior Vice President

 
 
NORSE CBO, LTD.

 
 
By:
 
 
       
Name:
Title:

 
 
PILGRIM PRIME RATE TRUST

 
 
By:
 
 
       
Name:
Title:

 
 
 
 
 

10


 
 
PROMETHEUS INVESTMENT FUNDING
    NO. I LTD.
By: CPF ASSET ADVISORS LLC, as
      Investment Manager

 
 
By:
 
/s/  FRANCESCO OSSINO      
Name: Francesco Ossino
Title: Director

 
 
By:
 
/s/  ELIZABETH H. TALLMADGE      
Name: Elizabeth H. Tallmadge
Title: Managing Director
          Chief Investment Officer

 
 
SWAPS CSLT

 
 
By:
 
 
       
Name:
Title:

 
 
TORONTO DOMINION (TEXAS), INC.

 
 
By:
 
/s/  CAROLYN R. FAETH      
Name: Carolyn R. Faeth
Title: Vice President

 
 
TRANSAMERICA BUSINESS CREDIT CORP.

 
 
By:
 
 
       
Name:
Title:

 
 
UNION BANK OF CALIFORNIA, N.A.

 
 
By:
 
 
       
Name:
Title:

 
 
CREDIT INDUSTRIEL ET COMMERCIAL

 
 
By:
 
/s/  SEAN MOUNIER      
Name: Sean Mounier
Title: First Vice President

 
 
By:
 
/s/  ANTHONY ROCK      
Name: Anthony Rock
Title: Vice President

 
 
WACHOVIA BANK N.A.

 
 
By:
 
/s/  SHAWN JANKO      
Name: Shawn Janko
Title: Vice President

 
 
STANDARD FEDERAL BANK N.A.

 
 
By:
 
/s/  KATHLEEN HALLBERG      
Name: Kathleen Hallberb
Title: Assistant Vice President

 
 
 
 
 

11


 
 
LENDER: COBANK, ACB

 
 
By:
 
/s/  S. RICHARD DILL      
Name: S. Richard Dill
Title: Vice President

12

        For purposes of the Credit Documents to which the Subsidiary Guarantors are party, by their respective signatures below, each Subsidiary Guarantor hereby consents and agrees to the entering into of this Amendment and acknowledges and affirms that each of the Subsidiaries Guaranty and Security Documents (as amended, modified or supplemented prior to the date hereof) remains in full force and effect in accordance with its terms on the date hereof and after giving effect to this Amendment:

    DIXIE CONTAINER CORPORATION

 
 
By:
 
/s/  JOHN R. OLSEN      
Name: John R. Olsen
Title: Asst. Secretary

 
 
PCA HYDRO, INC.

 
 
By:
 
/s/  JOHN R. OLSEN      
Name: John R. Olsen
Title: Asst. Secretary

 
 
PACKAGING CREDIT COMPANY, LLC

 
 
By:
 
/s/  JOHN R. OLSEN      
Name: John R. Olsen
Title: Asst. Secretary

 
 
PCA INTERNATIONAL, INC.

 
 
By:
 
/s/  PAMELA A. BARNES      
Name: Pamela A. Barnes
Title: Treasurer

13



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SECOND AMENDMENT