<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 18, 2000.
REGISTRATION NO. 333-86963
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------
PACKAGING CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2631 36-4277050
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------
1900 WEST FIELD COURT
LAKE FOREST, ILLINOIS 60045
TELEPHONE: (847) 482-3000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
----------------------
Copies to:
<TABLE>
<S> <C> <C>
RICHARD B. WEST JAMES S. ROWE GERARD M. MEISTRELL
PACKAGING CORPORATION OF AMERICA KIRKLAND & ELLIS CAHILL GORDON & REINDEL
1900 WEST FIELD COURT 200 EAST RANDOLPH DRIVE 80 PINE STREET
LAKE FOREST, ILLINOIS 60045 CHICAGO, ILLINOIS 60601 NEW YORK, NEW YORK 10005
TELEPHONE: (847) 482-3000 TELEPHONE: (312) 861-2000 TELEPHONE: (212) 701-3000
(Name, address, including zip code,
and telephone number, including area
code, of agent for service)
</TABLE>
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION. DATED JANUARY 18, 2000.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
46,250,000 Shares
[LOGO]
PACKAGING CORPORATION OF AMERICA
Common Stock
-----------
This is an initial public offering of shares of common stock of Packaging
Corporation of America.
PCA is offering 11,500,000 of the shares to be sold in the offering. Pactiv
Corporation, formerly known as Tenneco Packaging Inc., the selling stockholder,
is offering an additional 34,750,000 shares. PCA will not receive any of the
proceeds from the sale of the shares being sold by the selling stockholder.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $12.00 and $15.00. The common stock has been approved for
listing, subject to official notice of issuance, on the New York Stock Exchange
under the symbol "PKG".
SEE "RISK FACTORS" ON PAGE 10 TO READ ABOUT MATERIAL RISKS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
--------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
--------------
<TABLE>
<CAPTION>
Per Share Total
---------- --------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to PCA........................... $ $
Proceeds, before expenses, to the selling stockholder....... $ $
</TABLE>
To the extent that the underwriters sell more than 46,250,000 shares of
common stock, the underwriters have the option to purchase up to an additional
6,410,240 shares from the selling stockholder at the initial public offering
price less the underwriting discount.
--------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
DEUTSCHE BANC ALEX. BROWN J.P. MORGAN & CO.
---------
Prospectus dated , 2000.
<PAGE>
[PICTURES DEPICTING REPRESENTATIVE
CORRUGATED PACKAGING PRODUCTS]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT PACKAGING CORPORATION
OF AMERICA AND THE OFFERING. IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY
BE IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS, INCLUDING THE
FINANCIAL DATA AND RELATED NOTES AND THE DOCUMENTS TO WHICH WE REFER YOU, BEFORE
MAKING AN INVESTMENT DECISION. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS.
OUR BUSINESS
OVERVIEW
PCA is the sixth largest producer of containerboard in the United States and
the sixth largest manufacturer of corrugated packaging products, based on 1998
production capacity and 1999 estimated production capacity. Our sales were
$1.571 billion in 1998 and $1.250 billion on a pro forma basis for the nine
months ended September 30, 1999.
PRODUCTS
PCA produces corrugated containers as well as the containerboard used to
manufacture corrugated containers. Corrugated containers are the most commonly
used type of paper packaging. According to the Fibre Box Handbook, over 90% of
the goods shipped in most developed countries get to market using corrugated
packaging. Corrugated containers, sometimes referred to as cardboard boxes, are
made by combining multiple layers of heavyweight paper known as containerboard
and fabricating them into finished boxes.
CONTAINERBOARD
The two types of containerboard are linerboard and medium. Linerboard is
used for the two flat outer facings while medium is used to form the fluted
inner or middle layer of the corrugated sheet. Kraft linerboard and
semi-chemical medium are common types of linerboard and medium that are made
from a high percentage of virgin, as opposed to recycled, fiber. Virgin fiber is
produced by chemically processing wood into pulp. By industry definition, kraft
linerboard must contain no less than 80% virgin fiber and semi-chemical medium
no less than 75% virgin fiber. All other containerboard is referred to as
recycled. The recycled fiber used to make recycled containerboard comes
primarily from used corrugated containers as well as other recovered and
reprocessed papers.
CORRUGATED CONTAINERS
Converting plants fabricate corrugated sheets and produce corrugated
containers. Converting plants may be either corrugator plants or sheet plants.
Corrugator plants perform both a combining operation and a boxmaking operation.
In the combining operation, corrugated medium is fluted into a wavy sheet and
laminated to linerboard to produce corrugated, or combined sheets. In the
boxmaking operation, the combined sheet is then printed, cut, folded and joined
to create the finished boxes. Sheet plants purchase already combined sheets and
form them into finished boxes.
OPERATIONS
PCA produces kraft linerboard and semi-chemical medium at four mill
locations. In 1999, our mills produced 2.2 million tons of containerboard, which
accounted for 6% of U.S. capacity.
PCA also operates 67 converting facilities in 25 states. Of these
facilities, 39 are corrugator plants, 26 are sheet plants and two are small,
specialty operations. These specialty operations
1
<PAGE>
include a collating and distribution packaging center, as well as a machine
rebuild facility. Our corrugator plants convert approximately 80% of the
containerboard we produce into finished corrugated containers. As a result, we
are considered an integrated producer. By industry standards, integrated
producers own their own containerboard mills and use at least 50% of the
containerboard production from those mills in their converting operations. In
1999, our converting plants shipped approximately 27 billion square feet of
corrugated packaging products, compared to 25 billion square feet in 1998. PCA's
1998 shipments represented 6% of all corrugated packaging products shipped in
the United States.
PCA currently owns approximately 390,000 acres of timberland and has the
rights to cut the wood from an additional 150,000 acres through long term lease
agreements. Over 95% of our owned or leased wood supply is within 100 miles of
our mill sites. This close proximity minimizes handling and transportation costs
and ensures us a reliable supply of wood fiber. We have recently sold 405,000
acres of our timberland, but have entered into supply agreements covering
329,000 acres of this timberland to provide a future supply of wood fiber during
the terms of these agreements. The proceeds from these sales were used to pay
down debt.
COMPETITIVE STRENGTHS AND BUSINESS STRATEGIES
LOW-COST PRODUCER
Because containerboard is a commodity, containerboard producers compete
primarily on price. Therefore, having a low manufacturing cost operation is an
important competitive advantage. PCA's Counce and Tomahawk mills represent
two-thirds of PCA's containerboard production capacity. Based on studies by
Jacobs-Sirrine, an industry consulting firm, these two mills were ranked in the
lowest quartile for cash manufacturing costs in the industry. One of these
studies was a single-client study that we paid Jacobs-Sirrine to perform in
February 1998. The other was a multi-client study issued by Jacobs-Sirrine in
the fourth quarter of 1998 that was available for purchase by the general
public.
INTEGRATED OPERATIONS
The high level of integration between our containerboard and converting
operations helps to provide a stable and predictable demand for our
containerboard mill production. It also helps to dampen earnings fluctuations.
According to Pulp & Paper Week, from 1995 to 1998, industry containerboard
prices declined by 31% and earnings from our containerboard mills were adversely
affected. During the same period, our average corrugated container price fell by
only 11%. We were able to maintain relatively stable margins and earnings in our
converting operations since the costs for the containerboard purchased by our
converting plants were lower, which offset the decline in corrugated container
prices.
DIVERSIFIED CUSTOMER BASE
PCA's corrugated container customer base is broadly diversified across
industries and geographic locations. In 1999, we sold corrugated products to
over 9,000 customers, which required us to ship to over 15,000 separate customer
locations. This broad customer base reduces our dependence on any single
customer or market. For 1999, no customer represented more than 6% of our total
sales and our top 10 customers represented only about 20% of our total sales.
FOCUS ON VALUE-ADDED PRODUCTS AND SERVICES
Through acquisitions and capital investments, we have broadened our ability
to provide specialized printing and package design, product features and
superior customer service. As a
2
<PAGE>
result, our corrugated container selling price per thousand square feet has
consistently exceeded the industry average since 1995.
RECENT DEVELOPMENTS
FOURTH QUARTER FINANCIAL RESULTS
We reported fourth quarter 1999 operating income of $83 million on net sales
of $446 million. Operating income for the fourth quarter included a $12 million
pre-tax gain on timberland sales. Operating income improved $70 million compared
to fourth quarter 1998 adjusted operating income of $13 million. Fourth quarter
1998 adjusted operating income excluded a $14 million restructuring charge and a
$4 million charge for factored receivables financing from Tenneco Inc. Our
improved earnings are primarily the result of higher prices and sales volumes
for both containerboard and corrugated products. We reported fourth quarter 1999
net income available to common stockholders of $23 million, which excludes a
$7 million extraordinary loss, net of taxes, related to the early extinguishment
of debt.
DEBT REDUCTION
Using $263 million in timberland sale proceeds and other cash generated from
operations, we prepaid an additional $331 million of senior debt in the fourth
quarter. From April 12, 1999, the date we became a stand-alone company, through
December 31, 1999, we have prepaid $440 million of senior debt. As of
December 31, 1999, we had $779 million of senior debt and $550 million of senior
subordinated debt outstanding. As a result of our lower total debt level and
prevailing business conditions, we reduced our $250 million of availability
under our revolving credit facility to $150 million in the fourth quarter, and
as of December 31, 1999, had no amounts outstanding under that facility.
EQUITY SPONSOR
Madison Dearborn Partners, LLC, a private equity investment firm, was the
financial sponsor for the transactions by which PCA acquired its current
operations. Madison Dearborn, through limited partnerships of which it is the
general partner, has approximately $4 billion of assets under management.
Madison Dearborn focuses on investments in several specific sectors including
natural resources, communications, consumer, health care and industrial. Madison
Dearborn's objective is to invest, in partnership with outstanding management
teams, in companies which have the potential for significant long-term equity
appreciation. Since 1980, Madison Dearborn's principals have invested
approximately $2.6 billion in more than 150 management buyout and private equity
transactions in which the firm acted as a leading investor. PCA is Madison
Dearborn's largest equity investment to date.
THE TRANSACTIONS
On April 12, 1999, Pactiv Corporation, formerly known as Tenneco Packaging
Inc., sold its containerboard and corrugated packaging products business to PCA,
an entity formed by Madison Dearborn 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
$1.46 billion 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 million
3
<PAGE>
of 9 5/8% senior subordinated notes due 2009 and $100 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.
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 $1.21 billion and a revolving credit
facility with up to $250 million in availability. PCA's total borrowings under
the senior credit facility as of September 30, 1999 consisted of $1.110 billion
of term loans. No amounts were outstanding under the revolving credit facility
as of that date.
The following sets forth the current common stock ownership of PCA, before
giving effect to the sale of common stock in the offering:
[GRAPH]
- --------------
(1) The other investors in PCA Holdings are Sixty Wall Street Fund, L.P., J.P.
Morgan Capital Corporation, BT Capital Investors, L.P. and other investors,
none of whom own more than 0.5% of the equity interests of PCA Holdings.
(2) PCA has also issued options to management to purchase common stock, which,
if exercised, would result in management owning in the aggregate
approximately 9.6% of the common equity of PCA.
(3) Pactiv was formerly known as Tenneco Packaging Inc. and was formerly a
wholly owned subsidiary of Tenneco Inc. Tenneco Inc. is now known as Tenneco
Automotive Inc. and is often referred to in this prospectus as Tenneco.
Pactiv was spun off from Tenneco in November 1999 and is now a publicly
traded company.
(4) PCA was formed in January 1999 and acquired the containerboard and
corrugated packaging products business of The Containerboard Group of Pactiv
in April 1999 as a result of the transactions. The Containerboard Group is
often referred to in this prospectus as the Group.
After giving effect to the offering and assuming the exercise in full of the
underwriters' over-allotment option from Pactiv, Pactiv will not own any shares
of common stock of PCA, PCA
4
<PAGE>
Holdings will own 47.4% of the outstanding common stock and management will own
3.0% of the outstanding common stock, without giving effect to the exercise of
any options issued to management in June 1999, or 8.6% of the outstanding common
stock assuming the exercise in full of these options.
THE OFFERING
<TABLE>
<S> <C> <C>
Shares offered by PCA................................ 11,500,000
Shares offered by selling stockholder................ 34,750,000
-----------
Total shares offered............................. 46,250,000
===========
Shares outstanding after the offering................ 106,100,000
Proposed New York Stock Exchange symbol.............. PKG
Use of proceeds...................................... PCA will use the net proceeds from the
sale of its shares to redeem all of
its outstanding 12 3/8% senior
exchangeable preferred stock due 2010.
PCA will not receive any of the
proceeds from the sale of the shares
being sold by the selling stockholder.
</TABLE>
Except as otherwise indicated, we have presented the information in this
prospectus assuming that the underwriters do not exercise their option to
purchase additional shares from the selling stockholder in the offering.
The number of shares outstanding after the offering is based on the shares
outstanding as of December 31, 1999 and does not take into account the 6,576,460
shares of common stock issuable upon the exercise by management of outstanding
options, all of which will become exercisable upon completion of the offering.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 1900 West Field Court, Lake
Forest, Illinois 60045 and our telephone number is (847) 482-3000.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
Set forth below are the summary historical and pro forma financial data of
PCA and The Containerboard Group of Pactiv Corporation, which we refer to in
this prospectus as the Group. The historical financial data as of and for the
years ended December 31, 1996, 1997 and 1998 has been derived from the audited
combined financial statements of the Group, which was acquired by PCA in the
transactions, and the related notes thereto included elsewhere in this
prospectus. The historical financial data as of and for the years ended
December 31, 1994 and 1995 has been derived from the unaudited financial
statements of the Group. The historical financial data for the nine months ended
September 30, 1998 and the period from January 1, 1999 to April 11, 1999 has
been derived from the unaudited condensed combined financial statements of the
Group included elsewhere in this prospectus. The historical financial data as of
September 30, 1999 and for the period from April 12, 1999 to September 30, 1999
has been derived from the unaudited consolidated financial statements of
PCA included elsewhere in this prospectus. The unaudited pro forma financial
data as of and for the nine months ended September 30, 1999 and for the year
ended December 31, 1998 was derived from the unaudited pro forma financial
information included elsewhere in this prospectus. The information in the
following table should be read in conjunction with "The Transactions,"
"Unaudited Pro Forma Financial Information," "Selected Financial and Other
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," the historical combined financial statements of the Group and
the related notes, and the historical consolidated financial statements of PCA
and the related notes contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
GROUP PCA GROUP
------------------------------------------------------------------- ----------- ----------
NINE
PRO FORMA MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED
------------------------------------------------------------------- DEC. 31, SEPT. 30,
1994 1995 1996 1997 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales............. $ 1,441,673 $ 1,844,708 $ 1,582,222 $ 1,411,405 $ 1,571,019 $1,571,019 $1,184,142
Cost of sales......... (1,202,996) (1,328,838) (1,337,410) (1,242,014) (1,289,644) (1,270,184) (962,126)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Gross profit........ 238,677 515,870 244,812 169,391 281,375 300,835 222,016
Selling and
administrative
expenses............ (71,312) (87,644) (95,283) (102,891) (108,944) (102,568) (79,670)
Corporate overhead/
allocation(3)....... (34,678) (38,597) (50,461) (61,338) (63,114) (63,114) (47,530)
Restructuring/
impairment
charge(4)........... -- -- -- -- (14,385) (14,385) --
Other income
(expense)........... (4,701) (16,915) 56,243 44,681 26,818 41,592 32,064
----------- ----------- ----------- ----------- ----------- ----------- ----------
Income (loss) before
interest, income
taxes and
extraordinary
item.............. 127,986 372,714 155,311 49,843 121,750 162,360 126,880
Interest expense,
net................. (740) (1,485) (5,129) (3,739) (2,782) (159,476) (2,148)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Income (loss) before
income taxes and
extraordinary
item................ 127,246 371,229 150,182 46,104 118,968 2,884 124,732
Income tax benefit
(expense)........... (50,759) (147,108) (59,816) (18,714) (47,529) (516) (49,654)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Income (loss) before
extraordinary
item.............. 76,487 224,121 90,366 27,390 71,439 2,368 75,078
Extraordinary item.... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss)... $ 76,487 $ 224,121 $ 90,366 $ 27,390 $ 71,439 $ 2,368 $ 75,078
=========== =========== =========== =========== =========== =========== ==========
<CAPTION>
GROUP PCA(2)
----------- -------------------------
JAN. 1, APRIL 12, PRO FORMA
1999 1999 NINE MONTHS
THROUGH THROUGH ENDED
APRIL 11, SEPT. 30, SEPT. 30,
1999 1999 1999
----------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales............. $ 433,182 $816,538 $ 1,249,720
Cost of sales......... (367,483) (640,587) (1,003,942)
----------- -------- -----------
Gross profit........ 65,699 175,951 245,778
Selling and
administrative
expenses............ (30,584) (53,283) (82,463)
Corporate overhead/
allocation(3)....... (14,890) (13,509) (28,399)
Restructuring/
impairment
charge(4)........... (230,112) -- --
Other income
(expense)........... (2,207) 56 218
----------- -------- -----------
Income (loss) before
interest, income
taxes and
extraordinary
item.............. (212,094) 109,215 135,134
Interest expense,
net................. (221) (73,627) (117,743)
----------- -------- -----------
Income (loss) before
income taxes and
extraordinary
item................ (212,315) 35,588 17,391
Income tax benefit
(expense)........... 83,716 (14,655) (7,569)
----------- -------- -----------
Income (loss) before
extraordinary
item.............. (128,599) 20,933 9,822
Extraordinary item.... (6,327) -- --
----------- -------- -----------
Net income (loss)... $ (134,926) $ 20,933 $ 9,822
=========== ======== ===========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
GROUP PCA GROUP
------------------------------------------------------------------- ----------- ----------
NINE
PRO FORMA MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED
------------------------------------------------------------------- DEC. 31, SEPT. 30,
1994 1995 1996 1997 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per
share(7):
Income (loss) before
extraordinary
item.............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79
Extraordinary
item.............. -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss)
per common
share............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79
=========== =========== =========== =========== =========== =========== ==========
Diluted earnings per
share(7):
Income (loss) before
extraordinary
item.............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79
Extraordinary
item.............. -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss)
per common
share............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79
=========== =========== =========== =========== =========== =========== ==========
Weighted average
common shares out-
standing............ 94,600 94,600 94,600 94,600 94,600 106,100 94,600
OTHER DATA:
EBITDA (1)............ $ 178,148 $ 435,620 $ 234,041 $ 137,595 $ 218,700 $ 310,901 $ 199,156
Rent expense on oper-
ating leases bought
out as
part of the transac-
tions(1)............ 93,600 94,900 94,700 73,900 72,500 -- 54,602
Net cash provided by
operating
activities.......... 107,642 336,599 55,857 107,213 195,401 170,581 133,964
Net cash used for
investing
activities.......... (113,119) (371,068) (74,232) (111,885) (177,733) (93,535) (81,148)
Net cash (used for)
provided by financ-
ing activities...... 6,112 36,454 16,767 3,646 (17,668) (22,030) (52,816)
Capital
expenditures........ $ 110,853 $ 252,745 $ 168,642 $ 110,186 $ 103,429 $ 103,429 $ 70,966
<CAPTION>
GROUP PCA(2)
----------- -------------------------
JAN. 1, APRIL 12, PRO FORMA
1999 1999 NINE MONTHS
THROUGH THROUGH ENDED
APRIL 11, SEPT. 30, SEPT. 30,
1999 1999 1999
----------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic earnings per
share(7):
Income (loss) before
extraordinary
item.............. $ (1.36) $ .16 $ .09
Extraordinary
item.............. (.07) -- --
----------- -------- -----------
Net income (loss)
per common
share............. $ (1.43) $ .16 $ .09
=========== ======== ===========
Diluted earnings per
share(7):
Income (loss) before
extraordinary
item.............. $ (1.36) $ .16 $ .09
Extraordinary
item.............. (.07) -- --
----------- -------- -----------
Net income (loss)
per common
share............. $ (1.43) $ .16 $ .09
=========== ======== ===========
Weighted average
common shares out-
standing............ 94,600 92,451 106,100
OTHER DATA:
EBITDA (1)............ $ (181,189) $181,221 $ 251,296
Rent expense on oper-
ating leases bought
out as
part of the transac-
tions(1)............ 17,746 -- --
Net cash provided by
operating
activities.......... 153,649 169,168 181,144
Net cash used for
investing
activities.......... (1,121,145) (55,229) (74,970)
Net cash (used for)
provided by financ-
ing activities...... 967,496 (82,740) (109,382)
Capital
expenditures........ $ 1,128,255 $ 49,216 $ 71,938
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------
PRO
ACTUAL FORMA
---------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital(5).......................................... $ 179,933 $ 186,142
Total assets................................................ 2,425,839 2,449,677
Total long-term obligations(6).............................. 1,756,905 1,660,405
Total stockholders' equity.................................. 357,720 484,267
</TABLE>
7
<PAGE>
NOTES TO SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
1) PCA calculates "EBITDA" as income (loss) before interest, income taxes and
extraordinary item, as reported, plus depreciation, depletion and
amortization as reported in the statement of cash flows, as presented in the
following table:
<TABLE>
<CAPTION>
GROUP PCA GROUP
--------------------------------------------------------- ----------- ---------
NINE
PRO FORMA MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED
--------------------------------------------------------- DEC. 31, SEPT. 30,
1994 1995 1996 1997 1998 1998 1998
--------- --------- --------- --------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before interest, income
taxes and extraordinary item........ $127,986 $372,714 $155,311 $ 49,843 $121,750 $162,360 $126,880
Add: Depreciation, depletion and
amortization.................... 50,162 62,906 78,730 87,752 96,950 148,541 72,276
-------- -------- -------- -------- -------- -------- --------
EBITDA................................ $178,148 $435,620 $234,041 $137,595 $218,700 $310,901 $199,156
======== ======== ======== ======== ======== ======== ========
<CAPTION>
GROUP PCA(2)
--------- -------------------------
JAN. 1, APRIL 12, PRO FORMA
1999 1999 NINE MONTHS
THROUGH THROUGH ENDED
APRIL 11, SEPT. 30, SEPT. 30,
1999 1999 1999
--------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before interest, income
taxes and extraordinary item........ $(212,094) $109,215 $135,134
Add: Depreciation, depletion and
amortization.................... 30,905 72,006 116,162
--------- -------- --------
EBITDA................................ $(181,189) $181,221 $251,296
========= ======== ========
</TABLE>
For the historical periods, income (loss) before interest, income taxes and
extraordinary item, includes charges for rent expense on operating leases
bought out as part of the transactions. As a result of the lease buy out,
PCA will no longer incur this rent expense, but will record non-cash charges
for depreciation and depletion related to these assets, which are now owned
rather than leased. This depreciation/depletion expense will be similar, but
not identical, to the amount of rent expense. On a pro forma basis for 1998,
the incremental depreciation/depletion was $7,200 less than the historical
rent expense, resulting in a net increase of $4,284 to pro forma 1998 net
income. To better understand historical EBITDA in relation to pro forma
EBITDA for the periods presented, we believe it may be useful to add back
this rent expense to reported EBITDA for the historical periods.
PCA's EBITDA is included in this prospectus because it is a financial
measure used by PCA's management to assess PCA's operating results and
liquidity, and because several of the indebtedness covenants in PCA's senior
credit facility and in the notes indenture are based upon a calculation that
utilizes EBITDA.
EBITDA should not be considered in isolation or viewed as a substitute for
cash flow from operations, net income or other measures of performance as
defined by generally accepted accounting principles, or as a measure of a
company's overall profitability or liquidity. In addition, EBITDA does not
represent the cash available to investors because capital expenditures, debt
service and income taxes are not deducted when calculating EBITDA.
PCA understands that EBITDA as used herein is not necessarily comparable to
other similarly titled captions of other companies due to potential
inconsistencies in the method of calculation.
In analyzing 1998 pro forma EBITDA for liquidity purposes, PCA also believes
that the following additional adjustments should be considered by investors:
<TABLE>
<S> <C>
Pro forma EBITDA for 1998................................... $310,901
Adjustments:
Other income(a)........................................... (41,592)
Non-recurring restructuring charge(b)..................... 14,385
Reduction in corporate overhead(c)........................ 32,954
Cost savings from restructuring(d)........................ 10,800
--------
Adjusted pro forma EBITDA for 1998.......................... $327,448
========
</TABLE>
a) Other income for 1998 consists substantially of nonrecurring items, such
as gains on the sale of non-strategic woodlands and a recycled paperboard
joint venture investment, that PCA believes are not relevant in analyzing
recurring EBITDA.
8
<PAGE>
b) During the fourth quarter of 1998, the Group adopted a restructuring
plan to eliminate approximately 100 personnel and close down four
facilities associated with the Group's business. As of December 31, 1998,
substantially all actions specified in the plan had been completed. A
charge of $14,385 was recorded for severance benefits, exit costs and
asset impairments, and is reflected in the Group's 1998 operating profit.
PCA believes that this non-recurring charge is not relevant in analyzing
recurring EBITDA.
c) As part of Tenneco, the Group was allocated $63,114 of Tenneco corporate
and Pactiv overhead expenses based on a variety of allocation methods. In
analyzing the carved-out business on a stand-alone basis, PCA estimates
that these costs will be approximately $30,160 for the first year
following the closing of the transactions. The determination of that
estimate is based on detailed analyses that consider (1) compensation and
benefits for Pactiv and new employees who are employed by PCA in
corporate functions such as in information technology, human resources,
finance and legal, and (2) non-payroll costs incurred by these
departments. Where applicable, the estimates consider the terms of
transition service arrangements between PCA and Pactiv.
d) The restructuring referred to in Note (b) above will result in reduced
cost of sales and selling and administrative expenses. This adjustment
represents the Group's estimate of the cost savings that would have been
achieved in 1998 if the restructuring had been in effect for all of 1998.
2) There was no activity for PCA from January 25, 1999, its date of inception,
through April 11, 1999.
3) The corporate overhead allocation represents the amounts charged by Tenneco
and Pactiv to the Group for its share of Tenneco's and Pactiv's corporate
expenses. On a stand-alone basis, management estimates that PCA's overhead
expense will be $30,160 for the first twelve months following the
acquisition.
4) This line item consists of non-recurring charges recorded in the fourth
quarter of 1998 and the first quarter of 1999 pertaining to a restructuring
charge and an impairment charge, respectively. For further information about
these charges, refer to Notes 7 and 14 to the Group's audited combined
financial statements and Note 7 to PCA's unaudited consolidated financial
statements.
5) Working capital represents (a) total current assets excluding cash and cash
equivalents less (b) total current liabilities excluding the current
maturities of long-term debt.
6) Total long-term obligations includes long-term debt, the current maturities
of long-term debt, and redeemable preferred stock.
7) 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). For the PCA historical period from April 12, 1999 to September 30,
1999, earnings available to common stockholders includes a reduction for
$5,809 of preferred stock dividends. For both pro forma periods, there is no
reduction for preferred dividends because the preferred stock redemption to
be completed using proceeds from the offering is treated as if it occurred
at the beginning of 1998.
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
September 30, 1999 and both pro forma periods, diluted earnings per share
includes the dilutive effect of the 6,576,460 options granted in June 1999.
This dilutive effect is calculated using the treasury stock method and the
expected initial public offering price.
9
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE OTHER
INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO MAKE AN
INVESTMENT IN THE COMMON STOCK. IF ANY OF THE EVENTS DESCRIBED BELOW ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE ADVERSELY
AFFECTED IN A MATERIAL WAY. THIS COULD CAUSE THE TRADING PRICE OF OUR COMMON
STOCK TO DECLINE, PERHAPS SIGNIFICANTLY.
INDUSTRY RISKS
INDUSTRY EARNINGS CYCLICALITY--PERIODIC IMBALANCES OF SUPPLY AND DEMAND AFFECT
THE PRICE AT WHICH WE CAN SELL CONTAINERBOARD AND OUR EARNINGS.
The price at which we can sell containerboard could fall if industry
oversupply conditions return or economic conditions deteriorate. This could
significantly reduce our cash flow and could have a material adverse effect on
our results of operations and our financial condition.
Historically, prices for containerboard have reflected changes in
containerboard supply and demand. Changes in containerboard supply result from
capacity additions or reductions, as well as changes in inventory levels.
Containerboard demand is dependent upon both domestic demand for corrugated
packaging products and the demand for linerboard exports, which represent about
20% of total U.S. linerboard shipments, according to the Pulp & Paper 1999-2000
North American Fact Book. Domestic demand for corrugated packaging is the more
stable factor. It generally corresponds to changes in the rate of growth in the
U.S. economy.
From 1994 to 1996, capacity additions outpaced both domestic and export
demand for containerboard. This excess supply led to lower industry operating
rates and declining prices from late-1995 until mid-1997. Although prices
generally improved from mid-1997 through mid-1998, the containerboard market was
still adversely affected by weaker containerboard exports. This weakness was
most apparent in shipments to Asia during the second half of 1998.
The supply/demand balance improved throughout 1999 and the average price of
linerboard increased approximately 25% during 1999. However, industry oversupply
conditions could return or economic conditions could deteriorate in the future.
PCA produced approximately 2.2 million tons of containerboard in 1999. If
the price per ton of containerboard sold by PCA decreased by $10 per ton, PCA's
operating income would have decreased by about $22 million.
COMPETITION--THE INTENSITY OF COMPETITION IN OUR INDUSTRY COMBINED WITH THE
COMMODITY NATURE OF CONTAINERBOARD COULD RESULT IN DOWNWARD PRESSURE ON PRICING,
WHICH COULD HAVE AN ADVERSE EFFECT ON OUR OPERATING RESULTS.
PCA operates in an industry that is highly competitive, with no single
containerboard or corrugated packaging producer having a dominant position.
PCA's primary competition for sales of containerboard 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. All of
the companies other than Willamette are larger than PCA based on estimated 1999
production capacity. On a national level, our primary competitors for corrugated
packaging 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. Many of these companies are larger than PCA based on estimated
1999 production capacity. The intensity of competition, together with the
commodity nature of containerboard, can lead to lower prices.
10
<PAGE>
PCA produced approximately 2.2 million tons of containerboard in 1999. If
the price per ton of containerboard sold by PCA decreased by $10 per ton, PCA's
operating income would have decreased by about $22 million.
We can not assure you that containerboard and corrugated packaging pricing
will not decline in the future.
CLUSTER RULE COMPLIANCE--WE WILL INCUR INCREASED CAPITAL COSTS TO MEET CLUSTER
RULE REQUIREMENTS.
We currently expect to spend approximately $48 million between 2000 and 2005
to achieve compliance with new Cluster Rule requirements. Our costs to achieve
Cluster Rule compliance could be significantly higher than our estimate.
In April 1998, the United States Environmental Protection Agency finalized
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 limit
our allowable discharges of air and water pollutants. As a result, we and our
competitors are required to incur costs to ensure compliance with these new
rules. From 1997 through 1999, we spent approximately $7 million on Cluster Rule
compliance. We currently estimate that total capital costs for Cluster Rule
compliance will be $19 million for 2000.
COMPANY RISKS
LEVERAGE--OUR BUSINESS MAY BE ADVERSELY IMPACTED AS A RESULT OF OUR SUBSTANTIAL
LEVERAGE, WHICH REQUIRES THE USE OF A SUBSTANTIAL PORTION OF OUR EXCESS CASH
FLOW AND MAY LIMIT OUR ACCESS TO ADDITIONAL CAPITAL.
After the offering, we will continue to have a significant amount of
indebtedness, and we have the right to incur additional indebtedness. The
following chart shows important credit statistics as of the closing of the
transactions on April 12, 1999 and as of September 30, 1999:
<TABLE>
<CAPTION>
AT APRIL 12, AT SEPTEMBER 30,
1999 1999
------------- -----------------
(IN MILLIONS)
<S> <C> <C>
Total indebtedness.............................. $1,769.0 $1,660.4
Preferred stock................................. $ 100.0 $ 100.0
Stockholders' equity............................ $ 325.8 $ 357.7
</TABLE>
For the period from January 1, 1999 to April 11, 1999, earnings were
insufficient to cover fixed charges by $212.3 million. On a pro forma basis for
the nine months ended September 30, 1999, our ratio of earnings to fixed charges
was 1.14 to 1 and our ratio of earnings to fixed charges and preferred stock
dividends was 1.01 to 1.
Our substantial indebtedness could have important consequences to you. For
example, it could:
- prevent us from satisfying our obligations with respect to our outstanding
indebtedness, which could lead to an event of default and an acceleration
of that indebtedness;
- increase our vulnerability to general adverse economic and industry
conditions by limiting our flexibility in planning for and reacting to
changes in our business and industry;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general corporate
purposes;
- limit our ability to make strategic acquisitions or take other corporate
action;
11
<PAGE>
- place us at a competitive disadvantage compared to our competitors that
have proportionately less debt; and
- limit our ability to borrow additional funds and increase the cost of
funds that we can borrow.
ADDITIONAL BORROWINGS AVAILABLE--WE AND OUR SUBSIDIARIES MAY BE ABLE TO INCUR
SUBSTANTIALLY MORE DEBT, WHICH COULD INCREASE THE RISKS CREATED BY OUR
SUBSTANTIAL INDEBTEDNESS.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. For example, the senior credit facility permits
additional borrowings of up to $150.0 million, all of which are currently
available for borrowing, and the indenture governing our notes also permits us
to incur additional indebtedness. If new debt is added to our or our
subsidiaries' current debt levels, the related risks that we and they now face
could intensify.
RESTRICTIONS IMPOSED BY THE SENIOR CREDIT FACILITY AND THE INDENTURE GOVERNING
OUR NOTES--OUR OPERATING FLEXIBILITY IS LIMITED IN SIGNIFICANT RESPECTS BY THE
RESTRICTIVE COVENANTS IN OUR SENIOR CREDIT FACILITY AND THE INDENTURE GOVERNING
OUR NOTES.
Our senior credit facility and the indenture governing our notes impose
restrictions on us that could increase our vulnerability to general adverse
economic and industry conditions by limiting our flexibility in planning for and
reacting to changes in our business and industry. Specifically, these
restrictions limit our ability, among other things, to:
<TABLE>
<S> <C>
- - incur additional indebtedness; - enter into transactions with affiliates;
- - pay dividends and make distributions; - enter into sale and leaseback
transactions;
- - issue stock of subsidiaries; - make capital expenditures;
- - make investments; - merge or consolidate our company; and
- - repurchase stock; - transfer and sell assets.
- - create liens;
</TABLE>
COST OF RAW MATERIALS--AN UNEXPECTED INCREASE IN THE COST OF WOOD FIBER COULD
HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
We may not have continued access to sufficient quantities of wood fiber at
current prices. Wood fiber is the largest component we use in producing
containerboard. We presently satisfy about 15% of our fiber needs with wood cut
from company-owned or leased timberland after giving effect to timberland sold
in 1999. We purchase wood fiber from others to meet about 65% of our fiber
requirements. The remaining 20% of our fiber needs are met with recycled fiber.
We are more dependent on purchased wood fiber than some of our competitors. As a
result, we may be more vulnerable than some competitors to increases in the
market price for wood fiber.
In the fourth quarter of 1999, we sold approximately 405,000 acres of
timberland. We have entered into two wood fiber supply agreements covering
approximately 329,000 of the 405,000 acres of timberland sold during 1999. The
first agreement, covering 200,000 acres, is a five year agreement. The second
agreement, covering 129,000 acres, is a seven year agreement. If we cannot
locate other sources of wood fiber at costs comparable to our current levels,
our vulnerability to market price increases will increase. PCA spends
approximately $150 million annually for purchased wood fiber. If the price of
all wood fiber purchased increased by 10%, our annual fiber cost would increase
by about $15 million.
12
<PAGE>
DEPENDENCE UPON KEY PERSONNEL--A LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
Our success is highly dependent on the skills, experience and efforts of
Paul T. Stecko, our Chairman of the Board and Chief Executive Officer, William
J. Sweeney, our Executive Vice President-Corrugated Products and Mark W.
Kowlzan, our Vice President-Containerboard/Wood Products. These executives are
not bound by employment contracts. The loss of services of one or more of these
individuals could have a material adverse effect on our company.
In addition, as our business develops and expands, we believe that our
future success will depend on our continued ability to attract and retain highly
skilled and qualified personnel. We cannot assure you that we will be able to
continue to employ key personnel or that we will be able to attract and retain
qualified personnel in the future. Failure to retain or attract key personnel
could have a material adverse effect on our business, financial condition and
results of operations.
ENVIRONMENTAL MATTERS--PCA MAY INCUR SIGNIFICANT ENVIRONMENTAL LIABILITIES WITH
RESPECT TO BOTH PAST AND FUTURE OPERATIONS.
We are subject to, and must comply with, a variety of federal, state and
local environmental laws, particularly those relating to air and water quality,
waste disposal and the cleanup of contaminated soil and groundwater. Because
environmental regulations are constantly evolving, we have incurred, and will
continue to incur, costs to maintain compliance with those laws. Although we
have established reserves to provide for future environmental liability, these
reserves may not be adequate.
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 1999,
remediation costs at our mills and converting plants totaled about
$2.5 million. As of December 31, 1999, we maintained a reserve of $133,000 for
environmental remediation liability as well as a general overall environmental
reserve of $3,555,407, 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, was $11.0 million for 1999 and we currently estimate that they will
be $26.0 million for 2000.
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 on
properties on which we now conduct or formerly conducted operations.
TECHNOLOGY, FINANCIAL AND ADMINISTRATIVE REQUIREMENTS--WE MAY INCUR INCREASED
COSTS TO OBTAIN NECESSARY TECHNOLOGICAL, FINANCIAL AND ADMINISTRATIVE SERVICES
AFTER OUR TRANSITION AGREEMENT WITH PACTIV EXPIRES.
Before the transactions, the Group operated as a division of Pactiv, which
was then a subsidiary of Tenneco. Tenneco provided the Group with treasury, tax
and selected administrative, financial reporting and information system
services. As part of the sale of the Group, we negotiated a Technology,
Financial and Administrative Transition Services Agreement with Pactiv for
Pactiv and its affiliates to provide these services to PCA for a period of
twelve months and for an additional six months at our option.
13
<PAGE>
As of December 31, 1999, we perform the following services internally that
were previously part of the agreement:
- telecommunications and data communications support services;
- technical computer assistance;
- disaster planning and recovery management; and
- treasury and cash management administration.
We continue to rely on this agreement to provide selected information
systems services, periodic financial reporting, and payroll and related
functions. We have exercised our option to extend these services for six months,
through October 2000. To continue to operate, we will need to further extend the
agreement with Pactiv, to locate another service provider or to develop the
capability to provide these services internally.
For the services Pactiv continues to perform and including the six month
extension, we will pay Pactiv up to $4.7 million in 2000. If our cost to obtain
these services increases by 10%, our annual costs for these services would
increase by approximately $0.5 million.
UNCERTAINTY OF FUTURE BUSINESS WITH PACTIV AND TENNECO AUTOMOTIVE--IF WE ARE
UNABLE TO RENEW OUR PURCHASE/SUPPLY AGREEMENTS WITH PACTIV AND TENNECO
AUTOMOTIVE THERE MAY BE AN ADVERSE EFFECT ON OUR EARNINGS.
We have agreed to supply Pactiv and Tenneco Automotive with their
containerboard and corrugated packaging requirements for five years, through
April 11, 2004. The agreements cover all containerboard and corrugated products
that were purchased by Pactiv and Tenneco Automotive and their affiliates during
the 12 months before April 12, 1999. We may not be able to extend these
agreements beyond five years, and the loss of Pactiv and Tenneco Automotive as
customers could have an adverse impact on our earnings if we are unable to
replace that business at comparable profit levels.
As a result of these agreements, Pactiv and Tenneco Automotive represented
4.6% and 0.7%, respectively, of our total net sales for 1999. For the year ended
December 31, 1999, Pactiv accounted for $77.4 million of our sales of all
products and $64.7 million of our sales of corrugated products. For the year
ended December 31, 1999, Tenneco Automotive accounted for $12.7 million of our
sales of corrugated products.
Prices under these agreements were established based on prices charged to
these customers before the closing of the transactions and will be adjusted if
the published market price for containerboard changes. In addition, we may
change prices annually for changes in the actual cost of items other than
containerboard. We believe that the pricing, terms and conditions for these
agreements are competitive by market standards for customers with comparable
volume and product specifications.
If PCA had to replace all of its business with Pactiv and Tenneco Automotive
with new business which was only 75% as profitable, PCA's annual operating
income would decrease by approximately $2 million.
CONTROLLING STOCKHOLDER; POTENTIAL CONFLICTS--THE INTERESTS OF OUR CONTROLLING
STOCKHOLDER COULD CONFLICT WITH THOSE OF THE OTHER HOLDERS OF THE COMMON STOCK.
After the offering, PCA Holdings will beneficially own approximately 47.4%
of the outstanding common stock of PCA. As a result, PCA Holdings will
effectively have the ability to elect all of the members of our board of
directors, appoint new management and approve any action requiring the approval
of our stockholders. The directors have the authority to make decisions
affecting our capital structure, including the issuance of additional
indebtedness and the declaration of dividends. The interests of PCA Holdings
could conflict with the interests of the other holders of the common stock.
14
<PAGE>
INVESTMENT RISKS
USE OF PROCEEDS--WE EXPECT TO USE SUBSTANTIALLY ALL OF THE NET PROCEEDS OF THE
PRIMARY OFFERING TO REDEEM ALL OF OUR OUTSTANDING SENIOR EXCHANGEABLE PREFERRED
STOCK AND, AS A RESULT, WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL AND
LIQUIDITY REQUIREMENTS.
We expect to use substantially all of the net proceeds of the primary
offering of our common stock to redeem all of our outstanding senior
exchangeable preferred stock. As a result, little or none of the net proceeds
will be available to fund current or future operations. We expect that our
principal sources of funds following the offering will be cash generated from
operating activities and, if necessary, borrowings under our senior credit
facility. We cannot assure you that these funds will provide us with sufficient
liquidity and capital resources for us to meet our current and future financial
obligations, or to provide funds for our working capital, capital expenditures
and other needs for the foreseeable future. We may require additional equity or
debt financing to meet our working capital requirements or to fund our capital
expenditures. Additional financing may not be available if and when required or,
if available, may not be on terms satisfactory to us.
ABSENCE OF PUBLIC MARKET--THE ABSENCE OF A PUBLIC MARKET FOR OUR COMMON STOCK
CREATES UNCERTAINTY IN THE MARKET PRICE.
Immediately before the offering, you could not buy or sell our common stock
publicly. We and the selling stockholder will negotiate and determine the
initial public offering price with the representatives of the underwriters based
on several factors including:
- prevailing market conditions;
- PCA's historical performance;
- estimates of the business potential and earnings prospects of PCA;
- an assessment of PCA's management; and
- consideration of the above factors in relation to the market valuation of
companies in related businesses.
The negotiated initial public offering price may not accurately reflect the
true market value of PCA.
ABSENCE OF ACTIVE TRADING MARKET--YOU MAY NOT BE ABLE TO RESELL YOUR COMMON
STOCK, OR MAY HAVE TO SELL IT AT A DISCOUNT IF AN ACTIVE TRADING MARKET IS NOT
DEVELOPED AND MAINTAINED.
No public market currently exists for our common stock. Although our common
stock has been approved for listing on the New York Stock Exchange, subject to
official notice of issuance, a liquid market for the common stock may not
develop or be maintained. As a result, you may not be able to sell your shares
of common stock or may have to sell them at a discount.
PRICE AND VOLUME FLUCTUATIONS--THE TRADING VOLUME AND PRICE OF OUR COMMON STOCK
COULD FLUCTUATE SUBSTANTIALLY.
The market for our shares may be subject to extreme price and volume
fluctuations. We believe that a number of factors, both within and outside our
control, could cause the trading volume and price of our common stock to
fluctuate, perhaps substantially. Important factors that could cause our common
stock to fluctuate include:
- announcements of developments related to our business or our competitors'
or customers' businesses;
- fluctuations in our financial results;
- general conditions or developments in the containerboard and corrugated
packaging products business;
15
<PAGE>
- potential sales of our common stock into the marketplace by us or our
stockholders; and
- a shortfall in revenue, gross margin, earnings or other financial results
or changes in research analysts' expectations.
AVAILABILITY OF SIGNIFICANT AMOUNTS OF COMMON STOCK FOR SALE--THE MARKET PRICE
OF OUR COMMON STOCK COULD BE ADVERSELY AFFECTED AS A RESULT OF THE AVAILABILITY
OF A SIGNIFICANT AMOUNT OF OUR COMMON STOCK FOR SALE.
The future sale of a substantial number of shares of common stock in the
public market following the offering, or the perception that future sales could
occur, could adversely affect the prevailing market price of our common stock.
Approximately 106,100,000 shares of our common stock will be outstanding after
completion of the offering and approximately 6,576,460 additional shares of
common stock will be subject to currently exercisable options. All 46,250,000
shares of common stock being offered in the offering will be eligible for
immediate resale in the public market without restriction, except for any shares
purchased by our affiliates.
Our officers and directors and all of our existing stockholders have agreed
with the underwriters not to offer, sell, hedge, or contract to sell, hedge or
otherwise dispose of any of their shares of common stock or any other securities
of PCA that they own that are substantially similar to the common stock for a
period of at least 180 days after the date of the offering without the prior
written approval of Goldman, Sachs & Co. After the 180 day lock-up period
expires, these shares will be freely tradeable, subject to limitations imposed
by Rule 144 and Rule 701 under the Securities Act and, in some cases, to
transfer restrictions contained in management equity agreements.
Beginning 180 days after the completion of the offering, PCA Holdings, which
currently holds 50,306,960 shares of our common stock, will have the right to
require us to register its shares of common stock under the Securities Act at
our expense. If the underwriters do not exercise their overallotment option,
Pactiv will beneficially own 6,410,240 shares of common stock and will also have
rights that require us to register its shares of common stock under the
Securities Act at our expense beginning 180 days after the completion of the
offering.
CHARTER DOCUMENTS--SOME OF THE PROVISIONS OF OUR CHARTER DOCUMENTS COULD
DISCOURAGE POTENTIAL ACQUISITION PROPOSALS AND COULD DELAY, DETER OR PREVENT A
CHANGE IN CONTROL.
PCA's certificate of incorporation and its bylaws may have the effect of
making it more difficult for a third party to acquire, or could discourage a
third party from attempting to acquire, control of PCA.
PCA's certificate of incorporation authorizes its board of directors,
subject to any limitations prescribed by law, to issue shares of preferred stock
in one or more series without stockholder approval. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or discouraging a third party from
acquiring, a majority of PCA's outstanding voting stock.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements about us 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," "estimates" 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, including, among other things,
those risks identified under the caption "Risk Factors."
16
<PAGE>
THE TRANSACTIONS
In July 1998, Tenneco announced its intent to pursue strategic alternatives
which could result in the separation of Tenneco's automotive, specialty
packaging and containerboard and corrugated packaging products businesses.
Tenneco analyzed various alternatives for the separation of Pactiv's
containerboard and corrugated packaging products business, which we often refer
to in this prospectus as the Group, including a sale, merger, spin-off or
initial public offering. Pactiv entered into negotiations with Madison Dearborn
for the sale of the Group in January 1999. Madison Dearborn, a private equity
investment firm that invests in this sector, believed that the Group represented
an attractive investment opportunity.
On January 25, 1999, Pactiv entered into a contribution agreement to sell
the Group to PCA, an entity formed by Madison Dearborn 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. Under the
terms of the contribution agreement, PCA Holdings, 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 the
senior credit facility, (2) the offering of the senior subordinated notes,
(3) the offering of the senior exchangeable preferred stock, (4) a cash equity
investment of $236.5 million by PCA Holdings and (5) an equity investment by
Pactiv valued at $193.5 million.
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 consists of three term loan facilities in an original
aggregate principal amount of $1.21 billion and a revolving credit facility
which originally had up to $250 million in availability. PCA's total borrowings
under the senior credit facility as of September 30, 1999 consisted of
$1.110 billion of term loans. No amounts were outstanding under the revolving
credit facility as of that date.
The following table sets forth the sources and uses of funds for the
transactions.
<TABLE>
<S> <C>
DOLLARS IN THOUSANDS
SOURCES OF FUNDS:
Senior credit facility
Revolving credit facility (a)........................... $ 9,000
Term Loan A............................................. 460,000
Term Loan B............................................. 375,000
Term Loan C............................................. 375,000
Notes..................................................... 550,000
Preferred stock........................................... 100,000
PCA Holdings equity investment............................ 236,500
Pactiv equity investment.................................. 193,500
----------
Total................................................... $2,299,000
==========
USES OF FUNDS:
Acquisition consideration (b)............................. $2,200,000
Estimated fees, expenses and working capital (c).......... 99,000
----------
Total................................................... $2,299,000
==========
</TABLE>
- --------------
(a) Immediately after the closing of the transactions, we had $241 million in
additional availability under our new revolving credit facility. As of
September 30, 1999, we had $250 million in
17
<PAGE>
availability and no borrowings outstanding under the revolving credit
facility. If we had, the interest rate would have been 8.40% per annum on
any amounts borrowed. Effective December 14, 1999, we elected to reduce our
availability under the revolving credit facility from $250 million to
$150 million.
(b) The acquisition consideration does not include the impact of a post-closing
price adjustment based on changes to the net working capital of the
containerboard business from September 30, 1998 through the closing. On
August 25, 1999, PCA Holdings and Pactiv agreed that the acquisition
consideration should be reduced as a result of this adjustment by an amount
equal to $20 million plus interest through the date of payment by Pactiv. On
September 23, 1999, Pactiv paid PCA $20.7 million, representing the
$20 million adjustment and $0.7 million of interest. PCA recorded
$11.9 million of this amount on the June 30, 1999 balance sheet,
representing the amount that was previously agreed to, and recorded the
remaining amount in September 1999.
(c) Includes a fee paid to Madison Dearborn at the closing of the transactions
of $15 million plus out-of-pocket expenses incurred in connection with the
transactions.
Before the closing of the transactions in April 1999, it was agreed that
after the closing, members of PCA's management would have the right to acquire
PCA common stock at the same price per share being paid by PCA Holdings in the
transactions, and receive options with an exercise price equal to the amount
being paid by PCA Holdings for common stock in the transactions. After the
closing of the transactions, PCA offered to 125 members of management of PCA
shares of common stock of PCA at the same price per share paid by PCA Holdings.
These employees included five executive officers, 11 senior managers and 109
facility and key managers. Of these employees, 113 elected to purchase common
stock in the offering. PCA sold a total of 3,132,800 shares of common stock in
the management offering. The proceeds were used to redeem 1,723,040 shares from
PCA Holdings and 1,409,760 shares from Pactiv. PCA also issued to management
options to purchase 6,576,460 shares.
Before the closing of the transactions, Pactiv agreed under the terms of the
contribution agreement to purchase certain timberland that was leased by Pactiv
for use by the containerboard business and buy-out all remaining mill operating
leases (collectively, the "Lease Buy-out"). As a result of the Lease Buy-out,
PCA owned approximately 800,000 acres of timberland, had lease or harvest rights
to 150,000 acres of timberland and owned all of its mills.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to PCA from the sale of the 11,500,000 shares of common
stock being offered by it in the offering are estimated to be approximately
$143,021,750 at an assumed initial public offering price of $13.50 per share,
after deducting the estimated underwriting discounts and offering expenses of
$12,228,250 payable by PCA.
PCA will use the net proceeds to redeem all outstanding shares of its
12 3/8% senior exchangeable preferred stock due 2010 (1,058,094 shares as of
January 1, 2000) at a redemption price of 112.375% of its liquidation
preference, plus accrued and unpaid dividends through the date of redemption. If
the redemption occurred on March 15, 2000, the redemption price would be
112.375% of $105,809,400, plus $6,001,377 of accrued and unpaid dividends, or
$124,904,690.
Any net proceeds received by PCA in excess of the amounts required to redeem
the outstanding senior exchangeable preferred stock will be used to pay down
debt or for general corporate purposes, including working capital. Any proceeds
used to pay down debt would be applied ratably to the following term loans
oustanding under PCA's senior credit facility:
- Term Loan A, which matures in quarterly installments from December 2001
through 2005, with a weighted average interest rate of 8.7036% and
$296,148,760 outstanding as of December 31, 1999;
- Term Loan B, which matures in quarterly installments from December 2001
through 2007, with a weighted average interest rate of 9.0894% and
$241,425,620 outstanding as of December 31, 1999; and
- Term Loan C, which matures in quarterly installments from December 2001
through 2008, with a weighted average interest rate of 9.4536% and
$241,425,620 outstanding as of December 31, 1999.
PCA entered into the senior credit facility on April 12, 1999. The proceeds
of the loans made under the senior credit facility were used to finance a
portion of the transactions and related expenses, to refinance outstanding
indebtedness and liabilities and for general corporate purposes including
working capital.
PCA will not receive any of the proceeds from the sale of the shares by the
selling stockholder in the offering.
19
<PAGE>
DILUTION
The net tangible book value of PCA as of September 30, 1999 was
approximately $356.1 million, or $3.76 per share of common stock. Net tangible
book value per share represents the amount of our stockholders' equity, less
intangible assets, divided by 94,600,000 shares of common stock outstanding as
of September 30, 1999.
After giving effect to the sale of the 11,500,000 shares of common stock
being offered by PCA at an assumed initial public offering price of $13.50 per
share, after deducting estimated underwriting discounts and commissions and
offering expenses payable by PCA, and after using most of the net proceeds to
redeem the senior exchangeable preferred stock, the pro forma net tangible book
value of PCA as of September 30, 1999 would have been approximately
$482.7 million, or $4.55 per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $.79 per share to existing
stockholders and an immediate dilution of $8.95 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.... $ 13.50
Net tangible book value per share at
September 30, 1999............................. $ 3.76
Increase per share attributable to new
investors...................................... .79
----------
Pro forma net tangible book value per share after
the offering..................................... 4.55
----------
Net tangible book value dilution per share to new
investors........................................ $ 8.95
==========
</TABLE>
The following table summarizes on a pro forma basis, as of September 30,
1999, the differences between the existing stockholders and new investors with
respect to the number of shares of common stock purchased from PCA, the
aggregate consideration paid and the average price per share paid, before
deducting estimated underwriting discounts and commissions and offering expenses
payable by PCA:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 94,600,000 89.2% $342,596,000 68.8% $ 3.62
New investors........................... 11,500,000 10.8 155,250,000 31.2 13.50
----------- ------- ------------ ------- -------
Total................................. 106,100,000 100.0% $497,846,000 100.0%
=========== ======= ============ =======
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of September 30, 1999. As of September 30, 1999, there were
options outstanding to purchase a total of 6,576,460 shares of common stock with
a weighted average exercise price of approximately $4.55 per share. To the
extent that any of these options are exercised, there will be further dilution
to new investors.
20
<PAGE>
DIVIDEND POLICY
We intend to retain all earnings for the foreseeable future for use in the
operation and expansion of our business and to repay existing indebtedness.
Accordingly, we currently have no plans to pay dividends on our 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 prohibited or
restricted from paying dividends 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.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of PCA as of
September 30, 1999 on an actual basis, and as adjusted to reflect the sale of
the 11,500,000 shares of common stock offered by PCA in the offering at an
assumed initial public offering price of $13.50 per share, after deducting the
estimated underwriting discounts and offering expenses payable by PCA and after
applying the net proceeds therefrom as described in "Use of Proceeds." The
information in this table should be read in conjunction with "Unaudited Pro
Forma Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the audited combined financial statements
of the Group and the related notes and the audited financial statements of PCA
and the related note, which appear elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $ 31,200 $ 56,038
========== ==========
Debt:
Senior credit facility
Revolving credit facility (a)........................... -- --
Term Loan A............................................. 421,983 421,983
Term Loan B............................................. 344,008 344,008
Term Loan C............................................. 344,008 344,008
Notes..................................................... 550,000 550,000
Other..................................................... 406 406
---------- ----------
Total debt.............................................. 1,660,405 1,660,405
Senior exchangeable preferred stock, liquidation preference
$100 per share; 3,000,000 shares authorized, 1,000,000
shares issued and outstanding, actual; no shares issued
and outstanding, as adjusted.............................. 96,500 --
Stockholders' equity:
Junior preferred stock, liquidation preference $1.00 per
share, 100 shares authorized, issued and outstanding
(b)..................................................... -- --
Common stock, par value $.01 per share,
300,000,000 shares authorized; 94,600,000 shares issued
and outstanding, actual; 106,100,000 shares issued and
outstanding, as adjusted (c)............................ 946 1,061
Additional paid-in capital (c)............................ 341,650 484,557
Retained earnings......................................... 15,124 (1,351)
---------- ----------
Total stockholders' equity................................ 357,720 484,267
---------- ----------
Total capitalization.................................... $2,114,625 $2,144,672
========== ==========
</TABLE>
- --------------
(a) As of September 30, 1999, we had $250 million in availability and no
borrowings outstanding under our revolving credit facility. If we had, the
interest rate would have been 8.40% per annum on any amounts borrowed.
Effective December 14, 1999, we elected to reduce our availability under the
revolving credit facility from $250 million to $150 million.
(b) Any references to preferred stock contained in this prospectus do not
include the 100 shares of junior preferred stock unless otherwise indicated.
PCA Holdings and Pactiv collectively hold all of the shares of junior
preferred stock. Following the offering, PCA Holdings will hold all of the
shares of junior preferred stock. Holders of the junior preferred stock are
not entitled to receive any dividends or distributions, and have no voting
rights. Shares of junior preferred stock may not be reissued after being
reacquired in any manner by PCA.
(c) The as adjusted amount does not include the 6,576,460 shares of common stock
issuable upon exercise of stock options issued under PCA management equity
agreements at an exercise price of approximately $4.55 per share. All of
these options will become exercisable upon completion of the offering.
22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information has been derived by
the application of pro forma adjustments, which give effect to the April 12,
1999 transactions, to the historical combined financial statements of the Group,
which was acquired by PCA in the transactions, and the historical consolidated
financial statements of PCA, both of which are included elsewhere in this
prospectus. The transactions include the following related events:
- borrowings under the senior credit facility;
- the Lease Buy-out;
- Pactiv's contribution of the containerboard and corrugated packaging
products business to PCA in exchange for Pactiv's equity investment and
cash;
- issuance of PCA common stock to PCA Holdings in exchange for cash;
- PCA's issuance of the notes and preferred stock; and
- PCA's grant of options to management.
The unaudited pro forma statements of income for the year ended December 31,
1998 and the nine months ended September 30, 1999 give effect to the
transactions as if the transactions had been consummated on January 1, 1998. The
pro forma adjustments exclude the impacts, if any, resulting from the potential
effect of interest rate hedges on the senior credit facility.
See "The Transactions" for more information about the sale of equity to PCA
management. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Market Risk and Risk Management Policies" for more
information about the interest rate hedges on the senior credit facility.
The transactions represented a series of related transactions that fall
within the scope of EITF Issue No. 88-16, BASIS IN LEVERAGED BUY-OUT
TRANSACTIONS. However, in accordance with the guidance in EITF 88-16, because a
change in control was deemed not to have occurred due to the existence of
certain participating veto rights held by PCA directors designated by Pactiv,
the transactions are considered a recapitalization-restructuring for which a
change in accounting basis is not appropriate. Accordingly, PCA has recorded the
Group net assets contributed by Pactiv at their historical values.
The pro forma financial information also reflects the issuance by PCA of
11,500,000 shares of common stock in the offering and the application of the net
proceeds therefrom as described in "Use of Proceeds."
The unaudited pro forma financial information is for comparative purposes
only and does not purport to represent what PCA's results of operations would
actually have been had the transactions in fact occurred on the assumed dates or
to project PCA's results of operations for any future period. The unaudited pro
forma financial information should be read in conjunction with the Group's
historical combined financial statements and related notes, PCA's historical
consolidated financial statements and related notes, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and other
financial information included elsewhere in this prospectus.
The pro forma and other adjustments, as described in the accompanying notes
to the unaudited pro forma balance sheet and statements of income, are based on
available information and assumptions that management believes are reasonable.
23
<PAGE>
PACKAGING CORPORATION OF AMERICA
UNAUDITED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
PCA PRO FORMA PCA
SEPTEMBER 30, 1999 ADJUSTMENTS PRO FORMA
------------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 31,200 $ 24,838 (a) $ 56,038
Accounts receivable, net....................................... 213,152 213,152
Receivables from affiliated companies.......................... -- --
Notes receivable............................................... 590 590
Inventories.................................................... 155,428 155,428
Prepaid expenses and other current assets...................... 18,656 18,656
---------- --------- ----------
TOTAL CURRENT ASSETS......................................... 419,026 24,838 443,864
Property, plant and equipment, at cost:
Land, timber, timberlands and buildings........................ 710,317 710,317
Machinery and equipment........................................ 1,891,051 1,891,051
Other, including construction in progress...................... 123,474 123,474
Less: Accumulated depreciation and depletion................... (817,918) (817,918)
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET........................... 1,906,924 1,906,924
---------- ----------
Intangible assets.............................................. 1,588 1,588
---------- ----------
Other long-term assets......................................... 97,642 (1,000)(c) 96,642
---------- ----------
Investments.................................................... 659 659
---------- --------- ----------
TOTAL ASSETS................................................. $2,425,839 $ 23,838 $2,449,677
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................. $ 8,196 $ $ 8,196
Accounts payable............................................... 100,047 100,047
Payables to Tenneco affiliates................................. -- --
Accrued interest............................................... 25,703 25,703
(400)(c)
Accrued liabilities............................................ 82,143 (5,809)(a) 75,934
---------- --------- ----------
TOTAL CURRENT LIABILITIES.................................... 216,089 (6,209) 209,880
---------- --------- ----------
Long-term liabilities:
Long-term debt................................................. 1,652,209 1,652,209
Deferred taxes................................................. 96,099 96,099
Other liabilities.............................................. 7,222 7,222
---------- ----------
TOTAL LONG-TERM LIABILITIES.................................. 1,755,530 1,755,530
---------- --------- ----------
Mandatorily redeemable preferred stock, liquidation preference
$100 per share, 3,000,000 shares authorized, 1,000,000 shares
issued and outstanding, actual; no shares issued and
outstanding, as adjusted..................................... 96,500 (96,500)(a) --
Stockholders' equity:
Junior preferred stock, liquidation preference $1.00 per share,
100 shares authorized, issued and outstanding................ -- --
Common stock, par value $.01 per share, 300,000,000 shares
authorized; 94,600,000 shares issued and outstanding, actual;
106,100,000 shares issued and outstanding, pro forma (b)..... 946 115 (a) 1,061
Additional paid in capital (b)................................. 341,650 142,907 (a) 484,557
(600)(c)
Retained earnings.............................................. 15,124 (15,875)(a) (1,351)
---------- --------- ----------
TOTAL STOCKHOLDERS' EQUITY................................... 357,720 126,547 484,267
---------- --------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $2,425,839 $ 23,838 $2,449,677
========== ========= ==========
</TABLE>
24
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(DOLLARS IN THOUSANDS)
(a) Assumes the net proceeds from the sale of 11,500,000 new shares of common
stock will be primarily used to redeem all of the outstanding shares of
PCA's 12 3/8% senior exchangeable preferred stock due 2010 (1,000,000 shares
as of September 30, 1999) at a redemption price of 112.375% of its
liquidation preference, plus accrued and unpaid dividends, as follows:
<TABLE>
<CAPTION>
REDEMPTION OF
ISSUANCE OF PREFERRED NET
COMMON STOCK STOCK ADJUSTMENT
------------ ------------- ----------
<S> <C> <C> <C>
Cash................................ $ 143,022 $ (118,184) $ 24,838
Accrued dividends................... -- (5,809) (5,809)
Preferred stock..................... -- (96,500) (96,500)
Common stock........................ 115 -- 115
Additional paid-in capital.......... 142,907 -- 142,907
(3,500)
Retained earnings................... -- (12,375) (15,875)
</TABLE>
(b) Common stock and additional paid-in capital as of September 30, 1999 have
been adjusted for a 220-for-one stock split effected on October 19, 1999.
(c) Represents the accelerated charge to expense of the bonus paid to PCA's CEO
as a result of the completion of the offering. As this charge is
non-recurring, it has not been reflected as an adjustment to the unaudited
pro forma statement of income.
25
<PAGE>
PACKAGING CORPORATION OF AMERICA
UNAUDITED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------
GROUP APRIL 12, 1999 STOCK PCA PRO
HISTORICAL TRANSACTION OFFERINGS FORMA(L)
---------- ----------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales.............................. $ 1,571,019 $ -- $ -- $ 1,571,019
7,200 (a) --
Cost of sales.......................... (1,289,644) 12,260 (b) -- (1,270,184)
----------- --------- ------- -----------
Gross profit......................... 281,375 19,460 -- 300,835
1,449 (b)
(1,973)(c)
2,500 (d)
Selling and administrative expenses.... (108,944) 4,400 (e) -- (102,568)
Corporate overhead allocation.......... (63,114) -- -- (63,114)
Non-recurring restructuring charge..... (14,385) -- -- (14,385)
Other income........................... 26,818 14,774 (g) -- 41,592
----------- --------- ------- -----------
Income before interest and income
taxes.............................. 121,750 40,610 -- 162,360
Interest expense, net.................. (2,782) (156,694)(h) -- (159,476)
----------- --------- ------- -----------
Income before income taxes........... 118,968 (116,084) -- 2,884
Income tax (expense) benefit........... (47,529) 47,013 (i) -- (516)
----------- --------- ------- -----------
Net income............................. 71,439 (69,071) -- 2,368
Preferred dividends and accretion of
preferred stock issuance costs....... -- (12,693)(k) 12,693 (n) --
----------- --------- ------- -----------
Net income available to common
stockholders......................... $ 71,439 $ (81,764) $12,693 $ 2,368
=========== ========= ======= ===========
Basic net income per common share (o).. $ .02
===========
Diluted net income per common share
(o).................................. $ .02
===========
</TABLE>
26
<PAGE>
PACKAGING CORPORATION OF AMERICA
UNAUDITED PRO FORMA STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
GROUP PRO FORMA ADJUSTMENTS
JANUARY 1, PCA -----------------------
1999 APRIL 12, 1999 APRIL 12,
THROUGH THROUGH 1999 STOCK PCA
APRIL 11, 1999 SEPTEMBER 30, 1999(M) TRANSACTION OFFERINGS PRO FORMA
-------------- --------------------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales.................... $ 433,182 $ 816,538 $ -- $ -- $1,249,720
688 (a)
Cost of sales................ (367,483) (640,587) 3,440 (b) -- (1,003,942)
--------- --------- -------- --------- ----------
Gross profit............... 65,699 175,951 4,128 $ -- 245,778
367 (b)
(493)(c)
701 (d)
Selling and administrative
expenses................... (30,584) (53,283) 829 (e) -- (82,463)
Corporate
overhead/allocation........ (14,890) (13,509) -- -- (28,399)
Non-recurring impairment
charge..................... (230,112) -- 230,112 (f) -- --
Other income (expense),
net........................ (2,207) 56 2,369 (g) -- 218
--------- --------- -------- --------- ----------
Income (loss) before
interest, income taxes
and extraordinary item... (212,094) 109,215 238,013 -- 135,134
Interest expense, net........ (221) (73,627) (43,895)(h) -- (117,743)
--------- --------- -------- --------- ----------
Income (loss) before income
taxes and extraordinary
item..................... (212,315) 35,588 194,118 -- 17,391
Income tax benefit
(expense).................. 83,716 (14,655) (76,630)(i) -- (7,569)
--------- --------- -------- --------- ----------
Income (loss) before
extraordinary item......... (128,599) 20,933 117,488 -- 9,822
--------- --------- -------- --------- ----------
Extraordinary item........... (6,327) -- 6,327 (j) -- --
--------- --------- -------- --------- ----------
Net income (loss)............ (134,926) 20,933 123,815 -- 9,822
Preferred dividends and
accretion of preferred
stock issuance costs....... -- (5,809) (3,598)(k) 9,407(n) --
--------- --------- -------- --------- ----------
Net income (loss) available
to common stockholders..... $(134,926) $ 15,124 $120,217 $ 9,407 $ 9,822
========= ========= ======== ========= ==========
Basic net income per common
share(o)................... $ .09
==========
Diluted net income per common
share(o)................... $ .09
==========
</TABLE>
27
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) To record the estimated depletion/depreciation on the timber and mill
assets acquired in the Lease Buy-out, and to remove the operating lease
expense related to those leases, resulting in a net decrease to cost of
sales as follows:
<TABLE>
<CAPTION>
JANUARY 1, 1999
YEAR ENDED THROUGH
DECEMBER 31, 1998 APRIL 11, 1999
----------------- ---------------
<S> <C> <C>
New depreciation/depletion.................. $ 65,300 $ 17,058
Eliminate lease expense..................... (72,500) (17,746)
-------- --------
$ (7,200) $ (688)
======== ========
</TABLE>
(b) Because the contributed net assets have a carrying value greater than their
fair value, as determined by the value of the acquisition consideration, an
asset impairment was recorded by Pactiv in connection with the transactions
relating to the Group's fixed and intangible assets. The pre-tax impairment
charge was reflected in the Group's separate financial statements in the
first quarter of 1999 and consisted of the following components:
<TABLE>
<S> <C>
Write-off remaining goodwill................................ $ 46,206
Reduction in property, plant and equipment.................. 183,906
--------
$230,112
========
</TABLE>
The following adjustment reflects reduced depreciation and amortization
resulting from this impairment charge:
<TABLE>
<CAPTION>
JANUARY 1, 1999
YEAR ENDED THROUGH
DECEMBER 31, 1998 APRIL 11, 1999
----------------- ---------------
<S> <C> <C>
Goodwill amortization........................ $ 1,449 $ 367
Property, plant and equipment depreciation... 12,260 3,440
------- ------
$13,709 $3,807
======= ======
</TABLE>
(c) To eliminate the deferred gain amortization related to the Meridian lease
that is part of the Lease Buy-out.
(d) To reduce OPEB expense relating to the portion of the Group post-retirement
health care benefit obligations retained by Pactiv as part of the
transactions and not assumed by PCA.
(e) To eliminate specialty rebates provided by the Group on boxes sold to
Tenneco affiliates. As part of the transactions, Pactiv agreed that PCA
will no longer provide these rebates.
(f) The impairment charge recorded by the Group in the nine months ended
September 30, 1999 is eliminated with a pro forma adjustment because it is
directly related to the transactions and is non-recurring.
(g) To eliminate the discount expense recognized on the sale of factored
receivables because the receivables were acquired by PCA in connection with
the transactions.
28
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(h) To record interest expense and amortization of deferred financing costs on
the debt incurred to finance the transactions, calculated as follows:
<TABLE>
<CAPTION>
JANUARY 1, 1999
YEAR ENDED THROUGH
DECEMBER 31, 1998 APRIL 11, 1999
----------------- ---------------
<S> <C> <C>
Revolving Credit Facility
($9,000 @7.75%)............................ $ 698 $ 195
Term Loan A
($460,000 @ 7.75%)......................... 35,185 9,399
Term Loan B
($375,000 @ 8.25%)......................... 30,879 8,599
Term Loan C
($375,000 @ 8.50%)......................... 31,815 8,860
Senior Subordinated Notes
($550,000 @ 9.625%)........................ 52,938 14,829
-------- -------
151,515 41,882
-------- -------
Eliminate interest on debt not assumed....... (2,782) (221)
Amortization of deferred financing costs..... 7,125 1,999
Amortization of settlement payment on
interest rate protection agreement related
to the notes............................... 836 235
-------- -------
Pro forma interest adjustment............ $156,694 $43,895
======== =======
</TABLE>
The above interest amounts on the Revolving Credit Facility and Term
Loans assume a Eurodollar rate, equivalent to LIBOR, of 5% and give effect
to the principal payments required on the Term Loans during the first 21
months. The effect on interest expense pertaining to the variable rate
Revolving Credit Facility and Term Loans of a 1/8(th) of one percent
variance in interest rates would be $1,514 and $1,094 for the year ended
December 31, 1998 and the nine months ended September 30, 1999,
respectively.
(i) To record the income tax effect on all pro forma adjustments, at an
effective tax rate of 40.5% for December 31, 1998, and 39.5% for
September 30, 1999. The tax rate is higher than the federal statutory rate
of 35% due to state income taxes.
(j) To eliminate the extraordinary loss, net of taxes, on the early
extinguishment of debt as part of the transactions.
(k) To record dividends on the preferred stock and accretion of the preferred
stock issuance costs as follows:
<TABLE>
<CAPTION>
JANUARY 1, 1999
YEAR ENDED THROUGH
DECEMBER 31, 1998 APRIL 11, 1999
----------------- ---------------
<S> <C> <C>
Preferred stock dividend..................... $12,375 $3,439
Accretion of preferred stock issuance
costs...................................... 318 159
------- ------
$12,693 $3,598
======= ======
</TABLE>
29
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(l) There are no historical financial statements for PCA for 1998 because PCA
was not incorporated until January 25, 1999.
(m) There was no activity for PCA from January 25, 1999, its date of inception,
through April 11, 1999.
(n) The pro forma financial information also reflects the redemption of the
preferred stock using proceeds from the offering. As a result, dividends on
the preferred stock and accretion of the preferred stock issuance costs are
eliminated.
(o) All share and per share data have been adjusted to reflect a 220-for-one
split of PCA's common stock which became effective on October 19, 1999. The
following table sets forth the computation of basic and diluted income per
share:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1998 1999
----------------- -------------
<S> <C> <C>
Numerator:
Net income................................. $ 2,368 $ 9,822
======== ========
Denominator:
Basic common shares outstanding............ 106,100 106,100
Effect of dilutive securities:
Stock options.............................. 2,617 2,617
-------- --------
Diluted common shares outstanding............ 108,717 108,717
Basic income per common share................ $ .02 $ .09
Diluted income per common share.............. $ .02 $ .09
</TABLE>
30
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth the selected historical financial and other
data of PCA and the Group, and pro forma financial and other data of PCA. The
selected historical financial and other data as of and for the years ended
December 31, 1996, 1997 and 1998 was derived from the audited combined financial
statements of the Group and the related notes thereto included elsewhere in this
prospectus. The selected historical financial and other data as of and for the
years ended December 31, 1994 and 1995 was derived from the unaudited combined
financial statements of the Group. The historical financial data for the nine
months ended September 30, 1998 and for the period from January 1, 1999 to April
11, 1999 has been derived from the unaudited condensed combined financial
statements of the Group included elsewhere in this prospectus. The historical
financial data as of September 30, 1999 and for the period from April 12, 1999
to September 30, 1999 has been derived from the unaudited consolidated financial
statements of PCA included elsewhere in this prospectus. The unaudited pro forma
financial and other data as of and for the nine months ended September 30, 1999
and for the year ended December 31, 1998 was derived from the unaudited pro
forma financial information of PCA included elsewhere in this prospectus. The
pro forma financial data does not purport to represent what PCA's financial
position or results of operations would actually have been had the transactions
in fact occurred on the assumed dates or to project PCA's financial position or
results of operations for any future date or period. 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,"
"Unaudited Pro Forma Financial Information," 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 prospectus.
<TABLE>
<CAPTION>
GROUP PCA GROUP
------------------------------------------------------------------- ----------- ----------
NINE
PRO FORMA MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED
------------------------------------------------------------------- DEC. 31, SEPT. 30,
1994 1995 1996 1997 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales............. $ 1,441,673 $ 1,844,708 $ 1,582,222 $ 1,411,405 $ 1,571,019 $1,571,019 $1,184,142
Cost of sales......... (1,202,996) (1,328,838) (1,337,410) (1,242,014) (1,289,644) (1,270,184) (962,126)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Gross profit........ 238,677 515,870 244,812 169,391 281,375 300,835 222,016
Selling and
administrative
expenses............ (71,312) (87,644) (95,283) (102,891) (108,944) (102,568) (79,670)
Corporate overhead/
allocation(3)....... (34,678) (38,597) (50,461) (61,338) (63,114) (63,114) (47,530)
Restructuring/
impairment
charge(4)........... -- -- -- -- (14,385) (14,385) --
Other income
(expense)(5)........ (4,701) (16,915) 56,243 44,681 26,818 41,592 32,064
----------- ----------- ----------- ----------- ----------- ----------- ----------
Income (loss) before
interest, income
taxes and
extraordinary
item.............. 127,986 372,714 155,311 49,843 121,750 162,360 126,880
Interest expense,
net................. (740) (1,485) (5,129) (3,739) (2,782) (159,476) (2,148)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Income (loss) before
income taxes and
extraordinary
item.............. 127,246 371,229 150,182 46,104 118,968 2,884 124,732
Income tax benefit
(expense)........... (50,759) (147,108) (59,816) (18,714) (47,529) (516) (49,654)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Income (loss) before
extraordinary
item.............. 76,487 224,121 90,366 27,390 71,439 2,368 75,078
Extraordinary
item.............. -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss)... $ 76,487 $ 224,121 $ 90,366 $ 27,390 $ 71,439 $ 2,368 $ 75,078
=========== =========== =========== =========== =========== =========== ==========
<CAPTION>
GROUP PCA(2)
---------- --------------------------
JAN. 1, APRIL 12, PRO FORMA
1999 1999 NINE MONTHS
THROUGH THROUGH ENDED
APRIL 11, SEPT. 30, SEPT. 30,
1999 1999 1999
---------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales............. $ 433,182 $ 816,538 $1,249,720
Cost of sales......... (367,483) (640,587) (1,003,942)
---------- ---------- ----------
Gross profit........ 65,699 175,951 245,778
Selling and
administrative
expenses............ (30,584) (53,283) (82,463)
Corporate overhead/
allocation(3)....... (14,890) (13,509) (28,399)
Restructuring/
impairment
charge(4)........... (230,112) -- --
Other income
(expense)(5)........ (2,207) 56 218
---------- ---------- ----------
Income (loss) before
interest, income
taxes and
extraordinary
item.............. (212,094) 109,215 135,134
Interest expense,
net................. (221) (73,627) (117,743)
---------- ---------- ----------
Income (loss) before
income taxes and
extraordinary
item.............. (212,315) 35,588 17,391
Income tax benefit
(expense)........... 83,716 (14,655) (7,569)
---------- ---------- ----------
Income (loss) before
extraordinary
item.............. (128,599) 20,933 9,822
Extraordinary
item.............. (6,327) -- --
---------- ---------- ----------
Net income (loss)... $ (134,926) $ 20,933 $ 9,822
========== ========== ==========
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
GROUP PCA GROUP
------------------------------------------------------------------- ----------- ----------
NINE
PRO FORMA MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED
------------------------------------------------------------------- DEC. 31, SEPT. 30,
1994 1995 1996 1997 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per
share(9):
Income (loss) before
extraordinary
item.............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79
Extraordinary
item.............. -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss)
per common
share............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79
=========== =========== =========== =========== =========== =========== ==========
Diluted earnings per
share(9):
Income (loss) before
extraordinary
item.............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79
Extraordinary
item.............. -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss)
per common
share............. $ .81 $ 2.37 $ .96 $ .29 $ .76 $ .02 $ .79
=========== =========== =========== =========== =========== =========== ==========
Weighted average
common shares out-
standing............ 94,600 94,600 94,600 94,600 94,600 106,100 94,600
OTHER DATA:
EBITDA(1)............. $ 178,148 $ 435,620 $ 234,041 $ 137,595 $ 218,700 $ 310,901 $ 119,156
Rent expense on oper-
ating leases bought
out as part of the
transactions(1)..... 93,600 94,900 94,700 73,900 72,500 -- 54,602
Net cash provided by
operating
activities.......... 107,642 336,599 55,857 107,213 195,401 170,581 133,964
Net cash used for
investing
activities.......... (113,119) (371,068) (74,232) (111,885) (177,733) (93,535) (81,148)
Net cash (used for)
provided by financ-
ing activities...... 6,112 36,454 16,767 3,646 (17,668) (22,030) (52,816)
Depreciation, deple-
tion,
amortization........ 50,162 62,906 78,730 87,752 96,950 148,541 72,276
Capital expenditures.. 110,853 252,745 168,642 110,186 103,429 103,429 70,966
BALANCE SHEET DATA:
Working capital (defi-
cit)(6)............. $ (101,281) $ (150,429) $ (102,278) $ 34,314 $ 80,027 $ 104,936
Total assets.......... 863,568 1,202,536 1,261,051 1,317,263 1,367,403 1,355,515
Total long-term
obliga-
tions (7)........... 20,267 21,739 20,316 27,864 17,552 17,030
Total stockholders'
equity (8).......... 389,981 640,483 784,422 854,060 908,392 883,136
<CAPTION>
GROUP PCA(2)
---------- --------------------------
JAN. 1, APRIL 12, PRO FORMA
1999 1999 NINE MONTHS
THROUGH THROUGH ENDED
APRIL 11, SEPT. 30, SEPT. 30,
1999 1999 1999
---------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic earnings per
share(9):
Income (loss) before
extraordinary
item.............. $ (1.36) $ .16 $ .09
Extraordinary
item.............. (.07) -- --
---------- ---------- ----------
Net income (loss)
per common
share............. $ (1.43) $ .16 $ .09
========== ========== ==========
Diluted earnings per
share(9):
Income (loss) before
extraordinary
item.............. $ (1.36) $ .16 $ .09
Extraordinary
item.............. (.07) -- --
---------- ---------- ----------
Net income (loss)
per common
share............. $ (1.43) $ .16 $ .09
========== ========== ==========
Weighted average
common shares out-
standing............ 94,600 92,451 106,100
OTHER DATA:
EBITDA(1)............. $ (181,189) $ 181,221 $ 251,296
Rent expense on oper-
ating leases bought
out as part of the
transactions(1)..... 17,746 -- --
Net cash provided by
operating
activities.......... 153,649 169,168 181,144
Net cash used for
investing
activities.......... (1,121,145) (55,229) (74,970)
Net cash (used for)
provided by financ-
ing activities...... 967,496 (82,740) (109,382)
Depreciation, deple-
tion,
amortization........ 30,905 72,006 116,162
Capital expenditures.. 1,128,255 49,216 71,938
BALANCE SHEET DATA:
Working capital (defi-
cit)(6)............. $ 179,933 $ 186,142
Total assets.......... 2,425,839 2,449,677
Total long-term
obliga-
tions (7)........... 1,756,905 1,660,405
Total stockholders'
equity (8).......... 357,720 484,267
</TABLE>
32
<PAGE>
NOTES TO SELECTED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
1) PCA calculates "EBITDA" as income (loss) before interest, income taxes
and extraordinary item, as reported, plus depreciation, depletion and
amortization as reported in the statement of cash flows, as presented in
the following table:
<TABLE>
<CAPTION>
GROUP PCA GROUP
--------------------------------------------------------- ------------ ------------------------
NINE JAN. 1,
PRO FORMA MONTHS 1999
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED THROUGH
--------------------------------------------------------- DEC. 31, SEPT. 30, APRIL 11,
1994 1995 1996 1997 1998 1998 1998 1999
--------- --------- --------- --------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before
interest, income taxes
and extraordinary
item.................... $127,986 $372,714 $155,311 $ 49,843 $121,750 $162,360 $126,880 $(212,094)
Add: Depreciation,
depletion and
amortization............ 50,162 62,906 78,730 87,752 96,950 148,541 72,276 30,905
-------- -------- -------- -------- -------- -------- -------- ---------
EBITDA.................... $178,148 $435,620 $234,041 $137,595 $218,700 $310,901 $199,156 $(181,189)
======== ======== ======== ======== ======== ======== ======== =========
<CAPTION>
PCA(2)
--------------------------
APRIL 12, PRO FORMA
1999 NINE MONTHS
THROUGH ENDED
SEPT. 30, SEPT. 30,
1999 1999
---------- -------------
<S> <C> <C>
Income (loss) before
interest, income taxes
and extraordinary
item.................... $109,215 $135,134
Add: Depreciation,
depletion and
amortization............ 72,006 116,162
-------- --------
EBITDA.................... $181,221 $251,296
======== ========
</TABLE>
For the historical periods, income (loss) before interest, income taxes and
extraordinary item includes charges for rent expense on operating leases
bought out as part of the transactions. As a result of the Lease Buy-out,
PCA will no longer incur this rent expense, but will record non-cash charges
for depreciation and depletion related to these assets, which are now owned
rather than leased. This depreciation/depletion expense will be similar, but
not identical, to the amount of rent expense. On a pro forma basis for 1998,
the incremental depreciation/depletion was $7,200 less than the historical
rent expense, resulting in a net increase of $4,284 to pro forma 1998 net
income. To better understand historical EBITDA in relation to pro forma
EBITDA for the periods presented, we believe it may be useful to add back
this rent expense to reported EBITDA for the historical periods.
PCA's EBITDA is included in this prospectus because it is a financial
measure used by PCA's management to assess the company's operating results
and liquidity, and because several of the indebtedness covenants in PCA's
senior credit facility and in the notes indenture are based upon a
calculation that utilizes EBITDA.
EBITDA should not be considered in isolation or viewed as a substitute for
cash flow from operations, net income or other measures of performance as
defined by generally accepted accounting principles, or as a measure of a
company's overall profitability or liquidity. In addition, EBITDA does not
represent the cash available to investors because capital expenditures, debt
service and income taxes are not deducted when calculating EBITDA.
PCA understands that EBITDA as used herein is not necessarily comparable to
other similarly titled captions of other companies due to potential
inconsistencies in the method of calculation.
In analyzing 1998 pro forma EBITDA for liquidity purposes, PCA also believes
that the following additional adjustments should be considered by investors:
<TABLE>
<S> <C>
Pro forma EBITDA for 1998................................... $310,901
Adjustments:
Other income(a)........................................... (41,592)
Non-recurring restructuring charge(b)..................... 14,385
Reduction in corporate overhead(c)........................ 32,954
Cost savings from restructuring(d)........................ 10,800
--------
Adjusted pro forma EBITDA for 1998.......................... $327,448
========
</TABLE>
33
<PAGE>
NOTES TO SELECTED FINANCIAL AND OTHER DATA (CONTINUED)
(DOLLARS IN THOUSANDS)
(a) Other income for 1998 consists substantially of nonrecurring items,
such as gains on the sale of non-strategic woodlands and a recycled
paperboard joint venture investment, that PCA believes are not
relevant in analyzing recurring EBITDA.
(b) During 1998, Pactiv adopted a restructuring plan to eliminate
approximately 100 personnel and close down four facilities associated
with the Group's business. As of December 31, 1998, substantially all
actions specified in the plan had been completed. A charge of $14,385
was recorded for severance benefits, exit costs and asset
impairments, and is reflected in the Group's 1998 operating profit.
PCA believes that this non-recurring charge is not relevant in
analyzing recurring EBITDA.
(c) As part of Tenneco, the Group was allocated $63,114 of Tenneco
corporate and Pactiv overhead expenses based on a variety of
allocation methods. In analyzing the carved-out business on a
stand-alone basis, PCA estimates that these costs will be
approximately $30,160 for the first year following the closing of the
transactions. The determination of that estimate is based on detailed
analyses that consider (1) compensation and benefits for Pactiv and
new employees who are employed by PCA in corporate functions such as
in information technology, human resources, finance and legal, and
(2) non-payroll costs incurred by these departments. Where
applicable, the estimates consider the terms of transition service
arrangements between PCA and Pactiv.
(d) The restructuring referred to in Note (b) above will result in
reduced cost of sales and selling and administrative expenses. This
adjustment represents the Group's estimate of the cost savings that
would have been achieved in 1998 if the restructuring had been in
effect for all of 1998.
2) There was no activity for PCA from January 25, 1999, its date of
inception, through April 11, 1999.
3) The corporate overhead allocation represents the amounts charged by
Tenneco and Pactiv to the Group for its share of Tenneco's and Pactiv's
corporate expenses. On a stand-alone basis, management estimates that
PCA's overhead expense will be $30,160 for the first twelve months
following the acquisition.
4) This line item consists of non-recurring charges recorded in the fourth
quarter of 1998 and first quarter of 1999 pertaining to a restructuring
charge and an impairment charge, respectively. For further information
about these charges, refer to Notes 7 and 14 to the Group's audited
combined financial statements and Note 7 to PCA's unaudited consolidated
financial statements.
5) Other income, net consists of nonrecurring items, the largest components
of which are as follows:
<TABLE>
<C> <S>
Fiscal year 1994 No individually significant items that are considered
non- recurring.
Fiscal year 1995 No individually significant items that are considered
non-recurring.
Fiscal year 1996 A $50,000 gain on the sale of recycled paperboard
mills.
Fiscal year 1997 A $37,730 gain on the refinancing of operating
leases.
</TABLE>
34
<PAGE>
NOTES TO SELECTED FINANCIAL AND OTHER DATA (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<C> <S>
Fiscal year 1998 A $16,944 gain on the sale of non-strategic woodlands
and a $15,060 gain on the sale of the Caraustar
recycled paperboard joint venture interest.
Nine months ended A $16,944 gain on the sale of non-strategic woodlands
September 30, and a $15,060 gain on the sale of the Caraustar
1998 recycled paperboard joint venture interest.
Nine months ended No individually significant items that are considered
September 30, non- recurring.
1999
</TABLE>
6) Working capital represents (a) total current assets excluding cash and
cash equivalents less (b) total current liabilities excluding the
current maturities of long-term debt.
7) 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.
8) Represents the Group's interdivision account with Pactiv for the
historical period through April 11, 1999.
9) 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). For the PCA historical period from
April 12, 1999 to September 30, 1999, earnings available to common
stockholders includes a reduction for $5,809 of preferred stock
dividends. For both pro forma periods, there is no reduction for
preferred dividends because the preferred stock redemption to be
completed using proceeds from the offering is treated as if it occurred
at the beginning of 1998.
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
September 30, 1999 and both pro forma periods, diluted earnings per share
includes the dilutive effect of the 6,576,460 options granted in June
1999. This dilutive effect is calculated using the treasury stock method
and the expected initial public offering price.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of historical results of operations and financial
condition should be read in conjunction with the audited financial statements
and the notes thereto which appear elsewhere in this prospectus.
OVERVIEW
In connection with the transactions, PCA acquired The Containerboard Group
of Pactiv Corporation, which consisted of its containerboard and corrugated
packaging products business and which we refer to in this prospectus 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 has historically operated as a division of Pactiv, and has not
historically operated as a separate, stand-alone entity. As a result, the
historical financial information included in this prospectus 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 presented.
As a division of Pactiv, the Group was allocated corporate overhead expenses
in the amounts of $50.5 million, $61.3 million and $63.1 million for the years
ended December 31, 1996, 1997 and 1998, respectively. These expenses were
allocated to the Group based upon the relative level of effort and time spent on
Group activities by the Tenneco affiliates. This was generally measured using a
formula based upon the Group's percentage of Tenneco's total fixed assets,
revenues and payroll. PCA estimates that these expenses will be approximately
$30.2 million on a stand-alone basis for the first twelve months following the
acquisition, based on detailed analyses of compensation benefits for employees
who are now employed by PCA as a result of the acquisition and related
non-payroll costs incurred after the acquisition. In addition, future operating
results are expected to be affected by changes in depreciation and amortization
expense related to impaired assets, elimination of certain lease financing costs
and intercompany transactions with affiliates of Tenneco, and other items
resulting from the acquisition. See "Unaudited Pro Forma Financial Information"
included elsewhere in this prospectus. We cannot assure you that we will be able
to realize all of the benefits we expect as a stand-alone entity.
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
The market for containerboard is highly cyclical. Historically, prices for
containerboard have reflected changes in containerboard supply that result from
capacity additions and reductions, as well as changes in inventory levels.
Containerboard demand is dependent upon both domestic demand for corrugated
packaging products and linerboard export activity. Domestic demand for
corrugated packaging products is the more stable factor. It generally
corresponds to changes in the rate of growth in the U.S. economy. Exports
represent about 20% of total linerboard shipments.
36
<PAGE>
From 1994 to 1996, capacity additions outpaced both domestic and export
demand for containerboard. This excess supply led to lower industry operating
rates and declining prices from late-1995 until mid-1997. Although prices
generally improved from mid-1997 through mid-1998, the containerboard market was
adversely affected by weaker containerboard exports. This weakness was most
apparent in shipments to Asia in the second half of 1998, which resulted in
lower prices.
While export shipments for the first nine months of 1999 continued to be
lower than the first nine months of 1998, the supply/demand balance improved
throughout 1999, and the average price of linerboard increased approximately 25%
during 1999. However, industry oversupply conditions could return or economic
conditions could deteriorate in the future.
During 1999, several major containerboard manufacturers announced production
curtailments and mill shutdowns, and only minimal capacity additions have been
publicly announced through 2002 according to the American Forest & Paper
Association.
According to Pulp & Paper Week, after giving effect to the price increases
in 1999, average prices in December 1999 for linerboard and corrugating medium
were 25% and 46% higher, respectively, than December 1998 prices.
Pulp & Paper Week, in its January 10, 2000 publication, reported that eight
North American containerboard producers, including PCA, have announced price
increases of $50 per ton for linerboard and $60 per ton for corrugating medium,
effective with February shipments. Pulp & Paper Week, in its January 17, 2000
publication, reported that two additional North American containerboard
producers announced the same price increases.
RESULTS OF OPERATIONS
The historical results of operations of the Group and PCA are set forth
below:
<TABLE>
<CAPTION>
GROUP PCA
------------------------------------------------------------------ -------------------------------
FOR THE FOR THE
FOR THE FOR THE PERIOD FROM PRO FORMA
FOR THE YEAR ENDED NINE MONTHS PERIOD FROM APRIL 12, 1999 NINE MONTHS
DECEMBER 31, ENDED JANUARY 1, 1999 THROUGH ENDED
------------------------------ SEPTEMBER 30, THROUGH SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998 1998 APRIL 11, 1999 1999 1999
-------- -------- -------- -------------- ---------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales............ $1,582.2 $1,411.4 $1,571.0 $1,184.1 $ 433.2 $816.5 $1,249.7
======== ======== ======== ======== ======= ====== ========
Operating Income
(Loss)............. $ 155.3 $ 49.8 $ 121.7 $ 126.9 $(212.1) $109.2 $ 135.1
Interest Expense..... (5.1) (3.7) (2.8) (2.2) (0.2) (73.6) (117.7)
Income (Loss) Before
Taxes and
Extraordinary
Item............... 150.2 46.1 118.9 124.7 (212.3) 35.6 17.4
Provision for Income
Taxes.............. (59.8) (18.7) (47.5) (49.6) 83.7 (14.7) (7.6)
-------- -------- -------- -------- ------- ------ --------
Income (Loss) Before
Extraordinary
Item............... $ 90.4 $ 27.4 $ 71.4 $ 75.1 $(128.6) $ 20.9 $ 9.8
-------- -------- -------- -------- ------- ------ --------
Extraordinary Item... -- -- -- -- (6.3) -- --
-------- -------- -------- -------- ------- ------ --------
Net Income (Loss).... $ 90.4 $ 27.4 $ 71.4 $ 75.1 $(134.9) $ 20.9 $ 9.8
======== ======== ======== ======== ======= ====== ========
</TABLE>
37
<PAGE>
Operating income included several significant unusual or non-recurring items
for each of the periods presented. Excluding these items, operating income would
have been as follows:
<TABLE>
<CAPTION>
GROUP PCA
------------------------------------------------------------------ -------------------------------
FOR THE FOR THE
FOR THE FOR THE PERIOD FROM PRO FORMA
FOR THE YEAR ENDED NINE MONTHS PERIOD FROM APRIL 12, 1999 NINE MONTHS
DECEMBER 31, ENDED JANUARY 1, 1999 THROUGH ENDED
------------------------------ SEPTEMBER 30, THROUGH SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998 1998 APRIL 11, 1999 1999 1999
-------- -------- -------- -------------- ---------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Income (Loss) as
Reported................. $155.3 $ 49.8 $121.7 $ 126.9 $(212.1) $109.2 $135.1
Recycled Paperboard Mills
Divestiture
Divestiture Gain (1)..... (50.0) -- (15.1) (15.1) -- -- --
Earnings................. (4.0) -- -- -- -- -- --
Joint Venture Income
(1).................... (0.6) (1.7) (0.3) (0.3) -- -- --
Non-Strategic Woodlands
Divestitures (1)......... -- (4.4) (16.9) (16.9) -- -- --
Mill Lease Refinancing
(1)...................... -- (37.7) -- -- -- -- --
Restructuring Charge....... -- -- 14.4 -- -- -- --
Impairment Charge.......... -- -- -- -- 230.1 -- --
------ ------ ------ ------- ------- ------ ------
Adjusted Operating
Income................... $100.7 $ 6.0 $103.8 $ 94.6 $ 18.0 $109.2 $135.1
====== ====== ====== ======= ======= ====== ======
</TABLE>
- ------------------
(1) Included in other income as part of the audited financial statements.
RECYCLED PAPERBOARD MILLS DIVESTITURE
In 1996, the Group sold two recycled paperboard mills, located in Rittman,
Ohio and Tama, Iowa, and a recycling center and brokerage operation to a joint
venture with Caraustar Industries. The Group received cash and a 20 percent
interest in the joint venture and recognized a gain of $50.0 million in the
second quarter as a result of the transaction.
Operating income for the recycled paperboard business reported in 1996
before the formation of the joint venture was approximately $4.0 million.
In 1998, the Group divested its 20 percent interest in the joint venture
with Caraustar and recognized a $15.1 million gain in the second quarter on the
divestiture.
The Group's share of operating income from the joint venture was
$0.6 million, $1.7 million and $0.3 million, respectively, for the years ended
December 31, 1996, 1997 and 1998.
NON-STRATEGIC WOODLANDS DIVESTITURES
In the third quarter of 1998, the Group recognized a $16.9 million gain on
the sale of approximately 18,500 acres of woodlands used as a fiber source for
the Counce mill. These woodlands were not considered a strategic fiber source
for the Counce operation.
In the third quarter of 1997, the Group recognized a $4.4 million gain on
the sale of non-strategic woodlands known as the Willow Flowage property located
near the Tomahawk mill.
MILL LEASE REFINANCING
On January 31, 1997, Pactiv entered into an operating lease agreement with
Credit Suisse Leasing 92A, L.P., as lessor, and a group of financial
institutions led by Citibank, N.A., as agent. The agreement refinanced previous
operating leases between General Electric Credit Corporation and
38
<PAGE>
Pactiv, which were entered into at the same time as General Electric Credit's
purchase of certain assets from Georgia-Pacific Corporation in January 1991.
Through this refinancing, several capital lease obligations were extinguished as
the assets were incorporated into the new operating lease. In connection with
this refinancing, certain fixed assets and deferred credits were eliminated,
resulting in a net gain recognized in the first quarter of 1997 of approximately
$37.7 million.
RESTRUCTURING CHARGE
In the fourth quarter of 1998, the Group recorded a pre-tax restructuring
charge of $14.4 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 has eliminated a total of 112 positions, including
the closing of four converting facilities. The following table reflects the
components of this charge:
<TABLE>
<CAPTION>
JANUARY 1,
FOURTH 1999--
QUARTER DECEMBER 31, APRIL 11, APRIL 11, PACTIV
RESTRUCTURING 1998 1998 1999 1999 BALANCE
CHARGE ACTIVITY BALANCE ACTIVITY BALANCE RETAINED RECLASSIFICATION
------------- -------- -------------- ---------- --------- --------- ----------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash Charges:
Severance............. $ 5.2 $(0.9) $4.3 $(1.3) $3.0 $(1.9) $ --
Facility Exit Costs
and Other........... 3.8 (0.4) 3.4 (0.7) 2.7 -- (0.7)
----- ----- ---- ----- ---- ----- -----
Total Cash Charges.... 9.0 (1.3) 7.7 (2.0) 5.7 (1.9) (0.7)
Non-cash Charges:
Asset Impairments..... 5.4 (3.8) 1.6 (1.5) 0.1 -- 0.7
----- ----- ---- ----- ---- ----- -----
$14.4 $(5.1) $9.3 $(3.5) $5.8 $(1.9) $ --
===== ===== ==== ===== ==== ===== =====
<CAPTION>
APRIL 12,
1999--
SEPT. 30, SEPT. 30,
1999 1999
ACTIVITY BALANCE
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Cash Charges:
Severance............. $(0.8) $0.3
Facility Exit Costs
and Other........... (0.2) 1.8
----- ----
Total Cash Charges.... (1.0) 2.1
Non-cash Charges:
Asset Impairments..... (0.3) 0.5
----- ----
$(1.3) $2.6
===== ====
</TABLE>
- --------------------
(1) Includes activity for both the Group (January 1, 1999 through April 11,
1999) and PCA (April 12, 1999 through September 30, 1999).
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 $2.1 million of cash charges remaining
at September 30, 1999, approximately $0.2 million was incurred in the fourth
quarter of 1999, and PCA expects to incur approximately $1.6 million of these
charges in 2000.
IMPAIRMENT CHARGE
As a result of the transactions, the Group recorded a non-cash impairment
charge of $230.1 million in the first quarter of 1999, which is described in
Note 14 of the Group's audited combined financial statements and Note 7 of PCA's
unaudited consolidated financial statements.
EXTRAORDINARY LOSS
During the first quarter of 1999, the Group extinguished $16.6 million of
debt incurred to finance a boiler at the Counce mill. In connection with that
extinguishment, an extraordinary loss of $10.5 million was recorded, which was
$6.3 million net of the related tax effect.
39
<PAGE>
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO REPORTED NINE MONTHS
ENDED SEPTEMBER 30, 1998
NET SALES
Net sales increased by $65.6 million, or 5.5%, for the pro forma nine months
ended September 30, 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 price of containerboard to third parties,
partially offset by decreases in corrugated products prices.
Average prices of corrugated products decreased by 1.4% for the pro forma
nine months ended September 30, 1999 from the comparable period of 1998, while
corrugated products volume increased by 8.0% in 1999, from 18.7 billion square
feet in 1998 to 20.2 billion square feet in 1999.
Average containerboard prices for third party sales increased by 1.2% in the
pro forma first nine months of 1999 from the comparable period in 1998, while
volume to external domestic and export customers increased 8.5%, to 414,409 tons
in 1999 from 381,947 tons in 1998.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)
Operating income increased by $40.2 million, or 42.4%, for the pro forma
nine months ended September 30, 1999 from the comparable period in 1998,
excluding a $16.9 million gain on the sale of non-strategic woodlands and a
$15.1 million gain on the sale of a 20% interest in a recycled paperboard joint
venture in 1998. The increase was the result of increased sales volume of both
corrugated products and containerboard, the increased sales price of
containerboard to third parties and reduced corporate overhead expenses,
partially offset by lower prices of corrugated products.
Gross profit increased $23.8 million, or 10.7%, for the pro forma nine
months ended September 30, 1999 from the comparable period in 1998. Gross profit
as a percentage of sales improved from 18.7% of sales in the first nine months
of 1998 to 19.7% of sales in the current period primarily due to the volume
increases described above.
Selling and administrative expenses increased $2.8 million, or 3.5%, for the
pro forma nine months ended September 30, 1999 from the comparable period in
1998, primarily as a result of Year 2000 remediation expenses.
Corporate overhead for the pro forma nine months ended September 30, 1999
decreased by $19.1 million, or 40.2%, 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 nine months ended
September 30, 1999 included three and one-half months of corporate overhead
charged by Tenneco and Pactiv and five 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.
INTEREST EXPENSE AND INCOME TAXES
Interest expense increased by $115.6 million, or 5,381.5%, for the pro forma
nine months ended September 30, 1999 from the comparable period in 1998,
primarily due to borrowings under the senior credit facility and the issuance of
$550 million of the senior subordinated notes. This indebtedness was incurred to
finance the transactions.
40
<PAGE>
PCA's effective tax rate was 43.5% for the pro forma nine months ended
September 30, 1999 and 39.8% for the comparable period in 1998. The tax rate is
higher than the federal statutory rate of 35% due to state income taxes.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES
Net sales increased by $159.6 million, or 11.3%, from 1997 to 1998. The
increase was primarily the result of increases in prices for both corrugated
products and containerboard and, to a lesser extent, increases in shipments of
corrugated products.
Average prices for corrugated products increased by 7.0% in 1998 from 1997,
while corrugated volume increased by 4.6% in 1998, from 23.9 billion square feet
in 1997 to 25.0 billion square feet in 1998.
Average containerboard prices for external third party sales increased by
11.7% in 1998 from 1997, while volume to external domestic and export customers
decreased 8.4%, to 527,000 tons in 1998 from 575,000 tons in 1997.
According to Pulp & Paper Week, an industry publication, average linerboard
and semi-chemical medium prices for 42 lb. Liner-East and 26 lb. Medium-East,
which are representative benchmark grades, were $373 and $315, respectively, per
ton in 1998. This compares to $333 and $268, respectively, per ton in 1997.
According to the Fibre Box Association, average sale prices for corrugated
products increased by 4.0% in 1998 from 1997.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)
Adjusted operating income increased by $97.8 million, or 1,630.0%, from 1997
to 1998 as a result of both higher sales prices and sales volumes, which
primarily contributed to the gross margin improvement of $112.0 million, or
66.1%.
Gross margins improved from 12.0% of sales in 1997 to 17.9% of sales in
1998, primarily due to the price increases described above. These price
increases were partially offset by a higher level of depreciation attributable
to the Group's capital expenditure program and to higher costs incurred as a
result of changes in product mix.
Selling and administrative expenses increased by $6.1 million, or 5.9%, from
1997 to 1998, primarily as a result of costs incurred to support the increased
focus on graphics design and other value added product services in corrugated
products.
Corporate allocations increased by $1.8 million, or 2.9%, primarily as a
result of the Group's increased use of the Tenneco shared services center
located in The Woodlands, Texas.
INTEREST EXPENSE AND INCOME TAXES
The Group's interest expense for 1998 and 1997 primarily related to the cost
of debt incurred to finance a boiler at the Counce mill. The interest expense
declined by approximately $1.0 million, or 25.6%, in 1998, as a portion of this
debt was retired during the year.
The Group's effective tax rate was 40.0% in 1998 and 40.6% in 1997. The tax
rate is higher than the federal statutory rate of 35% due to state income taxes.
41
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales decreased by $170.8 million, or 10.8%, from 1996 to 1997.
Approximately $48.3 million of the decrease was the result of the divestiture in
June 1996 of two recycled paperboard mills. The balance of the decrease was
primarily the result of decreases in prices for both corrugated products and
containerboard, partially offset by increases in shipments of corrugated
products and containerboard to external third parties.
Average prices for corrugated products decreased by 7.8% in 1997 from 1996,
while corrugated volume increased by 1.3% in 1997 from 23.6 billion square feet
in 1996 to 23.9 billion square feet in 1997.
Average containerboard prices for external third party sales decreased by
10.2% in 1997 from 1996, while volume to external domestic and export customers
increased 30.4%, to 575,000 tons in 1997 from 441,000 tons in 1996.
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 $333 and $268, respectively, per ton in 1997. This
compares to $382 and $315, respectively, per ton in 1996. According to the Fibre
Box Association, average sale prices for corrugated products decreased by 10.3%
in 1997 from 1996.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)
Excluding a one-time $50.0 million gain and $4.6 million of income from
recycled paperboard mill operations in 1996, adjusted operating income declined
$94.7 million, or 94.0% from 1996 to 1997. This decline was primarily the result
of the lower pricing described above, partially offset by variable cost
reductions at the mills resulting in a net decline in gross profit of $75.4
million, or 30.8%.
These factors, combined with the impact of the 1996 divestiture of the
recycled paperboard mills, contributed to a decline in gross margins from 15.5%
in 1996 to 12.0% in 1997.
Selling and administrative expenses increased by $7.6 million, or 8.0%, from
1996 to 1997. This increase was primarily the result of greater expenses
incurred to increase the number of sales and design personnel for the corrugated
products business.
Corporate allocations increased by $10.9 million, or 21.6%, from 1996 to
1997. The increase was the result of an overall increase in Pactiv's overhead,
and consequently higher allocations to the Group.
INTEREST EXPENSE AND INCOME TAXES
The Group's interest expense declined by $1.4 million, or 27.1%, from 1996
to 1997, primarily as a result of the termination of capital leases that were
extinguished when the new mill operating lease agreement was entered into in
January 1997.
The Group's effective tax was 40.6% in 1997 and 39.8% in 1996. The tax rate
was higher than the federal statutory rate of 35% due to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL
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.
42
<PAGE>
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.
Effective April 12, 1999, PCA maintains its own cash accounts.
The following table sets forth the Group's cash flows for the periods shown:
<TABLE>
<CAPTION>
GROUP PCA
----------------------------------------------------------------- -------------------------------
FOR THE FOR THE
FOR THE YEAR ENDED FOR THE FOR THE PERIOD PERIOD APRIL PRO FORMA
DECEMBER 31, NINE MONTHS JANUARY 1, 1999 12, 1999 NINE MONTHS
------------------------------ ENDED THROUGH THROUGH ENDED
1996 1997 1998 SEPT. 30, 1998 APRIL 11, 1999 SEPT. 30, 1999 SEPT. 30, 1999
-------- -------- -------- -------------- --------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH PROVIDED (USED) BY:
Operating
Activities.......... $ 55.8 $107.2 $195.4 $134.0 $ 153.6 $169.2 $181.2
Investing
Activities.......... (74.2) (111.9) (177.7) (81.2) (1,121.1) (55.2) (75.0)
Financing
Activities.......... 16.8 3.7 (17.7) (52.8) 967.5 (82.8) (109.4)
------ ------ ------ ------ --------- ------ ------
Net Cash Change....... $ (1.6) $ (1.0) $ -- $ -- $ -- $ 31.2 $ (3.2)
====== ====== ====== ====== ========= ====== ======
</TABLE>
OPERATING ACTIVITIES
Cash flow provided by operating activities increased $47.2 million, or
35.2%, for the nine months ended September 30, 1999 from the comparable period
in 1998. The increase was primarily due to increases in depreciation, depletion
and amortization and reduced working capital.
Cash flow provided by operating activities increased by $88.2 million, or
82.3%, from 1997 to 1998. The increase was due primarily to higher net income of
$44.0 million, collection of a higher level of receivables and increased
non-cash charges for restructuring and depreciation.
Cash provided by operating activities increased by $51.4 million, or 91.9%,
from 1996 to 1997. The lower net income of $63.0 million resulting from lower
pricing was more than offset by a deferred tax increase of $76.8 million
resulting from accelerated depreciation on tax owned assets and higher
depreciation, depletion and amortization.
INVESTING ACTIVITIES
Net cash used for investing activities decreased $6.2 million, or 7.6%, for
the pro forma nine months ended September 30, 1999 from the comparable period in
1998, primarily as a result of lower expenditures related to software
development.
Cash used for investing activities increased by $65.8 million, or 58.9%,
from 1997 to 1998. The increase was primarily attributable to a prepaid lease
payment made in late-December 1998 of $84.2 million to acquire timberland as
part of the Lease Buy-out. Proceeds from assets sales were $15.8 million higher
in 1998, due to the 1998 timberland sale transaction previously described.
During 1997 and 1998, additions to property, plant and equipment totaled
$110.2 million and $103.4 million, respectively.
Net cash used for investing activities increased by $37.7 million, or 50.7%,
from 1996 to 1997. During 1996 and 1997, additions to property, plant and
equipment totaled $168.6 million and $110.2 million, respectively. The higher
level of capital expenditures in 1996 was attributable to the rebuild of a
machine at the Counce mill, for which a total of $78.4 million in capital
expenditures
43
<PAGE>
was spent, with the majority of the spending occurring in 1996. Included in the
1996 investing activities are $122.7 million of proceeds from disposals compared
to $10.5 million in 1997. The proceeds from disposals were primarily related to
the sale of the 80% interest in the recycled paperboard assets to Caraustar
Industries. Cash expended for other long-term assets decreased $16.5 million,
primarily due to lower cash funding of pension assets.
As of September 30, 1999, PCA had commitments for capital expenditures of
$75.6 million. PCA believes operating cash flow from continuing operations will
be sufficient to fund these commitments.
FINANCING ACTIVITIES
Cash used for financing activities increased $56.6 million, or 107.1%, for
the pro forma nine months ended September 30, 1999 from the comparable period in
1998. The increase was primarily attributable to the voluntary prepayments PCA
has made on its three term loans under the senior credit facility.
Cash provided by financing activities decreased by $21.4 million, or 584.6%,
from 1997 to 1998, primarily reflecting the change in the net transfer of funds
between the Group and Pactiv. The Group also retired $10.3 million of debt
during 1998, which related to the financing of a boiler at the Counce mill.
Cash provided by financing activities decreased by $13.1 million, or 78.3%,
from 1996 to 1997, primarily due to changes in the net transfer of funds between
the Group and Pactiv.
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 billion of indebtedness
outstanding as compared to historical indebtedness outstanding of approximately
$0.5 million. PCA's significant debt service obligations following the
transactions could have material consequences to PCA's securityholders,
including holders of common stock. See "Risk Factors."
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 $1.21 billion
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 revolving credit facility. The following
table provides the interest rate as of December 31, 1999 for each of the term
loans and the revolving credit facility:
<TABLE>
<CAPTION>
BORROWING ARRANGEMENT INTEREST RATE
- --------------------- -------------
<S> <C>
Term Loan A................................................. 8.7036%
Term Loan B................................................. 9.2035%
Term Loan C................................................. 9.4536%
Revolver
Revolver--Eurodollar...................................... 9.2500%
Revolver--Base Rate....................................... 10.2500%
</TABLE>
The borrowings under the revolving credit facility are available to fund
PCA's working capital requirements, capital expenditures and other general
corporate purposes. The Term Loan A must
44
<PAGE>
be repaid in quarterly installments from December 2001 through 2005. The Term
Loan B must be repaid in quarterly installments from December 2001 through 2007.
The Term Loan C must be repaid in quarterly installments from December 2001
through 2008. The revolving credit facility will terminate in 2005. See
"Description of Certain Indebtedness--Description of Senior Credit Facility."
Effective December 14, 1999, PCA elected to reduce its availability under
the revolving credit facility from $250.0 million to $150.0 million.
PCA made voluntary prepayments using timberland proceeds or excess cash to
permanently reduce its borrowings under the term loans on the following dates in
the following amounts:
- May 18, 1999--$75.0 million;
- July 15, 1999--$10.0 million;
- September 16, 1999--$1.3 million;
- September 30, 1999--$13.7 million;
- October 1, 1999--$194.6 million;
- October 14, 1999--$27.5 million;
- October 29, 1999--$10.9 million;
- November 15, 1999--$10.0 million;
- November 19, 1999--$12.5 million;
- November 22, 1999--$43.7 million;
- November 30, 1999--$23.8 million; and
- December 30, 1999--$8.0 million.
In addition, PCA repaid the $9.0 million drawn on the revolver using excess
cash.
The instruments governing PCA's indebtedness and the preferred stock,
including the senior credit facility, the indenture governing the notes and the
certificate of designation governing 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, together with the highly leveraged nature of PCA, could
limit corporate and operating activities. See "Risk Factors--Company
Risks--Leverage."
PCA intends to use the net proceeds received by it from the offering to
redeem all of the outstanding shares of preferred stock at an aggregate
redemption price of approximately $125 million, assuming that the preferred
stock is redeemed on or about March 15, 2000.
PCA estimates that it will make approximately $135 million in capital
expenditures in 2000. These expenditures will be used primarily for cost
reduction, business growth, maintenance and environmental compliance.
In August 1999, PCA signed purchase and sales agreements with various buyers
to sell 405,000 acres of its 800,000 acres of owned timberland. PCA completed
these sales in the fourth quarter of 1999 and received total proceeds of $263
million. These proceeds were used to pay down debt.
In addition, PCA is permitted under the terms of the senior credit facility
and the indenture governing the notes to use net proceeds in excess of
$500.0 million, if any, to redeem up to
45
<PAGE>
$100.0 million of the notes, or to pay a dividend on or repurchase its equity
interests. Under the terms of the notes indenture, PCA may use the net proceeds
of a timberland sale to redeem not more than 35% of the aggregate principal
amount of notes issued and outstanding under the notes indenture, excluding
notes held by PCA and its subsidiaries. PCA must make the redemption within
60 days of the timberland sale and must pay a redemption price equal to 109.625%
of the principal amount of notes to be redeemed plus accrued and unpaid interest
and liquidated damages, if any, to the date of redemption.
PCA may only use the net proceeds of a timberland sale to pay a dividend or
repurchase its equity interests if PCA's debt to cash flow ratio at the time of
payment or repurchase, after giving effect to the payment or repurchase, the
application of the proceeds of the timberland sale, and any increase in fiber,
stumpage or similar costs as a result of the timberland sale, would be no
greater than 4.5 to 1 and PCA's debt and preferred stock to cash flow ratio no
greater than 5.0 to 1. The senior credit facility imposes similar restrictions
on the ability of PCA to use the net proceeds of a timberland sale to make these
payments or repurchases.
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. There can be no assurance, however,
that PCA's business will generate sufficient cash flow from operations or that
future borrowings will be available under the senior credit facility or
otherwise to enable it to service its indebtedness, including the senior credit
facility and the notes, to retire or redeem the notes when required or to make
anticipated capital expenditures. 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.
See "Risk Factors."
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 United States Environmental Protection Agency 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.
46
<PAGE>
YEAR 2000 ISSUE
YEAR 2000 ISSUE. Year 2000 issues address the ability of electronic
processing equipment to process date sensitive information and recognize the
last two digits of a date as occurring in or after the year 2000. Many of our
computer software and hardware systems, and some of our non-information
technology infrastructure and manufacturing equipment, that utilize
date-sensitive data, were structured to use a two-digit data field. As a result,
these IT and non-IT systems would not, as originally structured, be able to
properly recognize dates in or after the Year 2000. We believe we have completed
the remediation or replacement of critical IT and non-IT systems, and as of
January 18, 2000, Year 2000 issues have not had and are not expected to have a
material adverse effect on our results of operations.
YEAR 2000 PROGRAM. Our predecessor, Pactiv, created a Year 2000 management
team in June of 1998 to address the Year 2000 issue. The Year 2000 program,
started by Pactiv and continued by PCA, involved three primary phases:
- identifying and testing all information technology systems and all
non-information technology infrastructure and equipment that have a
potential Year 2000 issue;
- remediating or replacing all non-compliant systems and equipment; and
- testing all remediated or replaced systems and equipment.
In addition, our Year 2000 efforts have involved assessing and monitoring
the Year 2000 readiness of our major suppliers and vendors, responding to
customer inquiries regarding our state of readiness, tracking Year 2000 related
expenditures and developing contingency or continuity plans.
STATE OF READINESS. PCA has completed all phases of its Year 2000 program.
As of January 18, 2000 all critical functions were operating in the Year 2000
with no apparent Year 2000 issues. None of PCA's products are date-sensitive. In
addition, we have reasonable assurance that as an outcome of our
testing/certification process, we will continue to remain in normal "operations
and maintenance" mode with no Year 2000 issues materially affecting our
business.
In addition, we have developed and implemented a standard purchasing,
accounts payable and maintenance tracking system for our mills. In conjunction
with our Year 2000 project we have also implemented new order entry, corrugator
scheduling, converting scheduling, shop floor manufacturing, shipping, inventory
management and invoicing systems as part of an overall modernization project for
our corrugated products plants.
YEAR 2000 COSTS. As of December 31, 1999, we incurred costs of
approximately $4.5 million to address Year 2000 issues. We do not expect to
incur any significant additional costs to address Year 2000 issues. We have
expensed these costs as they have been incurred, except in instances where we
determined that replacing existing computer systems or equipment was more
effective and efficient, particularly where additional functionality was
available.
YEAR 2000 RISKS. At this time, we believe we have resolved all material
Year 2000 issues. However, it is possible that latent Year 2000 issues could
arise in the future. If this happens, we will implement our contingency plans in
an effort to minimize the impact of the problem.
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.
47
<PAGE>
MARKET RISK AND RISK MANAGEMENT POLICIES
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.
On March 5, 1999, PCA entered into an interest rate protection agreement
with J.P. Morgan Securities Inc. to lock in then current interest rates on
10-year U.S. Treasury notes. PCA entered into this agreement to protect it
against increases in the 10-year U.S. Treasury note rate, which served as a
reference in determining the interest rate applicable to the notes, which have a
comparable term. The agreement has a notional amount of $450.0 million and a
10-year U.S. Treasury note reference rate of 5.41%. As a result of a decrease in
the interest rate on 10-year U.S. Treasury notes, PCA was obligated to make a
single payment of approximately $8.4 million to J.P. Morgan Securities Inc. upon
settlement of the agreement which was made on the date of the closing of the
notes offering.
Under the terms of the senior credit facility, PCA is 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 facility.
As a result, PCA has entered into three interest rate collar agreements
which protect against rising interest rates and simultaneously guarantee a
minimum interest rate. The notional amount of these collars was $720 million. As
PCA has made debt prepayments, the required notional amount of these collars has
continued to decrease. Accordingly, on November 30, 1999 PCA sold an interest
rate collar which reduced the notional amount of the remaining two collars to
$510 million. The weighted average floor of the interest rate collar agreements
is 4.96% and the weighted average ceiling of the interest rate collar agreements
is 6.75%. The interest rate on approximately 65% of PCA's term loan obligations
at December 31, 1999 are capped. PCA receives payments under the collar
agreements if the LIBOR rate exceeds the ceiling. Correspondingly, PCA makes
payments under the collar agreements if the LIBOR rate goes below the floor. In
both cases, the amount received or paid is based on the notional amount and the
difference between the actual LIBOR rate and the ceiling or floor rate. The
weighted average duration of the interest rate collar agreements is
approximately three and one half years.
PCA's earnings are affected by changes in short-term interest rates as a
result of borrowings under the term loans. If LIBOR interest rates for these
borrowings increase one percent, PCA's interest expense would increase, and
income before income taxes would decrease, by approximately $7.8 million
annually until the LIBOR rate exceeds the ceiling rate. At that point, only 35%
of the debt would result in additional interest rate expense. As of
December 31, 1999, the interest rate on the term loans was based on a weighted
average LIBOR rate of 5.9%. The effect of the interest rate change to the fair
market value of the outstanding debt is insignificant. This analysis does not
consider any other impacts 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.
NEW ACCOUNTING STANDARDS
For a description of changes in accounting principles affecting PCA, see
Note 2 to the Group's audited combined financial statements included elsewhere
in this prospectus. None of the new accounting standards required to be adopted
on January 1, 1999 had any material impact on the Group's or PCA's results of
operations. In addition, management does not expect that new accounting
standards currently pending will materially impact PCA's operating results.
48
<PAGE>
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 1999-2000 North American Fact Book. With 1999 net sales of $1.7 billion,
PCA produced 2.2 million tons of containerboard and shipped about 27 billion
square feet of corrugated products.
In 1999, we produced over 1.4 million tons of kraft linerboard at our mills
located in Counce, Tennessee and Valdosta, Georgia. We also produced 800,000
tons of semi-chemical medium at our mills located in Tomahawk, Wisconsin and
Filer City, Michigan. About 15% of our 1999 total fiber requirements were met
with wood from our owned or leased timberland, which are generally located
within 100 miles of our mills.
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.
INDUSTRY OVERVIEW
CORRUGATED CONTAINERS
According to the Fibre Box Association, the value of industry shipments of
corrugated containers was over $20 billion in 1998. According to this source,
corrugated container volume has grown at a compound annual rate of 3.1% since
1975. Demand for corrugated containers has increased in all but four years
during this 23-year period. At no time during this period did demand for
corrugated containers decrease in consecutive years.
Most converting plants are either corrugator plants or sheet plants. There
are approximately 612 corrugator plants in the United States. Corrugater plants
have equipment on-site that flutes the medium and combines it with linerboard to
create corrugated sheets. These sheets are then converted into corrugated
containers on-site.
There are approximately 860 sheet plants in the United States. Sheet plants
purchase corrugated sheets from corrugator plants and convert these sheets into
finished corrugated containers. According to the Fibre Box Association,
corrugator plants account for 84% of the industry's corrugated container
shipments, while sheet plants contribute the remaining 16%.
The primary end-use markets for corrugated containers are shown below:
<TABLE>
<S> <C>
Food, beverages and agricultural products................... 39.2%
Paper and fiber products.................................... 22.6%
Petroleum, plastic, synthetic and rubber products........... 10.3%
Glass, pottery, fabricated metal and metal containers....... 6.8%
Electrical and electronic machinery and appliances.......... 3.7%
</TABLE>
High-volume, national account customers typically seek suppliers with
multiple plant locations that can provide broad geographic coverage, an array of
manufacturing capabilities and flexibility to provide products in critical
situations. Local accounts tend to place a greater emphasis on local sales and
customer service support, quick order turnaround and specialized services. All
types of customers value price, quality and dependability.
49
<PAGE>
Corrugated containers are generally delivered by truck. Compared to many
other products, the amount of corrugated containers that can fit into a
truckload weighs much less. This, coupled with the relatively low price per ton
of corrugated containers, 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. Most converters serve
markets within a 150-mile radius of their plants and employ a locally based
sales force to solicit accounts in that market area.
The corrugated products industry is highly fragmented, with an estimated 702
companies in the United States. The top five U.S. integrated corrugated
manufacturers produce approximately 65% of total U.S. industry production.
Integrated producers accounted for approximately three-quarters of total
corrugated container shipments.
CONTAINERBOARD
Containerboard, which includes both linerboard and corrugating medium, is
the principal raw material used to manufacture corrugated containers. Linerboard
is used as the inner and outer facings, or liners, of a corrugated container.
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 containers.
Containerboard may be manufactured from both softwood and hardwood fibers,
as well as from recycled fibers from used corrugated containers and waste
clippings from corrugated converting operations. Kraft linerboard is made
predominantly from softwoods like pine. Semi-chemical 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. 42 lb. linerboard
is the most common weight, but linerboard is produced in weights that vary from
under 26 lb. to over 90 lb. The number represents the weight in pounds per
thousand square feet of that linerboard. Producers also market linerboard by
performance characteristics, appearance and color. The following table describes
different product weight, performance and color characteristics:
<TABLE>
<CAPTION>
CATEGORY PRODUCTS DESCRIPTION
- -------- -------- -----------
<S> <C> <C>
Weights (lb./1,000 sq. ft.)....... 26 - 38 lb. Lightweights
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
</TABLE>
50
<PAGE>
The market demand for high performance grades, lightweights and white
linerboard continue to grow at a faster rate because customers are seeking
better strength characteristics at a lower cost as well as improved appearance.
Recycled linerboard production has also grown rapidly in recent years due to
favorable economics, customer demand for recycled packaging, and improved
quality and performance characteristics. Recycled linerboard accounted for
approximately 17% of total U.S. linerboard estimated production in 1999. A
recycled linerboard mill is typically smaller and less capital-intensive than
kraft linerboard mills. These mills are likely to be located near a major urban
area where the supply of recycled material is abundant and converter operations
are more geographically concentrated.
U.S. linerboard producers export nearly 20% of their production. The top
three markets are Europe, Asia and Latin America, which together consumed about
90% of the U.S. linerboard exports during 1998. Linerboard exports have grown at
an average rate of 6% a year during the last 15 years, reaching a record
4.6 million tons in 1997. Due to the strong U.S. dollar and weak Asian markets,
exports of linerboard were significantly lower in 1998 at 3.7 million tons. The
market for exported medium is considerably smaller than for linerboard. About
2.5% of the corrugating medium produced in the United States is exported.
Despite recent consolidation activity, the containerboard industry remains
relatively fragmented, with the top five producers accounting for 57% of
production capacity and the top ten accounting for 76%.
Containerboard is a commodity-like product whose price tends to be highly
cyclical. Historically, pricing for containerboard has reflected changes in
containerboard supply that resulted from capacity additions and reductions, as
well as changes in inventory levels and demand. The supply/demand balance
improved throughout 1999 and the average price of linerboard increased about 25%
during 1999. In 1999, several major containerboard manufacturers announced
production curtailments and mill shutdowns. These reductions represent nearly
2 million tons or 5% of North American capacity. Only minimal capacity additions
have been publicly announced through 2002 according to the American Forest &
Paper Association.
BUSINESS STRATEGY
Our on-going operating strategy focuses on three elements:
- Building upon our low cost mill status and continuing to reduce
manufacturing costs in our containerboard mills;
- Focusing our sales and marketing efforts for corrugated containers on
value-added, higher margin products and customers; and
- Emphasizing investment and growth in our corrugated container operations
to further increase our level of integration.
COMPETITIVE STRENGTHS
- LOW-COST PRODUCER. Based on two studies performed in 1998 by
Jacobs-Sirrine, an industry consulting firm, PCA's two largest containerboard
mills were ranked in the lowest quartile for cash manufacturing costs in the
industry. One of these studies was a single-client study that we paid
Jacobs-Sirrine to perform in February 1998. The other was a multi-client study
issued by Jacobs-Sirrine in the fourth quarter of 1998 that was available for
purchase by the general public. The Counce and Tomahawk mills represent
two-thirds of PCA's production capacity. Counce produces linerboard and Tomahawk
makes semi-chemical medium. The industry uses cash
51
<PAGE>
manufacturing cost per ton as a measure of operating cost effectiveness for
containerboard mill production. Cash manufacturing costs are the out-of-pocket
costs associated with producing containerboard, which include costs for fiber,
chemicals, energy, other materials and consumables, hourly labor and salaried
supervision.
Valdosta, our second kraft linerboard mill, uses only virgin fiber. In
February 1998, Jacobs-Sirrine also ranked it as a low cost, or first quartile,
mill. In the fourth quarter 1998 study, Valdosta's ranking fell to below average
cost, or third quartile. This was due primarily to a decline in recycled fiber
prices. This decline improved the relative cost position of recycled mills.
Recycled fiber costs have increased recently to nearly the same level as in
February 1998. This recycled fiber cost increase has improved Valdosta's cost
position, returning it to the lowest cost quartile.
Filer City, our smallest mill, produces semi-chemical medium. Filer City
ranks as an average cost mill in both of the Jacobs-Sirrine studies.
Fiber represents the single largest cost element in manufacturing
containerboard. Our mills are located near abundant supplies of wood fiber.
Additionally, our ability to vary the percentage of softwood, hardwood and
recycled fiber enables us to react to changes in fiber prices and minimize fiber
costs. Overall, our fiber costs are among the lowest in the industry.
In recent years, we have also made significant productivity and efficiency
gains. These include labor savings, higher machine speeds, reduced waste and
lower chemical and energy costs.
- INTEGRATED OPERATIONS. Our level of containerboard integration with our
converting facilities is approximately 80%. This high level of integration
provides a stable and predictable demand for our containerboard mill production.
The remaining 20% of production is sold externally, with about two-thirds going
to domestic corrugated converters and one-third to the export market. According
to Pulp & Paper Week, during the period of 1995 to 1998, industry containerboard
prices declined by 31% while our average corrugated box price fell by only 11%.
The relative earnings stability of our converting plants acts to somewhat offset
the more cyclical earnings of our mills. Containerboard pricing behaves much as
a commodity and is highly dependent on the relative balance of containerboard
supply and demand. Corrugated container demand has been fairly stable over the
past 20 years and tracks general economic growth as measured by Gross Domestic
Product and industrial production.
- DIVERSIFIED CUSTOMER BASE. Our broad customer base enables us to minimize
our dependence on any one industry, geography or individual customer. We have
focused our sales efforts on smaller, local accounts, which usually demand more
customized products and services than higher volume national accounts.
Approximately 75% of our current revenues are derived from local accounts.
- FOCUS ON VALUE-ADDED PRODUCTS AND SERVICES. We have pursued a strategy of
providing our customers with value-added products, enhanced graphics and
superior customer service. Since 1995, we have acquired nine converting
facilities. Four of these acquisitions significantly increased our graphics
capabilities, while five sheet plant acquisitions improved our ability to
provide shorter production runs and faster turnaround times in those markets. We
have also established five geographically dispersed graphics design centers that
use sophisticated computer design software to create visually appealing
customized boxes. Our close proximity to our customers, our broad geographic
coverage and our ability to provide value-added products and services has
consistently resulted in a higher selling price than the industry average.
52
<PAGE>
OPERATIONS AND PRODUCTS
MILLS
Our two linerboard mills can manufacture a broad range of linerboard grades
ranging from 26 lb. to 96 lb. Our two semi-chemical 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 five largest linerboard
mills in the United States out of approximately 70 linerboard mills. Its
production capacity is approximately 1,003,000 tons per year. In 1999, we
produced approximately 948,800 tons of kraft linerboard on two paper machines at
Counce. We produced a broad range of basis weights from 31 lb. to 96 lb. Our
Counce mill machines also produce a variety of performance and specialty grades
of linerboard including high-ring crush and wet strength. In 1998 we developed
the capability to produce linerboard grades with a mottled white printing
surface. Mottled white has a marble-like coloration and is typically priced from
$130 to $175 per ton higher than kraft linerboard, but is more expensive to
produce.
VALDOSTA. Our Valdosta, Georgia mill is a kraft linerboard mill and has a
production capacity of approximately 457,000 tons per year. In 1999, our single
paper machine at Valdosta produced approximately 433,800 tons of linerboard.
Valdosta primarily produces middleweight linerboard ranging from 42 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 medium mill in
the United States out of 69 medium mills. Its production capacity is 548,000
tons per year. In 1999, we produced approximately 525,300 tons of semi-chemical
medium at Tomahawk using three paper machines, one of which is the third largest
corrugated medium machine in the United States. 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 semi-chemical medium. This
includes high ring crush, wet strength, tare weight and super heavyweight.
FILER CITY. Our Filer City, Michigan mill is a semi-chemical medium
operation. In 1999, Filer City produced approximately 272,100 tons of medium on
two paper machines. 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 medium grades in basis weights
from 21 lb. to 40 lb.
CORRUGATED PRODUCTS
We operate 39 corrugator plants, 28 sheet/specialty plants and five graphic
design centers. The 39 corrugator plants have a corrugator on site and
manufacture both combined sheets and finished boxes. Twenty-six sheet plants
purchase combined sheets and create finished boxes. 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
boxes. Customers are increasingly using special in-store corrugated displays to
market their products and are requiring more intricate packaging designs. In
response, 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.
53
<PAGE>
Our converting locations 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 corrugating
facilities which enables us to offer additional services and converting
capabilities such as small volume, 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 own, lease, manage or have cutting rights to approximately
540,000 acres of timberland located near our Counce, Valdosta and Tomahawk
mills. The acreage we control includes 390,000 acres of owned land and another
150,000 acres of long term leases. Virtually all of these leases have terms over
20 years.
Over 95% of our owned or leased timberland is located within 100 miles of
our mills, which results in lower wood transportation costs and provides a
secure source of wood fiber. After giving effect to the timberland sold in 1999,
approximately 15% of our total fiber requirements were supplied by wood from
timberland owned or leased by us.
In addition to the timberland we manage ourselves, we have initiated a
Forest Management Assistance Program. Through this program we provide
professional forestry assistance to private timberland owners to improve harvest
yields and to optimize their harvest schedule. We have managed the regeneration
of over 97,000 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.
We also participate 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, and participating in flora and fauna research and protecting water
streams.
We believe that the wood supplies near our Valdosta, Filer City and Tomahawk
mills are very good and will remain so for the foreseeable future. We do not own
or lease any timberland near our Filer City mill, and as a result of our recent
sale of 405,000 acres of timberland, we do not own or lease any timberland near
our Tomahawk mill and we own or lease significantly less timberland near our
Valdosta mill. We have entered into supply agreements covering 329,000 acres of
the 405,000 acres of timberland sold near our Tomahawk and Valdosta mills. We
currently believe that we will be able to purchase our wood requirements at
competitive prices. At Counce, where pine is in shorter supply, we would
consider selling a significant portion of our timberland if we could obtain a
competitively priced, long-term supply agreement from the buyer.
SOLID WOOD AND RECYCLING FACILITIES
We own three sawmills located in Ackerman, Mississippi; Selmer, Tennessee;
and Fulton, Mississippi. These three sawmills produce approximately 155 million
board feet annually 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 that provides us with wood chips for use at
our Counce Mill. The solid wood products group enables us to maximize the value
of our timber through lumber sales, when appropriate, and also provides us with
a supply of wood chips.
54
<PAGE>
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 and provide a source of recycled fiber to
our nearby Counce mill.
PERSONNEL
An on-site mill manager oversees each of our mills. The mill manager's
operating staff includes personnel who support mill operations and woodlands, as
well as support groups for scheduling and shipping, technical services and
process control, maintenance and reliability, and engineering and technology.
Our administrative support groups include accounting, information systems,
payroll and human resources. All of the groups mentioned above report to each
respective mill manager. Headquarters corporate support, located in Lake Forest,
Illinois includes the containerboard sales group and the production scheduling
group, which processes customer orders. We also maintain a 13-member corporate
mill engineering staff that provides engineering, procurement, construction and
start-up services for the four mills.
Each of our converting plants is managed by a team, which usually includes a
general manager, a sales manager, a production manager, a controller and a
customer service manager. We also have a centralized technical support group
comprised of 14 packaging engineers and technicians. This group provides
services to our 67 converting facilities that include testing, engineering,
manufacturing and technical support. Our technical support group also works with
our customers on location to assure that our customers' quality and performance
standards are consistently met. Our converting plants are grouped into seven
geographic areas. Plants in each area report to an area general manager.
SALES AND MARKETING
Our containerboard sales group is responsible for the sale of linerboard and
corrugating medium to our own corrugating 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 converting plants. These
personnel also coordinate and execute all containerboard trade agreements with
other containerboard manufacturers.
Our corrugated products are sold through a direct sales and marketing
organization of approximately 350 sales personnel. Sales representatives and a
sales manager at each manufacturing 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.
In addition to the 350 direct sales and marketing personnel, we have almost
100 support personnel that are new product development engineers and product
graphics and design specialists. These individuals are located at both the
corrugating facilities as well as the graphic design centers.
DISTRIBUTION
Finished goods produced in our mills are shipped by rail or truck. Our
individual mills do not own or maintain outside warehousing facilities. We do
use several third-party warehouses for short-term storage.
Our corrugated containers 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
55
<PAGE>
total costs due to the high bulk and relatively low value of corrugated
containers. As a result, our converting plants typically service customers
within a 150 miles radius.
CUSTOMERS
CONTAINERBOARD. Our converting plants, either directly or through exchange
agreements, consume more than three-quarters of our mills' containerboard
production. These exchanges, or trades, allow us to swap containerboard produced
in our mills for containerboard manufactured at other companies' locations.
Trades, which are common in the industry, reduce the distance the rolls of
containerboard have to be shipped, and, in turn, overall freight costs. Trades
also encourage more efficient production for the industry, since companies can
trade for containerboard grades they cannot manufacture as efficiently on their
own equipment.
The containerboard that we do not consume directly or through trades is sold
to independent domestic converters and export customers. We also sell
containerboard to manufacturers of fiber drums, air bags, protective packaging
and other specialty products.
CORRUGATED PACKAGING. About three-quarters of our corrugated packaging
customers are regional and local accounts, and they are broadly diversified
across industries and geographic locations. Based on an internal customer survey
conducted in 1998, we estimate that nearly 40% of our customers have purchased
from us for over five years. Our top ten corrugated products customers accounted
for about 20% of our 1999 gross revenues and no single customer represented over
6% of our gross revenues.
RAW MATERIALS
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, all of
our 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
byproducts 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
60% to 70% of their energy requirements from their own byproducts. Presently,
50% of our electricity consumption for the four mills is generated on-site.
COMPETITION
CONTAINERBOARD. Containerboard is generally considered a commodity-type
product and can be purchased from numerous suppliers. While the containerboard
industry has been consolidating over the last two decades, it is still
relatively fragmented compared with other basic manufacturing industries such as
steel, automotive, commodity chemicals and petroleum. Approximately 59 companies
currently produce containerboard and the top five represent 57% of total
industry shipments. As a result, no single company has a dominant position in
the industry. PCA's primary competition for our external sales of containerboard
are a number of large, diversified paper companies, including Georgia-Pacific
Corporation, International Paper Company, Smurfit-Stone
56
<PAGE>
Container Corporation, Temple-Inland Inc., Weyerhaeuser Company and Willamette
Industries, Inc., as well as other regional manufacturers.
CORRUGATED CONTAINERS. Corrugated containers are produced by more than 715
U.S. companies operating nearly 1,500 plants. While the capability to make
corrugated containers are offered by these hundreds of companies, very few boxes
are produced as standard, or stock, items. Most corrugated containers are custom
manufactured to the customer's specifications for that container. Finished
containers are shipped to the customer flat, to be assembled for filling at the
customer's operation. Corrugated producers generally sell within a 150-mile
radius of their plants and compete with other corrugated facilities 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 users of boxes who purchase for all their user facilities on a
consolidated basis. These customers are often referred to as national or
corporate accounts. Typically, prices charged to national accounts reflect the
benefit to the corrugated manufacturer of the volume and scale economies these
large accounts bring.
Corrugated container 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.
EMPLOYEES
As of December 31, 1999, we had approximately 7,800 employees. Approximately
2,100 of these employees were salaried and approximately 5,700 were hourly.
Approximately 75% of our hourly employees are represented by unions. Our
unionized employees are represented primarily by the Paper, Allied Industrial,
Chemical, Energy Workers International Union, the Graphic Communications
International Union and the United Steel Workers of America.
Contracts for our unionized mill employees expire between October 2000 and
September 2003. Contracts for unionized converting plant employees expire
between February 2000 and November 2005. 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
57
<PAGE>
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 finalized
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. Our current spending projections to complete Cluster Rule compliance
implementation at our four mills is about $48 million from 2000 to 2005. From
1997 through 1999, we spent approximately $7 million on Cluster Rule compliance.
Total capital costs for environmental matters, including Cluster Rule
compliance, was $11 million for 1999 and we currently estimate that they will be
$26 million for 2000.
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 1999, remediation costs at our mills and
converting plants totaled about $2.5 million. We do not believe that any
on-going remedial projects are material in nature. As of December 31, 1999, we
maintained a reserve of $133,000 for environmental remediation liability as well
as a general overall environmental reserve of $3,555,407, 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 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 waste disposal. Pactiv also
retained environmental liability for a closed landfill located near the Filer
City mill.
PROPERTIES
MILLS. The table below provides a summary of our containerboard mills, the
principal products produced, each mill's capacity and their capacity
utilization.
<TABLE>
<CAPTION>
LOCATION FUNCTION CAPACITY UTILIZATION (%)*
- -------- -------- -------- ----------------
<S> <C> <C> <C>
Counce, TN......................... Kraft 1,003,000 95%
linerboard mill
Filer City, MI..................... Semi-chemical 367,000 74%**
medium mill
Tomahawk, WI....................... Semi-chemical 548,000 96%
medium mill
Valdosta, GA....................... Kraft 457,000 95%
linerboard mill
---------
Total.......................... 2,375,000
=========
</TABLE>
- --------------
* UTILIZATION IS DEFINED AS 1999 TONS PRODUCED DIVIDED BY ANNUAL CAPACITY.
** WE OPERATED ONLY TWO OF OUR THREE PAPER MACHINES AT FILER CITY IN 1999.
58
<PAGE>
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.
OTHER FACILITIES. In addition to our mills, we own 37 corrugator plants and
seven specialty 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 two corrugator plants,
21 sheet specialty 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.
TIMBERLAND. We own or lease approximately 540,000 acres of timberland as
shown below:
<TABLE>
<CAPTION>
OWN LEASE TOTAL
--- ----- -----
<S> <C> <C> <C>
Counce, TN..................................... 300,000 56,000 356,000
Tomahawk, WI................................... 1,000 -- 1,000
Valdosta, GA................................... 89,000 94,000 183,000
------- ------- -------
Total Acres.................................. 390,000 150,000 540,000
======= ======= =======
</TABLE>
All of our owned timberland is subject to a mortgage held by Morgan Guaranty
Trust Company of New York on behalf of the lenders under the senior credit
facility. Lease agreements are generally for 35 to 66 years and offer fiber
harvest rights on the leased properties.
HEADQUARTERS. We currently lease our executive and administrative offices
in Lake Forest, Illinois from Pactiv under a lease expiring in April 2003.
We currently believe that our facilities and properties are sufficient to
meet our operating requirements for the foreseeable future.
LEGAL PROCEEDINGS
In May 1999, we were served with a complaint filed in the United States
District Court for the Eastern District of Pennsylvania (WINOFF INDUSTRIES, INC.
V. STONE CONTAINER CORPORATION, ET AL.) alleging civil violations of Section 1
of the Sherman Act in connection with the pricing and production of linerboard
from October 1, 1993 through November 30, 1995. Plaintiffs purport to represent
a nationwide class of purchasers of corrugated containers, and the complaint
names ten major linerboard manufacturers as defendants. The complaint seeks
treble damages for allegedly unlawful corrugated container price increases, plus
attorneys' fees. We believe the allegations have no merit, are vigorously
defending ourselves, and believe the outcome of this litigation should not 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.
59
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of the persons who are the directors and
executive officers of PCA are provided below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Paul T. Stecko................ 55 Chairman of the Board and Chief Executive Officer
William J. Sweeney............ 59 Executive Vice President--Corrugated Products
Richard B. West............... 47 Chief Financial Officer, Vice President and Secretary
Mark W. Kowlzan............... 44 Vice President--Containerboard/Wood Products
Andrea L. Davey............... 43 Vice President--Human Resources
Dana G. Mead.................. 63 Director
Theodore R. Tetzlaff.......... 55 Director
Samuel M. Mencoff............. 43 Director and Vice President
Justin S. Huscher............. 46 Director and Assistant Secretary
Thomas S. Souleles............ 31 Director and Assistant Secretary
</TABLE>
PAUL T. STECKO has served as Chief Executive Officer of PCA since January
1999 and as Chairman of the Board of PCA since March 1999. From November 1998 to
April 1999, Mr. Stecko served as President and Chief Operating Officer of
Tenneco, now known as Tenneco Automotive. 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, now known as Pactiv. Prior to joining Tenneco, Mr. Stecko
spent 16 years with International Paper Company. Mr. Stecko is a member of the
board of directors of Pactiv, Tenneco Automotive, State Farm Mutual Insurance
Company and American Forest and Paper Association.
WILLIAM J. SWEENEY 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,
now known as Pactiv. 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.
RICHARD B. WEST has served as Chief Financial Officer of PCA since March
1999, as 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 from 1995 to April 1999. Prior to joining Tenneco, 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.
MARK W. KOWLZAN has served as Vice President--Containerboard/Wood Products
of PCA since April 1999. From 1998 to April 1999, Tenneco employed Mr. Kowlzan
as Vice President and General Manager--Containerboard/Wood Products and from
May 1996 to 1998, as Operations Manager and Mill Manager of the Counce mill.
Prior to joining Tenneco, Mr. Kowlzan spent 15 years at International Paper
Company, where he held a series of operational positions within its mill
organization.
ANDREA L. DAVEY has served as Vice President--Human Resources of PCA since
April 1999. From 1994 to April 1999, Ms. Davey was employed principally by
Tenneco where she held the positions of Director of Field Employee Relations,
Director of Training and Development, Director of
60
<PAGE>
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 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.
DANA G. MEAD has served as a director of PCA since March 1999. Mr. Mead is
also non-executive Chairman of Tenneco Automotive and Pactiv. Mr. Mead served as
a director and an executive officer of Tenneco since April 1992, when he joined
Tenneco as Chief Operating Officer. Prior to joining Tenneco, Mr. Mead served as
an Executive Vice President of International Paper Company from 1988 and served
as a Senior Vice President of that company from 1981. He is also a director of
Textron, Inc., Zurich Allied AG and Pfizer Inc.
THEODORE R. TETZLAFF has served as a director of PCA since March 1999.
Mr. Tetzlaff has been a Partner in the law firm of Jenner & Block, Chicago,
since 1976 and Chairman of its Executive Committee and Operations & Finance
Committee since July 1997. Mr. Tetzlaff served as General Counsel of Tenneco
from June 1992 to November 1999. Mr. Tetzlaff has served as a director of Case
Corp. since 1994. He was formerly Vice President, Legal and External Affairs, of
Cummins Engine Company, Inc. from 1980 to 1982. Mr. Tetzlaff is also a director
of Continental Materials Corp. and a Commissioner of the Public Buildings
Commission of Chicago.
SAMUEL M. MENCOFF has served as a director and Vice President of PCA since
January 1999. Mr. Mencoff has been employed principally by Madison Dearborn
Partners, Inc. since 1993 and currently serves as a Managing Director. From 1987
until 1993, Mr. Mencoff served as Vice President of First Chicago Venture
Capital. Mr. Mencoff is a member of the operating committee of the general
partner of Golden Oak Mining Company, L.P. and a member of the board of
directors of Bay State Paper Holding Company, Buckeye Technologies, Inc. and
Riverwood Holding, Inc.
JUSTIN S. HUSCHER has served as a director of PCA since March 1999 and also
as an Assistant Secretary of PCA since April 1999. Mr. Huscher has been employed
principally by Madison Dearborn Partners, Inc. since 1993 and currently serves
as a Managing Director. From 1990 until 1993, Mr. Huscher served as Senior
Investment Manager of First Chicago Venture Capital. Mr. Huscher is a member of
the operating committee of the general partner of Golden Oak Mining Company,
L.P. and a member of the board of directors of Bay State Paper Holding Company.
THOMAS S. SOULELES has served as a director of PCA since March 1999 and also
as an Assistant Secretary of PCA since April 1999. From January 1999 to
April 1999, Mr. Souleles served as a Vice President and Secretary of PCA.
Mr. Souleles has been employed principally by Madison Dearborn Partners, Inc.
since 1995 and currently serves as a Director. Prior to joining Madison Dearborn
Partners, Inc., Mr. Souleles attended Harvard Law School and Harvard Graduate
School of Business Administration where he received a J.D. and an M.B.A.
Mr. Souleles is a member of the board of directors of Bay State Paper Holding
Company.
Each director of PCA listed above was elected under the terms of a
stockholders agreement among Pactiv, PCA and PCA Holdings that was entered into
in connection with the transactions. Upon completion of the offering, the voting
provisions of the stockholders agreement will terminate. See "Certain
Relationships and Related Transactions--Stockholders Agreement." PCA anticipates
that Dana G. Mead and Theodore R. Tetzlaff will resign upon completion of the
offering and that two directors not otherwise affiliated with PCA or any of its
stockholders will be elected by the board of directors following completion of
the offering. PCA expects to hold its 2000 annual meeting of stockholders prior
to completion of the offering to elect directors, to ratify the appointment of
Ernst & Young LLP as PCA's independent public accountants for the year ended
December 31, 2000 and to transact such other business as may properly come
before the meeting. PCA anticipates that the nominees for directors at the
annual meeting will be the six current directors of PCA.
61
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
None of the executive officers of PCA received compensation from PCA prior
to the closing of the transactions on April 12, 1999. Before the closing of the
transactions, PCA's chief executive officer and its four other most highly
compensated executive officers, Mr. Stecko, Mr. Sweeney, Mr. West, Mr. Kowlzan
and Ms. Davey, were employed by, and received compensation from, Tenneco or its
affiliates.
Under the terms of letter agreements entered into with Mr. Stecko on
January 25, 1999 and May 19, 1999, PCA pays Mr. Stecko a base salary of $600,000
per annum, subject to increases approved by the Board, and has agreed to pay
Mr. Stecko an annual bonus of not less than $500,000 with respect to each of the
fiscal years 1999, 2000 and 2001, and an annual perquisite allowance of not less
than $60,000 payable in cash. In addition, PCA paid Mr. Stecko a signing bonus
payment of $1 million, the net proceeds of which, under the terms of the letter
agreements, were invested in common stock of PCA. If PCA terminates Mr. Stecko
without cause, he is entitled to receive an amount equal to three times the sum
of his base salary plus the amount of the highest annual bonus paid to him
during the previous three year period.
Under the terms of a memorandum from PCA to Mr. Sweeney, dated April 16,
1999, PCA agreed to pay Mr. Sweeney a bonus in the amount of $500,000 if either
PCA terminates Mr. Sweeney before April 12, 2002 for any reason other than for
cause or he is still employed by PCA on April 12, 2002. If Mr. Sweeney dies
before April 12, 2002, the bonus will be paid to his beneficiaries on a pro rata
basis. Mr. Sweeney agreed to use the after-tax proceeds of this bonus to pay off
the outstanding balance, if any, of the loan he received from Morgan Guaranty
Trust Company of New York to purchase equity of PCA during the June 1999
management equity issuance.
SUMMARY COMPENSATION TABLE. The following table sets forth compensation
information for the period from April 12, 1999 through December 31, 1999 for
PCA's chief executive officer and the four other most highly compensated
executive officers of PCA for the period ended December 31, 1999.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------ --------------
NAME AND OTHER ANNUAL OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED (#) COMPENSATION (4)
- ------------------------------ -------- --------- ------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Paul T. Stecko................ 1999(1) $434,545 $ --(2) $ 57,684 1,386,000 $1,008,289
Chief Executive Officer
William J. Sweeney............ 1999(1) 255,943 --(2) --(3) 587,400 39,914
Executive Vice President-
Corrugated Products
Richard B. West............... 1999(1) 143,142 --(2) --(3) 215,600 4,055
Chief Financial Officer,
Vice President and Secretary
Mark W. Kowlzan............... 1999(1) 140,941 --(2) --(3) 350,900 1,379
Vice President-
Containerboard/Wood Products
Andrea L. Davey............... 1999(1) 108,859 --(2) --(3) 140,580 9,795
Vice President-Human
Resources
</TABLE>
- ------------------
(1) Represents compensation paid by PCA from April 12, 1999, the date of the
closing of the transactions, through December 31, 1999.
(2) PCA did not pay annual bonuses during 1999 for the period from April 12,
1999 to December 31, 1999. Annual bonuses for this period will be determined
and paid in 2000.
(3) Mr. Sweeney, Mr. West, Mr. Kowlzan and Ms. Davey did not receive any
perquisites from PCA during 1999 for the period from April 12, 1999 to
December 31, 1999. Annual perquisite allowances for these individuals for
1999 were $30,000, $20,000, $20,000 and $12,000, respectively, and will be
paid in January 2000.
(4) Includes the dollar value of life insurance premiums paid by PCA on behalf
of the named executive officers, amounts contributed to supplemental
executive retirement accounts for the benefit of the named executive
officers and, in the case of Mr. Stecko, a $1 million signing bonus paid by
PCA.
62
<PAGE>
OPTION GRANT TABLE. The following table shows all grants of options to
acquire shares of PCA common stock made to the named executive officers under
the management equity agreements during 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES PERCENTAGE OF TOTAL APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM (2)
OPTIONS TO EMPLOYEES PRICE EXPIRATION --------------------------
NAME GRANTED (1) IN FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ------------ ------------------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Paul T. Stecko....... 1,386,000 21.1% $4.55 6/1/09 $3,965,998 $10,050,618
William J. Sweeney... 587,400 8.9 4.55 6/1/09 1,680,828 4,259,548
Richard B. West...... 215,600 3.3 4.55 6/1/09 616,933 1,563,429
Mark W. Kowlzan...... 350,900 5.3 4.55 6/1/09 1,004,090 2,544,561
Andrea L. Davey...... 140,580 2.1 4.55 6/1/09 402,266 1,019,420
</TABLE>
- --------------
(1) These options are not currently exercisable but will become exercisable upon
completion of the offering.
(2) Amounts reflect certain assumed rates of appreciation set forth in the
executive compensation disclosure rules of the SEC. Actual gains, if any, on
stock option exercises depend on future performance of PCA's common stock
and overall stock market conditions. No assurances can be made that the
amounts reflected in these columns will be achieved.
OPTION EXERCISES AND YEAR-END VALUE TABLE. The following table shows
aggregate exercises of options during 1999 by the named executive officers and
the aggregate value of unexercised options held by each named executive officer
as of December 31, 1999.
AGGREGATE OPTION EXERCISES IN LAST FISCAL
YEAR AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR END(1) AT YEAR END(1)(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul T. Stecko........ 0 0 0 1,386,000 0 $12,404,700
William J. Sweeney.... 0 0 0 587,400 0 5,257,230
Richard B. West....... 0 0 0 215,600 0 1,929,620
Mark W. Kowlzan....... 0 0 0 350,900 0 3,140,555
Andrea L. Davey....... 0 0 0 140,580 0 1,258,191
</TABLE>
- --------------
(1) These options were not exercisable at year end but will become exercisable
upon completion of the offering.
(2) Based on an assumed offering price of $13.50 per share.
COMPENSATION OF DIRECTORS
PCA does not currently compensate directors for serving as a director or on
committees of the board of directors or pay directors any fees for attendance at
meetings of the board, although PCA may elect to compensate directors in the
future using cash or equity. All directors are reimbursed for reasonable
out-of-pocket expenses incurred in connection with their attendance at board and
committee meetings.
63
<PAGE>
MANAGEMENT EQUITY AGREEMENTS
PCA entered into management equity agreements in June 1999 with 125 of its
management-level employees, including the named executive officers. Under these
agreements, PCA sold 3,132,800 shares of common stock to 113 of these employees
at approximately $4.55 per share, the same price per share at which PCA Holdings
purchased equity in the transactions. PCA guaranteed bank financing in the
amount of $5,200,000 in the aggregate to enable some of these members of PCA's
management to purchase equity under their respective management equity
agreements. The amount of bank financing guaranteed by PCA with respect to any
employee did not exceed 50% of the purchase price paid by the employee under his
or her management equity agreement. The capital stock purchased under the
management equity agreements is subject to vesting and is subject to repurchase
upon a termination of employment by PCA.
The management equity agreements also provide for the grant of options to
purchase up to an aggregate of 6,576,460 shares of PCA's common stock at the
same price per share at which PCA Holdings purchased common stock in the
transactions. These options will become exercisable upon completion of the
offering. The option shares are subject to contractual restrictions on transfer
for a period of up to 18 months following completion of the offering. All of the
options identified in the option grant table above were issued under the
management equity agreements.
LONG-TERM EQUITY INCENTIVE PLAN
PCA has adopted the Packaging Corporation of America 1999 Long-Term Equity
Incentive Plan. The equity incentive plan provides for grants of stock options,
stock appreciation rights, or SARs, restricted stock and performance awards.
Directors, officers and employees of PCA and its subsidiaries, as well as others
who engage in services for PCA, are eligible for grants under the plan. The
purpose of the equity incentive plan is to provide these individuals with
incentives to maximize stockholder value and otherwise contribute to the success
of PCA and to enable PCA to attract, retain and reward the best available
persons for positions of responsibility.
A total of 4,400,000 shares of our common stock, representing approximately
4% of our currently outstanding common stock on a fully-diluted basis, will be
available for issuance under the equity incentive plan, subject to adjustment in
the event of a reorganization, stock split, merger or similar change in the
corporate structure of PCA or the outstanding shares of common stock. These
shares may be, in whole or in part, authorized and unissued or held as treasury
shares.
The compensation committee of our board of directors will administer the
equity incentive plan. Our board also has the authority to administer the plan
and to take all actions that the compensation committee is otherwise authorized
to take under the plan. Grants will be awarded under the equity incentive plan
entirely in the discretion of the compensation committee. As a result, we are
unable to determine at this time the recipients, amounts and values of future
benefits to be received under the plan. We anticipate that in connection with
the offering, we will grant options to purchase an aggregate of approximately
350,000 shares of our common stock to approximately 175 employees. All of these
options will have an exercise price equal to the initial public offering price
of the common stock in the offering and will be subject to annual vesting over a
four-year period.
The following is a summary of the material terms of the equity incentive
plan, but does not include all of the provisions of the plan. For further
information about the plan, we refer you to the equity incentive plan, which we
have filed as an exhibit to the registration statement of which this prospectus
is a part.
64
<PAGE>
TERMS OF THE EQUITY INCENTIVE PLAN
ELIGIBILITY. Directors, officers and employees of PCA and its subsidiaries,
as well as other individuals performing significant services for us, or to whom
we have extended an offer of employment, will be eligible to receive grants
under the equity incentive plan. However, only employees may receive grants of
incentive stock options. In each case, the compensation committee will select
the actual grantees. As of December 31, 1999, there were approximately 350
employees expected to be eligible to participate in the equity incentive plan.
STOCK OPTIONS. Under the equity incentive plan, the compensation committee
may award grants of incentive stock options conforming to the provisions of
Section 422 of the Internal Revenue Code and other, non-qualified stock options.
The compensation committee may not, however, award to any one person in any
calendar year options to purchase common stock equal to more than 20% of the
total number of shares authorized under the plan. The compensation committee
also may not grant incentive stock options first exercisable in any calendar
year for shares of common stock with a fair market value greater than $100,000,
determined at the time of grant.
The compensation committee will determine the exercise price of any option
in its discretion. However, the exercise price of an incentive option may not be
less than 100% of the fair market value of a share of common stock on the date
of grant, and the exercise price of an incentive option awarded to a person who
owns stock constituting more than 10% of PCA's voting power may not be less than
110% of the fair market value on the date of grant.
Unless the compensation committee determines otherwise, the exercise price
of any option may be paid in any of the following ways:
- in cash,
- by delivery of shares of common stock with a fair market value equal to
the exercise price,
- by simultaneous sale through a broker of shares of common stock acquired
upon exercise, and/or
- by having PCA withhold shares of common stock otherwise issuable upon
exercise.
If a participant elects to deliver or withhold shares of common stock in
payment of any part of an option's exercise price, the compensation committee
may in its discretion grant the participant a "reload option." The reload option
entitles its holder to purchase a number of shares of common stock equal to the
number so delivered or withheld. The reload option may also include, if the
compensation committee chooses, the right to purchase a number of shares of
common stock equal to the number delivered or withheld in satisfaction of any of
PCA's tax withholding requirements in connection with the exercise of the
original option. The terms of each reload option will be the same as those of
the original exercised option, except that the grant date will be the date of
exercise of the original option, and the exercise price will generally be the
fair market value of the common stock on the date of grant of the reload option.
The compensation committee will determine the term of each option in its
discretion. However, no term may exceed ten years from the date of grant or, in
the case of an incentive stock option granted to a person who owns stock
constituting more than 10% of the voting power of PCA, five years from the date
of grant. In addition, all options under the equity incentive plan, whether or
not then exercisable, generally cease vesting when a grantee ceases to be a
director, officer or employee of, or to otherwise perform services for, PCA or
its subsidiaries. Options generally expire 90 days after the date of cessation
of service, provided that the grantee does not compete with PCA during this
90-day period.
65
<PAGE>
There are, however, exceptions depending upon the circumstances of
cessation. In the case of a grantee's death or disability, all options will
become fully vested and exercisable and remain so for up to 180 days after the
date of death or disability. In the event of retirement, a grantee's vested
options will remain exercisable for up to 90 days after the date of retirement,
while his or her unvested options may become fully vested and exercisable in the
discretion of the compensation committee. Upon termination for cause, all
options will terminate immediately. If there is a change in control of PCA and a
grantee is terminated from service with PCA and its subsidiaries within one year
thereafter, all options will become fully vested and exercisable and remain so
for up to one year after the date of termination. In addition, the compensation
committee has the authority to grant options that will become fully vested and
exercisable automatically upon a change in control of PCA, whether or not the
grantee is subsequently terminated.
SARS. The compensation committee may grant SARs under the equity incentive
plan alone or in tandem with stock options. SARs will be subject to the terms
and conditions determined by the compensation committee in its discretion. SARs
granted in tandem with options become exercisable only when, to the extent and
on the conditions that the related options are exercisable, and they expire at
the same time the related options expire. The exercise of an option results in
the immediate forfeiture of any related SAR to the extent the option is
exercised, and the exercise of an SAR results in the immediate forfeiture of any
related option to the extent the SAR is exercised.
Upon exercise of an SAR, the grantee will receive an amount in cash and/or
shares of common stock or other PCA securities equal to the difference between
the fair market value of a share of common stock on the date of exercise and the
exercise price of the SAR or, in the case of an SAR granted in tandem with
options, of the option to which the SAR relates, multiplied by the number of
shares as to which the SAR is exercised.
RESTRICTED STOCK. Under the equity incentive plan, the compensation
committee may award restricted stock to eligible participants. Restricted Stock
will be subject to the conditions and restrictions determined by the
compensation committee in its discretion, and will be restricted for the
duration determined by the committee, which will generally be at least six
months. A grantee will be required to pay PCA at least the aggregate par value
of any shares of restricted stock within ten days of the date of grant, unless
the shares are treasury shares. Unless the compensation committee determines
otherwise, all restrictions on a grantee's restricted stock will lapse when the
grantee ceases to be a director, officer or employee of, or to otherwise perform
services for, PCA and its subsidiaries, if the cessation occurs due to a
termination within one year after a change in control of PCA or due to death,
disability or, in the discretion of the compensation committee, retirement. If
termination of employment or service occurs for any other reason, all of a
grantee's restricted stock as to which the applicable restrictions have not
lapsed will be forfeited immediately.
PERFORMANCE AWARDS. Under the equity incentive plan, the compensation
committee may grant performance awards contingent upon achievement by the
grantee, PCA and/or its subsidiaries or divisions of set goals and objectives
regarding specified performance criteria, such as return on equity, over a
specified performance cycle, as designated by the compensation committee.
Performance awards may include:
- specific dollar-value target awards;
- performance units, the value of which is established by the compensation
committee at the time of grant; and/or
- performance shares, the value of which is equal to the fair market value
of a share of common stock on the date of grant. The value of a
performance award may be fixed or fluctuate on the basis of specified
performance criteria. A performance award may be paid out in cash and/or
shares of common stock or other PCA securities.
66
<PAGE>
Unless the compensation committee determines otherwise, if a grantee ceases
to be a director, officer or employee of, or to otherwise perform services for,
PCA and its subsidiaries prior to completion of a performance cycle, and the
reason for that cessation is because of termination within one year after a
change in control of PCA or due to death, disability or retirement, the grantee
will receive the portion of the performance award payable to him or her based on
achievement of the applicable performance criteria over the elapsed portion of
the performance cycle. If termination of employment or service occurs for any
other reason prior to completion of a performance cycle, the grantee will become
ineligible to receive any portion of a performance award.
VESTING, WITHHOLDING TAXES AND TRANSFERABILITY OF ALL AWARDS. The terms and
conditions of each award made under the equity incentive plan, including vesting
requirements, will be set forth consistent with the plan in a written notice to
the grantee. Except in limited circumstances, no award under the equity
incentive plan may vest and become exercisable within six months of the date of
grant, unless the compensation committee determines otherwise.
Unless the compensation committee determines otherwise, a participant may
elect to deliver shares of common stock, or to have PCA withhold shares of
common stock otherwise issuable upon exercise of an option or SAR or upon grant
or vesting of restricted stock, in order to satisfy PCA's required withholding
obligations in connection with any such exercise, grant or vesting.
Unless the compensation committee determines otherwise, no award made under
the equity incentive plan will be transferable other than by will or the laws of
descent and distribution or to a grantee's family member by gift, and each award
may be exercised only by the grantee, his or her qualified family member
transferee, or any of their respective executors, administrators, guardians or
legal representatives.
AMENDMENT AND TERMINATION OF THE EQUITY INCENTIVE PLAN. The board may amend
or terminate the equity incentive plan in its discretion, except that no
amendment will become effective without prior approval of PCA's stockholders if
such approval is necessary for continued compliance with any stock exchange
listing requirements. Furthermore, any termination may not materially and
adversely affect any outstanding rights or obligations under the equity
incentive plan without the affected participant's consent. If not previously
terminated by the board, the equity incentive plan will terminate on the tenth
anniversary of its adoption.
ONE MILLION DOLLAR COMPENSATION LIMIT
The Revenue Reconciliation Act of 1993 limits the annual deduction a
publicly held company may take for compensation paid to its chief executive
officer or any of its four other highest compensated officers in excess of
$1,000,000 per year, excluding for this purpose compensation that is
"performance-based" within the meaning of Code Section 162(m).
Compensation paid under the equity incentive plan will not qualify as
performance-based except to the extent paid pursuant to grants made under the
plan following approval of the plan by PCA's stockholders in accordance with
Code Section 162(m)(4)(c) and the related Treasury Regulations, and except to
the extent certain other requirements are satisfied. However, based on a special
rule contained in regulations issued under Section 162(m), the $1 million
deduction limitation described above should not apply to any options, SARs or
restricted stock granted, or cash-based compensation paid, prior to PCA's annual
meeting of stockholders in 2003, to the extent such grants or payments are made
under the equity incentive plan.
67
<PAGE>
BOARD COMMITTEES
Upon completion of the offering, PCA will have two standing committees--an
audit committee and a compensation committee. Upon completion of the offering,
each of these committees will consist of a majority of nonmanagment directors.
The audit committee will review and recommend to the board internal
accounting and financial controls for PCA and accounting principles and auditing
practices and procedures to be used in the preparation of PCA's financial
statements. The audit committee will also make recommendations to the board
concerning the engagement of independent public accountants and the scope of
their audits. The members of the audit committee have yet to be determined.
The compensation committee will administer PCA's benefit plans and make
recommendations concerning the compensation of employees. The compensation
committee will consist of Samuel M. Mencoff, chairman, Thomas S. Souleles and a
third director to be named.
68
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONTRIBUTION AGREEMENT
Pactiv, PCA Holdings and PCA entered into a contribution agreement governing
the sale of the containerboard and corrugated packaging products business to
PCA. PCA Holdings owns approximately 53% of the outstanding common stock of PCA
and Pactiv owns approximately 44% of the outstanding common stock of PCA. Under
the terms of the contribution agreement, the following occurred:
- PCA paid to Madison Dearborn, the entity that controls PCA Holdings, a
transaction fee of $15.0 million and reimbursed Madison Dearborn for
out-of-pocket expenses.
- PCA paid $2.0 million of the legal and accounting fees and expenses of
Pactiv incurred in connection with the transactions.
- Pactiv agreed to indemnify PCA, PCA Holdings and their affiliates for any
breaches of representations, warranties and covenants it made in the
contribution agreement relating to the condition of the business as of the
closing of the transactions and liabilities of the containerboard and
corrugated packaging products business which it agreed to retain. Pactiv's
indemnification obligation in respect of breaches of its representations
and warranties generally survives for 18 months from the closing and is
subject to a $12.5 million deductible and a $150.0 million cap.
- PCA agreed to indemnify Pactiv and its affiliates against those
liabilities it agreed to assume. PCA generally agreed to assume all
liabilities relating to the business. PCA did not generally assume,
however, liabilities relating to tax and employee benefit matters arising
before the closing or with respect to assets not conveyed to PCA. These
liabilities were retained by Pactiv. Pactiv also retained all
environmental liability for all former facilities, sites associated with
pre-closing waste disposal and a closed landfill located near the Filer
City mill.
- Pactiv agreed that, for a period of five years from the closing, it would
not engage in the business conducted by PCA as of the closing anywhere in
the U.S. or induce any customer of PCA to terminate its relationship with
PCA.
STOCKHOLDERS AGREEMENT
PCA, PCA Holdings and Pactiv entered into a stockholders agreement under
which they agreed to limit their ability to sell or transfer their common stock
and to provide for preemptive rights upon future issuances of common stock by
PCA. Under the terms of the stockholders agreement, PCA's board of directors
consists of six individuals--three directors designated by PCA Holdings
(Messrs. Mencoff, Huscher and Souleles), two directors designated by Pactiv
(Messrs. Mead and Tetzlaff) and the Chief Executive Officer of PCA
(Mr. Stecko). Pactiv and PCA Holdings agreed to vote their shares in future
elections to maintain this board composition. The stockholders agreement also
identifies company actions which Pactiv and PCA Holdings have agreed shall be
subject to the approval of at least four of the five directors designated by
Pactiv and PCA Holdings as described above, including:
(1) the approval of the adoption of, or any material change to, PCA's annual
business plan,
(2) the purchase or sale of assets having a fair market value in excess of
$32.5 million, other than in the ordinary course of business or in
connection with a sale of timberland,
(3) the acquisition of another business or participation in any joint
venture involving consideration in excess of $32.5 million, and
(4) the taking of actions that would have a disproportionate impact on
Pactiv or would otherwise be outside of the ordinary course of business.
The stockholders agreement will terminate as a result of the offering.
69
<PAGE>
REGISTRATION RIGHTS AGREEMENT
PCA, PCA Holdings and Pactiv entered into a registration rights agreement
under which Pactiv, PCA Holdings and their affiliates and transferees have
"demand" registration rights, which entitle them to cause PCA to register their
securities of PCA under the Securities Act. In addition, Pactiv, PCA Holdings
and their affiliates and transferees have "piggyback" registration rights, which
entitle them to cause PCA to include their securities in a registration in which
PCA proposes to register any of its securities under the Securities Act. Pactiv
and its affiliates, on the one hand, and PCA Holdings and its affiliates, on the
other hand, are each entitled to demand:
(1) three "long form" registrations on Form S-1, or a similar long form, in
which PCA will pay the registration expenses, other than underwriting
discounts and commissions,
(2) an unlimited number of "short form" registrations on Form S-2 or S-3, or
a similar short form, in which PCA will pay the registration expenses,
other than underwriting discounts and commissions, and
(3) an unlimited number of "long form" registrations on Form S-1, or a
similar long form, in which the requesting holders will pay the
registration expenses.
Pactiv and PCA Holdings also agreed in the registration rights agreement
that Pactiv and its affiliates will have first priority to participate in any
registration of PCA's securities during the 14-month period following the
closing of the transactions. After that time, PCA Holdings, Pactiv and their
affiliates will have equal priority, before any other holders of PCA's
securities, to participate in the registrations. Pactiv exercised one of its
"demand" registration rights under this agreement in order to effect the
registration of its shares of common stock for sale in the offering.
MANAGEMENT EQUITY AGREEMENTS
Each of PCA's executive officers entered into management equity agreements
with PCA in June 1999 under which the executive officers, or their respective
designees, purchased PCA common stock at approximately $4.55 per share as
follows:
- Paul T. Stecko--704,000 shares;
- William J. Sweeney--281,380 shares;
- Richard B. West--99,220 shares;
- Mark W. Kowlzan--162,800 shares; and
- Andrea L. Davey--66,000 shares.
The executive officers, or their respective designees, borrowed funds from
Morgan Guaranty Trust Company of New York, an affiliate of J.P. Morgan
Securities Inc., to finance up to 50% of the cost of purchasing the shares. PCA
guaranteed repayment of each of these loans. PCA has not been required to make
any payments with respect to these guarantees.
SERVICES AGREEMENT
PCA entered into a holding company support agreement with PCA Holdings under
which PCA agreed to reimburse PCA Holdings for all fees, costs and expenses, up
to an aggregate amount of $250,000 per year, related to PCA Holdings' investment
in PCA. These expenses include PCA Holdings' general operating expenses,
franchise tax obligations, accounting, legal, corporate reporting and
administrative expenses, and any other expenses incurred by PCA Holdings as a
result of its investment in PCA.
70
<PAGE>
PURCHASE/SUPPLY AGREEMENTS
PCA entered into separate purchase/supply agreements with the following
parties: Pactiv; Tenneco Automotive Inc.; and Tenneco Packaging Specialty and
Consumer Products Inc., an affiliate of Pactiv. Under the purchase/supply
agreements, each Pactiv entity agreed to purchase a substantial percentage of
its requirements for containerboard and corrugated packaging products from PCA
at the prices charged by PCA to Pactiv and its affiliates as of the closing. As
a result of these agreements, Pactiv and Tenneco Automotive represent 4.6% and
0.7%, respectively, of our total net sales for 1999. For the year ended
December 31, 1999, Pactiv accounted for $77.4 million of our sales of all
products and $64.7 million, of our sales of corrugated products. For the year
ended December 31, 1999, Tenneco Automotive accounted for $12.7 million of our
sales of corrugated products.
TRANSITION AGREEMENTS
PCA and Pactiv entered into a facility use agreement which provides for
PCA's use of a designated portion of Pactiv's headquarters located in Lake
Forest, Illinois for a period of up to four years following the closing of the
transactions. Under the facility use agreement, PCA is required to pay Pactiv
rent plus additional charges for the provision of building and business
services. The rent is calculated based on PCA's proportionate square footage
usage of the property.
PCA also entered into a transition services agreement with Pactiv which
provides for the performance of transitional services by Pactiv and its
affiliates to PCA that PCA currently requires to operate the containerboard and
corrugated packaging products business. Pactiv charges PCA an amount
substantially equal to its actual cost of providing the services, which cost
includes Pactiv's overhead expenses, but does not include Tenneco's overhead
expenses. The exact charge to PCA is the lesser of (1) Pactiv's actual cost and
(2) 105% of the cost as forecasted by Pactiv with respect to providing services
within the following categories: payroll, general accounting, tax support,
treasury/cash management, insurance/risk management, procurement and, human
resources and telecommunication and information services. The initial term of
the transition services agreement is for one year, but may be extended by PCA
for an additional six month term for a cost increase of 15% per year. PCA has
exercised this extension for some of the services covered by this agreement. PCA
may terminate any of the provided services on 90 days notice to Pactiv. In
addition, Pactiv agreed in the transition services agreement to reimburse PCA
for up to $5.4 million in expenditures incurred by PCA relating to system
enhancement and Year 2000 compliance for which $5.4 million was paid by Pactiv
in 1999. PCA agreed to provide administrative and transitional services to
Pactiv's former folding carton business under the terms of the transition
services agreement through 1999.
PCA, Tenneco and Pactiv entered into a human resources agreement under which
Pactiv transferred the employment of all of its active employees engaged in the
containerboard and corrugated packaging products business to PCA as of the
closing at the same rate of pay. Under the human resources agreement, the
employees are entitled to continue their participation in Pactiv and Tenneco
welfare and pension plans for a period of up to five years following the closing
of the transactions depending on the plan. PCA has agreed to reimburse Tenneco
for associated costs. In addition, PCA has agreed to pay Tenneco an annualized
fee of at least $5.2 million for continued participation. PCA assumed all of the
existing collective bargaining agreements with respect to containerboard
business employees as of the closing. PCA intends to adopt compensation and
benefit plans with respect to its employees as contemplated under the terms of
the transactions.
71
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of PCA's common stock as of December 31, 1999, and as adjusted to
reflect the sale of the common stock being offered hereby, assuming full
exercise of the underwriters' over-allotment option, by (1) each person or group
of affiliated persons who is known by PCA to own beneficially more than 5% of
the common stock, (2) each of PCA's directors, (3) each of PCA's executive
officers, (4) all directors and executive officers of PCA as a group and
(5) Pactiv. Except as otherwise noted and subject to community property laws,
the persons or entities in this table have sole voting and investment power with
respect to all the shares of common stock owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERING (1) SHARES OFFERING (1)
------------------- BEING -------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ---- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
PCA Holdings LLC (2) ................ 50,306,960 53.2% -- 50,306,960 47.4%
c/o Madison Dearborn Partners, LLC
Three First National Plaza
Chicago, IL 60602
Paul T. Stecko (3)................... 2,090,000 2.2% -- 2,090,000 2.0%
William J. Sweeney (4)............... 868,780 * -- 868,780 *
Richard B. West (5).................. 314,820 * -- 314,820 *
Mark W. Kowlzan (6).................. 513,700 * -- 513,700 *
Andrea L. Davey (7).................. 206,580 * -- 206,580 *
Dana G. Mead......................... -- -- -- -- --
Theodore R. Tetzlaff................. -- -- -- -- --
Samuel M. Mencoff (8)................ 44,131,010 46.7% -- 44,131,010 41.6%
Justin S. Huscher (9)................ 44,131,010 46.7% -- 44,131,010 41.6%
Thomas S. Souleles (10).............. 44,131,010 46.7% -- 44,131,010 41.6%
All directors and executive officers
as a group (10 persons) (11)....... 48,124,890 49.5% -- 48,124,890 44.2%
Pactiv Corporation (12).............. 41,160,240 43.5% 41,160,240 -- --
1900 West Field Court
Lake Forest, IL 60045
</TABLE>
- --------------
* Denotes ownership of less than one percent.
(1) Includes the number of shares and percentage ownership represented by the
shares determined to be beneficially owned by a person in accordance with
the rules of the Securities and Exchange Commission. The number of shares
beneficially owned by a person includes shares of common stock that are
subject to options held by that person that are currently exercisable or
exercisable within 60 days of December 31, 1999. These shares are deemed
outstanding for the purpose of computing the percentage of outstanding
shares owned by that person. These shares are not deemed outstanding,
however, for the purposes of computing the percentage ownership of any
other person.
(2) The members of PCA Holdings include Madison Dearborn Capital Partners III,
L.P. ("MDCP III"), two funds affiliated with MDCP III, J.P. Morgan Capital
Corporation ("J.P. Morgan Capital"), an affiliated fund of J.P. Morgan
Capital and BT Capital Investors, L.P. ("BT Capital"). MDCP III and its
affiliated funds may be deemed to have beneficial ownership of
72
<PAGE>
44,131,010 shares of common stock of PCA held by PCA Holdings, J.P. Morgan
Capital and its affiliated fund may be deemed to have beneficial ownership
of 4,888,950 shares of common stock of PCA and BT Capital may be deemed to
have beneficial ownership of 880,000 shares of common stock of PCA. Shares
beneficially owned by MDCP III and its affiliated funds may be deemed to be
beneficially owned by Madison Dearborn Partners III, L.P., the general
partner or manager, as applicable, of each fund ("MDP III"), by Madison
Dearborn, the general partner of MDP III and by a limited partner committee
of MDP III.
(3) Mr. Stecko owns 132,000 shares of common stock of PCA and the Paul T.
Stecko 1999 Dynastic Trust owns 572,000 shares of common stock of PCA. Mr.
Stecko may be deemed to have beneficial ownership of the shares of common
stock of PCA owned by the Paul T. Stecko 1999 Dynastic Trust. Mr. Stecko
also has an option to acquire 1,386,000 shares of common stock of PCA,
which will become exercisable upon the closing of the offering.
(4) Mr. Sweeney may be deemed to have beneficial ownership of the 281,380
shares of common stock of PCA owned by the William J. Sweeney 1999
Irrevocable Trust. Mr. Sweeney also has an option to acquire 587,400 shares
of common stock of PCA, which will become exercisable upon the closing of
the offering.
(5) Mr. West has an option to acquire 215,600 shares of common stock of PCA,
which will become exercisable upon the closing of the offering.
(6) Mr. Kowlzan has an option to acquire 350,900 shares of common stock of PCA,
which will become exercisable upon closing of the offering.
(7) Ms. Davey may be deemed to have beneficial ownership of the 66,000 shares
of common stock of PCA owned by the Andrea Lora Davey Trust dated February
19, 1994. Andrea L. Davey also has an option to acquire 140,580 shares of
common stock of PCA, which will become exercisable upon the closing of the
offering.
(8) Mr. Mencoff is a Managing Director of Madison Dearborn and may therefore be
deemed to share beneficial ownership of the shares owned by Madison
Dearborn. Mr. Mencoff expressly disclaims beneficial ownership of the
shares owned by Madison Dearborn.
(9) Mr. Huscher is a Managing Director of Madison Dearborn and may therefore be
deemed to share beneficial ownership of the shares owned by Madison
Dearborn. Mr. Huscher expressly disclaims beneficial ownership of the
shares owned by Madison Dearborn.
(10) Mr. Souleles is a Director of Madison Dearborn and may therefore be deemed
to share beneficial ownership of the shares owned by Madison Dearborn.
Mr. Souleles expressly disclaims beneficial ownership of the shares owned
by Madison Dearborn.
(11) Includes 2,680,480 shares issuable upon exercise of stock options, which
will become exercisable upon the closing of the offering.
(12) Assuming no exercise of the underwriters' over-allotment options, Pactiv
would beneficially own 6,410,240 shares, or 6.0% of the outstanding common
stock of PCA upon the closing of the offering.
73
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
PCA's restated certificate of incorporation authorizes the issuance of up to
300,000,000 shares of common stock, par value $0.01 per share, 3,000,000 shares
of senior exchangeable preferred stock, par value $0.01 per share, and 100
shares of junior preferred stock, par value $0.01 per share. As of December 31,
1999, 94,600,000 shares of common stock, 1,000,000 shares of senior exchangeable
preferred stock and 100 shares of junior preferred stock were outstanding. As of
December 31, 1999, PCA had 115 holders of common stock.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. Subject to preferences to which holders of senior exchangeable preferred
stock may be entitled, holders of common stock are entitled to receive ratably
the dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available therefor. See "Dividend Policy." If
there is a liquidation, dissolution or winding up of PCA, holders of common
stock would be entitled to share in PCA's assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted to the
holders of any outstanding shares of senior exchangeable preferred stock and
junior preferred stock. Holders of common stock have no preemptive or conversion
rights or other subscription rights and there are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are, and the shares of common stock offered by PCA in the offering, when
issued and paid for, will be, fully paid and nonassessable. The rights,
preferences and privileges of the holders of common stock are subject to, and
may be adversely affected by the rights of the holders of shares of any series
of preferred stock which PCA may designate in the future.
PREFERRED STOCK
Upon the redemption of the senior exchangeable preferred stock with the net
proceeds of the offering, PCA's certificate of incorporation will authorize its
board of directors, subject to any limitations prescribed by law, to issue
shares of preferred stock in one or more series without stockholder approval.
Each series of preferred stock will have the rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as will be determined by the
board of directors. The purpose of authorizing the board of directors to issue
preferred stock and determine its rights and preferences is to eliminate delays
and uncertainties associated with a stockholder vote on specific issuances. The
issuance of preferred stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire, or discourage a third
party from acquiring, a majority of PCA's outstanding voting stock. All of our
currently outstanding shares of senior exchangeable preferred stock will be
redeemed upon the completion of the offering, and we have no present plans to
issue any new shares of preferred stock. See "Risk Factors--Investment
Risks--Charter Documents" and "Use of Proceeds."
REGISTRATION RIGHTS
PCA, PCA Holdings and Pactiv are parties to a registration rights agreement
which provides Pactiv and PCA Holdings and their respective affiliates and
transferees with "demand" registration rights, entitling them to cause PCA to
register all or part of the common stock and or other securities of PCA held by
them under the Securities Act of 1933, as well as "piggyback"
74
<PAGE>
registration rights. Pactiv exercised one of its "demand" registration rights in
order to effect the offering of its common stock described herein. After the
offering, if Pactiv, together with its affiliates, no longer holds shares of PCA
with a fair market value of at least $500,000, it will no longer have "demand"
registration rights under the registration rights agreement. PCA Holdings and
its affiliates will continue to be entitled to demand (1) three "long form"
registrations in which PCA will pay the registration expenses, other than
underwriting discounts and commissions, (2) an unlimited number of "short form"
registrations in which PCA will pay the registration expenses, other than
underwriting discounts and commissions and (3) an unlimited number of "long
form" registrations in which the PCA Holdings will pay the registration
expenses.
EFFECT OF CERTIFICATE OF INCORPORATION AND BYLAWS
PCA's restated certificate of incorporation and its second amended and
restated bylaws may have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of PCA.
The restated certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The restated certificate provides and the bylaws
will provide that, except as otherwise required by law, special meetings of the
stockholders can only be called by a resolution adopted by a majority of the
board or by the chief executive officer of PCA. Stockholders are not permitted
to call a special meeting or require the board to call a special meeting.
The restated bylaws will establish an advance notice procedure for
stockholder proposals to be brought before an annual meeting of stockholders of
PCA, including proposed nominations of persons for election to the board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and who
has given to the secretary of PCA timely written notice, in proper form, of the
stockholders intention to bring that business before the meeting. Although the
restated bylaws will not give the board the power to approve or disapprove
stockholder nominations of candidates or proposals regarding other business to
come before a special or annual meeting, the bylaws may have the effect of
precluding the conduct of proposed business at a meeting if the proper
procedures are not followed or may discourage or defer a potential acquiror from
conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of PCA.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is First Chicago Trust
Company, a division of Equiserve. The address of the Transfer Agent and
Registrar is 525 Washington Boulevard, Jersey City, New Jersey 07310 and its
telephone number is (201) 324-0498.
75
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to the offering, there was no public market for our common
stock. Future sales of substantial amounts of common stock in the public market,
or the perception that such future sales could occur, could adversely affect the
market price of our common stock.
Upon completion of the offering, we will have outstanding an aggregate of
106,100,000 shares of common stock, assuming the issuance of 11,500,000 shares
of common stock offered hereby and no exercise of options prior to completion of
the offering. Of these shares, the 46,250,000 shares sold in the offering will
be freely tradable without restriction or further registration under the
Securities Act of 1933, except for any shares purchased by "affiliates" of PCA
as that term is defined in Rule 144 under the Securities Act. Sales by
affiliates of PCA would be subject to the limitations and restrictions described
below.
The remaining 59,850,000 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. All of the shares will be
subject to 180 day "lock-up" agreements beginning on the date of this
prospectus. Upon expiration of these lock-up agreements, the shares will become
eligible for sale subject to the limitations of Rule 144 and Rule 701 and, in
some cases, to contractual restrictions on transfer.
As of December 31, 1999, a total of 3,132,800 shares of common stock have
been issued to members of management under management equity agreements. All of
these shares are subject to restrictions on transfer following the offering.
Under these agreements, a stockholder may transfer up to 50% of his or her
shares beginning 180 days after the completion of the offering, and the
remaining 50% over the twelve-month period following the 180th day after
completion of the offering. Based on the shares of common stock issued to
members of management under management equity agreements as of December 31,
1999, 180 days after the effective date of the offering, a total of
approximately 1,566,400 shares of the common stock issued under the management
equity agreements would be available for resale in the public market.
In addition, as of December 31, 1999, there were a total of 6,576,460 shares
of common stock subject to outstanding options under our 1999 Management Equity
Compensation Plan, all of which will become vested and exercisable upon
completion of the offering. However, all of these shares are subject to 180 day
lock-up agreements and to restrictions on transfer contained in the agreements
pursuant to which the options were acquired. Under these agreements, an option
holder may transfer up to 50% of his or her option shares beginning 180 days
after the completion of the offering and the remaining 50% over the twelve-month
period following the 180th day after completion of the offering. Based on the
options outstanding as of December 31, 1999, 180 days after the effective date
of the offering, a total of approximately 3,288,230 shares of common stock
subject to outstanding options would be available for resale in the public
market.
PCA's officers and directors and all of PCA's existing stockholders have
agreed not to offer, sell, hedge, contract to sell, hedge or otherwise dispose
of any of their shares of common stock or any other securities of PCA that they
own that are substantially similar to the common stock, including but not
limited to any securities that are convertible into or exchangeable for, or that
represent the right to receive, common stock or any substantially similar
securities (other than pursuant to employee stock option plans existing on, or
upon the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this prospectus), for a period of 180 days after
the date of the offering. Goldman, Sachs & Co., however, may in its sole
discretion, at any time without notice, release all or any portion of the shares
subject to lock-up agreements.
76
<PAGE>
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell in "brokers'
transactions" or to market makers, within any three-month period, a number of
shares of common stock that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 1,061,000 shares immediately after the offering; or
- the average weekly trading volume in the common stock on the New York
Stock Exchange during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are generally subject to the availability of current
public information about PCA.
All of the currently outstanding shares of PCA were issued on or after
April 12, 1999. Accordingly, no shares of common stock may be sold under
Rule 144 prior to April 12, 2000.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been an affiliate of
PCA at any time during the 90 days preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
the shares without having to comply with the manner of sale, public information,
volume limitation or notice filing provisions of Rule 144. No shares of common
stock of PCA are currently eligible for sale under Rule 144(k).
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of the offering is entitled to sell the shares 90 days after the
effective date of the offering in reliance on Rule 144, without having to comply
with the holding period and notice filing requirements of Rule 144 and, in the
case of non-affiliates, without having to comply with the public information,
volume limitation or notice filing provisions of Rule 144.
The Commission has indicated that Rule 701 applies to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of the options whether the option shares are acquired before or after
the date the issuer becomes subject to the reporting requirements of the
Securities Exchange Act of 1934. Securities issued in reliance on Rule 701 are
restricted securities and, subject to the lock-up agreements and other
contractual restrictions described above, may be sold by persons other than
"affiliates", as defined in Rule 144, subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its one year minimum holding period requirements.
Upon the expiration of the lock-up agreements and contractual restrictions
on transfer described above, approximately 9,709,260 shares of common stock of
PCA will be eligible for resale under Rule 701. This number includes 3,132,800
shares held by management employees and 6,576,460 shares issuable upon exercise
of stock options.
REGISTRATION OF FORM S-8
After completion of the offering, PCA intends to file a registration
statement on Form S-8 covering the sale of up to 4,400,000 shares of common
stock reserved for issuance under the
77
<PAGE>
equity incentive plan. We anticipate that of the 4,400,000 shares reserved for
issuance under the plan, we will issue options to employees to purchase an
aggregate of approximately 350,000 shares of common stock in connection with the
offering. All of these options will vest in annual installments over a four-year
period, and none of these options will be immediately exercisable. As a result
of the filing of the Form S-8 registration statement, which will become
effective upon filing, the shares of common stock that may ultimately be
acquired upon exercise of these options or other awards under the plan will be
available for sale in the public market unless they are subject to vesting
restrictions or unless they are acquired by affiliates of PCA.
REGISTRATION RIGHTS
Beginning 180 days after the completion of the offering, PCA Holdings, which
currently holds 50,306,960 shares of common stock, will have rights that require
us to register its shares of common stock under the Securities Act at our
expense. If the underwriters do not exercise their overallotment option, Pactiv
will beneficially own 6,410,240 shares of common stock and will also have rights
that require us to register its shares of common stock under the Securities Act
at our expense beginning 180 days after the completion of the offering. See
"Certain Relationships and Related Transactions--Registration Rights Agreement."
78
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
DESCRIPTION OF SENIOR CREDIT FACILITY
In connection with the transactions, PCA entered into a senior credit
facility on April 12, 1999 which as of that date consisted of:
- a Term Loan A facility of $460.0 million in term loans;
- a Term Loan B facility of $375.0 million in term loans;
- a Term Loan C facility of $375.0 million in term loans; and
- a revolving credit facility of up to $250.0 million in revolving credit
loans and letters of credit.
As of December 31, 1999, PCA had no borrowings outstanding under the
revolving credit facility. Effective December 14, 1999, PCA elected to reduce
its availability under the revolving credit facility from $250.0 million to
$150.0 million.
The borrowings under the senior credit facility bear interest at a floating
rate and may be maintained as base rate loans or as Eurodollar loans. Base rate
loans bear interest at the base rate, which is the higher of (1) the applicable
prime lending rate of the administrative agent or (2) the Federal Reserve
reported overnight funds rate plus 1/2 of 1%, plus, in each case, an applicable
margin. Eurodollar loans bear interest at the Eurodollar rate as described in
the senior credit facility, plus an applicable margin.
The revolving credit facility must be repaid on or before April 12, 2005.
Prior to that date, funds may be borrowed, repaid and reborrowed, without
premium or penalty under the terms of the senior credit facility. The term loans
mature, and as a result must be repaid, in quarterly installments on March 31,
June 30, September 30 and December 31 of each year, beginning on September 30,
1999. Term Loan A will mature in quarterly installments from September 1999
through 2005. Term Loan B will mature in quarterly installments from September
1999 through 2007. Term Loan C will mature in quarterly installments from
September 1999 through 2008.
Voluntary prepayments of amounts outstanding under the senior credit
facility are permitted at any time, so long as PCA gives notice as required by
the senior credit facility. However, if a prepayment is being made with respect
to a Eurodollar loan and the prepayment is made on a date other than an interest
payment date, PCA must pay a fee to compensate the lender for losses and
expenses incurred by the lender as a result of the prepayment.
PCA made voluntary prepayments using timberland proceeds or excess cash to
permanently reduce its borrowings under the term loans on the following dates in
the following amounts:
- May 18, 1999--$75.0 million;
- July 15, 1999--$10.0 million;
- September 16, 1999--$1.3 million;
- September 29, 1999--$13.7 million;
- October 1, 1999--$194.6 million;
- October 14, 1999--$27.5 million;
- October 29, 1999--$10.9 million;
- November 15, 1999--$10.0 million;
- November 19, 1999--$12.5 million;
- November 22, 1999--$43.7 million;
- November 30, 1999--$23.8 million; and
- December 30, 1999--$8.0 million.
As a result of these prepayments, no quarterly installments are due until
December 2001 for Term Loans A, B and C.
The senior credit facility requires PCA to prepay the term loan facilities
and reduce commitments under the revolving credit facility with all or a portion
of the proceeds from designated financing or other transactions.
79
<PAGE>
DESCRIPTION OF SENIOR SUBORDINATED NOTES
PCA has issued $550,000,000 aggregate principal amount of 9 5/8% senior
subordinated notes due 2009. Interest on the notes is payable each April 1 and
October 1, beginning October 1, 1999. The notes are guaranteed by each of PCA's
current and future domestic subsidiaries, other than any receivables subsidiary.
At any time after April 1, 2004, PCA may redeem some or all of the notes, at
a redemption price of 104.8125% of the principal amount, declining ratably to
par after April 1, 2007, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date.
At any time prior to April 1, 2002, PCA may use the proceeds of offering of
its equity securities or that of its parent or timberland sales in excess of
$500 million to redeem, on one or more occasions, up to 35% of the aggregate
principal amount of the notes issued, at a redemption price of 109.625% of the
principal amount, plus accrued and unpaid interest and liquidated damages, if
any, to the redemption date.
At any time prior to April 1, 2004, if PCA undergoes specific kinds of
changes in control, PCA may redeem all but not less than all of the notes, at a
redemption price of the greater of (1) 101% of the principal amount or (2) the
excess over the principal amount of the notes of the present value on the
redemption date of 104.8125% plus all required interest payments due on the
notes through April 1, 2004, in each case plus accrued and unpaid interest and
liquidation damages, if any, to the redemption date.
If PCA undergoes specific kinds of changes of control, the holders of the
notes may require PCA to offer to purchase some or all of the notes at a price
equal to 101% of the principal amount.
The indenture governing the notes contains covenants that, among other
things, restrict PCA's ability to incur more debt, pay dividends on or purchase
stock, make investments, use assets as security in other transactions and sell
assets or merge with or into other companies.
80
<PAGE>
U.S. FEDERAL TAX CONSEQUENCES FOR
NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a summary of the material United States federal income and
estate tax consequences of the ownership and disposition of common stock
generally applicable to non-United States holders. A non-United States holder is
any beneficial owner of common stock that, for United States federal income tax
purposes, is a non-resident alien individual, a foreign corporation, a foreign
partnership or a foreign estate or trust as those terms are defined in the
Internal Revenue Code of 1986, as amended (the "Code"). This discussion is based
on the Code, existing, proposed and temporary regulations promulgated
thereunder, and administrative and judicial interpretations, all as of the date
of this prospectus, and all of which are subject to change either retroactively
or prospectively. Moreover, this discussion does not address all aspects of
United States federal income and estate taxation that may be relevant to
non-United States holders in light of their particular circumstances and does
not address any tax consequences arising under the laws of any state, local or
foreign taxing jurisdiction or the application of any particular tax treaty.
Further, it does not discuss special rules applicable to non-United States
holders that are, for example, banks, insurance companies, dealers in securities
and holders of securities held as part of a straddle, hedge or conversion
transaction. ALL PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS
REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER
TAX CONSEQUENCES OF OWNING AND DISPOSING OF COMMON STOCK.
GAIN ON DISPOSITION OF COMMON STOCK
A non-United States holder generally will not be subject to United States
federal income tax with respect to gain realized upon the sale or other
disposition of common stock unless:
(1) the gain is effectively connected with a United States trade or business
of the non-United States holder (or, if a tax treaty applies,
attributable to a permanent establishment in the United States maintained
by that non-United States holder);
(2) the non-United States holder is an individual who holds the common stock
as a capital asset, is present in the United States for a period or
periods aggregating 183 days or more during the taxable year in which the
sale or disposition occurs, and other conditions are met;
(3) the non-United States holder is an individual subject to tax pursuant to
the provisions of United States tax law applicable to United States
expatriates; or
(4) PCA is or has been a "United States real property holding corporation"
for United States federal income tax purposes at any time during the
shorter of the five-year period preceding the disposition or the holder's
holding period and (a) PCA's common stock is not regularly traded on an
established securities market or (b) the non-United States holder owns
more than 5% of PCA's common stock, as discussed below under "Foreign
Investment in Real Property Tax Act."
FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT
Under the Foreign Investment in Real Property Tax Act, as amended
("FIRPTA"), non-United States holders who would not otherwise be subject to
federal income tax on gain from dispositions of PCA common stock may,
nonetheless, be subject to United States federal income tax on disposition gain
if PCA is a "United States real property holding corporation" anytime during the
five years preceding the disposition or the holder's holding period, if shorter.
In general, PCA will be a United States real property holding corporation if 50%
or more of the fair market value of its assets constitute United States real
property interests within the meaning of the Code. Although
81
<PAGE>
PCA owns substantial amounts of United States real property, PCA believes that
it was not a United States real property holding corporation at the time of the
transactions in April 1999 and that PCA is not currently a United States real
property holding corporation. Because the determination of whether PCA is a
United States real property holding corporation turns on the relative value of
PCA's United States real property interests and its other assets, and because
the FIRPTA rules are complex, PCA can give no assurances that it is not a United
States real property holding corporation or that it will not become one.
Even if PCA is or becomes a United States real property holding corporation,
FIRPTA will not apply to cause a non-United States holder to be taxed on the
disposition of PCA common stock so long as PCA common stock is regularly traded
on an established securities market and the non-United States holder does not
own more than 5% of PCA's common stock anytime during the five years preceding
the disposition or the holder's holding period, if shorter, counting both direct
and indirect ownership under the applicable ownership attribution rules of the
Code. Similarly, even if PCA is a United States real property holding
corporation, non-United States holders will not be subject to 10% withholding on
the disposition of PCA common stock so long as PCA's common stock is regularly
traded on an established securities market.
WITHHOLDING ON DIVIDEND DISTRIBUTIONS
PCA currently has no plans to pay dividends on its common stock. If PCA were
to pay dividends on its common stock in the future, a non-United States holder
would generally be subject to a United States federal withholding tax of 30% on
the dividends unless (1) an applicable tax treaty reduces or eliminates
withholding, (2) the dividends are effectively connected with a United States
trade or business (or, if a tax treaty applies, attributable to a permanent
establishment in the United States maintained by such non-United States holder),
in which case regular graduated federal income tax rates would apply and, in the
case of a non-United States holder that is a corporation, a branch profits tax
may apply or (3) if the alien holder is an individual subject to tax pursuant to
the provisions of the United States tax law applicable to United States
expatriates, in which case regular graduated federal income tax rates would
apply. PCA is required to withhold 30% of any dividend distribution to a
non-United States holder unless the non-United States holder provides PCA or its
paying agent with a properly executed IRS Form 1001 or 4224 claiming an
exemption from or a reduction in the rate of withholding based upon one of the
exceptions noted above, including under the benefit of an applicable tax treaty.
Under new withholding regulations applicable to payments made after
December 31, 2000, a non-United States holder must supply PCA or its paying
agent with an IRS Form W-8BEN to claim such an exemption from or reduction in
withholding.
ESTATE TAX
An individual non-United States holder who is treated as the owner of PCA's
common stock at the time of that individual's death or has made certain lifetime
transfers of an interest in the common stock will be required to include the
value of the common stock and the lifetime transfers in that individual's gross
estate for United States federal estate tax purposes and may be subject to
United States federal estate tax, unless an applicable tax treaty provides
otherwise. For United States federal estate tax purposes, a "non-United States
holder" is an individual who is neither a citizen nor a domiciliary of the
United States. Whether an individual is considered a "domiciliary" of the United
States for estate tax purposes is generally determined on the basis of all of
the facts and circumstances.
82
<PAGE>
LEGAL MATTERS
Some of the legal matters in connection with the issuance of the common
stock will be passed upon for PCA by Kirkland & Ellis, Chicago, Illinois. Some
of the partners of Kirkland & Ellis, through an investment partnership,
beneficially own, indirectly through PCA Holdings, an aggregate of approximately
0.2% of the common stock. Some of the legal matters in connection with the
offering will be passed upon for the underwriters by Cahill Gordon & Reindel,
New York, New York.
EXPERTS
The balance sheet of Packaging Corporation of America as of January 31,
1999, appearing in this prospectus has been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and is included in reliance upon the authority of such firm as experts
in accounting and auditing.
The combined financial statements of The Containerboard Group, a division of
Tenneco Packaging Inc. (now known as Pactiv Corporation), as of December 31,
1998, 1997 and 1996, and for each of the three years in the period ended
December 31, 1998, included in this prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect to the combined financial statements, and are included herein in
reliance upon the authority of the firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules, under the Securities
Act of 1933, with respect to the shares of common stock to be sold in the
offering. This prospectus, which forms a part of the registration statement,
does not contain all of the information set forth in the registration statement.
For further information with respect to us and the common stock offered in this
prospectus, we refer you to the registration statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof. With
respect to each document filed with the Commission as an exhibit to the
registration statement, we refer you to the exhibit for a more complete
description of the matter involved.
We will be filing quarterly and annual reports, proxy statements and other
information with the Commission. Any reports or documents we file with the
Commission, including the registration statement, may be inspected and copied at
the Public Reference Section of the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 (telephone number: 1-800-SEC-0330), and at the
Regional Offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 14th Floor, 500 West Madison Street,
Chicago, Illinois 60661. Copies of the reports or other documents may be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a web site that contains reports and other information that is filed
through the Commission's Electronic Data Gathering Analysis and Retrieval
System. The web site can be accessed at http://www.sec.gov.
83
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
THE CONTAINERBOARD GROUP (A DIVISION OF TENNECO PACKAGING
INC.)--AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................. F-2
Combined Statements of Assets, Liabilities and
Interdivision Account as of December 31, 1998, 1997 and
1996.................................................... F-3
Combined Statements of Revenues, Expenses and
Interdivision Account for the years ended December 31,
1998, 1997 and 1996 (audited except for earnings per
share information)...................................... F-4
Combined Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996........................ F-5
Notes to Combined Financial Statements.................... F-7
PACKAGING CORPORATION OF AMERICA - AUDITED FINANCIAL
STATEMENTS
Report of Independent Auditors............................ F-27
Balance Sheet as of January 31, 1999...................... F-28
Note to Balance Sheet..................................... F-29
PACKAGING CORPORATION OF AMERICA - UNAUDITED FINANCIAL
STATEMENTS
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 (audited)............. F-30
Consolidated Statements of Income for the nine months
ended September 30, 1998 (unaudited), for the period
from January 1, 1999 through April 11, 1999 (unaudited)
and for the period from April 12, 1999 through
September 30, 1999 (unaudited).......................... F-31
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 (unaudited), for the period
from January 1, 1999 through April 11, 1999 (unaudited)
and for the period from April 12, 1999 through
September 30, 1999 (unaudited).......................... F-32
Notes to Consolidated Financial Statements (unaudited).... F-33
</TABLE>
F-1
<PAGE>
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-2
<PAGE>
THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
COMBINED STATEMENTS OF
ASSETS, LIABILITIES AND INTERDIVISION ACCOUNT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
F-3
<PAGE>
THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
COMBINED STATEMENTS OF
REVENUES, EXPENSES AND INTERDIVISION ACCOUNT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
Net sales........................................... $ 1,571,019 $ 1,411,405 $ 1,582,222
Cost of sales....................................... (1,289,644) (1,242,014) (1,337,410)
----------- ----------- ------------
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, taxes and extraordinary
item............................................ 121,750 49,843 155,311
Interest expense, net............................... (2,782) (3,739) (5,129)
----------- ----------- ------------
Income before taxes and extraordinary item........ 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):
Income before extraordinary item.................. $ .76 $ .29 $ .96
Extraordinary item................................ -- -- --
----------- ----------- ------------
Net income per common share....................... .76 .29 .96
=========== =========== ============
Weighted average common shares outstanding........ 94,600 94,600 94,600
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
F-4
<PAGE>
THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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)
--------- --------- ---------
</TABLE>
F-5
<PAGE>
THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
======== ======== =========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
F-6
<PAGE>
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.
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 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.
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.
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,
F-7
<PAGE>
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)
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.
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
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 $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:
<TABLE>
<S> <C>
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
===================
</TABLE>
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.
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.
F-8
<PAGE>
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)
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.
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.
F-9
<PAGE>
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)
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 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 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 $3,728,000, $4,345,000 and $4,789,000 in 1998, 1997 and 1996,
respectively.
F-10
<PAGE>
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)
INTANGIBLE ASSETS
Goodwill and intangibles, net of amortization, by major category are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
Goodwill................................... $48,046 $52,958 $51,721
Intangibles................................ 2,064 3,512 3,939
------- ------- -------
$50,110 $56,470 $55,660
======= ======= =======
</TABLE>
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.
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.
RECLASSIFICATIONS
The prior years' financial statements have been reclassified, where
appropriate, to conform to the 1998 presentation.
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.
F-11
<PAGE>
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)
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.
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
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
======= ======= =======
</TABLE>
F-12
<PAGE>
THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
4. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)
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.
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 for the early extinguishment of
debt.
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
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.
F-13
<PAGE>
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)
Actuarially allocated net pension cost for the Group's defined benefit
plans, excluding the Retirement Plan, consists of the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
======== ======== =======
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
========= ======== ========
</TABLE>
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.
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
F-14
<PAGE>
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)
year by senior management of Packaging. The amounts charged to expense for
these plans were $5,920,000, $6,407,000 and $6,722,000 in 1998, 1997 and
1996, respectively.
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.
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 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
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
F-15
<PAGE>
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)
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 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 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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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)
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
====== ====== ======
</TABLE>
The amounts expensed by the Group may be different because it was allocated
by Packaging.
F-16
<PAGE>
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 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.
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
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:
<TABLE>
<CAPTION>
DECEMBER 31,
RESTRUCTURING FOURTH-QUARTER 1998
COMPONENT CHARGE ACTIVITY BALANCE
--------- ------------- -------------- ------------
<S> <C> <C> <C>
(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
======= ====== ======
</TABLE>
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
F-17
<PAGE>
THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
7. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
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
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 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.
Following is an analysis of the components of combined income tax expense
(benefit):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
======== ======== =======
</TABLE>
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.
F-18
<PAGE>
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)
The components of the deferred tax assets (liabilities) at December 31,
1998, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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)
========= ========= =========
</TABLE>
9. ASSETS, LIABILITIES AND OTHER INCOME, NET DETAIL
PREPAID EXPENSES AND OTHER CURRENT ASSETS
The components of prepaid expenses and other current assets include:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
======= ======= =======
</TABLE>
F-19
<PAGE>
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)
OTHER LONG-TERM ASSETS
The components of the other long-term assets include:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
======== ======= =======
</TABLE>
ACCRUED LIABILITIES
The components of accrued liabilities include:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
======= ======= ========
</TABLE>
As part of the refinancing of the GECC leases in January, 1997 (Note 12),
certain deferred lease credits were eliminated.
F-20
<PAGE>
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)
OTHER LONG-TERM LIABILITIES
The components of the other long-term liabilities include:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
======= ======= =======
</TABLE>
OTHER INCOME, NET
The components of other income (expense), net include:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
======== ======== ========
</TABLE>
10. 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 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 media relations,
legal, human resources, accounting, public company reporting, data
processing systems, support, training, finance, treasury, and
F-21
<PAGE>
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)
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.
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.
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
F-22
<PAGE>
THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
12. LEASES (CONTINUED)
into at the same time as GECC's purchase of certain assets from
Georgia-Pacific in January, 1991. Through this refinancing, 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):
<TABLE>
<S> <C>
1999....................................... $ 83,804
2000....................................... 81,368
2001....................................... 79,428
2002....................................... 686,390
2003....................................... 26,975
Thereafter................................. 113,154
----------
Total................................ $1,071,119
==========
</TABLE>
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.
F-23
<PAGE>
THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
12. LEASES (CONTINUED)
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.
13. 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 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.
F-24
<PAGE>
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 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):
<TABLE>
<S> <C>
Intangibles................................................. $ 46,206
Machinery and equipment..................................... 183,906
--------
Total..................................................... $230,112
========
</TABLE>
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.
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
F-25
<PAGE>
THE CONTAINERBOARD GROUP
(A DIVISION OF TENNECO PACKAGING INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
15. SUMMARIZED COMBINED FINANCIAL INFORMATION ABOUT GUARANTOR SUBSIDIARIES
(CONTINUED)
subsidiaries are not presented because, in the opinion of management, such
financial statements are not material to investors.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(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
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
Net sales.......................................... $32,970 $25,758 $24,666
Gross profit....................................... 1,172 3,253 4,719
Net loss........................................... (866) (1,217) (351)
</TABLE>
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Packaging Corporation of America
We have audited the accompanying balance sheet of Packaging Corporation of
America as of January 31, 1999. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet 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 balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Packaging Corporation of America at
January 31, 1999 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 23, 1999
F-27
<PAGE>
PACKAGING CORPORATION OF AMERICA
BALANCE SHEET
JANUARY 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Shareholders' equity:
Preferred Stock, par value $1.00, authorized--100 shares;
issued--none.............................................. $--
Common Stock, par value $1.00, authorized--10 shares;
issued--none.............................................. $--
---
Total shareholders' equity.............................. $--
===
</TABLE>
F-28
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTE TO BALANCE SHEET
1. GENERAL
Packaging Corporation of America ("PCA") was incorporated on January 25,
1999 pursuant to the General Corporation Law of the State of Delaware. PCA
was formed to acquire The Containerboard Group of Tenneco Packaging Inc.,
which was completed on April 12, 1999.
PCA had no operations from the date of incorporation on January 25, 1999 to
January 31, 1999.
F-29
<PAGE>
PACKAGING CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
GROUP (NOTE 1)
-------------------
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 31,200 $ 1
Accounts receivable (net of allowance for doubtful
accounts of $4,669 as of September 30, 1999 and $5,220
in 1998)............................................... 213,152 13,971
Receivables from affiliated companies.................... -- 10,390
Notes receivable......................................... 590 27,390
Inventories.............................................. 155,428 150,719
Prepaid expenses and other current assets................ 18,656 41,092
---------- ----------
TOTAL CURRENT ASSETS................................... 419,026 243,563
Property, plant and equipment, at cost:
Land, timber, timberlands and buildings.................. 710,317 287,510
Machinery and equipment.................................. 1,891,051 1,289,459
Other, including construction in progress................ 123,474 100,136
Less: Accumulated depreciation and depletion............. (817,918) (735,749)
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET..................... 1,906,924 941,356
Intangible assets........................................ 1,588 50,110
Other long-term assets................................... 97,642 131,092
Investments.............................................. 659 1,282
---------- ----------
TOTAL ASSETS........................................... $2,425,839 $1,367,403
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................ $ 8,196 $ 617
Accounts payable......................................... 100,047 87,054
Payables to Tenneco affiliates........................... -- 7,091
Accrued interest......................................... 25,703 --
Accrued liabilities...................................... 82,143 69,390
---------- ----------
TOTAL CURRENT LIABILITIES.............................. 216,089 164,152
Long-term liabilities:
Long-term debt........................................... 1,652,209 16,935
Deferred taxes........................................... 96,099 254,064
Other liabilities........................................ 7,222 23,860
---------- ----------
TOTAL LONG-TERM LIABILITIES............................ 1,755,530 294,859
Mandatorily redeemable preferred stock (liquidation
preference $100 per share, 3,000,000 shares authorized,
1,000,000 shares issued and outstanding)................. 96,500 --
Stockholders' equity:
Interdivision account.................................... -- 908,392
Junior preferred stock (liquidation preference $1.00 per
share, 100 shares authorized, issued and
outstanding)........................................... -- --
Common stock (par value $.01 per share, 300,000,000
shares authorized, 94,600,000 shares issued and
outstanding)........................................... 946 --
Additional paid in capital............................... 341,650 --
Retained earnings........................................ 15,124 --
---------- ----------
TOTAL STOCKHOLDERS' EQUITY............................. 357,720 908,392
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $2,425,839 $1,367,403
========== ==========
</TABLE>
See notes to consolidated financial statements.
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles of complete financial statements.
F-30
<PAGE>
PACKAGING CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
GROUP (NOTE 1)
---------------------------------------
NINE MONTHS JANUARY 1, 1999 APRIL 12, 1999
ENDED THROUGH THROUGH
SEPTEMBER 30, 1998 APRIL 11, 1999 SEPTEMBER 30, 1999
-------------------- ---------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales...................... $1,184,142 $ 433,182 $ 816,538
Cost of sales.................. (962,126) (367,483) (640,587)
---------- --------- ---------
Gross profit................. 222,016 65,699 175,951
Impairment loss................ -- (230,112) --
Selling and administrative
expenses..................... (79,670) (30,584) (53,283)
Other income (expense), net.... 32,064 (2,207) 56
Corporate
allocations/overhead......... (47,530) (14,890) (13,509)
---------- --------- ---------
Income (loss) before
interest, taxes and
extraordinary item......... 126,880 (212,094) 109,215
Interest expense, net.......... (2,148) (221) (73,627)
---------- --------- ---------
Income (loss) before taxes
and extraordinary item..... 124,732 (212,315) 35,588
Provision for taxes............ (49,654) 83,716 (14,655)
---------- --------- ---------
Income (loss) before
extraordinary item......... 75,078 (128,599) 20,933
Extraordinary item, net of
tax.......................... -- (6,327) --
---------- --------- ---------
Net income (loss).............. 75,078 (134,926) 20,933
Preferred dividends and
accretion of preferred stock
issuance costs............... -- -- (5,809)
---------- --------- ---------
Net income (loss) available to
common stockholders.......... $ 75,078 $(134,926) $ 15,124
========== ========= =========
Basic earnings per share:
Income (loss) before
extraordinary item......... $ .79 $ (1.36) $ .16
Extraordinary item........... -- (.07) --
---------- --------- ---------
Net income (loss) per common
share...................... $ .79 $ (1.43) $ .16
========== ========= =========
Diluted earnings per share:
Income (loss) before
extraordinary item......... $ .79 $ (1.36) $ .16
Extraordinary item........... -- (.07) --
---------- --------- ---------
Net income (loss) per common
share...................... $ .79 $ (1.43) $ .16
========== ========= =========
Weighted average common shares
outstanding.................. 94,600 94,600 92,451
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
PACKAGING CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
GROUP (NOTE 1)
--------------------------------------- APRIL 12, 1999
NINE MONTHS JANUARY 1, 1999 THROUGH
ENDED THROUGH SEPTEMBER 30,
SEPTEMBER 30, 1998 APRIL 11, 1999 1999
------------------ --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income....................................... $ 75,078 $ (134,926) $ 20,933
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation, depletion and amortization....... 72,276 30,905 72,006
Amortization of financing costs................ -- -- 3,946
Extraordinary loss - early debt
extinguishment............................... -- 6,327 --
(Gain)/loss on sale of assets.................. (32,004) 230,112 (1,016)
Amortization of deferred gain.................. (1,480) (493) --
Increase in deferred income taxes.............. 48,559 9,782 11,309
Undistributed earnings of affiliated
companies.................................... (40) (106) 729
Other, net..................................... 102 56 275
Changes in components of working capital,
excluding transactions with Tenneco -
Decrease (increase) in current assets -
Accounts receivable........................ 2,006 (8,183) (33,172)
Inventories, net........................... (5,115) (7,514) 2,805
Prepaid expenses and other................. (635) 4,201 683
(Decrease) increase in current liabilities -
Accounts payable........................... (19,629) 26,996 27,912
Accrued liabilities........................ (5,154) (3,508) 62,758
-------- ----------- ---------
Net cash provided by operating activities.......... 133,964 153,649 169,168
-------- ----------- ---------
Cash Flows from Investing Activities:
Additions to property, plant and equipment....... (70,966) (1,128,255) (49,216)
Other long-term assets........................... (8,600) 2,284 (6,936)
Proceeds from disposals.......................... 4,381 825 1,314
Other, net....................................... (5,963) 4,001 (391)
-------- ----------- ---------
Net cash used for investing activities............. (81,148) (1,121,145) (55,229)
-------- ----------- ---------
Cash Flows from Financing Activities:
Proceeds from preferred stock.................... -- -- 96,500
Proceeds from long-term debt issued.............. 130 1,760,000 9,000
Payments on long-term debt....................... (10,457) (27,550) (109,061)
Financing costs.................................. -- -- (99,179)
Proceeds from final settlement of purchase
price.......................................... -- -- 20,000
Decrease in interdivision account................ (46,002) (616,769) --
Working capital transactions with Tenneco and
affiliated companies -
Decrease (increase) in receivables from
affiliated companies......................... 2,931 1,353 --
(Decrease) increase in factored receivables.... 1,138 (150,099) --
Increase in accounts payable to affiliated
companies.................................... (556) 561 --
-------- ----------- ---------
Net cash (used for) provided by financing
activities....................................... (52,816) 967,496 (82,740)
-------- ----------- ---------
Increase in cash and cash equivalents.............. -- 0 31,199
Cash and cash equivalents at beginning of period... 1 1 1
-------- ----------- ---------
Cash and cash equivalents at end of period......... $ 1 $ 1 $ 31,200
======== =========== =========
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
On April 12, 1999, Tenneco Packaging Inc. ("TPI"), a wholly owned subsidiary
of Tenneco Inc. ("Tenneco") as of September 30, 1999 that is now known as Pactiv
Corporation, sold its containerboard and corrugated packaging products business
(the "Group") to Packaging Corporation of America ("PCA") for $2.2 billion. The
Group is the predecessor to PCA. The $2.2 billion purchase price paid to TPI for
the Group consisted of $246.5 million in cash, the assumption of $1.8 billion of
debt incurred by TPI immediately prior to the 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."
PCA's consolidated financial statements as of September 30, 1999 and for the
period from April 12, 1999 to September 30, 1999, and the Group's (i.e.,
predecessor's) combined financial statements for the nine months ended
September 30, 1998 and for the period from January 1, 1999 to April 11, 1999,
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 generally accepted accounting principles 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 generally accepted
accounting principles for complete financial statements. Operating results
during the period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the period ending December 31, 1999.
As a result of the Group's relationship with TPI, the combined consolidated
balance sheets and the related combined consolidated income statements 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 PCA.
2. SUMMARY OF ACCOUNTING POLICIES
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 Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosure About Segments of an Enterprise and Related Information,"
in 1998 and determined that the Group was primarily engaged in one line of
business: the manufacture and sale of packaging materials, boxes and containers
for industrial and consumer markets. PCA also believes
F-33
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999 (CONTINUED)
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
that it is primarily engaged in this single line of business. No single customer
accounts for more than 10% of total revenues. PCA has no foreign operations.
EARNINGS PER SHARE
All share and per share data included in these unaudited 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.
The following table sets forth the computation of basic and diluted income
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
NINE MONTHS JANUARY 1, 1999 APRIL 12, 1999
ENDED THROUGH THROUGH
SEPTEMBER 30, 1998 APRIL 11, 1999 SEPTEMBER 30, 1999
------------------ --------------- ------------------
<S> <C> <C> <C>
Numerator:
Net income applicable to
common stockholders........... $75,078 $(134,926) $15,124
Denominator:
Basic common shares
outstanding................... 94,600 94,600 92,451
Effect of non-vested stock........ -- -- 2,149
Effect of dilutive securities:
Stock options (Note 6).......... -- -- 1,795
------- --------- -------
Dilutive common shares
outstanding..................... 94,600 94,600 96,395
Basic income (loss) per
common share.................... $ .79 $ (1.43) $ .16
Diluted income (loss) per
common share.................... $ .79 $ (1.43) $ .16
</TABLE>
CHANGES IN ACCOUNTING PRINCIPLES
In June, 1998, the Financial Accounting Standards Board issued 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 on 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
F-34
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999 (CONTINUED)
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
standard is not expected to have a significant effect on PCA's financial
position or results of operation.
3. INVENTORY
The components of inventories are as follows:
<TABLE>
<CAPTION>
GROUP (NOTE 1)
SEPTEMBER 30, -----------------
1999 DECEMBER 31, 1998
---------------- -----------------
(AUDITED)
<S> <C> <C>
(IN THOUSANDS)
Raw materials............................ $ 67,793 $ 86,681
Work in process and finished goods....... 62,138 48,212
Supplies................................. 49,254 44,310
-------- --------
Inventories at FIFO cost................. 179,185 179,203
Excess of FIFO cost over LIFO cost....... (23,757) (28,484)
-------- --------
Inventory, Net........................... $155,428 $150,719
======== ========
</TABLE>
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.
F-35
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999 (CONTINUED)
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
GROUP (NOTE 1)
SEPTEMBER 30, -----------------
1999 DECEMBER 31, 1998
---------------- -----------------
(IN THOUSANDS) (AUDITED)
<S> <C> <C>
Senior credit facility--
Revolving credit facility, interest at LIBOR (5.80% as
of September 30, 1999) + 2.75%, due April 12, 2005... $ -- $ --
Term Loan A, interest at LIBOR (5.80% as of
September 30, 1999) + 2.75%, due in varying quarterly
installments through April 12, 2005.................. 421,983 --
Term Loan B, interest at LIBOR (5.80% as of
September 30, 1999) + 3.25%, due in varying quarterly
installments through April 12, 2007.................. 344,008 --
Term Loan C, interest at LIBOR (5.80% as of
September 30, 1999) + 3.50%, due in varying quarterly
installments through April 12, 2008.................. 344,008 --
Senior subordinated notes, interest at 9.625%, payable
semi-
annually, due April 1, 2009............................ 550,000 --
Notes payable, interest at an average rate of 13.5%, due
in varying amounts through 2010........................ -- 16,553
Other.................................................... 406 999
---------- -------
Total.................................................. 1,660,405 17,552
Less: Current portion.................................... 8,196 617
---------- -------
Total long-term debt................................... $1,652,209 $16,935
========== =======
</TABLE>
As of September 30, 1999, annual payments for debt during the next five
years and thereafter were: $8.2 million, $56.8 million, $89.6 million, $104.6
million, $122.1 million and $1,279.2 million.
PCA prepaid $75.0 million of the term loans on May 18, 1999, $10.0 million
on July 15, 1999, $1.3 million on September 16, 1999, $13.7 million on September
30, 1999, $194.6 million on October 1, 1999, $27.5 million on October 14, 1999,
and $10.9 million on October 29, 1999. Accordingly, no quarterly installments
are due until December 2001 for Term Loans A, B and C.
During the second quarter of 1999, PCA entered into three interest rate
collar agreements which protect against rising interest rates and simultaneously
guarantee a minimum interest rate. The notional amount of these collars is
$720 million. The weighted average floor of the interest rate collar agreements
is 4.97% and the weighted average ceiling of the interest rate collar agreements
is 6.75%. The interest rates on approximately 64% of PCA's term loan obligations
at September 30, 1999 are capped.
In February 1999, Tenneco paid off the remaining note payable as part of the
Transactions. The payment was $27.2 million, including a $10.6 million premium
payment for early extinguishment of debt.
F-36
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999 (CONTINUED)
5. MANDATORILY 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.
3,000,000 shares are authorized and 1,000,000 shares were issued and outstanding
as of September 30, 1999. PCA incurred $3,500,000 of issuance costs. These costs
are being amortized through 2010, at which time the preferred stock is required
to be redeemed.
6. STOCKHOLDER'S 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 have the right to
elect one director to PCA's board of directors. Under the terms of the
stockholders agreement, the holders of the Junior Preferred Stock have agreed to
elect the individual serving as PCA's chief executive officer to fill this
director position. Shares of Junior Preferred Stock may not be reissued after
being reacquired in any manner by PCA.
In June 1999, PCA granted options to management for the purchase of
6,576,460 shares of common stock at the fair market value at the date of grant.
These options generally vest as follows:
<TABLE>
<S> <C>
June 2000................................................... 20%
June 2001................................................... 20%
June 2002................................................... 20%
June 2003................................................... 20%
June 2004................................................... 20%
</TABLE>
These options vest immediately upon the closing of an initial public
offering of PCA's equity. However, the option shares are subject to certain
contractual restrictions on transfer following their acquisition upon exercise
of the underlying options. At September 30, 1999, 6,576,460 options were
outstanding, none of which were exercisable.
On October 19, 1999, PCA effected a 220-for-one split of its common stock
which resulted in an increase in the number of outstanding shares of its common
stock 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.
7. SALE OF THE GROUP AND RELATED IMPAIRMENT
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 $2.2 billion, and a 45% common equity interest in the joint
venture. The owned and leased assets contributed included the Group's two
linerboard and two medium mills, 39 corrugator plants, 28 sheet/specialty
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.
F-37
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999 (CONTINUED)
7. SALE OF THE GROUP AND RELATED IMPAIRMENT (CONTINUED)
In connection with the Transactions, TPI 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.
Tenneco then contributed the Group's assets (subject to the new
indebtedness) and the Group's liabilities to PCA in exchange for (a) a 45%
common equity interest in PCA valued at approximately $200.0 million and
(b) $246.5 million in cash. As a result of the Transactions, Tenneco recognized
a pretax loss in the first quarter of 1999 of approximately $293.0 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 and was allocated to the following financial
statement line items:
<TABLE>
<S> <C>
(IN THOUSANDS)
Intangibles.............................................. $ 46,206
Machinery and equipment.................................. 183,906
--------
Total................................................ $230,112
========
</TABLE>
The impairment charge was first applied against the goodwill specifically
attributable to the containerboard assets and the remaining amount was applied
against property, plant and equipment.
The Group's financial statements reflect $230.1 million of the $293.0
million charge representing the impairment attributable to the assets. Tenneco
has informed PCA that the remaining $62.9 million charge primarily includes
liabilities for direct incremental costs of sales, severance costs and other
contractual obligations directly related to the containerboard transaction, and
the impairment of other containerboard-related assets not contributed to PCA.
The $62.9 million charge is not part of the Group's financial statements.
On August 25, 1999, PCA Holdings and TPI agreed that the acquisition
consideration should be reduced as a result of a post-closing price adjustment
by an amount equal to $20.0 million plus interest through the date of payment by
TPI. On September 23, 1999, TPI paid PCA $20.7 million, representing the $20.0
million adjustment and $0.7 million of interest. PCA recorded $11.9 million of
this amount on the June 30, 1999 balance sheet, representing the amount that was
previously agreed to, and recorded the remaining amount in September 1999.
8. EXTRAORDINARY LOSS
During the first quarter of 1999, the Group extinguished $16.6 million of
debt related to mill assets. In connection with that extinguishment an
extraordinary loss of $10.6 million was recorded ($6.3 million, net of the
related tax effects).
F-38
<PAGE>
PACKAGING CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999 (CONTINUED)
9. 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 TPI and included in the Group's combined financial
statements. In connection with the sale of the Group to PCA, each of these
companies became subsidiaries of PCA and fully, unconditionally, jointly and
severally guaranteed $550 million in senior subordinated notes issued by PCA in
connection with the Transactions. Separate financial statements of the guarantor
subsidiaries are not presented because, in the opinion of management, such
financial statements are not material to investors.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
(IN THOUSANDS)
Current assets........................................ $16,194
Non-current assets.................................... 14,041
-------
Total assets........................................ 30,235
Current liabilities................................... 4,292
Non-current liabilities............................... 5,332
-------
Total liabilities................................... 9,624
-------
Net assets............................................ $20,611
=======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Net sales........................................ $33,322 $25,814
Gross profit..................................... 2,540 918
Net (loss)....................................... (706) (579)
</TABLE>
10. SUBSEQUENT EVENT
In August 1999, PCA signed purchase and sales agreements with various buyers
to sell approximately 405,000 acres of timberland. PCA completed the sale of
these acres in the fourth quarter of 1999 and received total net proceeds of
$263 million. These proceeds were used to pay down debt.
F-39
<PAGE>
UNDERWRITING
PCA, the selling stockholder and the underwriters for the offering named
below have entered into an underwriting agreement with respect to the shares
being offered. Subject to certain conditions, each underwriter has severally
agreed to purchase the number of shares indicated in the following table.
Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Salomon Smith
Barney Inc., Deutsche Bank Securities Inc. and J.P. Morgan Securities Inc. are
the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co.........................................
Morgan Stanley & Co. Incorporated...........................
Salomon Smith Barney Inc....................................
Deutsche Bank Securities Inc................................
J.P. Morgan Securities Inc..................................
-----------
Total................................................. 46,250,000
===========
</TABLE>
------------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
6,410,240 shares from the selling stockholder to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by PCA and by the selling
stockholder. Such amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase 6,410,240 additional shares.
<TABLE>
<CAPTION>
Paid by PCA
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................ $ $
Total................................................ $ $
</TABLE>
<TABLE>
<CAPTION>
Paid by the Selling
Stockholder
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................ $ $
Total................................................ $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
U-1
<PAGE>
PCA's officers and directors and all of PCA's existing stockholders have
agreed with the underwriters not to offer, sell, hedge, or contract to sell,
hedge or otherwise dispose of any of their shares of common stock or any other
securities of PCA that they own that are substantially similar to the common
stock, including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, common stock or any
substantially similar securities (other than pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this prospectus), for a
period of 180 days after the date of the offering. Goldman, Sachs & Co.,
however, may in its sole discretion, at any time without notice, release all or
any portion of the shares subject to lock-up agreements. See "Shares Eligible
for Future Sale" for a discussion of transfer restrictions.
At the request of PCA, the underwriters have agreed to reserve up to
75,000 shares of common stock for sale to salaried and hourly employees of PCA
at the initial public offering price set forth on the cover of this prospectus.
The number of shares available for sale to the general public in the offering
will be reduced by the number of reserved shares sold to these employees. Any
reserved shares not so purchased will be offered to the general public on the
same basis as the other shares offered hereby.
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the selling stockholder,
PCA and the representatives. Among the factors to be considered in determining
the initial public offering price of the shares, in addition to prevailing
market conditions, will be PCA's historical performance, estimates of the
business potential and earnings prospects of PCA, an assessment of PCA's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
The common stock will be listed on the New York Stock Exchange under the
symbol "PKG". In order to meet one of the requirements for listing the common
stock on the NYSE, the underwriters have undertaken to sell lots of 100 or more
shares to a minimum of 2,000 beneficial holders.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the NYSE, in the
over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
PCA and the selling stockholder estimate that the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $2,500,000. Under the terms of the
U-2
<PAGE>
registration rights agreement, PCA has agreed to pay the expenses of the selling
stockholder, other than underwriting discounts and commissions, in connection
with the offering.
PCA and the selling stockholder have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
Goldman, Sachs & Co. is a lender under PCA's senior credit facility.
Goldman, Sachs & Co. represented Tenneco in connection with the sale of the
Group to PCA. Additionally, J.P. Morgan Securities Inc. and Deutsche Bank
Securities Inc. (under the name BT Alex. Brown Incorporated) were co-lead
arrangers, Bankers Trust Company, an affiliate of Deutsche Bank
Securities Inc., was the syndication agent, and Morgan Guaranty Trust Company of
New York, an affiliate of J.P. Morgan Securities Inc., was the administrative
agent, for the lenders' syndicate to the senior credit facility.
J.P. Morgan Capital Corporation and Sixty Wall Street Fund, L.P., affiliates
of J.P. Morgan Securities Inc., and BT Capital Investors, L.P., an affiliate of
Deutsche Bank Securities Inc., are co-investors with Madison Dearborn Capital
Partners III, L.P. in PCA Holdings, and, as of December 31, 1999, may be deemed
to own beneficially 3,666,713 shares, 1,222,237 shares and 880,000 shares of the
common stock of PCA, respectively. J.P. Morgan Capital Corporation, Sixty Wall
Street Fund, L.P. and BT Capital Investors, L.P. have agreed not to sell,
transfer, assign or hypothecate for 90 days following the effective date of the
offering either their membership interests in PCA Holdings LLC or any shares of
common stock of PCA issuable upon redemption of these interests in order to
comply with the provisions of Rule 2710 of the Conduct Rules of the National
Association of Securities Dealers, Inc. regarding underwriter compensation.
J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. (through its
affiliates) were the initial purchasers of the notes and the senior exchangeable
preferred stock issued in connection with the closing of the transactions and
have engaged, and may in the future engage (directly or through affiliates), in
commercial banking and/or investment banking transactions with PCA and its
affiliates.
U-3
<PAGE>
[MAP DEPICTING LOCATION OF CORRUGATED PLANTS,
MARKETING DESIGN CENTERS, TECHNICAL CENTER,
SHEET/SPECIALTY PLANTS AND MILLS/WOODLANDS]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary..................... 1
Risk Factors........................... 10
Forward-Looking Statements............. 16
The Transactions....................... 17
Use of Proceeds........................ 19
Dilution............................... 20
Dividend Policy........................ 21
Capitalization......................... 22
Unaudited Pro Forma Financial
Information.......................... 23
Selected Financial and Other Data...... 31
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 36
Business............................... 49
Management............................. 60
Certain Relationships and Related
Transactions......................... 69
Principal and Selling Stockholders..... 72
Description of Capital Stock........... 74
Shares Eligible for Future Sale........ 76
Description of Certain Indebtedness.... 79
U.S. Federal Tax Consequences for
Non-United States Holders of Common
Stock................................ 81
Legal Matters.......................... 83
Experts................................ 83
Where You Can Find More Information.... 83
Index to Financial Statements.......... F-1
Underwriting........................... U-1
</TABLE>
--------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
46,250,000 Shares
PACKAGING CORPORATION
OF AMERICA
Common Stock
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
DEUTSCHE BANC ALEX. BROWN
J.P. MORGAN & CO.
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses, to be paid solely by
PCA, of the issuance and distribution of the securities being registered hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 271,385
NASD filing fee............................................. 30,500
New York Stock Exchange listing fee......................... 466,100
Blue Sky fees and expenses (including attorneys' fees and
expenses)................................................. 5,000
Printing expenses........................................... 550,000
Accounting fees and expenses................................ 300,000
Transfer agent's fees and expenses.......................... 5,500
Legal fees and expenses..................................... 525,000
Miscellaneous expenses...................................... 346,515
----------
Total..................................................... $2,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
CERTIFICATE OF INCORPORATION
The Restated Certificate of Incorporation of PCA provides that to the
fullest extent permitted from time to time by the General Corporation Law of the
State of Delaware ("DGCL"), a director of PCA shall not be liable to the company
or its stockholders for monetary damages for a breach of fiduciary duty as a
director.
BY-LAWS
The Second Amended and Restated By-laws of PCA will provide that PCA shall
indemnify its directors and officers to the maximum extent permitted from time
to time by the DGCL.
DELAWARE GENERAL CORPORATION LAW
Section 145 of the DGCL provides that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. Section 145 further provides that a corporation
similarly may indemnify any such person serving in any such capacity who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, against expenses actually and reasonably incurred in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue
II-1
<PAGE>
or matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
such other court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided, however, that such
provision shall not eliminate or limit the liability of a director (1) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (3) under Section 174 of the DGCL,
which relates to unlawful payment of dividends and unlawful stock purchases and
redemptions, or (4) for any transaction from which the director derived an
improper personal benefit.
INSURANCE
The directors and officers of PCA are covered under directors' and officers'
liability insurance policies maintained by PCA with coverage up to $50 million.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The share numbers set forth below do not give effect to the 220-for-one
stock split effected on October 19, 1999, referred to in this registration
statement.
During the last three years, PCA has issued the following securities without
registration under the Securities Act of 1933:
(1) On April 12, 1999, in transactions exempt from registration under
Section 4(2) of the Securities Act of 1933, PCA issued:
(a) an aggregate of 236,500 shares of common stock to PCA Holdings LLC
for an aggregate of $236.5 million;
(b) an aggregate of 193,500 shares of common stock valued at
$193.5 million to Pactiv in partial consideration for the contribution of
its containerboard and corrugated packaging products business to PCA;
(c) an aggregate of 55 shares, liquidation preference $1.00 per share,
of junior preferred stock to PCA Holdings for nominal consideration; and
(d) an aggregate of 45 shares, liquidation preference $1.00 per share,
of junior preferred stock to Pactiv for nominal consideration.
(2) On April 12, 1999, in a transaction exempt from registration under
Section 4(2) of the Securities Act of 1933, PCA sold to J.P. Morgan
Securities Inc. and BT Alex. Brown Incorporated, pursuant to a Purchase
Agreement, dated as of March 30, 1999:
(a) an aggregate of $550 million aggregate principal amount of 9 5/8%
senior subordinated notes due 2009 for an aggregate consideration of
$550 million less underwriting discounts and commissions of $16.5 million;
and
(b) an aggregate of $100 million aggregate liquidation preference of
12 3/8% senior exchangeable preferred stock due 2010 for an aggregate
consideration of $100 million less underwriting discounts and commissions of
$3.5 million.
II-2
<PAGE>
The notes and preferred stock were immediately resold by the initial
purchasers in transactions not involving a public offering.
(3) In June 1999, in transactions exempt from registration under Rule 701 of
the Securities Act of 1933, PCA sold an aggregate of 14,240 shares of common
stock to employees of PCA for an aggregate of $14.2 million in cash. The
proceeds were used to redeem 7,832 shares from PCA Holdings and 6,408 shares
from Pactiv. PCA also issued options to management employees to purchase 29,893
shares of common stock.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
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 Letter Agreement Amending the Contribution Agreement, dated
as of April 12, 1999, among Pactiv, PCA Holdings and PCA.+
3.1 Restated Certificate of Incorporation of PCA.+
3.2 Form of Certificate of Amendment to Restated Certificate of
Incorporation of PCA.*
3.3 Form of Second Amended and Restated By-laws of PCA.*
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.+
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.+
4.3 Exchange Indenture, dated as of April 12, 1999, by and among
PCA and U.S. Trust Company of Texas, N.A.+
4.4 Notes Registration Rights Agreement, dated as of April 12,
1999, by and among PCA, Dahlonega, Dixie, PCA Hydro, PCA
Tomahawk, PCA Valdosta, J.P. Morgan Securities Inc. ("J.P.
Morgan") and BT Alex. Brown Incorporated ("BT").+
4.5 Preferred Stock Registration Rights Agreement, dated as of
April 12, 1999, by and among PCA, J.P. Morgan and BT.+
4.6 Form of Rule 144A Global Note and Subsidiary Guarantee.+
4.7 Form of Regulation S Global Note and Subsidiary Guarantee.+
4.8 Form of Rule 144A Global Certificate.+
4.9 Form of certificate representing shares of common stock.*
5.1 Opinion of Kirkland & Ellis.*
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.+
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").+
10.3 Subsidiaries Guaranty, dated as of April 12, 1999, made by
Dahlonega, Dixie, PCA Hydro, PCA Tomahawk, PCA Valdosta and
Morgan Guaranty.+
10.4 Pledge Agreement, dated as of April 12, 1999, among PCA,
Dahlonega, Dixie, PCA Hydro, PCA Tomahawk, PCA Valdosta and
Morgan Guaranty.+
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.5 TPI Security Agreement, dated as of April 12, 1999, between
Pactiv and Morgan Guaranty.+
10.6 PCA Security Agreement, dated as of April 12, 1999, among
PCA, Dahlonega, Dixie, PCA Hydro, PCA Tomahawk, PCA Valdosta
and Morgan Guaranty.+
10.7 Stockholders Agreement, dated as of April 12, 1999, by and
among Pactiv, PCA Holdings and PCA.+
10.8 Registration Rights Agreement, dated as of April 12, 1999,
by and among Pactiv, PCA Holdings and PCA.+
10.9 Holding Company Support Agreement, dated as of April 12,
1999, by and between PCA Holdings and PCA.+
10.10 Facility Use Agreement, dated as of April 12, 1999, by and
between Pactiv and PCA.+
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.+
10.12 Purchase/Supply Agreement, dated as of April 12, 1999,
between PCA and Tenneco Packaging Speciality and Consumer
Products Inc.+
10.13 Purchase/Supply Agreement, dated as of April 12, 1999,
between PCA and Pactiv.+
10.14 Purchase/Supply Agreement, dated as of April 12, 1999,
between PCA and Tenneco Automotive Inc.+
10.15 Technology, Financial and Administrative Transition Services
Agreement, dated as of April 12, 1999, between Pactiv and
PCA.+
10.16 Letter Agreement Regarding Terms of Employment, dated as of
January 25, 1999, between PCA and Paul T. Stecko.+
10.17 Letter Agreement Regarding Terms of Employment, dated as of
May 19, 1999, between PCA and Paul T. Stecko.+
10.18 1999 Long-Term Equity Incentive Plan, effective as of
October 19, 1999.*
10.19 Management Equity Agreement, dated as of June 1, 1999, among
PCA, Paul T. Stecko and the Paul T. Stecko 1999 Dynastic
Trust.+
10.20 Form of Management Equity Agreement, dated as of June 1,
1999, among PCA and the members of management party
thereto.+
10.21 Memorandum Regarding Special Retention Bonus, dated as of
April 16, 1999, from PCA to William J. Sweeney.+
10.22 Amended and Restated 1999 Management Equity Compensation
Plan, effective as of June 2, 1999.+
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.
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.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in the signature pages to the
registration statement).*
27.1 Financial Data Schedule.
</TABLE>
- --------------
+ Incorporated herein by reference to the same numbered exhibit to PCA's
Registration Statement on Form S-4 (Registration No. 333-79511).
* Previously filed.
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statement schedules of PCA for the
three years ended December 31, 1998 are included in this registration statement.
Schedule II - Packaging Corporation of America - Valuation and Qualifying
Accounts.
<TABLE>
<CAPTION>
ALLOWANCE FOR DOUBTFUL ACCOUNTS BALANCE PROVISION ADDITIONS/DEDUCTIONS TRANSLATION BALANCE END
RECEIVABLE BEGINNING OF YEAR (BENEFIT) FROM RESERVES * ADJUSTMENTS OF YEAR
- ---------- ----------------- --------- -------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- --------------
* 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 registration statement and have issued our
report thereon dated February 26, 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
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant, pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by any such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
or not such indemnification is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Packaging
Corporation of America has duly caused this Amendment No. 3 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lake Forest, State of Illinois, on January 17, 2000.
Packaging Corporation of America
By: /s/ RICHARD B. WEST
--------------------------------------
Name: Richard B. West
Title: Chief Financial Officer, Vice
President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed below by the following
persons in the capacities indicated on January 17, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ PAUL T. STECKO*
- --------------------------------------------
Paul T. Stecko Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
/s/ RICHARD B. WEST
- --------------------------------------------
Richard B. West Chief Financial Officer, Vice President and
Secretary (Principal Financial and Accounting
Officer)
/s/ DANA G. MEAD*
- --------------------------------------------
Dana G. Mead Director
/s/ THEODORE R. TETZLAFF*
- --------------------------------------------
Theodore R. Tetzlaff Director
/s/ SAMUEL M. MENCOFF*
- --------------------------------------------
Samuel M. Mencoff Director
/s/ JUSTIN S. HUSCHER*
- --------------------------------------------
Justin S. Huscher Director
/s/ THOMAS S. SOULELES*
- --------------------------------------------
Thomas S. Souleles Director
</TABLE>
- --------------
*By: /s/ RICHARD B. WEST
----------------------------------------
Richard B. West
ATTORNEY-IN-FACT
II-7
<PAGE>
EXHIBIT 1.1
PACKAGING CORPORATION OF AMERICA
Common Stock
------------------
UNDERWRITING AGREEMENT
------------------
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
Salomon Smith Barney Inc.
Deutsche Bank Securities Inc.
J.P. Morgan Securities Inc.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004.
Ladies and Gentlemen:
Packaging Corporation of America, a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 11,500,000 shares of common stock, par value
$.01 per share (the "Stock"), of the Company and Pactiv Corporation, a
stockholder of the Company (the "Selling Stockholder"), proposes, subject to
the terms and conditions stated herein, to sell to the Underwriters an
aggregate of 34,750,000 shares and, at the election of the Underwriters, up
to 6,410,240 additional shares of Stock. The aggregate of 46,250,000 shares
to be sold by the Company and the Selling Stockholder is herein called the
"Firm Shares" and the aggregate of 6,410,240 additional shares to be sold by
the Selling Stockholder is herein called the "Optional Shares". The Firm
Shares and the Optional Shares that the Underwriters elect to purchase
pursuant to Section 2 hereof are herein collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees
with, each of the Underwriters that:
(i) A registration statement on Form S-1 (File No.
333-86963) as amended by any pre-effective amendments filed prior
to the execution and delivery of this Agreement by each of the
Underwriters (the "Initial Registration Statement") in respect of
the Shares has been filed with the Securities and Exchange
Commission (the "Commission"); the Initial Registration Statement
and any post-effective amend-
1
<PAGE>
ment thereto, each in the form heretofore delivered to you, and,
excluding exhibits thereto, to you for each of the other
Underwriters, have been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the
size of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended
(the "Act"), which became effective upon filing, no other document
with respect to the Initial Registration Statement has heretofore
been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration
Statement, if any, has been issued and no proceeding for that
purpose has been initiated or threatened by the Commission (any
preliminary prospectus included in the Initial Registration
Statement or filed with the Commission pursuant to Rule 424(a) of
the rules and regulations of the Commission under the Act is
hereinafter called a "Preliminary Prospectus"; the various parts of
the Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with
Section 5(a) hereof and deemed by virtue of Rule 430A under the Act
to be part of the Initial Registration Statement at the time it was
declared effective, as amended at the time such part of the Initial
Registration Statement became effective or such part of the Rule
462(b) Registration Statement, if any, became or hereafter becomes
effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed
pursuant to Rule 424(b) under the Act, is hereinafter called the
"Prospectus");
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use
therein or by the Selling Stockholder expressly for use therein;
(iii) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will conform, in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder and do not and will not, as
of the applicable effective date as to the Registration Statement
and any amendment thereto and as of the applicable filing date as to
the Prospectus and any amendment or supplement thereto, contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; PROVIDED, HOWEVER, that this representation
and warranty shall not apply to any statements or omissions made in
reliance upon and in conformity with information furnished in
writing to the Company by an Underwriter through Goldman,
2
<PAGE>
Sachs & Co. expressly for use therein or by the Selling Stockholder
expressly for use therein;
(iv) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock (other
than pursuant to the grant or exercise of options under plans described
in the Prospectus) or increase in the long-term debt of the Company or
any of its subsidiaries or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole, otherwise than as set forth or
contemplated in the Prospectus;
(v) The Company and its subsidiaries have good and
marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them, in each
case free and clear of all liens, encumbrances and defects except
such as are described in the Prospectus or such as would not have a
material adverse effect on the business, senior management,
financial position, stockholders' equity or results of operations of
the Company and its subsidiaries, taken as a whole (a "Material
Adverse Effect"); and any real property and buildings held under
lease or cutting rights by the Company and its subsidiaries are held
by them under valid, subsisting and enforceable leases or other
agreements with such exceptions as would not, singly or in the
aggregate, have a Material Adverse Effect;
(vi) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of Delaware, with power and authority (corporate and
other) to own its properties and conduct its business as described
in the Prospectus, and has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business, other than where the failure to
be so qualified or in good standing would not, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect;
and each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation, with power and authority
(corporate and other) to own its properties and conduct its business
as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it owns
or leases properties or conducts any business, other than where the
failure to be so qualified or in good standing would not, singly or
in the aggregate, reasonably be expected to have a Material Adverse
Effect;
3
<PAGE>
(vii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company have been duly authorized and are validly issued, fully
paid and non-assessable and conform to the description of the Stock
contained in the Prospectus; and all of the issued shares of capital
stock of each subsidiary of the Company have been duly authorized,
validly issued, fully paid and non-assessable and (except for
directors' qualifying shares) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, security interests
and claims other than liens, encumbrances, security interests and
claims created pursuant to the senior bank financing as described in
the Prospectus;
(viii) The unissued Firm Shares to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued and fully paid and
non-assessable and will conform to the description of the Stock
contained in the Prospectus;
(ix) This Agreement has been duly authorized, executed and
delivered by the Company. The issue and sale of the Shares to be sold
by the Company hereunder and the compliance by the Company with all of
the provisions of this Agreement and the consummation of the
transactions herein contemplated will not (a) violate the certificate
or articles of incorporation or by-laws of the Company or any of its
subsidiaries, (b) constitute a violation by the Company or any of its
subsidiaries of any applicable provision of any law, statute or
regulation, except for violations which would not, singly or in the
aggregate, have a Material Adverse Effect, or (c) breach, or result in
a default under, any agreement known to the Company's executive
officers to be material to the Company and its subsidiaries taken as a
whole, except for conflicts or breaches which would not, singly or in
the aggregate, have a Material Adverse Effect; and no consent,
approval, authorization, order, license, registration or qualification
of or with any such court or governmental agency or body is required
for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares and such consents, approvals,
authorizations, orders, licenses, registrations or qualifications (i)
as may be required under state or foreign securities or Blue Sky laws
in connection with the purchase and distribution of the Shares by the
Underwriters, (ii) as have been obtained or (iii) the failure to obtain
of which would not, singly or in the aggregate, have a Material Adverse
Effect;
(x) Neither the Company nor any of its subsidiaries is,
or with the giving of notice or lapse of time or both would be, in
violation of or in default under, its certificate or articles of
incorporation or by-laws or any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which it or any of them or any
of their respective properties is bound, except, in the case of any
indenture, mortgage, deed of trust, loan agreement or other agreement,
for violations and defaults which would not, singly or in the
aggregate, have a Material Adverse Effect;
4
<PAGE>
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, and under the caption
"U.S. Federal Tax Consequences for Non-United States Holders of Common
Stock", insofar as they purport to describe the provisions of the laws
and documents referred to therein, are accurate and complete in all
material respects;
(xii) Other than as set forth in the Prospectus, there
are no legal or governmental investigations of which the Company has
received notice or proceedings pending against or affecting the
Company or any of its subsidiaries or any of their respective
properties which, if determined adversely to the Company or any of
its subsidiaries, would, singly or in the aggregate, reasonably be
expected to have Material Adverse Effect; and, to the Company's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others; and there are no
court and administrative orders, writs, judgments and decrees
specifically directed to the Company or any of its subsidiaries and
known to the Company's executive officers to be material to the
Company and its subsidiaries taken as a whole;
(xiii) Each of the Company and its subsidiaries owns,
possesses or has obtained all licenses, permits, certificates,
consents, orders, approvals and other authorizations from, and has made
all declarations and filings with, all federal, state, local and other
governmental authorities (including foreign regulatory agencies), all
self-regulatory organizations and all courts and other tribunals,
domestic or foreign, necessary to own or lease, as the case may be, and
to operate its properties and to carry on its business as conducted as
of the date hereof and as of each Time of Delivery (as defined in
Section 4 hereof), in each case except as disclosed in the Prospectus
or except where such failure to own, possess or obtain necessary
licenses, permits, certificates, consents, orders, approvals or
authorizations or failure to make necessary declarations and filings
would not, singly or in the aggregate, have a Material Adverse Effect,
and neither the Company nor any such subsidiary has received any actual
notice of any proceeding relating to revocation or modification of any
such license, permit, certificate, consent, order, approval or other
authorization, except as described in the Prospectus or except as would
not, singly or in the aggregate, have a Material Adverse Effect; and
each of the Company and its subsidiaries is in compliance with all laws
and regulations (other than Environmental Laws (as defined herein))
relating to the conduct of its business as conducted as of the date
hereof and as of each Time of Delivery, except as disclosed in the
Prospectus or except where the failure to comply would not, singly or
in the aggregate, have a Material Adverse Effect;
(xiv) The Company and its subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human
health and safety, the environment or hazardous or toxic substances
or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
have received all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions
of any such permit, license or other approval, except as
5
<PAGE>
disclosed in the Prospectus or except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failures to comply with the terms and conditions
of such permits, licenses or other approvals would not, singly or in
the aggregate, have a Material Adverse Effect;
(xv) In the ordinary course of its business, the Company
conducts a periodic review of the effect of Environmental Laws on the
business, operations and properties of the Company and its
subsidiaries, in the course of which it identifies and evaluates
associated costs and liabilities; on the basis of such review, the
Company has reasonably concluded that, except as disclosed in the
Prospectus, such associated costs and liabilities would not, singly or
in the aggregate, have a Material Adverse Effect;
(xvi) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company",
as such term is defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act");
(xvii) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida
Statutes;
(xviii) Arthur Anderson LLP, who has certified certain
historical financial information of the containerboard and corrugated
packaging products group of the Selling Stockholder and its
subsidiaries, and Ernst & Young LLP, who has certified certain
historical financial information of the Company and its subsidiaries,
are each, to the Company's knowledge, independent public accountants as
required by the Act and the rules and regulations of the Commission
thereunder; and
(xix) The Company has reviewed its operations and that
of its subsidiaries and any vendors and suppliers with which the
Company or any of its subsidiaries has a material relationship to
evaluate the extent to which the business or operations of the
Company or any of its subsidiaries has been or will be affected by
the Year 2000 Problem. As a result of such review, except as
disclosed in the Prospectus, the Company has no reason to believe,
and does not believe, that the Year 2000 Problem has had or will
have a Material Adverse Effect or has resulted or will result in any
material loss or interference with the Company's business or
operations. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind is not functioning or
will not function, in the case of dates or time periods occurring
after December 31, 1999, at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000.
(b) The Selling Stockholder represents and warrants to, and
agrees with, each of the Underwriters and the Company that:
6
<PAGE>
(i) The Selling Stockholder has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of the State of Delaware;
(ii) All consents, approvals, authorizations and orders
necessary for the execution and delivery by the Selling Stockholder of
this Agreement, and for the sale and delivery of the Shares to be sold
by the Selling Stockholder hereunder, have been obtained; and the
Selling Stockholder has full right, power and authority (a) to enter
into this Agreement and this Agreement has been duly executed and
delivered by the Selling Stockholder and (b) to sell, assign, transfer
and deliver the Shares to be sold by the Selling Stockholder hereunder;
(iii) The sale of the Shares to be sold by the Selling
Stockholder hereunder and the compliance by the Selling Stockholder
with all of the provisions of this Agreement and the consummation of
the transactions herein contemplated will not (a) violate the
certificate of incorporation or by-laws of the Selling Stockholder, (b)
constitute a violation by the Selling Stockholder of any applicable
provision of any law, statute or regulation, except for violations
which would not affect the ability of the Selling Stockholder to
deliver the Shares or otherwise consummate the transactions pursuant to
and in accordance with this Agreement, or (c) breach, or result in a
default under, any agreement known to the Selling Stockholder's
executive officers to be material to the Selling Stockholder, except
for conflicts or breaches which would not affect the ability of the
Selling Stockholder to deliver the Shares or otherwise consummate the
transactions pursuant to and in accordance with this Agreement;
(iv) The Selling Stockholder has, and immediately prior to
each Time of Delivery (as defined in Section 4 hereof) the Selling
Stockholder will have, good and valid title to the Shares to be sold by
the Selling Stockholder hereunder, free and clear of all liens,
encumbrances, equities or claims (other than the restrictions on
transfer specifically set forth in the Stockholders Agreement dated as
of April 12, 1999 by and among the Selling Stockholder, the Company and
PCA Holdings LLC, which restrictions will cease to be effective at the
Time of Delivery in respect of Shares delivered and paid for pursuant
hereto); and, upon delivery of such Shares and payment therefor
pursuant hereto, good and valid title to such Shares, free and clear of
all liens, encumbrances, security interests and claims, will pass to
the several Underwriters;
(v) During the period beginning on the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, hedge, contract to sell, hedge or
otherwise dispose of, except as provided hereunder, any securities of
the Company that are substantially similar to the Shares (it being
understood that such securities do not include the Company's 12 3/8%
Senior Exchangeable Preferred Stock due 2010), including but not
limited to any securities that are convertible into or exchangeable
for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock
option plans existing on, or upon the conversion or exchange of
convertible or exchangeable securities outstanding as of, the date of
this Agreement), without your prior written consent;
7
<PAGE>
(vi) The Selling Stockholder has not taken and will not
take, directly or indirectly, any action which is designed to or
which has constituted or which might reasonably be expected to cause
or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Shares;
(vii) To the extent that any statements or omissions
made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto are made in
reliance upon and in conformity with written information furnished
to the Company by the Selling Stockholder expressly for use therein,
such Preliminary Prospectus and the Registration Statement did, and
the Prospectus and any further amendments or supplements to the
Registration Statement and the Prospectus, when they become
effective or are filed with the Commission, as the case may be, will
conform in all material respects to the requirements of the Act and
the rules and regulations of the Commission thereunder and will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading;
(viii) In order to document the Underwriters' compliance
with the reporting and withholding provisions of the Tax Equity and
Fiscal Responsibility Act of 1982 with respect to the transactions
herein contemplated, the Selling Stockholder will deliver to you
prior to or at the First Time of Delivery (as hereinafter defined) a
properly completed and executed United States Treasury Department
Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof); and
(ix) The Shares are subject to the interests of the
Underwriters hereunder; the obligations of the Selling Stockholder
hereunder shall not be terminated by operation of law, whether by the
dissolution of the Selling Stockholder, or by the occurrence of any
other event; and if the Selling Stockholder should be dissolved, or if
any other such event should occur, before the delivery of the Shares
hereunder, certificates representing the Shares shall be delivered by
or on behalf of the Selling Stockholder in accordance with the terms
and conditions of this Agreement.
2. Subject to the terms and conditions herein set forth, (a)
the Company and the Selling Stockholder agree, severally and not jointly, to
sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and the Selling
Stockholder, at a purchase price per share of $ , the number of Firm
Shares (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Firm Shares to be sold by
the Company and the Selling Stockholder as set forth opposite their
respective names in Schedule II hereto by a fraction, the numerator of which
is the aggregate number of Firm Shares to be purchased by such Underwriter as
set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares to be purchased
by all of the Underwriters from the Company and the Selling Stockholder
hereunder and (b) in the event and to the extent that the Underwriters shall
exercise the election to purchase Optional Shares as provided below, the
Selling Stockholder agrees to sell to each of the Underwriters, and each of
the Underwriters agrees, severally and not jointly, to purchase from the
Selling
8
<PAGE>
Stockholder, at the purchase price per share set forth in clause (a) of this
Section 2, that portion of the number of Optional Shares as to which such
election shall have been exercised (to be adjusted by you so as to eliminate
fractional shares) determined by multiplying such number of Optional Shares
by a fraction the numerator of which is the maximum number of Optional Shares
which such Underwriter is entitled to purchase as set forth opposite the name
of such Underwriter in Schedule I hereto and the denominator of which is the
maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Selling Stockholder hereby grants to the Underwriters the right
to purchase at their election up to 6,410,240 Optional Shares, at the
purchase price per share set forth in the paragraph above, for the sole
purpose of covering sales of shares in excess of the number of Firm Shares.
Any such election to purchase Optional Shares may be exercised only by
written notice from you to the Selling Stockholder, given within a period of
30 calendar days after the date of this Agreement and setting forth the
aggregate number of Optional Shares to be purchased and the date on which
such Optional Shares are to be delivered, as determined by you but in no
event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Selling Stockholder otherwise agree in
writing, earlier than two or later than ten business days after the date of
such notice.
3. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale
upon the terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter
hereunder, in definitive form, and in such authorized denominations and
registered in such names as Goldman, Sachs & Co. may request upon at least
forty-eight hours' prior notice to the Company and the Selling Stockholder
shall be delivered by or on behalf of the Company and the Selling Stockholder
to Goldman, Sachs & Co., through the facilities of The Depository Trust
Company ("DTC"), for the account of such Underwriter, against payment by or
on behalf of such Underwriter of the purchase price therefor by wire transfer
of Federal (same-day) funds to the respective accounts specified by the
Company and the Selling Stockholder to Goldman, Sachs & Co. at least
forty-eight hours in advance. The Company and the Selling Stockholder will
cause the certificates representing the Shares to be made available for
checking and packaging at least twenty-four hours prior to each Time of
Delivery (as defined below) with respect thereto at the office of DTC or its
designated custodian (the "Designated Office"). The time and date of such
delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
New York City time, on ............., 2000 or such other time and date as
Goldman, Sachs & Co., the Company and the Selling Stockholder may agree upon
in writing, and, with respect to the Optional Shares, 9:30 a.m., New York
City time, on the date specified by Goldman, Sachs & Co. in the written
notice given by Goldman, Sachs & Co. of the Underwriters' election to
purchase such Optional Shares, or such other time and date as Goldman, Sachs
& Co. and the Selling Stockholder may agree upon in writing. Such time and
date for delivery of the Firm Shares is herein called the "First Time of
Delivery", such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery", and
each such time and date for delivery is herein called a "Time of Delivery".
9
<PAGE>
(b) The documents to be delivered at each Time of
Delivery by or on behalf of the parties hereto pursuant to Section 7 hereof,
including the cross-receipt for the Shares and any additional documents
requested by the Underwriters pursuant to Section 7(m) hereof, will be
delivered at the offices of Cahill Gordon & Reindel, 80 Pine Street, New
York, New York 10005 (the "Closing Location"), and the Shares will be
delivered at the Designated Office, all at each Time of Delivery. A meeting
will be held at the Closing Location at ..............p.m., New York City
time, on the New York Business Day next preceding each Time of Delivery, at
which meeting the final drafts of the documents to be delivered pursuant to
the preceding sentence will be available for review by the parties hereto.
For the purposes of this Section 4, "New York Business Day" shall mean each
Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law
or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by
you and to file such Prospectus pursuant to Rule 424(b) under the
Act not later than the Commission's close of business on the second
business day following the execution and delivery of this Agreement,
or, if applicable, such earlier time as may be required by Rule
430A(a)(3) under the Act; to make no further amendment or any
supplement to the Registration Statement or Prospectus prior to the
last Time of Delivery which shall be disapproved by you promptly
after reasonable notice thereof; to advise you, promptly after it
receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been
filed and to furnish you copies thereof; to advise you, promptly
after it receives notice thereof, of the issuance by the Commission
of any stop order or of any order preventing or suspending the use
of any Preliminary Prospectus or prospectus, of the suspension of
the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or
Prospectus or for additional information; and, in the event of the
issuance of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or prospectus or suspending
any such qualification, promptly to use its best efforts to obtain
the withdrawal of such order;
(b) Promptly from time to time to take such action as
you may reasonably request to qualify the Shares for offering and
sale under the securities laws of such jurisdictions as you may
request and to comply with such laws so as to permit the continuance
of sales and dealings therein in such jurisdictions for as long as
may be necessary to complete the distribution of the Shares,
provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction;
(c) Prior to 11:00 A.M., New York City time, on the
New York Business Day next succeeding the date of this Agreement and
from time to time, to furnish the Underwriters with copies of the
Prospectus in New York City in such quantities as
10
<PAGE>
you may reasonably request, and, if the delivery of a prospectus is
required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering
or sale of the Shares and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made when such Prospectus is delivered, not misleading,
or, if for any other reason it shall be necessary during such period
to amend or supplement the Prospectus in order to comply with the
Act, to notify you and upon your request to prepare and furnish
without charge to each Underwriter and to any dealer in securities
as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will
correct such statement or omission or effect such compliance, and in
case any Underwriter is required to deliver a prospectus in
connection with sales of any of the Shares at any time nine months
or more after the time of issue of the Prospectus, upon your request
but at the expense of such Underwriter, to prepare and deliver to
such Underwriter as many copies as you may request of an amended or
supplemented Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders
as soon as practicable, but in any event not later than eighteen
months after the effective date of the Registration Statement (as
defined in Rule 158(c) under the Act), an earnings statement of the
Company and its subsidiaries (which need not be audited) complying
with Section 11(a) of the Act and the rules and regulations of the
Commission thereunder (including, at the option of the Company, Rule
158);
(e) During the period beginning on the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, hedge, contract to sell, hedge or
otherwise dispose of, except as provided hereunder, any securities
of the Company that are substantially similar to the Shares (it
being understood that such securities do not include the Company's
12 3/8% Senior Exchangeable Preferred Stock due 2010), including but
not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or
any such substantially similar securities (other than pursuant to
employee stock option plans existing on, or upon the conversion or
exchange of convertible or exchangeable securities outstanding as
of, the date of this Agreement), without your prior written consent;
(f) To furnish to its stockholders as soon as
practicable after the end of each fiscal year an annual report
(including a balance sheet and statements of income, stockholders'
equity and cash flows of the Company and its consolidated
subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three
quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement), to
make available to its stockholders consolidated summary financial
information of the Company and its subsidiaries for such quarter in
reasonable detail;
11
<PAGE>
(g) During a period of three years from the effective
date of the Registration Statement, to furnish to you copies of all
reports or other communications (financial or other) furnished to
stockholders, and to deliver to you (i) as soon as they are
available, copies of any reports and financial statements furnished
to or filed with the Commission or any national securities exchange
on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial
condition of the Company as you may from time to time reasonably
request (such financial statements to be on a consolidated basis to
the extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its stockholders generally or
to the Commission);
(h) To use the net proceeds received by it from the
sale of the Firm Shares pursuant to this Agreement in the manner
specified in the Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list, subject to notice
of issuance, the Shares on the New York Stock Exchange (the
"Exchange"); and
(j) If the Company elects to rely upon Rule 462(b),
the Company shall file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement, and the Company shall at
the time of filing either pay to the Commission the filing fee for
the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
6. The Company and the Selling Stockholder, jointly and
severally, covenant and agree with one another and with the several
Underwriters that (a) the Company will pay or cause to be paid the following:
(i) the fees, disbursements and expenses of the Company's counsel and
accountants; (ii) the fees, disbursements and expenses of one firm selected
as counsel for the Selling Stockholder in connection with the registration of
the Shares; (iii) all expenses, including registration and filing fees, in
connection with the preparation, printing, filing and distribution of the
registration statement, any preliminary prospectus or final prospectus, term
sheets and any other offering documents, and amendments and supplements
thereto, and the mailing and delivering of copies thereof to any underwriters
and dealers; (iv) the cost of printing or producing any underwriting
agreements and blue sky or legal investment memoranda, and any other
documents in connection with the offering, sale or delivery of the Shares;
(v) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws, including the fees,
disbursements and expenses of counsel for the underwriters in connection with
such qualification and in connection with blue sky and legal investment
surveys; (vi) the filing fees incident to securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of
the Shares; (vii) transfer agents' and registrars' fees and expenses and the
fees and expenses of any other agent or trustee appointed in connection with
such offering; (viii) all security engraving and security printing expenses;
(ix) all fees, disbursements and expenses payable in connection with the
listing of the Shares on any securities exchange or automated interdealer
quotation system and the rating of such Shares; and (x) other out-of-pocket
expenses of the Selling Stockholder with respect to participating in such
registration to the ex-
12
<PAGE>
tent the Company is contractually obligated to pay such expenses; and (b) the
Selling Stockholder will pay or cause to be paid all expenses and taxes
incident to the sale and delivery of the Shares to be sold by the Selling
Stockholder to the Underwriters hereunder. Notwithstanding the foregoing, the
Selling Stockholder and the Company shall each be responsible for its own
internal administrative and similar costs. In connection with clause (b) of
the preceding sentence, Goldman, Sachs & Co. agrees to pay New York State
stock transfer tax, and the Selling Stockholder agrees to reimburse Goldman,
Sachs & Co. for associated carrying costs if such tax payment is not rebated
on the day of payment and for any portion of such tax payment not rebated. It
is understood, however, that, except as provided in this Section, and
Sections 8 and 11 hereof, the Underwriters will pay all of their own costs
and expenses, including the fees of their counsel, stock transfer taxes on
resale of any of the Shares by them, and any advertising expenses connected
with any offers they may make. Notwithstanding any other provision in this
Agreement to the contrary, the Company and the Selling Shareholder agree
that, as between them, the responsibility for expenses, including the
expenses described in this Section 6, shall be determined as set forth in the
Registration Rights Agreement dated April 12, 1999 among the Company, the
Selling Shareholder and PCA Holdings LLC, and, further, that if a party is
required under this Agreement to pay an amount for which the other party is
responsible under such Registration Rights Agreement, the responsible party
shall, upon demand, reimburse the other party.
7. The obligations of the Underwriters hereunder, as to the
Shares to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and
other statements of the Company and of the Selling Stockholder herein are, at
and as of such Time of Delivery, true and correct, the condition that the
Company and the Selling Stockholder shall have performed all of its and their
obligations hereunder theretofore to be performed, and the following
additional conditions:
(a) The Prospectus shall have been filed with the
Commission pursuant to Rule 424(b) within the applicable time period
prescribed for such filing by the rules and regulations under the
Act and in accordance with Section 5(a) hereof; if the Company has
elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have become effective by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement; no stop order suspending
the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction;
(b) Cahill Gordon & Reindel, counsel for the
Underwriters, shall have furnished to you such written opinion or
opinions (a draft of each such opinion is attached as Annex II(a)
hereto), dated such Time of Delivery, with respect to such matters
as you may reasonably request, and such counsel shall have received
such papers and information as they may reasonably request to enable
them to pass upon such matters;
13
<PAGE>
(c) Kirkland & Ellis, counsel for the Company, shall
have furnished to you their written opinion (a draft of such opinion
is attached as Annex II(b) hereto), dated such Time of Delivery, in
form and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated
under the General Corporation Law of the State of Delaware;
(ii) The Company is existing and in good
standing under the General Corporation Law of the State of
Delaware (for purposes of the opinions in this paragraph,
such counsel being entitled to rely exclusively upon the
certificates issued by the governmental authorities in the
State of Delaware);
(iii) As of the date of such Time of Delivery,
the authorized capital stock of the Company consists of (A)
300,000,000 shares of common stock, par value $0.01 per
share, and (B) 3,000,100 shares of preferred stock
consisting of (x) 3,000,000 shares of Senior Exchangeable
Preferred Stock due 2010, par value $0.01 per share and (y)
100 shares of Junior Preferred Stock, par value $0.01 per
share; the outstanding capital stock of the Company
(including the Shares being delivered at such Time of
Delivery) has been duly authorized and is validly issued,
fully paid and non-assessable;
(iv) The issuance of the Shares to be sold by
the Company has been duly authorized and, when appropriate
certificates representing such Shares are duly
countersigned by the Company's transfer agent and registrar
and delivered against payment of the agreed consideration
therefor in accordance with the terms of this Agreement,
will be validly issued, fully paid and non-assessable, and
nothing has come to the attention of such counsel that has
caused such counsel to conclude that the issuance of such
shares will be subject to any preemptive or similar rights;
(v) PCA Hydro, Inc. is existing and in good
standing under the General Corporation Law of the State of
Delaware; Dixie Container Corporation is existing and in
good standing under the Virginia Stock Corporation Act (for
purposes of the opinions in this paragraph, such counsel
being entitled to rely exclusively upon the certificates
issued by the governmental authorities in the required
jurisdictions);
(vi) As of the date of such Time of Delivery,
based solely upon review of the stock ledgers of each of
the subsidiaries of the Company, the Company is the record
holder of all of the outstanding shares of capital stock of
each of its subsidiaries;
(vii) The Company has the corporate power to
enter into and perform its obligations under this Agreement
and to issue, sell and deliver the Firm Shares as
contemplated by this Agreement; the Company has the
corporate power to own and lease its properties and to
conduct its business as described in the Prospectus;
14
<PAGE>
(viii) The Board of Directors of the Company has
adopted by requisite vote the resolutions necessary to
authorize the execution, delivery and performance of this
Agreement; no approval by the stockholders of the Company
is required, except as shall have been obtained;
(ix) The Company has duly executed and
delivered this Agreement;
(x) To such counsel's actual knowledge, no
legal or governmental investigations or proceedings are
pending or overtly threatened to which the Company or any
of its subsidiaries is a party or to which the property or
assets of the Company or any of its subsidiaries is subject
(i) that would be required under Item 103 of Regulation S-K
under the Act to be disclosed in a registration statement
or a prospectus delivered at the time of confirmation of
the sale of any offering of securities registered under the
Act that are not described in the Prospectus or (ii) which
seeks to restrain, enjoin or prevent the consummation of or
otherwise challenge the issuance or sale of the Shares or
the consummation of the other transactions contemplated by
this Agreement;
(xi) The issue and sale of the Shares to be
sold by the Company in accordance with the provisions of
this Agreement and the consummation by the Company of the
transactions herein contemplated will not (a) violate the
certificate or articles of incorporation or by-laws of the
Company or any of its subsidiaries, (b) constitute a
violation by the Company or any of its subsidiaries of any
applicable provision of any law, statute or regulation
(except with respect to compliance with any disclosure
requirement or any prohibition against fraud or
misrepresentation or as to whether performance of the
indemnification or contribution provisions in this
Agreement would be permitted, as to which such counsel need
express no opinion) or (c) breach, or result in a default
under, any existing obligation of the Company and its
subsidiaries under any of its Other Specified Agreement (a
list of which is attached to such counsel's opinion);
(xii) To such counsel's knowledge, no consent,
approval, authorization, order, registration or
qualification of or with any court or governmental agency
or body is required for the issue and sale of the Shares or
the consummation by the Company of the transactions
contemplated by this Agreement, except the registration
under the Act and the Securities Exchange Act of 1934, as
amended, of the Shares, and such consents, approvals,
authorizations, orders, registrations or qualifications (a)
as may be required under state or foreign securities or
Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters, (b) as have
been obtained or (c) the failure to obtain which would not
have, singly or in the aggregate, a Material Adverse Effect;
15
<PAGE>
(xiii) The statements set forth in the
Prospectus under the caption "Description of Capital
Stock", insofar as they purport to constitute a summary of
the terms of the Stock, are correct in all material
respects;
(xiv) The Company is not an "investment
company", as such term is defined in the Investment Company
Act; and
(xv) Based upon such counsel's participation
in conferences and its document review, its understanding
of applicable law and the experience it has gained in its
practice thereunder and relying as to matters of fact upon
the statements of officers and other representatives of the
Company, such counsel can advise that nothing has come to
its attention that has caused it to conclude that (i) the
Registration Statement or any further amendment or
supplement thereto made by the Company prior to such Time
of Delivery (other than financial statements and related
notes and other financial and accounting data included in
the Registration Statement, as to which no advice need be
given) at its effective date contained an untrue statement
of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading or (ii) the Prospectus or
any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than
financial statements and related notes and other financial
and accounting data included in the Prospectus, as to which
no advice need be given) at the date it bears or on the
date of this letter contained an untrue statement of a
material fact or omitted to state a material fact necessary
in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or
(iii) as of the effective date, either the Registration
Statement or the Prospectus (other than financial
statements and related notes and other financial and
accounting data included in the Registration Statement, as
to which no advice need be given) appeared on its face not
to be responsive in all material respects to the
requirements of Form S-1.
In rendering such opinion, such counsel may state that they
express no opinion as to any laws other than the internal laws of the
State of New York, the General Corporation Law of the State of Delaware
and the federal law of the United States;
(d) John R. Olsen, Corporate Counsel of the Company, shall
have furnished to you his written opinion, dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that the
Company has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
jurisdiction other than Delaware in which it owns or leases properties
or conducts any business, other than where the failure to be so
qualified or in good standing would not, singly or in the aggregate,
reasonably be expected to have a Material Adverse Effect (such counsel
being entitled to rely in respect of the opinion in this clause upon
certificates issued by governmental authorities in the required
jurisdictions and upon opinions of local counsel and in respect of
matters of fact upon certificates of officers of the Company);
16
<PAGE>
(e) Jenner & Block, counsel for the Selling
Stockholder, shall have furnished to you its written opinion (a
draft of such opinion is attached as Annex II(c) hereto), dated such
Time of Delivery, in form and substance satisfactory to you, to the
effect that:
(i) This Agreement has been duly executed and
delivered by or on behalf of the Selling Stockholder; and
the sale of the Shares to be sold by the Selling
Stockholder hereunder and the compliance by the Selling
Stockholder with all of the provisions of this Agreement
and the consummation of the transactions herein
contemplated will not (a) violate the certificate of
incorporation or by-laws of the Selling Stockholder, (b)
constitute a violation by the Selling Stockholder of any
applicable provision of any law, statute or regulation
known to such counsel, except for violations which would
not affect the ability of the Selling Stockholder to
deliver the Shares or otherwise consummate the transactions
pursuant to and in accordance with this Agreement, or (c)
breach, or result in a default under, any agreement known
to such counsel and the executive officers of the Selling
Stockholder to be material to the Selling Stockholder,
except for conflicts or breaches which would not affect the
ability of the Selling Stockholder to deliver the Shares or
otherwise consummate the transactions pursuant to and in
accordance with this Agreement;
(ii) No consent, approval, authorization, order,
license, registration or qualification of or with any court or
governmental agency or body is required for the consummation
by the Selling Stockholder of the transactions contemplated by
this Agreement to be performed by it in connection with the
Shares to be sold by the Selling Stockholder hereunder, except
such as have been obtained under the Act and such as may be
required under state or foreign securities or Blue Sky laws in
connection with the purchase and distribution of such Shares
by the Underwriters;
(iii) Immediately prior to such Time of
Delivery the Selling Stockholder had good and valid title
to the Shares to be sold at such Time of Delivery by the
Selling Stockholder under this Agreement, free and clear of
all liens, encumbrances, security interests and claims, and
full right, power and authority to sell, assign, transfer
and deliver the Shares to be sold by the Selling
Stockholder hereunder; and
(iv) Good and valid title to such Shares, free
and clear of all liens, encumbrances, security interests
and claims, has been transferred to each of the several
Underwriters who have purchased such Shares in good faith
and without notice of any such lien, encumbrance, equity or
claim or any other adverse claim within the meaning of the
Uniform Commercial Code.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction outside the
United States and such counsel may rely upon a certificate of the
Selling Stockholder in respect of matters of fact (includ-
17
<PAGE>
ing as to ownership of, and liens, encumbrances, security interests
and claims on, the Shares sold by the Selling Stockholder), provided
that such counsel shall state that they believe that both you and
they are justified in relying upon such certificate;
(f) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at
each Time of Delivery, each of Arthur Andersen LLP and Ernst & Young
LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance
satisfactory to you, to the effect set forth in Annex I hereto (the
executed copy of the letters delivered prior to the execution of this
Agreement is attached as Annex I(a) hereto and a draft of the form of
letters to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery
is attached as Annex I(b) hereto);
(g) (i) Neither the Company nor any of its
subsidiaries shall have sustained since the date of the latest
audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus, and (ii) since
the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock
(other than pursuant to the grant or exercise of options under plans
described in the Prospectus) or increase in the long-term debt of
the Company or any of its subsidiaries or any change, or any
development involving a prospective change, in or affecting the
general affairs, management, financial position, stockholders'
equity or results of operations of the Company and its subsidiaries,
taken as a whole, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in
clause (i) or (ii), is in the judgment of the Representatives so
material and adverse as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares being
delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(h) On or after the date hereof (i) no downgrading
shall have occurred in the rating accorded the Company's debt
securities or preferred stock by any "nationally recognized
statistical rating organization", as that term is defined by the
Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no
such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its
rating of any of the Company's debt securities or preferred stock;
(i) On or after the date hereof there shall not have
occurred any of the following: (i) a suspension or material
limitation in trading in securities generally on the New York Stock
Exchange; (ii) a suspension or material limitation in trading in the
Company's securities on the New York Stock Exchange; (iii) a general
moratorium on commercial banking activities declared by either
Federal or New York State authorities; or (iv) the outbreak or
escalation of hostilities involving the United States or the
18
<PAGE>
declaration by the United States of a national emergency or war, if
the effect of any such event specified in this clause (iv) in the
judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of
the Shares being delivered at such Time of Delivery on the terms and
in the manner contemplated in the Prospectus;
(j) The Shares to be sold by the Company and the
Selling Stockholder at such Time of Delivery shall have been duly
listed, subject to notice of issuance, on the Exchange;
(k) The Company has obtained and delivered to the
Underwriters executed copies of an agreement from the persons named
in Schedule III hereto to the effect set forth in Subsection 1(b)(v)
hereof in form and substance satisfactory to you;
(l) The Company shall have complied with the
provisions of Section 5(c) hereof with respect to the furnishing of
prospectuses on the New York Business Day next succeeding the date
of this Agreement; and
(m) The Company and the Selling Stockholder shall have
furnished or caused to be furnished to you at such Time of Delivery
certificates of officers of the Company and of the Selling
Stockholder, respectively, satisfactory to you as to the accuracy of
the representations and warranties of the Company and the Selling
Stockholder, respectively, herein at and as of such Time of
Delivery, as to the performance by the Company and the Selling
Stockholder of all of their respective obligations hereunder to be
performed at or prior to such Time of Delivery, and as to such other
matters as you may reasonably request, and the Company shall have
furnished or caused to be furnished certificates as to the matters
set forth in subsections (a) and (g) of this Section, and as to such
other matters as you may reasonably request.
8. (a) The Company and the Selling Stockholder, jointly
and severally, will indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; PROVIDED, HOWEVER, that the Company and the Selling
Stockholder shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or
any such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through
Goldman, Sachs & Co. expressly for use therein;
19
<PAGE>
PROVIDED, FURTHER, that the liability of the Selling Stockholder pursuant to
this subsection (a) shall not exceed the product of the number of Shares sold
by the Selling Stockholder, including any Optional Shares, and the initial
public offering price of the Shares as set forth in the Prospectus.
(b) Each Underwriter will indemnify and hold harmless
the Company and the Selling Stockholder against any losses, claims, damages
or liabilities to which the Company or the Selling Stockholder may become
subject, under the Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
an untrue statement or alleged untrue statement of a material fact contained
in any Preliminary Prospectus, the Registration Statement or the Prospectus,
or any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman,
Sachs & Co. expressly for use therein; and will reimburse the Company and the
Selling Stockholder for any legal or other expenses reasonably incurred by
the Company or the Selling Stockholder in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party
under subsection (a) or (b) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is to be
made against an indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory
to such indemnified party (which shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party), and, after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party under such subsection for any legal expenses of other
counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified party is
an actual or potential party to such action or claim) unless such settlement,
compromise or judgment (i) includes an unconditional release of the
indemnified party from all liability arising out of such action or claim and
(ii) does not include a statement as to or an admission of fault, culpability
or a failure to act, by or on behalf of any indemnified party.
20
<PAGE>
(d) If the indemnification provided for in this
Section 8 is unavailable to or insufficient to hold harmless an indemnified
party under subsection (a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Stockholder on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c)
above, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and the Selling Stockholder on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities (or actions in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholder on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Shares purchased under this
Agreement (before deducting expenses) received by the Company and the Selling
Stockholder bear to the total underwriting discounts and commissions received
by the Underwriters with respect to the Shares purchased under this
Agreement, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Stockholder on the one
hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Selling Stockholder and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (d) were determined by PRO RATA allocation (even
if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above in this subsection (d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company and the Selling
Stockholder under this Section 8 shall be in addition to any liability which
the Company and the Selling Stockholder may
21
<PAGE>
otherwise have and shall extend, upon the same terms and conditions, to each
person, if any, who controls any Underwriter within the meaning of the Act;
and the obligations of the Underwriters under this Section 8 shall be in
addition to any liability which the respective Underwriters may otherwise
have and shall extend, upon the same terms and conditions, to each officer
and director of the Company and to each person, if any, who controls the
Company or the Selling Stockholder within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation
to purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or
other parties to purchase such Shares on the terms contained herein. If
within thirty-six hours after such default by any Underwriter you do not
arrange for the purchase of such Shares, then the Company and the Selling
Stockholder shall be entitled to a further period of thirty-six hours within
which to procure another party or other parties satisfactory to you to
purchase such Shares on such terms. In the event that, within the respective
prescribed periods, you notify the Company and the Selling Stockholder that
you have so arranged for the purchase of such Shares, or the Company and the
Selling Stockholder notify you that they have so arranged for the purchase of
such Shares, you or the Company and the Selling Stockholder shall have the
right to postpone such Time of Delivery for a period of not more than seven
days, in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall
include any person substituted under this Section with like effect as if such
person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for
the purchase of the Shares of a defaulting Underwriter or Underwriters by you
and the Company and the Selling Stockholder as provided in subsection (a)
above, the aggregate number of such Shares which remains unpurchased does not
exceed one-eleventh of the aggregate number of all of the Shares to be
purchased at such Time of Delivery, then the Company and the Selling
Stockholder shall have the right to require each non-defaulting Underwriter
to purchase the number of Shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the
number of Shares which such Underwriter agreed to purchase hereunder) of the
Shares of such defaulting Underwriter or Underwriters for which such
arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for
the purchase of the Shares of a defaulting Underwriter or Underwriters by you
and the Company and the Selling Stockholder as provided in subsection (a)
above, the aggregate number of such Shares which remains unpurchased exceeds
one-eleventh of the aggregate number of all of the Shares to be purchased at
such Time of Delivery, or if the Company and the Selling Stockholder shall
not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Selling
Stockholder to sell the Optional Shares) shall thereupon terminate, without
li-
22
<PAGE>
ability on the part of any non-defaulting Underwriter or the Company or the
Selling Stockholder, except for the expenses to be borne by the Company and
the Selling Stockholder and the Underwriters as provided in Section 6 hereof
and the indemnity and contribution agreements in Section 8 hereof; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company, the Selling Stockholder and
the several Underwriters, as set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement, shall remain in
full force and effect, regardless of any investigation (or any statement as
to the results thereof) made by or on behalf of any Underwriter or any
controlling person of any Underwriter, or the Company, or the Selling
Stockholder, or any officer or director or controlling person of the Company,
or any controlling person of the Selling Stockholder, and shall survive
delivery of and payment for the Shares. No indemnity, agreement,
representation, warranty, statement or other provision of this Agreement
shall, solely as between the Company and the Selling Stockholder, amend or
modify any other agreement by and among the Company, Tenneco Automotive Inc.
(formerly Tenneco Inc.) and/or the Selling Stockholder; and each indemnity,
agreement, representation, warranty and other statement of the Company or the
Selling Stockholder set forth herein shall not, solely as among such parties
and the several Underwriters, be affected or governed by any such agreement.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, neither the Company nor the Selling Stockholder shall then be under
any liability to any Underwriter except as provided in Sections 6 and 8
hereof; but, if for any other reason any Shares are not delivered by or on
behalf of the Company and/or the Selling Stockholder as provided herein, the
Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for
the purchase, sale and delivery of the Shares not so delivered, but the
Company and the Selling Stockholder shall then be under no further liability
to any Underwriter in respect of the Shares not so delivered except as
provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each
of the Underwriters, and the parties hereto shall be entitled to act and rely
upon any statement, request, notice or agreement on behalf of any Underwriter
made or given by you jointly or by Goldman, Sachs & Co. on behalf of you as
the representatives.
All statements, requests, notices and agreements hereunder shall be
in writing, and if to the Underwriters shall be delivered or sent by mail,
telex or facsimile transmission to you as the representatives in care of
Goldman, Sachs & Co., 32 Old Slip, 21st Floor, New York, New York 10005,
Attention: Registration Department; if to the Selling Stockholder shall be
delivered or sent by mail, telex or facsimile transmission to counsel for the
Selling Stockholder at its address set forth in Schedule II hereto; and if to
the Company shall be delivered or sent by mail, telex or facsimile
transmission to the address of the Company set forth in the Registration
Statement, Attention: Secretary; provided, however, that any notice to an
Underwriter pursuant to Section 8 (c) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire or
23
<PAGE>
telex constituting such Questionnaire, which address will be supplied to the
Company or the Selling Stockholder by you upon request. Any such statements,
requests, notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to
the benefit of, the Underwriters, the Company and the Selling Stockholder
and, to the extent provided in Sections 8 and 10 hereof, the officers and
directors of the Company and each person who controls the Company, the
Selling Stockholder or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser
of any of the Shares from any Underwriter shall be deemed a successor or
assign by reason merely of such purchase.
14. Time shall be of the essence for purposes of this
Agreement. As used herein, the term "business day" shall mean any day when
the Commission's office in Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed
to be an original, but all such counterparts shall together constitute one
and the same instrument.
24
<PAGE>
If the foregoing is in accordance with your understanding, please
sign and return to us ten counterparts hereof, and upon the acceptance hereof
by you, on behalf of each of the Underwriters, this letter and such
acceptance hereof shall constitute a binding agreement among each of the
Underwriters, the Company and the Selling Stockholder. It is understood that
your acceptance of this letter on behalf of each of the Underwriters is
pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company and the
Selling Stockholder for examination upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
PACKAGING CORPORATION OF AMERICA
By: ______________________________
Name:
Title:
PACTIV CORPORATION
By: ______________________________
Name:
Title:
25
<PAGE>
Accepted as of the date hereof
in New York, New York:
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
Salomon Smith Barney Inc.
Deutsche Bank Securities Inc.
J.P. Morgan Securities Inc.
By: ______________________________________
(Goldman, Sachs & Co.)
26
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to Be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to Be Purchased Exercised
----------- --------------- ------------------
<S> <S> <S>
Goldman, Sachs & Co.....................
Morgan Stanley & Co. Incorporated.......
Salomon Smith Barney Inc................
Deutsche Bank Securities Inc............
J.P. Morgan Securities Inc..............
--------------- -------------------
Total.............................. 46,250,000 6,410,240
=============== ===================
</TABLE>
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Number of Optional
Shares to Be
Total Number of Sold if
Firm Shares Maximum Option
Underwriter to Be Sold Exercised
----------- --------------- -------------------
<S> <C> <C>
The Company............................. 11,500,000 0
The Selling Stockholder................. 34,750,000 6,410,240
-------------- -------------------
Total.............................. 46,250,000 6,410,240
============== ===================
</TABLE>
<PAGE>
SCHEDULE III
LOCKUP AGREEMENTS
-----------------
Packaging Corporation of America
PCA Holdings LLC
Madison Dearborn Partners, LLC
Madison Dearborn Capital Partners III, L.P.
Madison Dearborn Special Equity III, L.P.
Special Advisors Fund I, LLC
J.P. Morgan Capital Corporation
Sixty Wall Street Fund, L.P.
BT Capital Investors, L.P.
Randolph Street Partners II
Pactiv Corporation
Paul T. Stecko
William J. Sweeney
Richard B. West
Mark W. Kowlzan
Andrea L. Davey
Dana G. Mead
Theodore R. Tetzlaff
Samuel M. Mencoff
Justin S. Huscher
Thomas S. Souleles
Paul T. Stecko 1999 Dynastic Trust
Each of the signatories to the Management Equity Agreement Among
Packaging Corporation of America and each of the persons listed on the
signature pages thereto, dated as of June 1, 1999.
<PAGE>
ANNEX I
Pursuant to Section 7(f) of the Underwriting Agreement, the
accountants shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants
with respect to the Company and its subsidiaries within the meaning
of the Act and the applicable published rules and regulations
thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if
applicable, financial forecasts and/or pro forma financial
information) examined by them and included in the Prospectus or the
Registration Statement comply as to form in all material respects
with the applicable accounting requirements of the Act and the
related published rules and regulations thereunder; and, if
applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public
Accountants of the unaudited consolidated interim financial
statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial
statements derived from audited financial statements of the Company
for the periods specified in such letter, as indicated in their
reports thereon, copies of which have been furnished to the
representatives of the Underwriters (the "Representatives") and are
attached hereto;
(iii) They have made a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the unaudited condensed consolidated statements of
income, consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus as indicated in their reports
thereon copies of which are attached hereto and on the basis of
specified procedures including inquiries of officials of the Company
who have responsibility for financial and accounting matters
regarding whether the unaudited condensed consolidated financial
statements referred to in paragraph (vi)(A)(i) below comply as to
form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations, nothing came to their attention that caused them to
believe that the unaudited condensed consolidated financial
statements do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the related
published rules and regulations;
(iv) The unaudited selected financial information with
respect to the consolidated results of operations and financial
position of the Company for the five most recent fiscal years
included in the Prospectus agrees with the corresponding amounts
(after restatements where applicable) in the audited consolidated
financial statements for such five fiscal years which were included
or incorporated by reference in the Company's Annual Reports on Form
10-K for such fiscal years;
(v) They have compared the information in the
Prospectus under selected captions with the disclosure requirements
of Regulation S-K and on the basis of limited procedures specified
in such letter nothing came to their attention as a result of the
foregoing procedures that caused them to believe that this
information does not
<PAGE>
conform in all material respects with the disclosure requirements of
Items 301, 302, 402 and 503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not
constituting an examination in accordance with generally accepted
auditing standards, consisting of a reading of the unaudited
financial statements and other information referred to below, a
reading of the latest available interim financial statements of the
Company and its subsidiaries, inspection of the minute books of the
Company and its subsidiaries since the date of the latest audited
financial statements included in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for
financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus do not comply as to
form in all material respects with the applicable
accounting requirements of the Act and the related
published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed
consolidated statements of income, consolidated balance
sheets and consolidated statements of cash flows included
in the Prospectus for them to be in conformity with
generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and
any such unaudited data and items were not determined on a
basis substantially consistent with the basis for the
corresponding amounts in the audited consolidated financial
statements included in the Prospectus;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived any unaudited
condensed financial statements referred to in clause (A)
and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in clause
(B) were not determined on a basis substantially consistent
with the basis for the audited consolidated financial
statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to
form in all material respects with the applicable
accounting requirements of the Act and the published rules
and regulations thereunder or the pro forma adjustments
have not been properly applied to the historical amounts in
the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital
stock upon exercise of options and stock appreciation
<PAGE>
rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which
were outstanding on the date of the latest financial
statements included in the Prospectus) or any increase in
the consolidated long-term debt of the Company and its
subsidiaries, or any decreases in consolidated net current
assets or stockholders' equity or other items specified by
the Representatives, or any increases in any items
specified by the Representatives, in each case as compared
with amounts shown in the latest balance sheet included in
the Prospectus, except in each case for changes, increases
or decreases which the Prospectus discloses have occurred
or may occur or which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in clause (E) there were any decreases in
consolidated net revenues or operating profit or the total
or per share amounts of consolidated net income or other
items specified by the Representatives, or any increases in
any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year
and with any other period of corresponding length specified
by the Representatives, except in each case for decreases
or increases which the Prospectus discloses have occurred
or may occur or which are described in such letter; and
(vii) In addition to the examination referred to in
their report(s) included in the Prospectus and the limited
procedures, inspection of minute books, inquiries and other
procedures referred to in paragraphs (iii) and (vi) above, they have
carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and
financial information specified by the Representatives, which are
derived from the general accounting records of the Company and its
subsidiaries, which appear in the Prospectus, or in Part II of, or
in exhibits and schedules to, the Registration Statement specified
by the Representatives, and have compared certain of such amounts,
percentages and financial information with the accounting records of
the Company and its subsidiaries and have found them to be in
agreement.
<PAGE>
EXHIBIT 10.23
FIRST AMENDMENT AND CONSENT
FIRST AMENDMENT AND CONSENT (this "AMENDMENT"), dated as of August 26,
1999, among PACKAGING CORPORATION OF AMERICA, a Delaware corporation ("PCA"),
the Lenders from time to time party to the Credit Agreement referred to below,
J.P. MORGAN SECURITIES INC. and DEUTSCHE BANK SECURITIES INC. (as successor to
BT Alex. Brown Incorporated), as Co-Lead Arrangers (in such capacity, each a
"CO-LEAD ARRANGER" and, collectively, the "CO-LEAD ARRANGERS"), BANKERS TRUST
COMPANY, as Syndication Agent (in such capacity, the "SYNDICATION AGENT"), and
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 shall have the respective meanings provided such terms in the
Credit Agreement.
W I T N E S S E T H :
- - - - - - - - - - -
WHEREAS, PCA, the Lenders, the Co-Lead Arrangers, the Syndication Agent
and the Administrative Agent are parties to a Credit Agreement, dated as of
April 12, 1999 (as in effect on the date hereof, the "CREDIT AGREEMENT");
WHEREAS, subject to the terms and conditions of this Amendment, parties
hereto wish to amend the Credit Agreement as herein provided;
NOW, THEREFORE, it is agreed:
I. AMENDMENTS TO CREDIT AGREEMENT.
1. Section 4.02(e) of the Credit Agreement is hereby amended by
inserting the following new clause (u) immediately after the text "(other than"
appearing in said Section:
"(u) so long as no Default or Event of Default is in existence on the
date of receipt thereof, the proceeds received by the Borrower from the
Permitted Primary Offering to the extent (and only to the extent) same are
applied within 60 days of the date of receipt thereof to the redemption of then
outstanding Borrower PIK Preferred Stock (and the payment of accrued and unpaid
dividends thereon and all related redemption premiums) in accordance with the
relevant provisions of the Borrower Preferred Stock Documents and this Agreement
and the payment of the reasonable fees and expenses incurred in connection with
the Permitted Primary Offering,".
2. Section 9.03 of the Credit Agreement is hereby amended by (i)
deleting the word "and" appearing at the end of clause (ix) of said Section,
(ii) deleting the period at the end of clause (x) of said Section and inserting
the text "; and" in lieu thereof and (ii) inserting the following new clause
(xi) at the end of said Section:
"(xi) so long as no Default or Event of Default is then in existence
or would exist after giving effect thereto, the Borrower may utilize the
proceeds of the Permitted Primary
<PAGE>
Offering to redeem Borrower PIK Preferred Stock and pay all accrued and
unpaid dividends thereon and all redemption premiums in respect thereof."
3. Section 11.01 of the Credit Agreement is hereby amended by
inserting the following definition in said Section in appropriate alphabetical
order:
"PERMITTED PRIMARY OFFERING" shall mean the issuance by PCA on or prior
to December 31, 1999 of shares of Borrower Common Stock pursuant to a fully
underwritten public offering.
II. MISCELLANEOUS PROVISIONS.
1. In order to induce the Lenders to enter into this Amendment, the
Borrower represents and warrants that:
(a) no Default or Event of Default exists as of the First Amendment
Effective Date (as defined below), both immediately before and immediately
after giving effect to this Amendment; and
(b) all of the representations and warranties contained in the Credit
Agreement or the other Credit Documents are true and correct in all material
respects on the First Amendment Effective Date both immediately before and
immediately after giving effect to this Amendment, with the same effect as
though such representations and warranties had been made on and as of the
First Amendment Effective Date (it being understood that any representation
or warranty made as of a specific date shall be true and correct in all
material respects as of such specific date).
2. 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.
3. 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 PCA and the Administrative Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
5. This Amendment shall become effective on the date (the "FIRST
AMENDMENT EFFECTIVE DATE") when each of the Borrower, the Administrative Agent
and the Required Lenders shall have signed a counterpart hereof (whether the
same or different
2
<PAGE>
counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Administrative Agent at its Notice Office.
6. From and after the First Amendment Effective Date, all references
in the Credit Agreement and each of the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as modified
hereby.
* * *
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Amendment as of the date first above
written.
PACKAGING CORPORATION OF AMERICA
By: /s/ Richard B. West
---------------------------------
Title: Chief Financial Officer
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, INDIVIDUALLY AND AS
ADMINISTRATIVE AGENT
By: /s/ Colleen Galle
---------------------------------
Title: Vice President
<PAGE>
J.P. MORGAN SECURITIES, INC.,
AS CO-LEAD ARRANGER
By: /s/ Douglas A. Cruikshank
---------------------------------
Title: Vice President
<PAGE>
DEUTSCHE BANC ALEX BROWN INCORPORATED,
AS A CO-LEAD ARRANGER
By: /s/ Loretta C. Summers
----------------------------------
Title: MD
<PAGE>
BANKERS TRUST COMPANY,
INDIVIDUALLY AND AS SYNDICATION
AGENT
By: /s/ Robert R. Telesca
----------------------------------
Title: Assistant Vice President
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P.,
INDIVIDUALLY AND AS DOCUMENTATION AGENT
By:
----------------------------------
Name:
Title:
<PAGE>
ABN AMRO BANK N.V.
By: /s/ Christian H. Sievers
----------------------------------
Title: Senior Vice President
By: /s/ Wayne Rancourt
----------------------------------
Title: Vice President
<PAGE>
AERIES FINANCE LTD.
By:
----------------------------------
Name:
Title:
<PAGE>
AIM STRATEGIC INCOME FUND
By: INVESCO (NY) INC.,
AS INVESTMENT ADVISOR
By:
Name:
Title:
<PAGE>
ALLIANCE INVESTMENT OPPORTUNITIES FUND, L.L.C.
By: ALLIANCE INVESTMENT OPPORTUNITIES MANAGEMENT,
L.L.C.,
AS MANAGING MEMBER
By: ALLIANCE CAPITAL MANAGEMENT, L.P.,
AS MANAGING MEMBER
By: ALLIANCE CAPITAL MANAGEMENT CORPORATION,
AS GENERAL PARTNER
By:
--------------------------------------------
Name:
Title:
<PAGE>
ALLSTATE INSURANCE COMPANY
By: /s/ Jerry D. Zinkula
--------------------------------------------
Title: Authorized Signatory
By: /s/ Patricia W. Wilson
--------------------------------------------
Title: Authorized Signatory
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
By: /s/ Jerry D. Zinkula
--------------------------------------------
Title: Authorized Signatory
By: /s/ Patricia W. Wilson
--------------------------------------------
Title: Authorized Signatory
<PAGE>
AMARA-1 FINANCE LTD.
By:
--------------------------------------------
Name:
Title:
<PAGE>
AMARA-2 FINANCE LTD.
By:
--------------------------------------------
Name:
Title:
<PAGE>
ARCHIMEDES FUNDING II, LTD.
By: ING CAPITAL ADVISORS LLC,
AS COLLATERAL MANAGER
By: /s/ Michael J. Campbell
--------------------------------------------
Title: Senior Vice President &
Portfolio Manager
<PAGE>
ARCHIMEDES FUNDING, L.L.C.
By: ING CAPITAL ADVISORS LLC,
AS COLLATERAL MANAGER
By: /s/ Michael J. Campbell
--------------------------------------------
Title: Senior Vice President &
Portfolio Manager
<PAGE>
ARES LEVERAGED INVESTMENT FUND, L.P.
By: ARES MANAGEMENT, L.P.,
ITS GENERAL PARTNER
By:
--------------------------------------------
Name:
Title:
<PAGE>
ARES LEVERAGED INVESTMENT FUND II, L.P.
By: ARES MANAGEMENT II, L.P.,
ITS GENERAL PARTNER
By:
--------------------------------------------
Name:
Title:
<PAGE>
ATHENA CDO, LIMITED
By: PACIFIC INVESTMENT MANAGEMENT COMPANY,
AS ITS INVESTMENT ADVISOR
By: /s/ Mohan V. Phansalker
--------------------------------------------
Title: Senior Vice President
<PAGE>
BANK OF MONTREAL
By:
--------------------------------------------
Name:
Title:
<PAGE>
THE BANK OF NOVA SCOTIA
By: /s/ F. C. H. Ashby
--------------------------------------------
Title: Senior Manager Loan Operations
<PAGE>
BANK POLSKA KASA OPIEKI, S.A.-PEKAO S.A. GROUP
By: /s/ Barry W. Henry
--------------------------------------------
Title: Vice President
<PAGE>
BANK UNITED
By: /s/ Phil Green
--------------------------------------------
Title: Director Commercial Syndications
<PAGE>
BANKBOSTON, N.A. AS TRUST
ADMINISTRATOR FOR LONGLANE
MASTE TRUST IV
By: /s/ Liam G. Stokes
--------------------------------------------
Title: Director
<PAGE>
BANQUE WORMS CAPITAL CORPORATION
By:
--------------------------------------------
Name:
Title:
<PAGE>
BAYERISCHE HYPO-UND VEREINSBANK AG, NEW YORK BRANCH
By: /s/ Sylvia K. Cheng
--------------------------------------------
Title: Director
By: /s/ Carlo Lamberti
--------------------------------------------
Title: Associate Director
<PAGE>
BEAR STEARNS INVESTMENT PRODUCTS INC.
By:
--------------------------------------------
Name:
Title:
<PAGE>
BEDFORD CDO, LIMITED
By: PACIFIC INVESTMENT MANAGEMENT COMPANY,
AS ITS INVESTMENT ADVISOR
By: PIMCO Management Inc., a general partner
By: /s/ Mohan V. Phansalker
--------------------------------------------
Title: Senior Vice President
<PAGE>
BRANT POINT CBO 1999-1, LTD.
By:
--------------------------------------------
Name:
Title:
<PAGE>
CANADIAN IMPERIAL BANK OF COMMERCE
By:
--------------------------------------------
Name:
Title:
<PAGE>
CAPTIVA FINANCE LTD.
By:
--------------------------------------------
Name:
Title:
<PAGE>
CAPTIVA II FINANCE LTD.
By:
--------------------------------------------
Name:
Title:
<PAGE>
CAPTIVA III FINANCE LTD.,
By: AS ADVISED BY PACIFIC INVESTMENT MANAGEMENT COMPANY
By: /s/ David Dyer
--------------------------------------------
Title: Director
<PAGE>
CAPTIVA IV FINANCE LTD.,
By: AS ADVISED BY PACIFIC INVESTMENT MANAGEMENT COMPANY
By: /s/ David Dyer
--------------------------------------------
Title: Director
<PAGE>
CARAVELLE INVESTMENT FUND, L.L.C.
By:
--------------------------------------------
Name:
Title:
<PAGE>
CHASE MANHATTAN BANK
By: /s/ Jonathan Twichell
--------------------------------------------
Title: Vice President
<PAGE>
CHRISTIANA BANK OG KREDITKASSE ASA
By: /s/ Carl Petter Svendsen
--------------------------------------------
Title: Senior Vice President
By: /s/ Peter M. Dodge
--------------------------------------------
Title: Senior Vice President
<PAGE>
CIBC INC.
By:
--------------------------------------------
Name:
Title:
<PAGE>
COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE
By: /s/ Sean Mounier
--------------------------------------------
Title: First Vice President
By: /s/ Marcus Edward
--------------------------------------------
Title: Vice President
<PAGE>
THE CIT GROUP/EQUIPMENT FINANCING, INC.
By: /s/ Eric M. Moore
--------------------------------------------
Title: Assistant Vice President
<PAGE>
CO BANK, ACB
By: /s/ Brian J. Klatt
--------------------------------------------
Title: Vice President
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By:
--------------------------------------------
Name:
Title:
<PAGE>
CRESCENT/MACH I PARTNERS, L.P.
By: TCW ASSET MANAGEMENT COMPANY,
ITS INVESTMENT MANAGER
By:
--------------------------------------------
Name:
Title:
<PAGE>
CYPRESSTREE INSTITUTIONAL FUND, LLC
By: CYPRESSTREE INVESTMENT MANAGEMENT COMPANY, INC. ITS
MANAGING MEMBER
By: /s/ Timothy M. Barns
--------------------------------------------
Title: Managing Director
<PAGE>
CYPRESSTREE INVESTMENT FUND, LLC
By: CYPRESSTREE INVESTMENT MANAGEMENT COMPANY, INC.,
ITS MANAGING MEMBER
By: /s/ Timothy M. Barns
--------------------------------------------
Title: Managing Director
<PAGE>
CYPRESSTREE SENIOR FLOATING RATE FUND
By: CYPRESSTREE INVESTMENT MANAGEMENT COMPANY, INC., AS
PORTFOLIO MANAGER
By: /s/ Timothy M. Barns
--------------------------------------------
Title: Managing Director
<PAGE>
DEBT STRATEGIES FUND III, INC.
By: /s/ Andrew C. Liggio
--------------------------------------------
Title: Authorized Signatory
<PAGE>
DELANO COMPANY
By: PACIFIC INVESTMENT MANAGEMENT COMPANY, AS ITS
INVESTMENT ADVISOR
By: /s/ Mohan V. Phansalker
--------------------------------------------
Title: Senior Vice President
<PAGE>
DLJ CAPITAL FUNDING INC.
By:
--------------------------------------------
Name:
Title:
<PAGE>
DRESDNER BANK AG NEW YORK AND GRAND CAYMAN BRANCHES
By: /s/ Christopher E. Sarisky
----------------------------------
Title: Assistant Vice President
By: /s/ John R. Morrison
----------------------------------
Title: Vice President
<PAGE>
EA CAYMAN UNIT TRUST-EA/MACKAY
HIGH YIELD CAYMAN UNIT TRUST
By: MACKAY-SHIELDS FINANCIAL
CORPORATION ITS INVESTMENT
ADVISOR
By:
----------------------------------
Name:
Title:
<PAGE>
EATON VANCE SENIOR INCOME TRUST
By: EATON VANCE MANAGEMENT AS INVESTMENT ADVISOR
By: /s/ Scott H. Page
----------------------------------
Title: Vice President
<PAGE>
ELC (CAYMAN) LTD. CDO SERIES 1999-1
By: /s/ Thomas M. Finke
----------------------------------
Title: Managing Director
<PAGE>
ERSTE BANK DER OESTERREICHISCHEN
SPARKASSEN AG
By: /s/ Anca Trifan
----------------------------------
Title: Vice President
By: /s/ John S. Runnion
----------------------------------
Title: First Vice President
<PAGE>
FEDERAL STREET PARTNERS
By:
----------------------------------
Name:
Title:
<PAGE>
FIRST DOMINION FUNDING I
By:
----------------------------------
Name:
Title:
<PAGE>
FIRST DOMINION FUNDING II
By:
----------------------------------
Name:
Title:
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Philip Yarrow
----------------------------------
Title: Director
<PAGE>
FIRST UNION NATIONAL BANK
By: ../s/ Andrew Payne
----------------------------------
Title: Vice President
<PAGE>
FIRSTRUST BANK
By: /s/ E. A. D'Ancona
----------------------------------
Title: Executive Vice President
<PAGE>
FLEET NATIONAL BANK
By: /s/ Michael J. Sullivan
----------------------------------
Title: Vice President
<PAGE>
FLOATING RATE PORTFOLIO
By: INVESCO SENIOR SECURED MANAGEMENT, INC., AS
ATTORNEY IN FACT
By:
----------------------------------
Name:
Title:
<PAGE>
FRANKLIN FLOATING RATE TRUST
By:
----------------------------------
Name:
Title:
<PAGE>
FREMONT INVESTMENT & LOAN
By: /s/ Marie Chachere
----------------------------------
Title: Vice President
<PAGE>
THE FUJI BANK, LIMITED
By: /s/ Peter L. Chinnici
----------------------------------
Title: Senior Vice President &
Group Head
<PAGE>
GALAXY CLO 1999-1, LTD.
By:
----------------------------------
Name:
Title:
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ William E. Magee
----------------------------------
Title: Duly Authorized Signature
<PAGE>
GREAT POINT CLO 1999-1 LTD.
By:
----------------------------------
Name:
Title:
<PAGE>
HELLER FINANCIAL, INC.
By: /s/ Sheila C. Weimer
----------------------------------
Title: Vice President
<PAGE>
HIGHLAND LEGACY LIMITED
BY: HIGHLAND CAPITAL MANAGEMENT, L.P.
AS COLLATERAL MANAGER
By: /s/ Todd Travers
Title: Senior Portfolio Manager
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By: /s/ Walter R. Wolff
------------------------------
Title: Joint General Manager
<PAGE>
IMPERIAL BANK, A CALIFORNIA BANKING
CORPORATION
By: /s/ Ray Vadalma
------------------------------
Title: Senior Managing Director
<PAGE>
INDOSEUZ CAPITAL FUNDING IIA, LIMITED
By: INDOSUEZ CAPITAL AS PORTFOLIO ADVISOR
By: /s/ Melissa Marano
------------------------------
Title: Vice President
<PAGE>
INDOSUEZ CAPITAL FUNDING IV, L.P.
By: INDOSUEZ CAPITAL AS PORTFOLIO ADVISOR
By: /s/ Melissa Marano
------------------------------
Title: Vice President
<PAGE>
THE ING CAPITAL SENIOR SECURED HIGH INCOME FUND, L.P.
By: ING CAPITAL ADVISORS LLC,
AS INVESTMENT ADVISOR
By: /s/ Michael J. Campbell
------------------------------
Title: Senior Vice President &
Portfolio Manager
<PAGE>
J.H. WHITNEY MARKET VALUE FUND, L.P.
By:
------------------------------
Name:
Title:
<PAGE>
JACKSON NATIONAL LIFE INSURANCE COMPANY
By: PPM AMERICA, INC., AS ATTORNEY IN FACT, ON
BEHALF OF JACKSON NATIONAL LIFE INSURANCE
COMPANY
By: /s/ Michael DiRe
------------------------------
Title: Senior Managing Director
<PAGE>
KEMPER FLOATING RATE FUND
By: /s/ Mark E. Wittnebel
------------------------------
Title: S.V.P.
<PAGE>
KZH APPALOOSA LLC
By: /s/ Peter Chin
------------------------------
Title: Authorized Agent
<PAGE>
KZH CNC LLC
By: /s/ Peter Chin
------------------------------
Title: Authorized Agent
<PAGE>
KZH CRESCENT-2 LLC
By: /s/ Peter Chin
------------------------------
Title: Authorized Agent
<PAGE>
KZH CYPRESSTREE-1 LLC
By: /s/ Virginia Conway
------------------------------
Title: Authorized Agent
<PAGE>
KZH HIGHLAND-2 LLC
By: /s/ Peter Chin
------------------------------
Title: Authorized Agent
<PAGE>
KZH ING-1 LLC
By: /s/ Peter Chin
------------------------------
Title: Authorized Agent
<PAGE>
KZH ING-3 LLC
By: /s/ Peter Chin
------------------------------
Title: Authorized Agent
<PAGE>
KZH IV LLC
By: /s/ Peter Chin
------------------------------
Title: Authorized Agent
<PAGE>
KZH PONDVIEW LLC
By: /s/ Peter Chin
------------------------------
Title: Authorized Agent
<PAGE>
KZH SHOSHONE LLC
By: /s/ Peter Chin
------------------------------
Title: Authorized Agent
<PAGE>
KZH STERLING LLC
By: /s/ Peter Chin
------------------------------
Title: Authorized Agent
<PAGE>
KZH SOLEIL-2 LLC
By: /s/ Peter Chin
-------------------------------------------------------
Title: Authorized Agent
<PAGE>
LEHMAN COMMERCIAL PAPER
By:
-------------------------------------------------------
Name:
Title:
<PAGE>
LLOYDS TSB BANK PLC
By: /s/ Ian Dimmock
-------------------------------------------------------
Title: Vice President
<PAGE>
THE 1199 HEALTH CARE EMPLOYEES PENSION FUND
By: MACKAY-SHIELDS FINANCIAL CORPORATION ITS INVESTMENT
ADVISOR
By:
-------------------------------------------------------
Name:
Title:
<PAGE>
MAGNETITE ASSET INVESTORS LLC
By:
-------------------------------------------------------
Name:
Title:
<PAGE>
MEDICAL LIABILITY MUTUAL
INSURANCE COMPANY
By:
------------------------------------------------------
Name:
Title:
<PAGE>
MERRILL LYNCH PRIME RATE PORTFOLIO
By: MERRILL LYNCH ASSET MANAGEMENT, L.P.,
AS INVESTMENT ADVISOR
By: /s/ Andrew C. Liggio
-------------------------------------------------------
Title: Authorized Signatory
<PAGE>
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC.
By: /s/ Andrew C. Liggio
-------------------------------------------------------
Title: Authorized Signatory
<PAGE>
MERRILL LYNCH SENIOR FLOATING
RATE FUND, INC.
By: /s/ Andrew C. Liggio
-------------------------------------------------------
Title: Authorized Signatory
<PAGE>
MICHIGAN NATIONAL BANK
By: /s/ Lisa Davidson McKinnon
-------------------------------------------------------
Title: Senior Commercial Relationship Manager
<PAGE>
THE MITSUBISHI TRUST AND BANKING CORPORATION
By: /s/ Toshihiro Hayashi
-------------------------------------------------------
Title: Senior Vice President
<PAGE>
ML CLO XX PILGRIM AMERICA (CAYMAN) LTD.
By: PILGRIM INVESTMENTS, INC. AS ITS INVESTMENT MANAGER
By:
--------------------------------------------------
Name:
Title:
<PAGE>
MONUMENTAL LIFE INSURANCE COMPANY
By: /s/ John Bailey
-------------------------------------------------------
Title: Vice President
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
By:
-------------------------------------------------------
Name:
Title:
<PAGE>
MOUNTAIN CAPITAL CLO I, LTD.
By:
-------------------------------------------------------
Name:
Title:
<PAGE>
NATEXIS BANQUE BFCE
By: /s/ Evan S. Kraus
-------------------------------------------------------
Title: Assistant Vice President
By: /s/ Frank H. Madden, Jr.
-------------------------------------------------------
Title: Vice President & Group Manager
<PAGE>
STEIN ROE & FARNHAM CLO I LTD.,
By: STEIN ROE & FARNHAM INCORPORATED,
AS PORTFOLIO MANAGER
By: /s/ Brian Good
-------------------------------------------------------
Title: Vice President and Portfolio Manager
<PAGE>
NORSE CBO, LTD.
By: PETERSON CAPITAL MANAGEMENT, LLC AS ITS INVESTMENT
ADVISOR
By: PETERSON CAPITAL ADVISORS, LLC ITS MANAGER AND
PURSUANT TO DELEGATED AUTHORITY
By:
-------------------------------------------------------
Name:
Title:
<PAGE>
NORTH AMERICAN SENIOR FLOATING RATE FUND
By: CYPRESSTREE INVESTMENT MANAGEMENT COMPANY, INC., AS
PORTFOLIO MANAGER
By: /s/ Timothy M. Barns
-------------------------------------------------------
Title: Managing Director
<PAGE>
NORTHWOODS CAPITAL, LIMITED
By: ANGELO, GORDON & CO., L.P., AS COLLATERAL MANAGER
By: /s/ Jeffrey H. Aronson
-------------------------------------------------------
Title: Authorized Signatory
<PAGE>
OAK HILL SECURITIES FUND, L.P.
By: OAK HILL SECURITIES GENPAR, L.P.,
ITS GENERAL PARTNER
By: OAK HILL SECURITIES MGP, INC.,
ITS GENERAL PARTNER
By: /s/ Scott D. Krase
--------------------------------------------
Title: Vice President
<PAGE>
OAK MOUNTAIN LIMITED
By: ALLIANCE CAPITAL MANAGEMENT L.P., AS INVESTMENT
MANAGER
By: ALLIANCE CAPITAL MANAGEMENT CORPORATION, AS GENERAL
PARTNER
By: /s/ Kenneth G. Ostmann
--------------------------------------------
Title: Vice President
<PAGE>
OCTAGON LOAN TRUST
By: OCTAGON CREDIT INVESTORS, AS MANAGER,
AS A LENDER
By: /s/ Michael Nechankin
--------------------------------------------
Title: Portfolio Manager
<PAGE>
OLYMPIC FUNDING TRUST, SERIES 1999-1
By: /s/ Kelly C. Walker
--------------------------------------------
Title: Authorized Agent
<PAGE>
ORIX USA CORPORATION
By:
--------------------------------------------
Name:
Title:
<PAGE>
OSPREY INVESTMENTS PORTFOLIO
By: CITIBANK, N.A., AS MANAGER
By:
--------------------------------------------
Name:
Title:
<PAGE>
OXFORD STRATEGIC INCOME FUND
By: EATON VANCE MANAGEMENT, AS INVESTMENT ADVISOR
By: /s/ Scott H. Page
--------------------------------------------
Title: Vice President
<PAGE>
PACIFIC LIFE INSURANCE COMPANY
By:
--------------------------------------------
Name:
Title:
By:
--------------------------------------------
Name:
Title:
<PAGE>
PACIFIC REDWOOD CBO
By:
--------------------------------------------
Name:
Title:
<PAGE>
PARIBAS CAPITAL FUNDING LLC
By:
--------------------------------------------
Name:
Title:
<PAGE>
PERSEUS CDO I, LIMITED
By: /s/ John B. Wheeler
--------------------------------------------
Title: Managing Director
<PAGE>
PILGRIM PRIME RATE TRUST
By: PILGRIM INVESTMENTS, INC.,
AS ITS INVESTMENT MANAGER
By:
--------------------------------------------
Name:
Title:
<PAGE>
PUTNAM DIVERSIFIED INCOME TRUST
By:
--------------------------------------------
Name:
Title:
<PAGE>
PUTNAM DIVERSIFIED INCOME TRUST II
By:
--------------------------------------------
Name:
Title:
<PAGE>
PUTNAM FUNDS TRUST-PUTNAM HIGH YIELD TRUST II
By:
--------------------------------------------
Name:
Title:
<PAGE>
PUTNAM HIGH YIELD TOTAL RETURN FUND
By:
--------------------------------------------
Name:
Title:
<PAGE>
PUTNAM MASTER INCOME TRUST
By:
--------------------------------------------
Name:
Title:
<PAGE>
PUTNAM MASTER INTERMEDIATE INCOME TRUST
By:
--------------------------------------------
Name:
Title:
<PAGE>
PUTNAM PREMIER INCOME TRUST
By:
--------------------------------------------
Name:
Title:
<PAGE>
PUTNAM VARIABLE TRUST-PVT DIVERSIFIED INCOME FUND
By:
--------------------------------------------
Name:
Title:
<PAGE>
PUTNAM VARIABLE TRUST-PVT HIGH YIELD FUND
By:
--------------------------------------------
Name:
Title:
<PAGE>
ROYALTON COMPANY
By: PACIFIC INVESTMENT MANAGEMENT COMPANY, AS ITS
INVESTMENT ADVISOR
By: PIMCO MANAGEMENT INC.,
A GENERAL PARTNER
By: /s/ Mohan V. Phansalker
----------------------------------
Title: Senior Vice President
<PAGE>
SAAR HOLDINGS CDO, LIMITED
By: /s/ John B. Wheeler
----------------------------------
Title: Managing Director
<PAGE>
SENIOR DEBT PORTFOLIO
By: BOSTON MANAGEMENT AND RESEARCH, AS INVESTMENT
ADVISOR
By: /s/ Scott H. Page
----------------------------------
Title: Vice President
<PAGE>
SEQUILS-PILGRIM I, LTD.
By: PILGRIM INVESTMENTS, INC. AS ITS INVESTMENT MANAGER
By: /s/ Charles E. LeMieux, CFA
----------------------------------
Title: Assistant Vice President
<PAGE>
SEQUILS I, LTD
By: TCW ADVISORS, INC. AS ITS COLLATERAL MANAGER
By:
----------------------------------
Name:
Title:
By:
----------------------------------
Name:
Title:
<PAGE>
SOUTHERN PACIFIC BANK
By: /s/ Cheryl A. Wasilewski
----------------------------------
Title: Senior Vice President
<PAGE>
SRF TRADING, INC.
By: /s/ Kelly C. Walker
----------------------------------
Title: Vice President
<PAGE>
SRV-HIGHLAND, INC.
By:
----------------------------------
Name:
Title:
<PAGE>
STOCKSPLUS LP SUBFUND B (ACCT 400)
By: PACIFIC INVESTMENT MANAGEMENT COMPANY, AS ITS
INVESTMENT ADVISOR, ACTING THROUGH INVESTORS
FIDUCIARY TRUST COMPANY IN THE NOMINEE NAME OF IFTCO
By: PIMCO MANAGEMENT INC.,
A GENERAL PARTNER
By: /s/ Mohan V. Phansalker
----------------------------------
Title: Senior Vice President
<PAGE>
THE SUMITOMO BANK, LTD
By: /s/ Suresh S. Tata
----------------------------------
Title: Senior Vice President
<PAGE>
SUTTER CBO 1998-1 LTD.
By: WELLS FARGO BANK, N.A., ITS ATTORNEY-IN-FACT
By: /s/ Christine C. Rotter
----------------------------------
Title: Vice President
<PAGE>
TEACHERS' RETIREMENT SYSTEM OF LOUISIANA
By: MACKAY-SHIELDS FINANCIAL CORPORATION ITS INVESTMENT
ADVISOR
By:
----------------------------------
Name:
Title:
<PAGE>
MAINSTAY VP SERIES FUND, INC., ON BEHALF OF ITS HIGH YIELD
CORPORATE BOND PORTFOLIO
By: MACKAY-SHIELDS FINANCIAL CORPORATION ITS INVESTMENT
ADVISOR
By:
----------------------------------
Name:
Title:
<PAGE>
TORONTO DOMINION (NEW YORK), INC.
By: /s/ Jorge A. Garcia
----------------------------------
Title: Vice President
<PAGE>
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Perry Vavoules
----------------------------------
Title: Senior Vice President
<PAGE>
TRAVELERS CORPORATE LOAN FUND, INC.
By: TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORPORATION
By:
----------------------------------
Name:
Title:
<PAGE>
THE TRAVELERS INSURANCE COMPANY
By:
----------------------------------
Name:
Title:
<PAGE>
TRITON CBO III, LIMITED
By: INVESCO SENIOR SECURED MANAGEMENT, INC., AS
INVESTMENT ADVISOR
By:
----------------------------------
Name:
Title:
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Henry G. Montgomery
----------------------------------
Title: Vice President
<PAGE>
VAN KAMPEN PRIME RATE INCOME TRUST
By: /s/ Darvin Pierce
----------------------------------
Title: VP
<PAGE>
WACHOVIA BANK, N.A.
By: /s/ Debra L. Coheley
----------------------------------
Title: Senior Vice President
<PAGE>
EXHIBIT 10.24
SECOND AMENDMENT AND CONSENT
SECOND AMENDMENT AND CONSENT (this "AMENDMENT"), dated as of January 6,
2000, among PACKAGING CORPORATION OF AMERICA, a Delaware corporation (the
"BORROWER"), the Lenders from time to time party to the Credit Agreement
referred to below, J.P. MORGAN SECURITIES INC. and DEUTSCHE BANK SECURITIES INC.
(as successor to BT Alex. Brown Incorporated), as Co-Lead Arrangers (in such
capacity, each a "CO-LEAD ARRANGER" and, collectively, the "CO-LEAD ARRANGERS"),
BANKERS TRUST COMPANY, as Syndication Agent (in such capacity, the "SYNDICATION
AGENT"), and 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 shall have the respective meanings provided
such terms in the Credit Agreement.
W I T N E S S E T H :
WHEREAS, the Borrower, the Lenders, the Co-Lead Arrangers, the
Syndication Agent and the Administrative Agent are parties to a Credit
Agreement, dated as of April 12, 1999 (as in effect on the date hereof, the
"CREDIT AGREEMENT");
WHEREAS, the Borrower and certain Lenders have entered into a First
Amendment and Consent to the Credit Agreement, dated as of August 26, 1999 (the
"FIRST AMENDMENT"), permitting, subject to the terms and conditions provided
therein, the Borrower to use the proceeds of a Permitted Primary Offering (as
defined therein) as set forth therein; and
WHEREAS, subject to the terms and conditions of this Amendment, the
parties hereto wish to amend the Credit Agreement as herein provided to provide
for an extension of the date by which a Permitted Primary Offering may be
consummated;
NOW, THEREFORE, it is agreed:
1. The definition of "Permitted Primary Offering" appearing in
Section 11.01 of the Credit Agreement is hereby amended by deleting the phrase
"December 31, 1999" appearing therein and inserting the phrase "December 31,
2000" in lieu thereof.
2. In order to induce the Lenders to enter into this Amendment, the
Borrower represents and warrants that:
(a) no Default or Event of Default exists as of the Second Amendment
Effective Date (as defined below), both immediately before and immediately
after giving effect to this Amendment; and
(b) all of the representations and warranties contained in the Credit
Agreement or the other Credit Documents are true and correct in all material
respects on the Second Amendment Effective Date both immediately before and
immediately after giving effect
<PAGE>
to this Amendment, with the same effect as though such representations and
warranties had been made on and as of the Second Amendment Effective Date
(it being understood that any representation or warranty made as of a
specific date shall be true and correct in all material respects as of such
specific date).
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 CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
6. This Amendment shall become effective on the date (the "SECOND
AMENDMENT EFFECTIVE DATE") when each of the Borrower and the Required Lenders
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.
7. From and after the Second Amendment Effective Date, all references
in the Credit Agreement and each of the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as modified
hereby.
* * *
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Amendment as of the date first above
written.
PACKAGING CORPORATION OF AMERICA
By: /s/ Richard B. West
--------------------
Title: Chief Financial Officer
3
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, INDIVIDUALLY AND AS
ADMINISTRATIVE AGENT
By: /s/ Colleen B. Galle
---------------------
Title: Vice President
<PAGE>
J.P. MORGAN SECURITIES, INC.,
AS CO-LEAD ARRANGER
By: /s/ James E. Condon
--------------------
Title: Vice President
<PAGE>
DEUTSCHE BANC ALEX BROWN INCORPORATED, AS A CO-LEAD ARRANGER
By: /s/ Loretta L. Summers
-----------------------
Title: MD
<PAGE>
BANKERS TRUST COMPANY,
INDIVIDUALLY AND AS SYNDICATION
AGENT
By: /s/ Robert R. Telesca
----------------------
Title: Assistant Vice President
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS L.P.,
INDIVIDUALLY AND AS DOCUMENTATION AGENT
By: /s/ Mark Denatale
------------------
Title: Authorized Signatory
<PAGE>
ABN AMRO BANK N.V.
By: /s/ Ronald C. Spurga
----------------------
Title: Vice President
By: /s/ Robert W. Casey, Jr.
--------------------------
Title: General Vice President
<PAGE>
AERIES FINANCE LTD.
By:
--------------------------------------
Name:
Title:
<PAGE>
AIM STRATEGIC INCOME FUND
By: INVESCO (NY) INC.,
AS INVESTMENT ADVISOR
By:
-------------------------------
Name:
Title:
<PAGE>
ALLIANCE INVESTMENT OPPORTUNITIES FUND, L.L.C.
By: ALLIANCE INVESTMENT OPPORTUNITIES MANAGEMENT,
L.L.C.,
AS MANAGING MEMBER
By: ALLIANCE CAPITAL MANAGEMENT, L.P.,
AS MANAGING MEMBER
By: ALLIANCE CAPITAL MANAGEMENT CORPORATION,
AS GENERAL PARTNER
By:
--------------------------------------------------
Name:
Title:
<PAGE>
ALLSTATE INSURANCE COMPANY
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
<PAGE>
AMARA-1 FINANCE LTD.
By:
-----------------------------------
Name:
Title:
<PAGE>
AMARA-2 FINANCE LTD.
By:
-----------------------------------
Name:
Title:
<PAGE>
ARCHIMEDES FUNDING II, LTD.
By: ING CAPITAL ADVISORS LLC,
AS COLLATERAL MANAGER
By: /s/ Michael J. Campbell
--------------------------
Title: Senior Vice President &
Portfolio Manager
<PAGE>
ARCHIMEDES FUNDING III, LTD.
By: ING CAPITAL ADVISORS LLC,
AS COLLATERAL MANAGER
By: /s/ Michael J. Campbell
---------------------------
Title: Senior Vice President &
Portfolio Manager
<PAGE>
ARCHIMEDES FUNDING, L.L.C.
By: ING CAPITAL ADVISORS LLC,
AS COLLATERAL MANAGER
By:
---------------------------------------
Name:
Title:
<PAGE>
ARES LEVERAGED INVESTMENT FUND, L.P.
By: ARES MANAGEMENT, L.P.,
ITS GENERAL PARTNER
By:
---------------------------------------
Name:
Title:
<PAGE>
ARES LEVERAGED INVESTMENT FUND II, L.P.
By: ARES MANAGEMENT II, L.P.,
ITS GENERAL PARTNER
By:
---------------------------------------
Name:
Title:
<PAGE>
ATHENA CDO, LIMITED
By: PACIFIC INVESTMENT MANAGEMENT COMPANY,
AS ITS INVESTMENT ADVISOR
By: PIMCO Management Inc., a general partner
By: /s/ Mohan V. Phansalkar
--------------------------
Title: Senior Vice President
<PAGE>
BANK OF AMERICA, N.A.
By:
---------------------------------------
Name:
Title:
<PAGE>
BANK OF MONTREAL
By: /s/ Amy K. Dumser
----------------------
Title:
<PAGE>
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
----------------------
Title: Senior Manager Loan Operations
<PAGE>
BANK POLSKA KASA OPIEKI, S.A.-PEKAO S.A. GROUP
By: /s/ Barry W. Henry
----------------------
Title: Vice President &
Senior Lending Officer
<PAGE>
BANK UNITED
By: /s/ Phil Green
--------------------
Title: Director Commercial Syndications
<PAGE>
BANKBOSTON, N.A.
By: /s/ Marie C. Duprey
----------------------
Title: Vice President
<PAGE>
BANK ONE, NA
By: /s/ Eric C. Balk
-------------------
Title: AVP
<PAGE>
BANQUE WORMS CAPITAL CORPORATION
By:
--------------------------------------
Name:
Title:
<PAGE>
BAYERISCHE HYPO-UND VEREINSBANK AG, NEW YORK BRANCH
By: /s/ Sylvia K. Cheng
----------------------
Title: Director
By: /s/ Carlo Lamberti
----------------------
Title: Associate Director
<PAGE>
BEAR STEARNS INVESTMENT PRODUCTS INC.
By:
-----------------------------------------------
Name:
Title:
<PAGE>
BEDFORD CDO, LIMITED
By: PACIFIC INVESTMENT MANAGEMENT COMPANY,
AS ITS INVESTMENT ADVISOR
By: PIMCO Management Inc., a general partner
By: /s/ Mohan V. Phansalkar
--------------------------
Title: Senior Vice President
<PAGE>
BLACK DIAMOND INTERNATIONAL
By:
------------------------------------------
Name:
Title:
<PAGE>
Sankaty Advisors, Inc. as Collateral Manager for
BRANT POINT CLO 1999-1, LTD., as Term Lender
By: /s/ Diane J. Extor
---------------------
Title: Executive Vice President, Portfolio
Manager
<PAGE>
CANADIAN IMPERIAL BANK OF COMMERCE
By: /s/ Koren Volk
-------------------
Title: Authorized Signatory
<PAGE>
CAPTIVA FINANCE LTD.
By:
----------------------------------------
Name:
Title:
<PAGE>
CAPTIVA II FINANCE LTD.
By:
-----------------------------------------
Name:
Title:
<PAGE>
CAPTIVA III FINANCE LTD.,
By: AS ADVISED BY PACIFIC
INVESTMENT MANAGEMENT COMPANY
By: /s/ David Dyer
------------------
Title: Director
<PAGE>
CAPTIVA IV FINANCE LTD.,
By: AS ADVISED BY PACIFIC
INVESTMENT MANAGEMENT COMPANY
By: /s/ David Dyer
------------------
Title: Director
<PAGE>
CARAVELLE INVESTMENT FUND, L.L.C.
By:
----------------------------------------------
Name:
Title:
<PAGE>
CHASE MANHATTAN BANK
By:
-----------------------------------------
Name:
Title:
<PAGE>
CHRISTIANA BANK OG KREDITKASSE ASA
By: /s/ Carl Petter Svendsen
---------------------------
Title: Senior Vice President
By: /s/ Peter M. Dodge
----------------------
Title: Senior Vice President
<PAGE>
CIBC INC.
By:
-------------------------------------
Name:
Title:
<PAGE>
COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE
By: /s/ Sean Mounier
-------------------
Title: First Vice President
By: /s/ Marcus Edward
--------------------
Title: Vice President
<PAGE>
THE CIT GROUP/EQUIPMENT FINANCING, INC.
By:
-------------------------------------
Name:
Title:
<PAGE>
CO BANK, ACB
By: /s/ Brian J. Klatt
----------------------
Title: Vice President
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By:
----------------------------------------
Name:
Title:
<PAGE>
CRESCENT/MACH I PARTNERS, L.P.
By: TCW ASSET MANAGEMENT COMPANY,
ITS INVESTMENT MANAGER
By:
---------------------------------
Name:
Title:
<PAGE>
CYPRESSTREE INSTITUTIONAL FUND, LLC
By: CYPRESSTREE INVESTMENT
MANAGEMENT COMPANY, INC. ITS
MANAGING MEMBER
By: /s/ Jonathan D. Sharkey
---------------------------
Title: Principal
<PAGE>
CYPRESSTREE INVESTMENT FUND, LLC
By: CYPRESSTREE INVESTMENT
MANAGEMENT COMPANY, INC. ITS
MANAGING MEMBER
By: /s/ Jonathan D. Sharkey
-----------------------------
Title: Principal
<PAGE>
CYPRESSTREE SENIOR FLOATING RATE FUND
By: CYPRESSTREE INVESTMENT
MANAGEMENT COMPANY, INC., AS
PORTFOLIO MANAGER
By: /s/ Jonathan D. Sharkey
---------------------------
Title: Principal
<PAGE>
DEBT STRATEGIES FUND III, INC.
By:
-----------------------------------
Name:
Title:
<PAGE>
DELANO COMPANY
By: PACIFIC INVESTMENT MANAGEMENT
COMPANY,
AS ITS INVESTMENT ADVISOR
By: PIMCO Management Inc., a general
partner
By: /s/ Mohan V. Phansalkar
-----------------------------------
Title: Senior Vice President
<PAGE>
DLJ CAPITAL FUNDING INC.
By:
-----------------------------------
Name:
Title:
<PAGE>
DRESDNER BANK AG NEW YORK AND GRAND
CAYMAN BRANCHES
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
<PAGE>
EA CAYMAN UNIT TRUST-EA/MACKAY HIGH
YIELD CAYMAN UNIT TRUST
By: MACKAY-SHIELDS FINANCIAL
CORPORATION ITS INVESTMENT ADVISOR
By:
-----------------------------------
Name:
Title:
<PAGE>
EATON VANCE INSTITUTIONAL SENIOR LOAN
FUND
BY: EATON VANCE MANAGEMENT AS
INVESTMENT ADVISOR
By: /s/ Scott H. Page
-----------------------------------
Title: Vice President
<PAGE>
EATON VANCE SENIOR INCOME TRUST
By: EATON VANCE MANAGEMENT AS
INVESTMENT ADVISOR
By: /s/ Scott H. Page
-----------------------------------
Title: Vice President
<PAGE>
ELC (CAYMAN) LTD. CDO SERIES 1999-1
By: /s/ Thomas M. Finke
-----------------------------------
Title: Managing Director
<PAGE>
ELT LIMITED
By:
-----------------------------------
Name:
Title:
<PAGE>
ERSTE BANK DER OESTERREICHISCHEN
SPARKASSEN AG
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
<PAGE>
FEDERAL STREET PARTNERS
By: /s/ David K. McKown
-----------------------------------
Title: Vice President
<PAGE>
FIRST DOMINION FUNDING I
By:
-----------------------------------
Name:
Title:
<PAGE>
FIRST DOMINION FUNDING II
By:
-----------------------------------
Name:
Title:
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
By:
-----------------------------------
Name:
Title:
<PAGE>
FIRST UNION NATIONAL BANK
By: /s/ Andrew Payne
-----------------------------------
Title: Vice President
<PAGE>
FIRSTRUST BANK
By: /s/ Kent D. Nelson
-----------------------------------
Title: Vice President and Manager
<PAGE>
FLEET NATIONAL BANK
By: /s/ Michael J. Sullivan
-----------------------------------
Title: Vice President
<PAGE>
FLOATING RATE PORTFOLIO
By: INVESCO SENIOR SECURED MANAGEMENT,
INC., AS ATTORNEY IN FACT
By:
-----------------------------------
Name:
Title:
<PAGE>
FRANKLIN FLOATING RATE TRUST
By: /s/ Chauncey Lufkin
-----------------------------------
Title: Vice President
<PAGE>
FREMONT INVESTMENT & LOAN
By: /s/ Maria Chachere
-----------------------------------
Title: Vice President
<PAGE>
THE FUJI BANK, LIMITED
By: /s/ Peter L. Chinnici
-----------------------------------
Title: Senior Vice President &
Group Head
<PAGE>
GALAXY CLO 1999-1, LTD.
By:
-----------------------------------
Name:
Title:
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Thomas E. Johnstone
-----------------------------------
Title: Duly Authorized Signatory
<PAGE>
Sankaty Advisors, Inc. as Collateral
Manager for
GREAT POINT CLO 1999-1 LTD., as Term
Lender
By: /s/ Diane J. Extor
-----------------------------------
Title: Executive Vice President,
Portfolio Manager
<PAGE>
HELLER FINANCIAL, INC.
By: /s/ Sheila C. Weimer
-----------------------------------
Title: Vice President
<PAGE>
THE ING CAPITAL SENIOR SECURED INCOME
FUND, L.P.
By:
-----------------------------------
Name:
Title:
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By: /s/ Walter R. Wolff
-----------------------------------
Title: Joint General Manager
<PAGE>
IMPERIAL BANK, A CALIFORNIA BANKING
CORPORATION
By:
-----------------------------------
Name:
Title:
<PAGE>
INDOSEUZ CAPITAL FUNDING IIA, LIMITED
By: INDOSUEZ CAPITAL LUXEMBOURG, AS
PORTFOLIO ADVISOR
By: /s/ Melissa Marano
-----------------------------------
Title: Vice President
<PAGE>
INDOSEUZ CAPITAL FUNDING IV, L.P.
By: INDOSUEZ CAPITAL LUXEMBOURG, AS
PORTFOLIO ADVISOR
By: /s/ Melissa Marano
-----------------------------------
Title: Vice President
<PAGE>
J.H. WHITNEY MARKET VALUE FUND, L.P.
By:
-----------------------------------
Name:
Title:
<PAGE>
JACKSON NATIONAL LIFE INSURANCE COMPANY
By: PPM AMERICA, INC., AS ATTORNEY IN
FACT, ON BEHALF OF JACKSON NATIONAL
LIFE INSURANCE COMPANY
By:
-----------------------------------
Name:
Title:
<PAGE>
KEMPER FLOATING RATE FUND
By: /s/ Mark E. Wittnebel
-----------------------------------
Title: Senior Vice President
<PAGE>
KZH APPALOOSA LLC
By:
-----------------------------------
Name:
Title:
<PAGE>
KZH CNC LLC
By: /s/ Peter Chin
-----------------------------------
Title: Authorized Agent
<PAGE>
KZH CRESCENT-2 LLC
By: /s/ Peter Chin
-----------------------------------
Title: Authorized Agent
<PAGE>
KZH CYPRESSTREE-1 LLC
By: /s/ Peter Chin
-----------------------------------
Title: Authorized Agent
<PAGE>
KZH HIGHLAND-2 LLC
By: /s/ Peter Chin
-----------------------------------
Title: Authorized Agent
<PAGE>
KZH ING-1 LLC
By: /s/ Peter Chin
-----------------------------------
Title: Authorized Agent
<PAGE>
KZH ING-3 LLC
By: /s/ Peter Chin
-----------------------------------
Title: Authorized Agent
<PAGE>
KZH IV LLC
By:
-----------------------------------
Name:
Title:
<PAGE>
KZH PONDVIEW LLC
By: /s/ Peter Chin
-----------------------------------
Title: Authorized Agent
<PAGE>
KZH SHOSHONE LLC
By: /s/ Peter Chin
-----------------------------------
Title: Authorized Agent
<PAGE>
KZH STERLING LLC
By:
-----------------------------------
Name:
Title:
<PAGE>
KZH SOLEIL LLC
By: /s/ Peter Chin
-----------------------------------
Title: Authorized Agent
<PAGE>
KZH SOLEIL-2 LLC
By: /s/ Peter Chin
-----------------------------------
Title: Authorized Agent
<PAGE>
LEHMAN COMMERCIAL PAPER
By:
-----------------------------------
Name:
Title:
<PAGE>
LLOYDS TSB BANK PLC
By:
-----------------------------------
Name:
Title:
<PAGE>
THE 1199 HEALTH CARE EMPLOYEES
PENSION FUND
By: MACKAY-SHIELDS FINANCIAL CORPORATION
ITS INVESTMENT ADVISOR
By:
-----------------------------------
Name:
Title:
<PAGE>
BANKBOSTON, N.A. AS TRUST ADMINISTRATOR
FOR LONGLANE MASTER TRUST IV
By:
-----------------------------------
Name:
Title:
<PAGE>
MAGNETITE ASSET INVESTORS LLC
By:
-----------------------------------
Name:
Title:
<PAGE>
MAINSTAY VP SERIES FUND, INC., ON BEHALF
OF ITS HIGH YIELD CORPORATE BOND PORTFOLIO
BY: MACKAY-SHIELDS FINANCIAL CORPORATION
ITS INVESTMENT ADVISOR
By:
-------------------------------------
Name:
Title:
<PAGE>
MEDICAL LIABILITY MUTUAL
INSURANCE COMPANY
By:
-----------------------------------
Name:
Title:
<PAGE>
MERRILL LYNCH PRIME RATE PORTFOLIO
By:
-----------------------------------
Name:
Title:
<PAGE>
MERRILL LYNCH SENIOR FLOATING RATE
FUND II, INC.
By:
-----------------------------------
Name:
Title:
<PAGE>
MERRILL LYNCH SENIOR FLOATING
RATE FUND, INC.
By:
-----------------------------------
Name:
Title:
<PAGE>
MICHIGAN NATIONAL BANK
By: /s/ Lisa Davidson McKinnon
-----------------------------------
Title: Vice President
<PAGE>
THE MITSUBISHI TRUST AND BANKING
CORPORATION
By: /s/ Beatrice E. Kossodo
-----------------------------------
Title: Senior Vice President
<PAGE>
ML CLO XX PILGRIM AMERICA (CAYMAN)
LTD.
By: PILGRIM INVESTMENTS, INC. AS ITS
INVESTMENT MANAGER
By:
-----------------------------------
Name:
Title:
<PAGE>
MONUMENTAL LIFE INSURANCE COMPANY
By:
-----------------------------------
Name:
Title:
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
By:
------------------------------------------
Name:
Title:
<PAGE>
MORGAN TRADING
By:
------------------------------------------
Name:
Title:
<PAGE>
MORGAN PORTFOLIO
By:
------------------------------------------
Name:
Title:
<PAGE>
MOUNTAIN CAPITAL CLO I, LTD.
By:
------------------------------------------
Name:
Title:
<PAGE>
NATEXIS BANQUE BFCE
By: /s/ Jordan Sadler
------------------------------------------
Title: Associate
By: /s/ Frank H. Madden, Jr.
------------------------------------------
Title: Vice President & Group Manager
<PAGE>
NOMURA BOND & LOAN FUND
BY: NOMURA CORPORATE RESEARCH &
ASSET MANAGEMENT INC.
AS INVESTMENT ADVISOR
By:
------------------------------------------
Name:
Title:
<PAGE>
NORSE CBO, LTD.
By: PETERSON CAPITAL MANAGEMENT,
LLC AS ITS INVESTMENT ADVISOR
By: PETERSON CAPITAL ADVISORS, LLC
ITS MANAGER AND PURSUANT TO
DELEGATED AUTHORITY
By: /s/ Timothy S. Peterson
------------------------------------------
Title: President
<PAGE>
NORTH AMERICAN SENIOR FLOATING RATE FUND
By: CYPRESSTREE INVESTMENT
MANAGEMENT COMPANY, INC., AS
PORTFOLIO MANAGER
By: /s/ Jonathan D. Sharkey
------------------------------------------
Title: Principal
<PAGE>
NORTHWOODS CAPITAL, LIMITED
By: ANGELO, GORDON & CO., L.P., AS
COLLATERAL MANAGER
By:
------------------------------------------
Name:
Title:
<PAGE>
OAK HILL SECURITIES FUND, L.P.
By: OAK HILL SECURITIES GENPAR, L.P.,
ITS GENERAL PARTNER
By: OAK HILL SECURITIES MGP, INC.,
ITS GENERAL PARTNER
By: /s/ Scott D. Krase
------------------------------------------
Title: Vice President
<PAGE>
OAK MOUNTAIN LIMITED
By: ALLIANCE CAPITAL MANAGEMENT
L.P., AS INVESTMENT MANAGER
By: ALLIANCE CAPITAL MANAGEMENT
CORPORATION, AS GENERAL
PARTNER
By:
------------------------------------------
Name:
Title:
<PAGE>
OCTAGON INVESTMENT PARTNERS III, LTD.
By: OCTAGON CREDIT INVESTORS, LLC,
AS PORTFOLIO MANAGER
By: /s/ Michael B. Nechamkin
------------------------------------------
Title: Portfolio Manager
<PAGE>
OLYMPIC FUNDING TRUST, SERIES 1999-1
By: /s/ Kelly C. Walker
------------------------------------------
Title: Authorized Agent
<PAGE>
ORIX USA CORPORATION
By:
------------------------------------------
Name:
Title:
<PAGE>
OSPREY INVESTMENTS PORTFOLIO
By: CITIBANK, N.A., AS MANAGER
By:
------------------------------------------
Name:
Title:
<PAGE>
OXFORD STRATEGIC INCOME FUND
By: EATON VANCE MANAGEMENT, AS INVESTMENT ADVISOR
By: /s/ Scott H. Page
------------------------------------------
Title: Vice President
<PAGE>
PACIFIC LIFE INSURANCE COMPANY
By:
------------------------------------------
Name:
Title:
By:
------------------------------------------
Name:
Title:
<PAGE>
PACIFIC REDWOOD CBO
By:
------------------------------------------
Name:
Title:
<PAGE>
PARIBAS CAPITAL FUNDING LLC
By:
------------------------------------------
Name:
Title:
<PAGE>
PARIBAS CORPORATION
By:
------------------------------------------
Name:
Title:
<PAGE>
PERSEUS CDO I, LIMITED
BY: Massachusetts Mutual Life Insurance Company,
as Collateral Manager
By: /s/ Steven J. Katz
-------------------
Title: Second V.P. & Associate General Counsel
<PAGE>
PILGRIM PRIME RATE TRUST
By: PILGRIM INVESTMENTS, INC.,
AS ITS INVESTMENT MANAGER
By:
-------------------------------
Name:
Title:
<PAGE>
PUTNAM DIVERSIFIED INCOME TRUST
By:
-------------------------------
Name:
Title:
<PAGE>
PUTNAM DIVERSIFIED INCOME TRUST II
By:
-------------------------------
Name:
Title:
<PAGE>
PUTNAM FUNDS TRUST-PUTNAM HIGH YIELD TRUST II
By:
-------------------------------
Name:
Title:
<PAGE>
PUTNAM HIGH YIELD TOTAL RETURN FUND
By:
-------------------------------
Name:
Title:
<PAGE>
PUTNAM MASTER INCOME TRUST
By:
-------------------------------
Name:
Title:
<PAGE>
PUTNAM MASTER INTERMEDIATE INCOME TRUST
By:
-------------------------------
Name:
Title:
<PAGE>
PUTNAM PREMIER INCOME TRUST
By:
-------------------------------
Name:
Title:
<PAGE>
PUTNAM VARIABLE TRUST-PVT DIVERSIFIED INCOME FUND
By:
-------------------------------
Name:
Title:
<PAGE>
PUTNAM VARIABLE TRUST-PVT HIGH YIELD FUND
By:
-------------------------------
Name:
Title:
<PAGE>
ROYAL BANK OF CANADA
By:
-------------------------------
Name:
Title:
<PAGE>
ROYALTON COMPANY
By: PACIFIC INVESTMENT MANAGEMENT COMPANY,
AS ITS INVESTMENT ADVISOR
By: PIMCO Management Inc., a general partner
By: /s/ Mohan V. Phansalkar
-------------------------------
Title: Senior Vice President
<PAGE>
SANKATY HIGH YIELD PARTNERS II, L.P.
By: /s/ Diane J. Exter
-------------------------------
Title: Executive Vice President, Portfolio Manager
<PAGE>
SAAR HOLDINGS CDO, LIMITED
BY: Massachusetts Mutual Life Insurance Company, as
Investment Manager
By: /s/ Steven J. Katz
-------------------------------
Title: Second V.P. & Associate General
Counsel
<PAGE>
SAWGRASS TRADING LLC
By: /s/ Kelly C. Walker
-------------------------------
Title: Vice President
<PAGE>
SENIOR DEBT PORTFOLIO
By: BOSTON MANAGEMENT AND RESEARCH, AS INVESTMENT
ADVISOR
By: /s/ Scott H. Page
-------------------------------
Title: Vice President
<PAGE>
SEQUILS-PILGRIM I, LTD.
By: PILGRIM INVESTMENTS, INC. AS ITS INVESTMENT MANAGER
By: /s/ Michel Prince
-------------------------------
Title: Vice President
<PAGE>
SEQUILS I, LTD
By: TCW ADVISORS, INC. AS ITS
COLLATERAL MANAGER
By:
------------------------------------------
Name:
Title:
By:
------------------------------------------
Name:
Title:
<PAGE>
SEQUILS-ING I (HBDGM), LTD.
BY: ING CAPITAL ADVISORS LLC,
COLLATERAL MANAGER AND
AUTHORIZED SIGNATORY
By: /s/ Michael J. Campbell
------------------------------------------
Title: Senior Vice President &
Portfolio Manager
<PAGE>
SOUTHERN PACIFIC BANK
By: /s/ Mun Young Kim
------------------------------------------
Title: Vice President
<PAGE>
SRF TRADING, INC.
By:
------------------------------------------
Name:
Title:
<PAGE>
SRV-HIGHLAND, INC.
By: /s/ Kelly C. Walker
------------------------------------------
Title: Vice President
<PAGE>
STEIN ROE & FARNHAM CLO I LTD.,
BY STEIN ROE & FARNHAM INCORPORATED,
AS PORTFOLIO MANAGER
By:
--------------------------------
Name:
Title:
<PAGE>
STOCKSPLUS LP SUBFUND B (ACCT 400)
By: PACIFIC INVESTMENT MANAGEMENT COMPANY, AS
ITS INVESTMENT ADVISOR, ACTING THROUGH
INVESTORS FIDUCIARY TRUST COMPANY IN THE
NOMINEE NAME OF IFTCO
By: PIMCO Management Inc., a general partner
By: /s/ Mohan V. Phansalkar
-----------------------------
Title: Senior Vice President
<PAGE>
THE SUMITOMO BANK, LTD
By:
-----------------------------
Name:
Title:
<PAGE>
SUTTER CBO 1998-1 LTD.
By: WELLS FARGO BANK, N.A., ITS
ATTORNEY-IN-FACT
By:
-----------------------------
Name:
Title:
<PAGE>
TEACHERS' RETIREMENT SYSTEM OF
LOUISIANA
By: MACKAY-SHIELDS FINANCIAL
CORPORATION ITS INVESTMENT
ADVISOR
By:
-----------------------------
Name:
Title:
<PAGE>
TORONTO DOMINION (NEW YORK), INC.
By: /s/ Jorge A. Garcia
-----------------------------
Title: Vice President
<PAGE>
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/ Perry Vavoules
-----------------------------
Title: Senior Vice President
<PAGE>
TRAVELERS CORPORATE LOAN FUND, INC.
By: TRAVELERS ASSET MANAGEMENT
INTERNATIONAL CORPORATION
By:
-----------------------------
Name:
Title:
<PAGE>
THE TRAVELERS INSURANCE COMPANY
By:
-----------------------------
Name:
Title:
<PAGE>
TRITON CBO III, LIMITED
By: INVESCO SENIOR SECURED
MANAGEMENT, INC., AS
INVESTMENT ADVISOR
By:
-----------------------------
Name:
Title:
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Buddy Montgomery
-----------------------------
Title: Vice President
<PAGE>
VAN KAMPEN PRIME RATE INCOME TRUST
By: Van Kampen Investment Advisory Corp.
By: /s/ Darvin D. Pierce
-----------------------------
Title: Vice President
<PAGE>
WACHOVIA BANK, N.A.
By: /s/ Debra L. Coheley
-----------------------------
Title: Senior Vice President
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
- Dixie Container Corporation
State of Incorporation: Virginia
Other trade names used: none
- PCA Hydro, Inc.
State of Incorporation: Delaware
Other trade names used: none
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of
this registraton statement.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 17, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 23, 1999 in Amendment No. 3 to the
Registration Statement (Form S-1 No. 333-86963) and related Prospectus of
Packaging Corporation of America for the initial registration of its common
stock.
ERNST & YOUNG LLP
Chicago, Illinois
January 17, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000075677
<NAME> PACKAGING CORPORATION OF AMERICA
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR OTHER OTHER
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999 APR-12-1999
<PERIOD-END> DEC-31-1998 APR-11-1999 SEP-30-1999
<CASH> 1 0 31,200
<SECURITIES> 42 0 42
<RECEIVABLES> 56,971 0 218,411
<ALLOWANCES> 5,220 0 4,669
<INVENTORY> 150,719 0 155,428
<CURRENT-ASSETS> 243,563 0 419,026
<PP&E> 1,677,105 0 2,724,842
<DEPRECIATION> 735,749 0 817,918
<TOTAL-ASSETS> 1,367,403 0 2,425,839
<CURRENT-LIABILITIES> 164,152 0 216,089
<BONDS> 17,552 0 1,652,209
0 0 96,500
0 0 0
<COMMON> 0 0 946
<OTHER-SE> 908,392 0 356,774
<TOTAL-LIABILITY-AND-EQUITY> 1,367,403 0 2,425,839
<SALES> 1,571,019 433,182 816,538
<TOTAL-REVENUES> 1,571,019 433,182 816,538
<CGS> 1,289,644 367,483 640,587
<TOTAL-COSTS> 1,289,644 367,483 640,587
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 2,710 412 0
<INTEREST-EXPENSE> 2,782 221 73,627
<INCOME-PRETAX> 118,968 (212,315) 35,588
<INCOME-TAX> 47,529 83,716 14,655
<INCOME-CONTINUING> 71,439 (128,599) 20,933
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 (6,327) 0
<CHANGES> 0 0 0
<NET-INCOME> 71,439 (134,926) 20,933
<EPS-BASIC> 0 0 0
<EPS-DILUTED> 0 0 0
</TABLE>
