PACKAGING DYNAMICS CORP - 10-K Annual Report

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

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NUMBER 000-49741
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PACKAGING DYNAMICS CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 32-0009217
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)

3900 WEST 43RD STREET 60632
CHICAGO, ILLINOIS (Zip Code)
(Address of Principal Executive Office)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(773) 843-8000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

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

The aggregate market value of the voting and non-voting common stock held
by non-affiliates of the Registrant as of June 28, 2002 was zero. As of that
date, all of the Common Stock was owned by IPMC, Inc., an indirect wholly owned
subsidiary of Ivex Packaging Corporation. As of March 1, 2003, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
$27.4 million based upon the closing price of $6.73.

At March 1, 2003, 9,626,041 shares of Common Stock, par value of $0.01,
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement filed within 120 days after the close of the
Company's fiscal year in connection with the 2003 Annual Meeting of Stockholders
are incorporated by reference
into Items 10, 11, 12 and 13 of Part III of this Form 10-K
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TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

ORGANIZATION AND STRUCTURE

Packaging Dynamics Corporation, referred to as the Company or Packaging
Dynamics, is a Delaware corporation which owns all of the limited liability
interest in Packaging Holdings L.L.C., referred to as Packaging Holdings.
Packaging Holdings is a limited liability company organized under the laws of
the state of Delaware and is the sole member of Packaging Dynamics, L.L.C.,
referred to as PDLLC, which is the parent company of several operating
subsidiaries.

In this annual report, except where the context requires otherwise, the
terms "we," "us" and "our" refer to Packaging Holdings and its subsidiaries for
the periods as of and prior to the July 1, 2002 contribution of all of the
Packaging Holdings limited liability company interests to Packaging Dynamics and
to Packaging Dynamics and its subsidiaries for the periods thereafter.

MERGER AND DISTRIBUTION

On March 18, 2002, the board of directors of Ivex Packaging Corporation, or
Ivex, approved a merger agreement providing for the merger with Ivex of a
wholly-owned subsidiary of Alcoa Inc. As a result of the merger, Ivex became a
wholly-owned subsidiary of Alcoa on July 1, 2002. The merger was conditioned
upon, among other things, the prior distribution to Ivex stockholders and option
holders of Ivex's 48.19% ownership interest in Packaging Holdings. To facilitate
this distribution, Ivex in March 2002 formed Packaging Dynamics, a C-corporation
for income tax purposes, to be the holding company for all of the ownership
interests in Packaging Holdings. In preparation for the distribution, Ivex and
the other members of Packaging Holdings exchanged their ownership interests in
Packaging Holdings for 9,437,750 shares of common stock of Packaging Dynamics.
On July 1, 2002, Ivex distributed 4,548,050 shares of Packaging Dynamics to its
stockholders and certain of its option holders immediately prior to the merger.

Also in connection with the merger and distribution, the $12.5 million 12%
subordinated note payable by Packaging Holdings to Ivex (the "12% Promissory
Note"), plus accreted interest, totaling approximately $19.3 million was
canceled and a consulting agreement with Ivex was canceled.

OVERVIEW

We are a vertically integrated flexible packaging company that laminates
and converts paper, film and foil into various value-added flexible packaging
products for the food service, industrial laminations and specialty paper
markets.

We were formed as Packaging Holdings in November 1998 when we acquired the
bag and sandwich wrap converting assets of Bagcraft Corporation of America, or
BCA, and the Detroit paper mill assets of IPMC, Inc., a subsidiary of Ivex. The
acquired BCA business is referred to in this annual report as "Bagcraft."
Historically, the Detroit paper mill had been one of Bagcraft's principal paper
suppliers. We combined the Bagcraft and Detroit paper mill businesses as part of
a strategic plan to create a premier vertically integrated flexible packaging
company specializing in providing value-added packaging products for markets
with attractive margins and growth rates. As part of this plan, we seek to
differentiate ourselves from our competition by offering a broad array of
customized products and superior customer service to address the specialized
needs of our customers.

The combination of the Bagcraft and Detroit businesses has also provided a
platform for enhanced sales and earnings growth, combining internal growth from
product extensions and further market penetration with external growth from
strategic add-on acquisitions, such as the acquisition of International
Converter, Inc., or ICI, and Wolf Packaging, Inc., or Wolf, discussed below.

In July 1999, we acquired ICI, a leading converter of aluminum foil and
paper-based packaging for food and industrial applications. ICI strengthened and
broadened our existing product offering and market presence, propelling us to a
leadership position in the laminated foil market.
2

During 2002, we extended our market share in the quick-service restaurant
industry by acquiring Wolf. Wolf is a manufacturer of foil and paper sandwich
wraps located in Fort Madison, Iowa and is a significant supplier to the
quick-service restaurant industry.

Our principal executive offices are located at 3900 West 43rd Street,
Chicago, Illinois 60632, and our telephone number is (773) 843-8000. Our home
page on the Internet is www.pkdy.com. We make our web site content available for
informational purposes only. It should not be relied upon for investment
purposes, nor is it incorporated by reference into this Form 10-K.

MARKETS, PRODUCTS AND MANUFACTURING PROCESS

We serve the foodservice, specialty laminations and specialty paper
markets. We are an integrated converter of paper, film and foil for use in a
variety of food packaging and industrial applications. We believe that we enjoy
a leading market share in our core product lines.

FOODSERVICE

We believe we are a leading supplier of sheet, wrap and bag products and we
provide extensive conversion expertise in the lamination of aluminum foil and
paper, as well as in flexographic and gravure printing, water and solvent based
inks, slitting, sheeting and die cutting.

Our end products include printed bags, fast food foil and paper sandwich
wrap sheets. The food service markets are comprised of quick-service restaurants
("QSRs"), distributors and retail packaging companies. Within these markets, we
provide products for use by QSR chains, food processors, bakeries, supermarkets,
deli's and concessions. We presently supply products to more than 1,000
customers in these markets, many of which are among the most well recognized
names in the food service industries. Our products are sold through
distributors, as well as directly to end users.

We have developed a number of proprietary innovations. Such innovations
include the Dubl-Wax bag, which was the first specialty-waxed bag serving the
retail bakery industry. Consistent with our commitment to new product
development, we are pursuing the addition of a number of smaller, but highly
profitable product lines that would expand our value added conversion
capabilities. These products include "to go" packaging, coffee bags, coated
foil, wax laminations and lidding products.

We manufacture what we believe to be one of the most diversified lines of
flexible packaging in the U.S. packaging industry, with over 300 different types
of bags and sheet serving the food service markets.

SPECIALTY LAMINATIONS

Our specialty laminations product group manufactures and converts custom
laminations for a variety of industrial uses. Our end products include can
liners, label stock and insulation facing. Our can liners and label stock
products are sold primarily to North American customers in the prepared food and
office supply industries. We service North American and European customers with
our insulation facing products. We produce a highly specialized insulation
facing product for the European market that is used in the production of foam
insulation.

SPECIALTY PAPER

The paper mill sells approximately 35% of its production to merchant
customers, within markets that are generally small and specialized but serve as
a profitable niche focus for us. Our paper mill is a producer of both virgin and
recycled lightweight grades of paper for applications such as waxing and foil
lamination for the flexible packaging industry with an emphasis on food
packaging and other bleached specialty applications. The paper mill manufactures
numerous grades of lightweight paper produced from either virgin or recycled
fiber, giving the paper mill the capability of serving various customer needs.

3

MANUFACTURING

We operate five converting facilities and one paper mill facility.

The manufacturing of our products involves conversion of raw materials,
consisting of various types of paper, foil, inks, coatings and adhesives, into a
variety of food packaging and industrial applications and, at our paper mill,
the conversion of pulp and recycled fiber into specialty paper.

We believe that our in-line printing and fabrication process enables us to
produce food packaging bags and sheets more efficiently than our competitors who
utilize multiple steps to manufacture a comparable product. The following are
the in-line production process steps required to produce our products (not all
products require each of the processes listed): printing, lamination, wax
application and coating, die cutout, bag formation, slitting and sheeting and
cutting. Our industrial manufacturing process consists of four distinct stages:
laminating and coating, printing (flexographic and gravure), slitting and
sheeting and cutting. We can laminate aluminum foil and paper substrates in a
broad range of special widths ranging from 15 inches to 64 inches.

Our paper mill produces a wide range of specialty, machine glazed papers
and has the ability to process recycled fiber, which is extremely cost
effective. Currently, recycled fiber that complies with U.S. Food and Drug
Administration regulations constitutes approximately 30% of the raw material
used in the paper mill's operations. The paper mill currently produces its
products on three paper machines, operates 24 hours per day, seven days per week
and is served by rail. The current annual production capacity of the paper
mill's three paper machines is approximately 55,000 tons. The mill produced
approximately 53,000 tons of paper in 2002.

Pulp, recycled fiber, aluminum foil and paper have historically represented
the largest portion of our cost of goods sold.

COMPETITION

We operate in markets that are highly competitive and face substantial
competition throughout all of our product lines from numerous companies. Many of
these competitors are significantly smaller than we are and have lower fixed
costs and greater operating flexibility. In addition to price competition,
competition with respect to many of our products is based on quality, supplier
response time, service and timely and complete order fulfillment.

EMPLOYEES

As of December 31, 2002, we employed approximately 1,128 people, 528 of
whom are covered by collective bargaining agreements. Of our 528 unionized
employees as of December 31, 2002, 76 employees are based in Belpre, Ohio and
are represented by the United Steelworkers of America under a contract that
expires in May 2005; 309 employees are based in Chicago, Illinois and are
represented by the International Brotherhood of Teamsters Local 743 under a
contract scheduled to expire in December 2005; and 143 employees are based in
Detroit, Michigan and are represented by the United Papermakers International
Union under a contract expiring in May 2004. There have been no significant
interruptions or curtailments of our operations due to labor disputes since our
inception, and we believe that relations with our employees are good; however,
as these labor contracts expire, there can be no assurances that there will be
no strikes, work stoppages or other labor disputes as we negotiate such
contracts.

RAW MATERIALS

Pulp, recycled fiber, aluminum foil and paper have historically represented
the largest portion of our raw materials. Generally, these raw materials are
readily available from a wide variety of suppliers. Costs for all of the
significant raw materials used by us tend to fluctuate with various economic
factors which generally affect us and our competitors. The availability of raw
materials was adequate during 2002 although prices for certain items such as
pulp, recycled fiber, aluminum foil and paper have been volatile and may
continue to fluctuate, in some instances adversely to us.

4

RESEARCH AND DEVELOPMENT

We have significant resources fully dedicated to product development in
bags (Chicago, Illinois) and foil-paper laminations (Caldwell, Ohio). We believe
we have a strong reputation in the market for creativity and new product
innovation. Our development programs are customer driven and focused on specific
customer product requests. Our product development personnel have many years of
experience in the field, and we believe we have the broadest product development
capability in the industry.

INTELLECTUAL PROPERTY

We own a number of U.S. patents and trademarks that collectively are
important to our business, but no single one of which is material to us. We
believe that our intellectual property rights and licensing rights are adequate
for our business.

CUSTOMERS, SALES AND BACKLOG

We have relationships with numerous customers in each of our product
categories. No material portion of our business is dependent on a single
customer or very few customers. Although we do not currently have a single
customer that accounts for 10% or more of our sales, the loss of one or more of
our largest customers, while not anticipated, could have a material adverse
effect on our financial condition or results of operations. In general, we
believe that the backlog of orders is not material to an understanding of our
business.

ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION

Since many of our packaging products are used in the food industry, we are
subject to the manufacturing standards of the U.S. Food and Drug Administration.
Historically, compliance with the standards of the food industry has not had a
material effect on our earnings, capital expenditures or competitive position.
There can be no assurance, however, that compliance with those standards will
not have a material adverse effect on our future operating results or financial
condition.

Our manufacturing operations are subject to federal, state and local
regulations governing the environment and the discharge of materials into air,
land and water, as well as the handling and disposal of solid and hazardous
wastes. We believe that we are in substantial compliance with applicable
environmental regulations and do not believe that costs of compliance will have
a material adverse effect on our earnings, capital expenditures or competitive
position. We do not expect to make material capital expenditures for
environmental control facilities for known items during 2003. There can be no
assurance, however, that these known items or others will not require additional
expenditures beyond those that are anticipated and that additional expenditures,
if any, would not have a material adverse effect on our operating results or
financial condition.

FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS

The Company is an integrated flexible packaging converter supplying
products to the food service, consumer products, bakery, supermarket and certain
industrial markets. The Company operates within and sells to customers
throughout the U.S., predominantly in one industry segment -- flexible packaging
bags and wrappers for the fast food, paper and specialty paper bag markets. The
Company is comprised of one operating segment based on management decisions as
to resource allocation.

5

ITEM 2. PROPERTIES

Our principal properties consist of our manufacturing locations. Shown
below are the locations of the principal properties which we own or lease. We
believe our facilities are suitable and adequate for the purposes for which they
are used and are adequately maintained.

OWNED FACILITIES

LEASED FACILITIES

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(1) Lease expires in 2026, subject to termination at our election in 2006, and
from time to time thereafter, upon specified notice.

(2) Lease expires in 2009, subject to our right to extend the lease for two
successive five-year periods upon our written notice to the lessor.

ITEM 3. LEGAL PROCEEDINGS

We are currently a party to various legal proceedings in various federal
and state jurisdictions arising out of the operations of our business. The
amount of alleged liability, if any, from these proceedings cannot be determined
with certainty; however, we believe that our ultimate liability, if any, arising
from the pending legal proceedings, as well as from asserted legal claims and
known potential legal claims which are probable of assertion, taking into
account established accruals for estimated liabilities, should not be material
to our financial condition or results of operations.

6

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

None.

EXECUTIVE OFFICERS OF THE COMPANY

Set forth below are the name, age, positions and offices held (as of the
date hereof) and a brief account of the business experience for each executive
officer of the Company.

7

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has traded on the NASDAQ since July 1, 2002, under the
ticker symbol PKDY. The high and low sales prices for the common stock by
quarter during 2002 as reported by the NASDAQ are shown below.

The approximate number of shareholders of record of our common stock as of
March 6, 2003 was 443 holders. We have never paid cash dividends on our common
stock. Any payment of cash dividends in the future will be at the discretion of
our Board of Directors and will depend upon the financial condition, capital
requirements and our earnings as well as other factors that our Board of
Directors may deem relevant. In addition, our senior credit facility prohibits
the payment of dividends on our common stock.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated balance sheet data as of December 31, 2002 and
2001 and the selected consolidated statement of operations data for each of the
three years ended December 31, 2002 for Packaging Dynamics Corporation have been
derived from audited consolidated financial statements included elsewhere in
this annual report. The selected consolidated balance sheet data as of December
31, 2000, 1999 and 1998 and the selected consolidated statement of operations
data for the year ended December 31, 1999 and the period from November 20 to
December 31, 1998 for Packaging Dynamics Corporation have been derived from
audited consolidated financial statements not included in this annual report.

The selected unaudited combined predecessor companies financial data as of
November 19, 1998 and for the period from January 1 to November 19, 1998 reflect
the combined businesses of BCA and IPMC, Inc., or IPMC, and are derived from
unaudited financial data prepared by management. In the opinion of management,
the selected unaudited combined financial data of the predecessor companies
reflect their combined financial position and results of operations, as of those
dates and for those periods presented, in accordance with accounting principles
generally accepted in the United States of America.

The selected financial data set forth below related to periods prior to
July 1, 2002, do not reflect the many changes that occurred in our operations,
capitalization and tax status in connection with and as a result of our new
corporate holding company structure. The selected financial data are not
necessarily indicative of what our results of operations or financial position
would have been had we operated as an independent public company during the
periods presented, nor is it necessarily indicative of our future results of
operations or financial position. The selected financial data should be read in
conjunction with "Management's Discussion

8

and Analysis of Financial Condition and Results of Operations" and the audited
consolidated financial statements and related notes included elsewhere in this
annual report.

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(1) The financial data of Packaging Dynamics Corporation include the acquisition
of Wolf, as of October 23, 2002, and ICI as of July 14, 1999.

(2) For purposes of the predecessor companies presentation, the unaudited
financial data of BCA and IPMC for the periods indicated have been combined.

(3) Prior to July 1, 2002, for income tax purposes, Packaging Holdings' federal
and state taxable income, other than income generated by ICI, was reported
by its members on their income tax returns as if the company were a
partnership. Because ICI remained a taxable C-corporation following its
acquisition by us in July 1999, ICI's income was reported on its corporate
tax returns and not on the income tax returns of Packaging Holdings'
members. Packaging Holdings' predecessor companies, BCA and IPMC, were also
taxable entities prior to our acquiring them.

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

The following discussion should be read in conjunction with our financial
statements and accompanying notes thereto, and the other financial information
included elsewhere in this annual report. This discussion contains
forward-looking statements. Please see "Special Note Regarding Forward-Looking
Statements" for a discussion of the uncertainties, risks and assumptions
associated with these statements. In the discussion that follows, dollar amounts
other than per share data are stated in thousands.

9

RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

NET SALES

Net sales increased by 9.7% in 2002 over our net sales in 2001. The
increase resulted primarily from additional volume associated with promotional
business of higher sales price foil-based sandwich wrap products with major
quick service restaurants and the acquisition of Wolf during the fourth quarter
of 2002. Overall, net sales of food service products increased $28,528 during
2002 compared to the prior year, partially offset by decreases in outside sales
volume of specialty paper due to an increased mix of intercompany products and
increased competitive pricing in the marketplace.

Net sales increased by 2.8% during the year ended December 31, 2001 over
net sales during the corresponding period in 2000. The increase resulted from
increased sales of converted products. The increased sales of converted products
were associated with new consumer product introductions and increased sales
volume of food service products of approximately $4,000, including foil based
sandwich wrap. The increased sales of converted products were partially offset
by decreased sales of specialty paper.

GROSS PROFIT

Gross profit increased 7.0% in 2002 compared to the corresponding period in
the prior year primarily as a result of the increased sales volume. The gross
profit margin was 12.1% which was .3% lower than 2001. The current period gross
profit margin was favorably impacted by the product mix as well as lower raw
material and energy costs partially offset by increased competitive pricing in
the marketplace, primarily for specialty paper.

Gross profit increased 4.4% during 2001 compared to 2000 primarily as a
result of increased sales volume. Gross profit margin was 12.4% during 2001
compared to 12.2% during 2000. The increased gross profit margin is primarily
attributable to lower labor and overhead costs as a percentage of sales. The
decrease in labor costs was associated primarily with a management restructuring
during 2000.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses increased $4,490 or 32.8% during the
year ended December 31, 2002 compared to the corresponding period in 2001. As a
percentage of net sales, selling and administrative expenses increased to 7.1%
during 2002 compared to 5.8% in 2001. The increase resulted primarily from long-
term incentive compensation expense discussed below, higher selling expenses
associated with the sales and marketing efforts and increased insurance costs.

Selling and administrative expenses decreased $369, or 2.6%, during 2001
compared to 2000. As a percentage of net sales, selling and administrative
expenses decreased to 5.8% during 2001 compared to 6.1% during 2000. The
decrease resulted from decreased salary expense of approximately $290 primarily
associated with a management restructuring during 2000 and management synergies,
such as reduced head count, associated with the 1999 ICI acquisition.

On July 1, 2002, Packaging Dynamics granted to management, for incentive
purposes and in consideration of their waiver of cash payments under the 2001
Long Tem Incentive Compensation Plan (the "2001 LTIP"), stock options for the
purchase of an aggregate of 815,089 shares of its common stock under the 2002
Long Term Incentive Stock Plan. Additionally, on July 1, 2002, Packaging
Dynamics granted to certain former employees stock options for the purchase of
an aggregate of 29,047 shares of its common stock under individual nonqualified
stock option agreements in consideration of their waiver of cash payments under
the 2001 LTIP. The options have an exercise price of $3.90 per share, which was
below the fair market value of Packaging Dynamics' common stock on the grant
date and 730,924 options, although fully vested, are not exercisable for three
years after the grant date. Consequently, for such options we have the right to
repurchase an executive's options if he terminates employment before the end of
the three-year period. We recorded a non-cash compensation charge of $2,667 for
the twelve months ended December 31, 2002 related to these management incentive
plans. For the twelve months ended December 31, 2001, we recorded no expense
related to this plan.
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AMORTIZATION EXPENSE

Amortization of intangibles decreased $846, or 87.6%, during 2002 compared
to 2001. The decrease primarily results from the elimination of goodwill
amortization during 2002, partially offset by the amortization of certain
intangibles associated with the Wolf acquisition. On January 1, 2002, we adopted
SFAS No. 142, "Goodwill and Other Intangible Assets". This statement requires
that goodwill and intangible assets with indefinite lives to no longer be
amortized but to instead be tested for impairment at least annually. Other
intangible assets with determinable lives will continue to be amortized over
their useful lives. The application of this statement resulted in the reduction
of goodwill amortization of $930 for the year ended December 31, 2002 compared
to the corresponding period in 2001.

Amortization of intangibles decreased $2,174, or 69.2%, during 2001
compared to 2000. The decrease primarily resulted from the expiration of a
non-compete agreement near the end of 2000. The non-compete agreement resulted
in amortization expense of $2,500 per year from our inception on November 20,
1998 through November 19, 2000.

ASSET SALES AND DISPOSALS

We continue our efforts to upgrade the capabilities of our manufacturing
operations. During the fourth quarter of 2002, we idled certain converting
equipment in our Chicago, Illinois manufacturing facility in anticipation of
installing two new bag making machines in the first quarter of 2003. The new bag
machines are expected to significantly improve productivity on several product
categories. Also, we permanently idled one of our paper machines and certain
paper making equipment at our paper mill in Detroit, Michigan, permanently
shifting all of the facility's paper production to its remaining three paper
machines. The elimination of this paper machine was due in part to our improved
focus on the productivity of the three remaining paper machines. These fourth
quarter manufacturing improvements and certain other productivity improvements
executed earlier in the year resulted in a loss of $3,397 on the sale or
disposal of the equipment. We expect to continue the productivity improvement
program which may result in future gains and losses on the sale or disposal of
equipment.

RESTRUCTURING EXPENSES

During 2000, we implemented a restructuring plan, which resulted in a
reduction in work force resulting in severance and other costs of $1,250,
referred to as the 2000 Restructuring Charge. During 2000 and 2001, we paid $440
and $683 as a result of the restructuring plan. At December 31, 2002,
substantially all amounts have been paid under the restructuring plan.

AMERISERVE BAD DEBT PROVISION

Ameriserve began to experience cash flow problems during late 1999 and
filed for bankruptcy in January 2000. We recorded bad debt provision of $3,420
during 2000 for all of the Ameriserve receivables that became uncollectible in
connection with the bankruptcy. During 2001, we also settled certain
preferential payment claims for $135.

INCOME FROM OPERATIONS

Income from operations and operating margins were $9,406 and 3.7%,
respectively, during 2002 compared to income from operations and operating
margin of $14,274 and 6.1%, respectively, during 2001. The decrease in operating
income resulted primarily from the increased operating expenses including the
asset sales and disposals and long-term incentive compensation charge partially
offset by the elimination of amortization of goodwill. Excluding the asset sales
and disposals and long-term incentive compensation charge during 2002 and the
Ameriserve bad debt provision and amortization of goodwill during 2001, income
from operations and operating margins were $15,470 and 6.0%, respectively,
during 2002 and $15,339 and 6.5%, respectively, during 2001. The decrease in
operating margin during the twelve months of 2002 compared to 2001 resulted
primarily from increased operating expenses. These unfavorable factors were
partially offset by the increased sales volume and gross profit.
11

Income from operations and operating margin were $14,274 and 6.1%,
respectively, during 2001, compared to $5,960 and 2.6%, respectively, during
2000. Excluding the 2000 Restructuring Charge, the Ameriserve bad debt provision
and the amortization of goodwill, income from operations and operating margin
were $15,339 and 6.5%, respectively during 2001, compared to $11,558 and 5.1%,
respectively, during 2000. The increase in operating income and margin in 2001
compared to 2000 was primarily the result of increased sales volume, reduced
amortization expense of $2,174 and lower cost structure, including reduced head
count.

INTEREST EXPENSE

Interest expense during 2002 was $7,596 compared to $11,327 during the same
period in 2001. The decrease in interest expense in 2002 compared to 2001
resulted primarily from decreased interest rates and average outstanding
indebtedness as a result of reductions in working capital and the forgiveness of
the 12% Promissory Note payable to Ivex. The average interest rates on
borrowings on our senior credit facility were approximately 2.15% less during
2002 compared to 2001. The paid-in-kind interest expense on the 12% Promissory
Note was $1,106 in 2002 compared with $2,045 in 2001, reflecting the
cancellation of the 12% Promissory Note payable to Ivex as of July 1, 2002.

Interest expense during 2001 was $11,327 compared to $11,998 during 2000,
respectively. The decrease in interest expense in 2001 compared to 2000 resulted
primarily from decreased average outstanding indebtedness and reduced interest
rates. The average interest rates on borrowings on our senior credit facility
were approximately 0.39% less during 2001 compared to 2000. The decrease in 2001
was partially offset by increased paid-in-kind interest accruing on the 12%
Promissory Note payable to Ivex. Paid-in-kind interest expense on the 12%
Promissory Note was $2,045 and $1,810 during 2001 and 2000, respectively.

INCOME TAXES

To facilitate the distribution on July 1, 2002, a new holding company
structure was created by contributing all of the limited liability company
interests of Packaging Holdings to Packaging Dynamics, a C-corporation for
income tax purposes, in exchange for the common stock. Prior to the
distribution, the members of Packaging Holdings reported federal and state
taxable income on their income tax returns as if it were a partnership. ICI has
remained a taxable C-corporation from the time we acquired it in July, 1999
through the date of the distribution. The income tax provision for 2002 was $879
compared to $603 in 2001. The increase in income tax provision was primarily
associated with our change in filing status.

The significant income tax benefit recorded in 2000 primarily reflects the
tax benefit associated with losses at ICI.

NET INCOME

Net income was $931 and $2,344 for 2002 and 2001, respectively compared to
a net loss of $5,200 in 2000. The decrease for 2002 as compared to 2001 was
primarily attributable to the asset sales and disposals, long-term incentive
compensation charge and increased tax expense, partially offset by the
elimination of amortization of goodwill and reduced interest. The net income in
2001 compared to a loss in 2000 was primarily the result of the 2000
Restructuring Charge and Ameriserve bad debt provision recorded during 2000.
Excluding the effect of these items in 2000, the increase in net income was
primarily due to the improved income from operations and reduced interest
expense

EBITDA AND ADJUSTED EBITDA

We have presented EBITDA information solely as supplemental disclosure
because we believe that it is generally accepted as providing useful information
regarding our ability to service or incur debt. We have furnished adjusted
EBITDA to provide additional information regarding supplemental items that we
believe is of interest to investors.

EBITDA consists of earnings from operations plus depreciation and
amortization. EBITDA should not be construed as an alternative to earnings from
operations as determined in accordance with generally

12

accepted accounting principles, as an indicator of our operating performance, as
a measure of liquidity or as an alternative to cash flow from operating
activities as determined in accordance with generally accepted accounting
principles. We have significant uses of cash flow, including capital
expenditures and debt principal repayments that are not reflected in EBITDA. It
should also be noted that not all companies that report EBITDA or Adjusted
EBITDA information calculate EBITDA or Adjusted EBITDA in the same manner as we
do.

Adjusted EBITDA is EBITDA plus the supplemental adjustments summarized in
the table below. Adjusted EBITDA is not a calculation prepared in accordance
with generally accepted accounting principles. It should not be considered in
isolation or as a substitute for measures of performance in accordance with
generally accepted accounting principles and is not indicative of operating
profit or cash flow from operations as determined under generally accepted
accounting principles.

EBITDA and Adjusted EBITDA for the years ended December 31, 2002, 2001 and
2000 are computed as follows:

Adjusted EBITDA and Adjusted EBITDA margins were $23,133 and 9.0%,
respectively, in 2002 as compared to $22,713 and 9.7%, respectively, in 2001 and
$21,025 and 9.2%, respectively, in 2000. The increase in Adjusted EBITDA
resulted from the increased sales volume and gross profit, partially offset by
higher operating expenses including increased selling expenses associated with
the sales and marketing efforts and increased insurance cost. The decrease in
Adjusted EBITDA margin primarily resulted from the decreased gross profit
margin. The increase in Adjusted EBITDA and Adjusted EBITDA margin in 2001
compared to 2000 primarily resulted from increased sales volume and improved
cost structure.

DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES

Our accounting policies are disclosed in Note 2 to our consolidated
financial statements. The more critical of our policies include revenue
recognition, long-lived assets and the use of estimates in valuing inventories
and accounts receivable which are described below.

REVENUE RECOGNITION

We recognize revenue primarily at the time title transfers to the customer
(generally upon shipment of products). Our revenue recognition policies are in
accordance with Staff Accounting Bulletin, or SAB, No. 101, "Revenue Recognition
in Financial Statements". Shipping and handling costs are included as a
component of cost of goods sold.

INVENTORIES

We state inventories at the lower of cost or market using the first-in,
first-out, or FIFO, method to determine the cost of raw materials and finished
goods. This cost includes raw materials, direct labor and manufacturing
overhead. Valuing inventories at the lower of cost or market requires the use of
estimates and judgment. Our policy is to evaluate all inventory quantities for
amounts on-hand that are potentially in excess

13

of estimated usage requirements, and to write down any excess quantities to
estimated net realizable value. Inherent in estimates of net realizable value
are manufacturing schedules, customer demand, possible alternative uses and
ultimate realization of potentially excess inventory.

ACCOUNTS RECEIVABLE

Accounts receivable from sales to customers are unsecured, and we value
accounts receivable net of allowances for doubtful accounts. These allowances
are based on estimates of the portion of the receivables that will not be
collected in the future. However, the ultimate collectibility of a receivable is
significantly dependent upon the financial condition of the individual customer,
which can change rapidly and without advance warning.

LONG-LIVED ASSETS

Long-lived assets, including property, plant and equipment and intangibles
with finite lives, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. If the expected future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the asset, an impairment
loss is recognized.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2002, we had cash and cash equivalents of $1,864, and
$23,675 was available under the revolving portion of the Senior Credit Facility.
Our working capital at December 31, 2002 was $16,977.

Our primary short-term and long-term operating cash requirements are for
debt service, working capital and capital expenditures. We expect to rely on
cash generated from operations supplemented by revolving borrowings under the
Senior Credit Facility to fund principal short-term and long-term cash
requirements.

The Senior Credit Facility provides for Term A Loans and Term B Loans
totaling $70,730 and a $25,000 revolving credit facility, up to $5,000 of which
may be in the form of letters of credit. The Term A Loan had a balance of
$13,375 at December 31, 2002 and is required to be repaid in quarterly payments
totaling $6,000 in 2003, and $7,375 in 2004. The Term B Loan had a balance of
$57,355 at December 31, 2002 and is required to be repaid in quarterly payments
totaling $720 in 2003, $28,400 in 2004 and $28,235 in 2005.

Loans under the Senior Credit Facility are designated from time to time, at
our election, either (1) as Eurodollar Loans, which bear interest at a rate
based on the London Interbank Offered Rate, or LIBOR, adjusted for regulatory
reserve requirements, or (2) as Base Rate Loans, which bear interest at a rate
based on the Federal Funds Rate or the prime rate. The interest rate on
Eurodollar Loans is equal to LIBOR plus an applicable percentage that varies
with the leverage ratio of PDLLC and its consolidated subsidiaries. The interest
rate on Base Rate Loans is equal to

- a base rate equal to the greater of (1) the Federal Funds rate plus 1/2
of 1% and (2) the prime rate, plus

- An applicable percentage that varies with the leverage ratio of PDLLC and
its consolidated subsidiaries.

Accordingly, Tranche A Term Loans and revolving loans bear interest at
rates of up to 2.75% plus the base rate, in the case of Base Rate Loans, and up
to 3.75% plus LIBOR, in the case of Eurodollar Loans. Tranche B Term Loans bear
interest at rates of up to 3.25% plus the base rate, in the case of Base Rate
Loans, and up to 4.25% plus LIBOR, in the case of Eurodollar Loans.

At December 31, 2002, the interest rates on borrowings under the Tranche A
Term Loan and the Tranche B Term Loan were 2.75% plus LIBOR and 3.75% plus
LIBOR, respectively, compared with 3.25% plus LIBOR and 4.0% plus LIBOR,
respectively, at December 31, 2001. In addition, as of December 31, 2002, we had
entered into interest rate derivative instruments, which are discussed in "
- -- Quantitative and Qualitative Disclosures About Market Risk". Borrowings are
collateralized by substantially all of the assets of

14

our operating subsidiaries. The revolving credit facility and Term A Loan will
terminate on November 20, 2004 and the Term B Loan will terminate on November
20, 2005.

Under the Senior Credit Facility, PDLLC is required to comply on a
quarterly basis with the following four financial covenants:

- under the leverage ratio covenant, as of the last day of each fiscal
quarter, PDLLC's ratio of total funded debt to consolidated EBITDA for
the 12-month period then ended must not exceed specified levels,
decreasing from 3.25 to 1 at present to 2 to 1 from and after April 1,
2004;

- under the interest coverage ratio covenant, as of the last day of each
fiscal quarter, PDLLC's ratio of consolidated EBITDA for the 12-month
period then ended to cash interest expense for such 12-month period must
be equal to or greater than certain specified levels, increasing from 3
to 1 at present to 4 to 1 from and after July 1, 2004;

- under the fixed charge coverage ratio covenant, as of the last day of
each fiscal quarter, for the 12-month period then ended, PDLLC's ratio of
consolidated EBITDA less capital expenditures and taxes to PDLLC's cash
interest expense and scheduled funded debt payments must be equal to or
greater than 1.15 to 1; and

- under the net worth covenant, Packaging Holdings consolidated net worth
as of the last day of each fiscal quarter must be equal to or greater
than $27,500 increased on a cumulative basis by (1) as of the last day of
each fiscal quarter, 50% of the consolidated net income of Packaging
Holdings (to the extent positive) for the fiscal quarter then ended,
commencing with the fiscal quarter ended December 31, 1998 and (2) 50% of
the net cash proceeds from any equity issuance after November 20, 1998 by
Packaging Holdings or any subsidiary of Packaging Holdings.

For purposes of the Senior Credit Facility, consolidated EBITDA, calculated
on a consolidated basis for PDLLC and its subsidiaries, consists of (1) net
income, excluding the effect of any extraordinary or other non-recurring gains
or losses or non-cash losses, plus (2) an amount which, in the determination of
net income, has been deducted for interest expense, taxes, depreciation and
amortization.

The Senior Credit Facility also contains various negative covenants that,
among other things, require Packaging Holdings and its subsidiaries to limit
future capital expenditures, borrowings, dividend payments, and payments to
related parties, and restricts Packaging Holdings' ability and the ability of
its subsidiaries to merge or consolidate. In addition, the Senior Credit
Facility prevents our subsidiaries from making distributions, prohibits changes
in the nature of business conducted by our subsidiaries and effectively
requires, subject to limited exceptions, that Packaging Dynamics'
pre-distribution stockholders, other than Ivex, retain beneficial ownership of
at least 42.5% in Packaging Dynamics. The failure to comply with the covenants
would result in a default under the Senior Credit Facility and permit the
lenders under the Senior Credit Facility to accelerate the maturity of the
indebtedness governed by the senior credit facility. We believe that we are
currently in compliance with the terms and conditions of the Senior Credit
Facility in all material respects. During the first quarter of 2003, the Company
amended the Senior Credit Facility to, among other things, restate future
leverage ratio and fixed charge ratio covenants.

Packaging Holdings issued the 12% Promissory Note in the amount of $12,500
to Ivex on November 20, 1998 in connection with the acquisition of Ivex's paper
mill operations located in Detroit, Michigan. The note with an accreted value of
$19,238, was cancelled on July 1, 2002 in connection with the distribution to
Ivex stockholders and option holders of Ivex's 48.19% ownership interest in
Packaging Holdings.

On July 14, 1999, Packaging Holdings issued a $3,000 note to the sellers in
connection with the acquisition of ICI. Interest on this note is 7.5% payable
semi-annually commencing on December 31, 1999. This note is unsecured and
subordinated to the senior credit facility. The note matures on July 14, 2004
and may be accelerated under specified circumstances, including a change in
control or an acceleration under the Senior Credit Facility.

15

The Senior Credit Facility and the ICI note include terms that limit
changes in our ownership structure. Modifications to the ownership structure
outside the limits prescribed by such agreements could place us in default under
these debt instruments.

We have outstanding obligations under debt agreements with the U.S.
Department of Housing and Urban Development, or HUD, in the form of promissory
notes payable to the City of Baxter Springs. These notes bear interest at rates
varying from 4.57% to 6.57%, as determined by HUD, and interest is payable on a
semi-annual basis. These notes are payable in annual installments of $700
through August 2004. Borrowings are collateralized by a first lien on the land
and building at our Baxter Springs, Kansas production facility and by a second
lien on specified machinery and equipment. Under specified circumstances,
repayment of the borrowings is subordinated to the repayment of obligations
under the senior credit facility.

To reduce the impact of changes in interest rates on our variable rate
debt, the Company has entered into interest rate derivative instruments, which
are discussed in " -- Quantitative and Qualitative Disclosures About Market
Risk".

We made capital expenditures of $5,037, $5,135 and $2,268 during 2002, 2001
and 2000, respectively. The increase in capital expenditures during 2002 and
2001 compared to 2000 resulted primarily from expenditures that are expected to
improve and increase converting productivity and capacity as well as reduce
utility related costs at our paper mill facility. At December 31, 2002, we have
capital projects ongoing at all locations.

On October 23, 2002, the Company acquired the outstanding common stock of
Wolf for the issuance of 166,667 shares of our common stock with a market value
of $984 and cash of $9,275 (including the repayment of certain indebtedness and
payment of costs related to the acquisition). Wolf is a manufacturer of foil and
paper sandwich wraps located in Fort Madison, Iowa. Wolf is a significant
supplier to the quick-service restaurant industry and generated annual revenues
of approximately $23,000 during 2002. The acquisition was funded with cash flows
from operations.

COMMISSION STATEMENT ABOUT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The Senior Credit Facility requires PDLLC to maintain specified financial
ratios and levels of tangible net worth. PDLLC was in compliance with those
covenants as of December 31, 2002 the latest measurement date. The occurrence of
any default of these covenants could result in acceleration of our obligations
under the Senior Credit Facility ($70,730 as of December 31, 2002) and
foreclosure on the collateral securing those obligations. During the first
quarter of 2003, the Company amended the Senior Credit Facility to, among other
things, restate future leverage ratio and fixed charge ratio covenants.

Disclosures about contractual obligations and commercial commitments are
included in various parts of this Report, including Note 5 -- Long-Term Debt and
Note 9 -- Commitments and Contingencies to the consolidated financial
statements. A summary of significant contractual obligations as of December 31,
2002 is included as follows:

The 12% Promissory Note was payable to Ivex, which held an ownership
interest in Packaging Holdings prior to the distribution to Ivex stockholders
and option holders of Ivex's 48.19% ownership interest in

16

Packaging Holdings. The 12% Promissory Note was cancelled in connection with the
distribution. Pursuant to a consulting agreement, we paid Ivex a fixed annual
consulting fee for services rendered to us by Ivex. During 2002, 2001 and 2000,
we recorded consulting fee expense of $250, $500 and $750 related to this
agreement. The consulting agreement was terminated in connection with the
distribution.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

NEW ACCOUNTING PRONOUNCEMENTS

We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
effective January 1, 2002 as more fully explained in Note 2 to the consolidated
financial statements.

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. SFAS
No. 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. We will adopt SFAS No. 143 effective January 1, 2003 and do
not expect the adoption to have a material effect on our consolidated financial
position or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13 and Technical Corrections as of April 2002" which
mainly addresses the accounting and disclosure related to early extinguishment
of debt transactions as well as several other technical corrections. SFAS No.
145 is effective for financial statements for fiscal years beginning after May
15, 2002 with early application encouraged. We will adopt SFAS No. 145 effective
January 1, 2003 and do not expect the adoption to have a material effect on our
consolidated financial position or cash flows.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which nullifies EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principle difference in accounting under SFAS No. 146 is
that a liability for the cost associated with an exit or disposal activity
cannot be recognized until the liability has been incurred. Under EITF 94-3, an
exit cost liability could be recognized at the date of any entity's commitment
to an exit plan. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002 with early application encouraged.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" which amends SFAS No. 123 by
providing transition guidance for companies adopting the fair value based method
of accounting for employee stock awards as well as mandating certain expanded
disclosures relative to companies' stock award plans regardless of the method
used to account for the awards. We adopted the disclosure requirements of SFAS
No. 148 effective December 31, 2002 as is more fully discussed in Note 2 to the
consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of a guarantor's accounting for, and disclosure
of, the issuance of certain types of guarantees by requiring that the guarantor
recognize a liability for the fair value of the obligation it assumes under a
guarantee. We have adopted the disclosure provisions of FIN 45 effective
December 31, 2002. The initial recognition and measurement provisions of FIN 45
are effective on a prospective basis for guarantees that are initiated or
modified after December 31, 2002. We do not expect the adoption of FIN 45 to
have a material effect on our consolidated financial position or cash flows.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We use interest rate swaps and collars to modify our exposure to interest
rate movements and to reduce borrowing costs. We have designated these
instruments as cash flow hedges and consider these instruments
17

effective at offsetting our risk to variable interest rates on debt. Our
exposure to interest rate risk consists of floating rate debt instruments that
are benchmarked to LIBOR. As of December 31, 2002, we had interest rate swap
agreements with a group of banks having notional amounts totaling $55,000 with
various maturity dates through December 10, 2003. These agreements effectively
fix our LIBOR rate for $40,000 and $15,000 of our Senior Credit Facility
indebtedness at rates of 3.83% and 1.61%, respectively. Beginning on December
10, 2003, we have a no cost collar agreement with a notional amount of $25,000
maturing on December 10, 2004. This collar agreement effectively fixes the LIBOR
base rate for $25,000 of our Senior Credit Facility indebtedness at a maximum of
3.97% and allow for us to pay the market LIBOR from a floor of 2.34% to the
maximum rate. If LIBOR falls below 2.34%, we are required to pay the floor rate
of 2.34%. A 10% unfavorable movement in LIBOR would not expose us to material
losses of earnings or cash flows.

Income or expense related to settlements under these agreements is recorded
as adjustments to interest expense in our financial statements. The fair market
value of our derivative instruments outlined above approximates a loss of $1,126
as of December 31, 2002 and is based upon the amount at which it could be
settled with a third party, although we have no current intention to trade any
of these instruments and plan to hold them as hedges for the Senior Credit
Facility. The fair market value of our derivative instruments, net of income
tax, was recorded in other comprehensive income (loss).

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included in this annual report, including without
limitation, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations -- For the Twelve Months Ended
December 31, 2002, 2001 and 2000 -- Liquidity and Capital Resources, -- Recently
Issued Accounting Pronouncements, and -- Quantitative and Qualitative Disclosure
About Market Risk" constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Among the
factors that could cause results to differ materially from current expectations
are: (i) changes in consumer demand and prices resulting in a negative impact on
revenues and margins; (ii) raw material substitutions and increases in the costs
of raw materials, utilities, labor and other supplies; (iii) increased
competition in the Company's product lines; (iv) changes in capital availability
or costs; (v) workforce factors such as strikes or labor interruptions; (vi) the
ability of the Company and it subsidiaries to develop new products, identify and
execute capital programs and efficiently integrate acquired businesses; (vii)
the cost of compliance with applicable governmental regulations and changes in
such regulations, including environmental regulations; (viii) the general
political, economic and competitive conditions in markets and countries where
the Company and its subsidiaries operate, including currency fluctuations and
other risks associated with operating in foreign countries; and (ix) the timing
and occurrence (or non-occurrence) of transactions and events which may be
subject to circumstances beyond the control of Packaging Dynamics and its
subsidiaries.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a)(1) The following financial statements of Packaging Dynamics are
included on pages 20 to 37.

- Report of Independent Accountants

- Consolidated Balance Sheets at December 31, 2002 and 2001

- Consolidated Statements of Operations for the Years ended December 31,
2002, 2001 and 2000

- Consolidated Statements of Changes in Stockholders' Equity for the Years
ended December 31, 2002, 2001 and 2000

- Consolidated Statements of Cash Flows for the Years ended December 31,
2002, 2001 and 2000

- Notes to the Consolidated Financial Statements

18

(a)(2) Financial Statement Schedules for the Year ended December 31, 2002
are included on pages 45 to 49.

- Schedule I -- Condensed Financial Information

- Schedule II -- Valuation and Qualifying Accounts and Reserves

All other schedules of Packaging Dynamics for which provision is made in
the applicable accounting regulations of the Securities and Exchange Commission
are not required, are inapplicable or have been disclosed in the notes to the
consolidated financial statements and therefore have been omitted.

19

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Packaging Dynamics Corporation

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Packaging Dynamics Corporation and its subsidiaries (the "Company")
at December 31, 2002 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedules listed
in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002 and SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective
January 1, 2001.

- -s- PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP

Chicago, Illinois
January 22, 2003

20

PACKAGING DYNAMICS CORPORATION

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of this statement.
21

PACKAGING DYNAMICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of this statement.
22

PACKAGING DYNAMICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of this statement.
23

PACKAGING DYNAMICS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/MEMBERS' EQUITY AND
OTHER COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of this statement.

24

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION

Packaging Dynamics Corporation ("the Company" or "Packaging Dynamics") is a
Delaware corporation established as a holding company to own all of the limited
liability interest in Packaging Holdings L.L.C. ("Packaging Holdings" or
"PHLLC"). Packaging Holdings is a limited liability company organized under the
laws of the state of Delaware and is the sole member of Packaging Dynamics,
L.L.C. ("PDLLC") which is the parent company of several operating subsidiaries.

On March 18, 2002, the board of directors of Ivex Packaging Corporation
("Ivex") approved a merger agreement providing for the merger with Ivex of a
wholly-owned subsidiary of Alcoa Inc. As a result of the merger, Ivex became a
wholly-owned subsidiary of Alcoa on July 1, 2002. The merger was conditioned
upon, among other things, the prior distribution to Ivex stockholders and option
holders of Ivex's 48.19% ownership interest in Packaging Holdings. To facilitate
the distribution, Ivex formed Packaging Dynamics, a C-corporation for income tax
purposes, to be the holding company for all of the ownership interests in
Packaging Holdings. In preparation for the distribution, Ivex and the other
members of Packaging Holdings exchanged their ownership interests in Packaging
Holdings for 9,437,750 shares of common stock of Packaging Dynamics. On July 1,
2002, Ivex distributed 4,548,050 shares of Packaging Dynamics to its
stockholders and certain of its option holders immediately prior to the merger.
The consolidated financial statements of Packaging Dynamics presented herein
include the results of operations, financial position and cash flows of
Packaging Holdings.

Also in connection with the merger and distribution, a new holding company
structure was created by contributing all of the limited liability company
interests of Packaging Holdings to Packaging Dynamics, a C-corporation for
income tax purposes, in exchange for the common stock; the $12,500 12%
subordinated note payable by Packaging Holdings to Ivex, plus accreted interest,
totaling approximately $19,238 was canceled; and a consulting agreement with
Ivex was canceled. The impact of the distribution is reflected on the
Consolidated Statements of Stockholders' Equity/Members' Equity and Other
Comprehensive Income (Loss) as Formation of Packaging Dynamics Corporation. The
impact on Stockholders' Equity of the distribution includes (i) an increase of
$19,238 resulting from the cancellation of the $12,500 12% subordinated note
payable to Ivex; (ii) a decrease of $9,200 resulting from additional deferred
tax liabilities due to Packaging Dynamics' C-corporation status; (iii) an
increase of $423 resulting from the repayment of certain advances and
obligations of members of Packaging Holdings; and (iv) a decrease of $366
resulting from expenses associated with the transaction.

On July 1, 2002, the Company issued 9,437,750 shares of common stock in
connection with the merger and distribution. Prior to July 1, 2002, the Company
ownership consisted of membership units. Accordingly, no earnings per share
information has been presented for any period prior to July 1, 2002.

The Company is an integrated flexible packaging converter supplying
products to the food service, consumer products, bakery, supermarket and certain
industrial markets. The Company operates within and sells to customers
throughout the U.S., predominantly in one industry segment -- flexible packaging
bags and wrappers for the fast food, paper and specialty paper bag markets. The
Company is comprised of one operating segment based on management decisions as
to resource allocation.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Packaging
Dynamics Corporation and its wholly-owned subsidiaries. Intercompany balances
and transactions have been eliminated.

25

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CASH AND CASH EQUIVALENTS

The Company considers any highly liquid instruments purchased with an
original maturity date of three months or less to be cash equivalents.

REVENUE RECOGNITION

The Company recognizes revenue primarily at the time title transfers to the
customer (generally upon shipment of products). Shipping and handling costs are
included as a component of cost of goods sold.

INVENTORIES

Inventories are stated at the lower of cost or market as determined by the
first-in, first-out (FIFO) method. Such cost includes raw materials, direct
labor and manufacturing overhead. Inventories at December 31, 2002 and December
31, 2001 consist of the following:

PROPERTY, PLANT AND EQUIPMENT

The Company capitalizes expenditures for major renewals and betterments at
cost and charges to operating expenses the cost of current maintenance and
repairs. Provisions for depreciation have been computed principally on the
straight-line method over the estimated useful lives (generally 31 years for
buildings, 15 to 31 years for improvements and 7 to 25 years for machinery and
equipment). During 2002, the Company changed the estimate of useful lives for
certain of its paper machinery and equipment to have a maximum useful life of 25
years resulting in a net reduction of annual depreciation expense of $200.

The cost and accumulated depreciation relating to assets retired or
otherwise disposed of are eliminated from the respective accounts at the time of
disposition. The resulting gain or loss is included in the current operating
results.

LONG-LIVED ASSETS

Long-lived assets, including property, plant and equipment and intangibles,
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. If the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized.

Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 generally establishes a standard framework from which to measure
impairment of long-lived assets and expands discontinued operations income
statement presentation to include a component of the entity. The adoption did
not have a material effect on the Company's consolidated financial position or
cash flows.

26

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

GOODWILL AND OTHER INTANGIBLE ASSETS

On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement requires goodwill and intangible assets with
indefinite lives to no longer be amortized but to instead be tested for
impairment at least annually. Other intangible assets with determinable lives
will continue to be amortized over their useful lives.

Impairment of goodwill is measured according to a two-step approach. In the
first step, the fair value of a reporting unit is compared to the carrying
amount of the reporting unit, including goodwill. If the carrying amount exceeds
the fair value, the second step of the goodwill impairment test is performed to
measure the amount of impairment loss, if any. In the second step, the implied
fair value of the goodwill is estimated as the fair value of the reporting unit
less the fair values of all the other tangible and intangible assets of the
reporting unit. If the carrying amount of the goodwill exceeds the implied fair
value of the goodwill, an impairment loss is recognized in an amount equal to
that excess, not to exceed the carrying amount of the goodwill. The Company
completed the required impairment tests during 2002 which indicated no
impairment charge was required.

A comparison of net income for the three years ended December 31, 2002
adjusted to remove goodwill amortization is as follows:

A rollforward of goodwill for 2002 and 2001 is as follows:

STOCK BASED COMPENSATION

At December 31, 2002, the company has a stock-based compensation plan,
which is described more fully in Note 8, "Employee Benefit Plans." The company
accounts for this plan under the recognition and measurement provisions of
Accounting Principles Board Opinion (APBO) No. 25 "Accounting for Stock Issued
to Employees," and related interpretations. Stock-based employee compensation
cost is reflected in earnings to the extent that option grants under those plans
had an exercise price below the market value of the underlying common stock on
the date of grant.

On a pro forma basis, had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant date, the Company's
net income for the year ended December 31, 2002 would have been $374.

The Company's pro forma net income was determined under the assumption that
the 2002 options granted were fully earned and vested at the date of grant. The
options granted during 2002 had an estimated fair value of $4.25. The fair value
of the options granted was estimated on the date earned using the

27

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Black-Scholes option-pricing model and utilized the following assumptions:
dividend yield -- 0%; volatility -- 35%; risk-free interest rate -- 4.82% and;
expected lives -- 5 years.

EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted average number of common shares outstanding during each
period. Diluted earnings per share reflects the potential dilution that could
occur if common stock options are exercised and is computed by dividing net
income by the weighted average number of common shares outstanding, including
common stock equivalent shares, issuable upon exercise of outstanding stock
options, to the extent that they would have a dilutive effect on the per share
amounts. Dilution of the Company's weighted average shares outstanding results
from common stock issuable upon exercise of outstanding stock options (183,747
for the year ended December 31, 2002). The Company recorded a basic and diluted
earnings per share of $0.09 and $0.09, respectively, for the quarter ending
September 30, 2002 and a basic and diluted loss per share of $0.06 and $0.06,
respectively, for the quarter ending December 31, 2002. Prior to July 1, 2002,
the Company ownership consisted of membership units. Accordingly, no earnings
per share information has been presented for any period prior to July 1, 2002.

DERIVATIVES AND OTHER COMPREHENSIVE INCOME (LOSS)

The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" effective January 1, 2001. The Company recognizes all
derivative instruments as assets or liabilities at fair value, with the related
gain or loss reflected within stockholders' equity/members' equity through
accumulated other comprehensive income (loss) or within operations depending
upon the nature of the derivative instrument.

The Company maintains interest rate swap agreements that are designated as
cash flow hedges to manage the market risk from changes in interest rates on a
portion of its variable rate term loans. Such derivative financial instruments
are recorded at fair value, and at December 31, 2002, the fair value
approximates a loss of $1,126 which is included in accrued liabilities within
the accompanying consolidated balance sheet. Changes in fair value, based upon
the amount at which the swap could be settled with a third party, are recorded
in other comprehensive income (loss). The differentials to be received or paid
under the interest rate swap agreements are recognized in income over the life
of the contract as adjustments to interest expense.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. SFAS
No. 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company will adopt SFAS No. 143 effective January 1,
2003 and does not expect the adoption to have a material effect on its
consolidated financial position or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13 and Technical Corrections as of April 2002" which
mainly addresses the accounting and disclosure related to early extinguishment
of debt transactions as well as several other technical corrections. SFAS No.
145 is effective for financial statements for fiscal years beginning after May
15, 2002 with early application encouraged. The Company will adopt SFAS No. 145
effective January 1, 2003 and does not expect the adoption to have a material
effect on its consolidated financial position or cash flows.

28

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which nullifies EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principle difference in accounting under SFAS No. 146 is
that a liability for the cost associated with an exit or disposal activity
cannot be recognized until the liability has been incurred. Under EITF 94-3, an
exit cost liability could be recognized at the date of any entity's commitment
to an exit plan. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of a guarantor's accounting for, and disclosure
of, the issuance of certain types of guarantees by requiring that the guarantor
recognize a liability for the fair value of the obligation it assumes under a
guarantee. The Company has adopted the disclosure provisions of FIN 45 effective
December 31, 2002. The initial recognition and measurement provisions of FIN 45
are effective on a prospective basis for guarantees that are initiated or
modified after December 31, 2002. The Company does not expect the adoption of
FIN 45 to have a material effect on its consolidated financial position or cash
flows.

CONCENTRATION OF CREDIT RISK

The Company performs ongoing credit evaluations of its customers and does
not generally require collateral. The Company maintains allowances for potential
credit losses based upon expected collectibility of all accounts receivable.

In 1999, Ameriserve Food Distribution Company, Inc. ("Ameriserve")
accounted for approximately 15.7% of the Company's gross sales. Ameriserve began
to experience cash flow problems during late 1999 and filed for bankruptcy in
January 2000. The Company recorded bad debt provisions of $750 and $3,420 during
1999 and 2000, respectively, for all of the Ameriserve receivables that became
uncollectible in connection with the bankruptcy. During 2001, the Company also
paid certain preferential payment claims of $135 related to Ameriserve.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and variable rate debt
approximates their estimated fair value based on market prices for the same or
similar type of financial instruments. The fair market value of the Company's
interest rate swaps were a loss of $1,126 at December 31, 2002.

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.

29

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECLASSIFICATION

Certain prior year amounts have been reclassified to conform to the current
year's presentation.

NOTE 3 -- ACQUISITION

On October 23, 2002, the Company acquired the outstanding common stock of
Wolf Packaging, Inc. ("Wolf") for the issuance of 166,667 shares of the
Company's common stock with a fair market value on the date of acquisition of
$984 and cash of $9,275 (including the repayment of certain indebtedness and
payment of costs related to the acquisition). Wolf is a manufacturer of foil and
paper sandwich wraps located in Fort Madison, Iowa. Wolf is a significant
supplier to the quick-service restaurant industry and generated annual revenues
of approximately $23,000 during 2002. As a result of the acquisition, the
Company is expected to enhance its market share of the quick-service restaurant
industry and reduce costs through economies of scale.

The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.

The intangible assets are comprised of customer contracts of $380 (1.4 year
weighted average life) and non-compete agreements of $100 (9.5 year weighted
average life). Goodwill is not expected to be deductible for income tax
purposes.

The Company's financial statements include the results of operations and
cash flows of Wolf from the purchase date. Adjusting for the full year effect of
the acquisition, unaudited pro forma net sales would have been higher by
approximately $19,000 and $16,000, respectively, compared to the reported net
sales in 2002 and 2001. Unaudited pro forma net income would not have been
significantly different compared to the Company's reported net income in 2002
and 2001, as incremental income from operations was offset by pro forma interest
expense related to the acquisition. The unaudited pro forma results of
operations were prepared as if the acquisition had occurred as of the beginning
of 2001, after giving effect for certain adjustments. The unaudited results were
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisitions been made as of the beginning of
the year or of results which may occur in the future.

30

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4 -- INTANGIBLE AND OTHER ASSETS

Intangible and other assets at December 31, 2002 and December 31, 2001
consist of the following:

The increase in covenants not to compete and customer contracts resulted
from $480 of intangible assets recorded as a result of the acquisition of Wolf.

Substantially all of the intangible and other asset balance at December 31,
2002 will be amortized before December 31, 2005.

NOTE 5 -- LONG-TERM DEBT

Long-term debt at December 31, 2002 and December 31, 2001 consists of the
following:

SENIOR CREDIT FACILITY

During 1998, PDLLC entered into a credit agreement (the "Senior Credit
Facility") with BankAmerica, N.A. that provided two term loans and a revolving
credit loan totaling $71,000, including a $22,500 revolving credit facility. The
term loans require quarterly principal payments beginning March 31, 1999 and
ending November 20, 2004 for Term Loan A and November 20, 2005 for Term Loan B.
These payments ranged from $125 to $5,000.

Effective July 15, 1999, in connection with the acquisition of
International Converter, Inc. ("ICI"), PDLLC executed an amendment and
restatement of the Senior Credit Facility that provided for two term loans
totaling $89,250 and a revolver with maximum borrowings of $45,000. Effective
August 18, 2000, the terms of the Senior Credit Facility and existing covenants
were amended. The terms were amended to change the scheduled amounts of
quarterly payments and interest rates. The term loans require quarterly
principal payments beginning September 30, 2000 and ending November 20, 2004 for
Term Loan A and November 20, 2005 for Term Loan B and range from $180 to $7,100.
In May 2001, the Senior Credit Facility was further amended to reduce the
maximum borrowings under the revolver to $25,000 and to modify existing
covenants.

31

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Borrowings under the revolver were zero and $1,700 at December 31, 2002 and 2001
(approximately $23,675 was available at December 31, 2002).

Loans under the Senior Credit Facility are designated from time to time, at
the Company's election, either (1) as Eurodollar Loans, which bear interest at a
rate based on the London Interbank Offered Rate, or LIBOR, adjusted for
regulatory reserve requirements, or (2) as Base Rate Loans, which bear interest
at a rate based on the Federal Funds Rate or the prime rate. The interest rate
on Eurodollar Loans is equal to LIBOR plus an applicable percentage that varies
with the leverage ratio of PDLLC and its consolidated subsidiaries. The interest
rate on Base Rate Loans is equal to

- a base rate equal to the greater of (1) the Federal Funds rate plus 1/2
of 1% and (2) the prime rate, plus

- an applicable percentage that varies with the leverage ratio of PDLLC and
its consolidated subsidiaries.

Accordingly, Tranche A Term Loans and revolving loans bear interest at
rates of up to 2.75% plus the base rate, in the case of Base Rate Loans, and up
to 3.75% plus LIBOR, in the case of Eurodollar Loans. Tranche B Term Loans bear
interest at rates of up to 3.25% plus the base rate, in the case of Base Rate
Loans, and up to 4.25% plus LIBOR, in the case of Eurodollar Loans.

At December 31, 2002, the interest rates on outstanding borrowings under
the Tranche A Term Loan and the Tranche B Term Loan were 2.75% plus LIBOR and
3.75% plus LIBOR, respectively, compared with 3.25% plus LIBOR and 4.00% plus
LIBOR, respectively, at December 31, 2001.

As of December 31, 2002, the Company had interest rate swap agreements with
a group of banks having notional amounts totaling $55,000 with various maturity
dates through December 10, 2003. These agreements effectively fix the LIBOR rate
for $40,000 and $15,000 of the Senior Credit Facility indebtedness at rates of
3.83% and 1.61%, respectively. Beginning on December 10, 2003, the Company has a
no cost collar agreement with a notional amount of $25,000 maturing on December
10, 2004. This collar agreement effectively fixes the LIBOR base rate for
$25,000 of the Senior Credit Facility indebtedness at a maximum of 3.97% and
allows for the Company to pay the market LIBOR from a floor of 2.34% to the
maximum rate. If LIBOR falls below 2.34%, the Company is required to pay the
floor rate of 2.34%. Borrowings under the Senior Credit Facility are
collateralized by substantially all of the assets of the Company's operating
subsidiaries. The revolving credit facility and Term A Loan will terminate on
November 20, 2004 and the Term B Loan will terminate on November 20, 2005.

Under the senior credit facility, PDLLC is required to comply on a
quarterly basis with the following four financial covenants:

- under the leverage ratio covenant, as of the last day of each fiscal
quarter, PDLLC's ratio of total funded debt to consolidated EBITDA for
the 12-month period then ended must not exceed specified levels,
decreasing from 3.25 to 1 at present to 2 to 1 from and after April 1,
2004;

- under the interest coverage ratio covenant, as of the last day of each
fiscal quarter, PDLLC's ratio of consolidated EBITDA for the 12-month
period then ended to cash interest expense for such 12-month period must
be equal to or greater than certain specified levels, increasing from 3
to 1 at present to 4 to 1 from and after July 1, 2004;

- under the fixed charge coverage ratio covenant, as of the last day of
each fiscal quarter, for the 12-month period then ended, PDLLC's ratio of
consolidated EBITDA less capital expenditures and taxes to PDLLC's cash
interest expense and scheduled funded debt payments must be equal to or
greater than 1.15 to 1; and

- under the net worth covenant, Packaging Holdings' consolidated net worth
as of the last day of each fiscal quarter must be equal to or greater
than $27,500, increased on a cumulative basis by (1) as of the
32

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

last day of each fiscal quarter, 50% of the consolidated net income of
Packaging Holdings (to the extent positive) for the fiscal quarter then
ended, commencing with the fiscal quarter ended December 31, 1998 and (2)
50% of the net cash proceeds from any equity issuance after November 20,
1998 by Packaging Holdings or any subsidiary of Packaging Holdings.

For purposes of the senior credit facility, consolidated EBITDA, calculated
on a consolidated basis for PDLLC and its subsidiaries, consists of (1) net
income, excluding the effect of any extraordinary or other non-recurring gains
or losses or non-cash losses, plus (2) an amount which, in the determination of
net income, has been deducted for interest expense, taxes, depreciation and
amortization.

The senior credit facility also contains various negative covenants that,
among other things, require Packaging Holdings and its subsidiaries to limit
future capital expenditures, borrowings, dividend payments, and payments to
related parties, and restricts Packaging Holdings' ability and the ability of
its subsidiaries to merge or consolidate. In addition, the senior credit
facility prevents the Company's subsidiaries from making distributions,
prohibits changes in the nature of business conducted by the Company's
subsidiaries and effectively requires, subject to limited exceptions, that
Packaging Dynamics' pre-distribution stockholders, other than Ivex, retain
beneficial ownership of at least 42.5% in Packaging Dynamics. The failure to
comply with the covenants would result in a default under the Senior Credit
Facility and permit the lenders under the Senior Credit Facility to accelerate
the maturity of the indebtedness governed by the Senior Credit Facility. The
Company is currently in compliance with the terms and conditions of the Senior
Credit Facility in all material respects. During the first quarter of 2003, the
Company amended the Senior Credit Facility to, among other things, restate
future leverage ratio and fixed charge ratio covenants.

SELLER NOTE PAYABLE

On July 14, 1999, the Company issued a $3,000 note subordinated to the
Senior Credit Facility to the seller in connection with the purchase of ICI.
Interest on this note is at 7.5% payable semi-annually commencing on December
31, 1999. This unsecured note matures on July 14, 2004 and may be accelerated
under certain circumstances, including a change of control and an acceleration
of the Senior Credit Facility.

BAXTER SPRINGS FACILITY LOANS

The Company has certain obligations under debt agreements with the U.S.
Department of Housing and Urban Development (HUD) in the form of promissory
notes payable to the City of Baxter Springs. The notes bear interest at various
rates varying from 4.57% to 6.57%, as determined by HUD and interest is payable
on a semi-annual basis. These notes are payable in annual installments of $700
through August 2004.

Borrowings are collateralized by a first lien on the land and building at
the Baxter Springs, Kansas production facility and by a second lien on certain
machinery and equipment. Under certain circumstances, repayment of the
borrowings is subordinated to the repayment of obligations under the Senior
Credit Facility.

CHANGE IN CONTROL PROVISIONS

The Senior Credit Facility and the ICI note include terms that limit
changes in the Company's ownership structure. Modifications to the ownership
structure outside the limits prescribed by such agreements could place the
Company in default under these debt instruments. The Company does not believe
that the distribution and common stock exchange as described in the merger
agreement by and between Ivex and Alcoa resulted in a change in control as
defined in the senior credit facility or the ICI note.

33

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MATURITIES

Maturities of long-term debt outstanding at December 31, 2002 are:

Year ending December 31:
2003...................................................... $ 7,420
2004...................................................... 39,475
2005...................................................... 28,235
-------
$75,130
=======

NOTE 6 -- RELATED PARTY TRANSACTIONS

PHLLC issued a $12,500 note subordinated to the Senior Credit Facility on
November 20, 1998 to IPMC, Inc., an indirect wholly-owned subsidiary of Ivex, in
connection with the acquisition of the assets of Ivex's paper mill operations
located in Detroit, Michigan. Interest on this note was paid-in-kind at a rate
of 12% on a semi-annual basis. The note was unsecured and matured on November
21, 2005. On July 1, 2002, the note payable for $19,238 was canceled.

Pursuant to a consulting agreement, PHLLC paid Ivex an annual consulting
fee for management and administrative services rendered to PHLLC by Ivex
including financial, tax, accounting and legal services. During 2002, 2001 and
2000, PHLLC recorded consulting fee expense of $250, $500 and $750,
respectively, related to this agreement. On July 1, 2002, the consulting
agreement was canceled.

NOTE 7 -- INCOME TAXES

Packaging Dynamics' corporate structure is a C-corporation and, as such,
the federal and state taxable income of the Company and its subsidiaries is
recorded on the consolidated income tax returns of the Packaging Dynamics. Prior
to the distribution, the members of Packaging Holdings reported federal and
state taxable income on their income tax returns. ICI had remained a taxable
C-corporation from the time the Company acquired it in July 1999 through the
date of the distribution.

The Company recognizes deferred tax assets and liabilities based on the
differences between the financial statement and tax bases of assets and
liabilities. In connection with the merger and distribution, Packaging Dynamics
recorded deferred tax assets and liabilities associated with the differences
between the financial statement and tax bases of its consolidated assets and
liabilities. The increase in deferred tax liabilities related to the change in
tax status was approximately $9,200.

The components of the income tax provision shown in the consolidated
statements of operations are as follows:

34

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision recognized for income taxes differs from the amount
determined by applying the U.S. federal income tax rate of 35% due to the
following:

Deferred tax liabilities (assets) are comprised of the following:

NOTE 8 -- EMPLOYEE BENEFIT PLANS

2001 Long-Term Incentive Compensation Plan -- PHLLC had an unfunded 2001
Long-Term Incentive Compensation Plan (the "2001 LTIP") for certain key
executives prior to the distribution. Under the terms of this plan, 3,000,000
incentive units, subject to adjustment, and representing 8.2% of the fully
diluted outstanding limited liability shares, had been granted. The plan was
designed to reward those individuals on the increased equity value of PHLLC, and
provided that 40% of the incentive units were earned on the effective date and
the remaining 60% could have been earned based upon PHLLC's attainment of
certain annual earnings targets. Participants in the plan vested on a pro-rata
basis over three years from the plan's origination date. In the event PHLLC
completed a transaction which caused a substantial change in ownership control,
the plan provided for an accelerated vesting schedule. The plan was terminated
during 2002.

2002 Long-term Incentive Stock Plan -- On July 1, 2002, Packaging Dynamics
granted to management, for incentive purposes and in consideration of their
waiver of cash payments under the 2001 LTIP, stock options for the purchase of
an aggregate of 815,089 shares of its common stock under the 2002 Long Term
Incentive Stock Plan. Additionally, on July 1, 2002, Packaging Dynamics granted
to certain former employees stock options for the purchase of an aggregate of
29,047 shares of its common stock under individual nonqualified stock option
agreements in consideration of their waiver of cash payments under the 2001
LTIP. The options have an exercise price of $3.90 per share, which was below the
fair market value of Packaging Dynamics' common stock on the grant date and
730,924 options, although fully vested, are not exercisable for three years
after the grant date. Consequently, for such options the Company has the right
to repurchase an executive's options if he terminates employment before the end
of the three-year period. The Company recorded a non-cash compensation charge of

35

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$2,667 during December 31, 2002 related to these management incentive plans.
During 2002, 43,397 options were repurchased from former employees for
approximately $124.

NOTE 9 -- COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

The Company is currently a party to various legal proceedings in various
federal and state jurisdictions arising out of the operations of its business.
The amount of alleged liability, if any, from these proceedings cannot be
determined with certainty; however, the Company believes that its ultimate
liability, if any, arising from the pending legal proceedings, as well as from
asserted legal claims and known potential legal claims which are probable of
assertion, would not have a material effect on the Company's financial
condition, results of operations or liquidity.

The Company's manufacturing operations are subject to federal, state and
local regulations governing the environment and the discharge of materials into
air, land and water, as well as the handling and disposal of solid and hazardous
wastes. As is the case with manufacturers in general, if a release of hazardous
substances occurs on or from the Company's properties or any associated offsite
disposal location, or if contamination from prior activities is discovered at
any of the Company's properties, the Company may be held liable. From time to
time, the Company is involved in regulatory proceedings and inquiries relating
to compliance with environmental laws, permits and other environmental matters.
The Company believes that it is in substantial compliance with applicable
environmental regulations and does not believe that costs of compliance will
have a material adverse effect on the Company's financial condition, results of
operations or liquidity.

LEASE COMMITMENTS

The Company occupies certain facilities under lease arrangements and leases
certain machinery, automobiles, and equipment. Rental expense amounted to
$1,632, $1,555 and $1,662 for the year ended December 31, 2002, 2001 and 2000,
respectively.

Future minimum rental commitments for operating leases with noncancelable
terms in excess of one year are as follows:

Year ending December 31:
2003........................................................ $1,498
2004........................................................ 1,320
2005........................................................ 773
2006........................................................ 654
2007........................................................ 343
Thereafter.................................................. 519
------
$5,107
======

NOTE 10 -- ASSET SALES AND DISPOSALS

The Company continues its efforts to upgrade the capabilities of its
manufacturing operations. During the fourth quarter of 2002, the Company idled
certain converting equipment in its Chicago, Illinois manufacturing facility in
anticipation of installing two new bag making machines in the first quarter of
2003. The new bag machines are expected to significantly improve productivity on
several product categories. Also, the Company permanently idled one of its paper
machines and certain paper making equipment at its paper mill in Detroit,
Michigan, permanently shifting all of the facility's paper production to its
remaining three paper machines. The elimination of this paper machine was due in
part to the Company's improved focus on the productivity of

36

PACKAGING DYNAMICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the three remaining paper machines. These fourth quarter manufacturing
improvements and certain other productivity improvements executed earlier in the
year resulted in a loss of $3,397 on the sale or disposal of the equipment. The
Company expects to continue the productivity improvement program which may
result in future gains and losses on the sale of equipment.

NOTE 11 -- RESTRUCTURING CHARGE

In January 2000, the Company commenced a restructuring plan, which resulted
in a reduction in work force of 32 people. The restructuring charge includes
severance and other benefits related to this reduction in force of $1,250. At
December 31, 2002 and 2001, there is $54 and $127, respectively, of severance
and other benefits costs remaining to be paid in future periods.

The restructuring charge activity is as follows:

NOTE 12 -- UNAUDITED QUARTERLY RESULTS

Summarized unaudited quarterly data for the years ended December 31, 2002
and 2001 are as follows:

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

(1) The Company recorded management compensation expense related to options of
$1,076, $219 and $1,372 during the quarters ended March 30, 2002, June 29,
2002 and September 28, 2002 (see Note 8 -- Employee Benefit Plans).

(2) Includes expense of $3,151 related to the sale and disposal of certain
machinery and equipment taken out of service (see Note 10 -- Asset Sales and
Disposals).

(3) Prior to July 1, 2002, the Company ownership consisted of membership units.
Accordingly, no earnings per share information has been presented for any
period prior to July 1, 2002.

37

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by Item 10 of this Form is incorporated herein by
reference from the Company's definitive Proxy Statement for the May 14, 2003
Annual meeting of Stockholders under the captions "Nomination and Election of
Directors", "Principal Stockholders" and "Section 16(a) Beneficial Ownership
Reporting Compliance"; and in Part I, Item 1, of this Form 10-K under the
caption "Executive Officers."

ITEM 11. EXECUTIVE COMPENSATION

Information required by Item 11 of this Form is incorporated herein by
reference to the Company's definitive Proxy Statement for the May 14, 2003
Annual Meeting of Stockholders under the captions "Executive Compensation" and
"Directors' Compensation" for 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by Item 12 of this Form, is incorporated herein by
reference to the Company's definitive Proxy Statement for the May 14, 2003
Annual Meeting of Stockholders under the captions "Principal Stockholders" and
"Directors' Compensation."

The following table summarizes additional equity compensation plan
information as of December 31, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by Item 13 of this Form is incorporated by reference
to the Company's definitive Proxy Statement for the May 14, 2003 Annual Meeting
of Stockholders under the caption "Certain Relationships and Related
Transactions."

ITEM 14. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90
days prior to the filing date of this annual report (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are effective
in alerting them on a timely basis to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act.

38

CHANGES IN INTERNAL CONTROLS

Since the Evaluation Date, there have not been any significant changes in
the Company's internal controls or in other factors that could significantly
affect such controls. There were no significant deficiencies or material
weaknesses, and therefore there were no corrective actions taken.

PART IV

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

FINANCIAL STATEMENTS

See Item 8 -- Financial Statements and Supplementary Data

SCHEDULES

- Schedule I -- Condensed Financial Information.....................Page 45

- Schedule II -- Valuation and Qualifying Accounts and Reserves.....Page 49

(a)(3) Exhibits.

2.1 Distribution Agreement, dated as of March 18, 2002, between
Ivex Packaging Corporation and Packaging Dynamics
Corporation (filed on March 19, 2002 as Exhibit 2.2 to Ivex
Packaging Corporation's Current Report on Form 8-K, dated
March 18, 2002, SEC File No. 1-13968 and incorporated herein
by reference)
2.2 Letter Agreement, dated March 18, 2002, among Ivex Packaging
Corporation, DCBS Investors, L.L.C., CB Investors, L.L.C.
and Packaging Investors, L.P. (filed on March 19, 2002 as
Exhibit 2.3 to Ivex Packaging Corporation's Current Report
on Form 8-K, dated March 18, 2002, SEC File No. 1-13968 and
incorporated herein by reference)
2.3 Amendment to Distribution Agreement, dated as of July 1,
2002, between Ivex Packaging Corporation and Packaging
Dynamics Corporation (filed on August 9, 2002 as Exhibit 2
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002 and incorporated herein by
reference)
3.1*** Form of Restated Certificate of Incorporation of Packaging
Dynamics Corporation
3.2** Bylaws of Packaging Dynamics Corporation
4.1 Reference is hereby made to Exhibit 3.1 and Exhibit 3.2.
4.2** Specimen Common Stock Certificate of Packaging Dynamics
Corporation
4.3 Registration Rights Agreement, dated July 1, 2002, by and
among Packaging Investors, L.P., DCBS Investors, L.L.C., CB
Investors, L.L.C. and Packaging Dynamics Corporation (filed
on August 9, 2002 as Exhibit 4.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002 and incorporated herein by reference)
4.4 Stockholders Agreement, dated July 1, 2002, by and among
Packaging Investors, L.P., DCBS Investors, L.L.C. and CB
Investors, L.L.C. (filed on August 9, 2002 as Exhibit 4.1 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002 and incorporated herein by
reference)
4.5*** First Amended and Restated Registration Rights Agreement,
dated as of October 23, 2002, by and among Packaging
Investors, L.P., DCBS Investors, L.L.C., CB Investors,
L.L.C., Mr. Thomas Wolf and the Company.
10.1 Reference is hereby made to Exhibit 2.1, Exhibit 2.2 and
Exhibit 2.3.
10.2 Tax Sharing Agreement, dated July 1, 2002, by and between
Ivex Packaging Corporation and Packaging Dynamics
Corporation (filed on August 9, 2002 as Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002 and incorporated herein by reference)

39

10.3* Credit Agreement, dated as of November 20, 1998, among
Packaging Dynamics, L.L.C., Packaging Holdings, L.L.C., each
of the subsidiaries of Packaging Dynamics, L.L.C., the
Lenders thereunder and NationsBank, N.A., as Agent for the
Lenders
10.4* First Amendment to Credit Agreement dated as of July 15,
1999 among Packaging Dynamics, L.L.C., CB Acquisition, Inc.,
the Existing Guarantors identified therein, the Lenders
identified therein and Bank of America, N.A., formerly known
as NationsBank, N.A., as Agent for the Lenders
10.5* Second Amendment to Credit Agreement, dated as of November
12, 1999, among Packaging Dynamics, L.L.C., International
Converter, Inc., the persons identified as Guarantors
therein, the persons identified as Lenders therein and Bank
of America, N.A., formerly known as NationsBank, N.A., as
Agent for the Lenders
10.6* Third Amendment to Credit Agreement, dated as of August 18,
2000, among Packaging Dynamics, L.L.C., International
Converter, Inc., the persons identified as Guarantors
therein, the persons identified as Lenders therein and Bank
of America, N.A., formerly known as NationsBank, N.A., as
Agent for the Lenders
10.7* Fourth Amendment to Credit Agreement, dated as of May 10,
2001, among Packaging Dynamics, L.L.C., International
Converter, Inc., the persons identified as Guarantors
therein, the persons identified as Lenders therein and Bank
of America, N.A., formerly known as NationsBank, N.A., as
Agent for the Lenders
10.8*** Fifth Amendment to the Credit Agreement dated as of March
18, 2003, among Packaging Dynamics, L.L.C., International
Converter, Inc., the persons identified as Guarantors
therein, the persons identified as lenders therein and Bank
of America, N.A., formerly known as NationsBank, N.A., as
Agent for the Lenders.
10.9* Packaging Holdings, L.L.C. Subordinated Note, dated July
1999, payable to Lombard Investments, Inc.
10.10* Loan Agreement, dated December 27, 1993, by and between
Bagcraft Corporation of America and the City of Baxter
Springs, Kansas
10.11* Assignment and Assumption Agreement dated as of November 20,
1998 by and among Bagcraft Corporation of America, Packaging
Dynamics, L.L.C. and Bagcraft Acquisition, L.L.C.
10.12* Commercial Guaranty made as of November 20, 1998 by Bagcraft
Acquisition, L.L.C. in favor of the City of Baxter Springs,
Kansas.
10.13*** Lease, dated October 23, 2002, between the Company and
W.O.W., L.L.C.
10.14* Sublease, dated December 16, 1975, E.I. DuPont de Nemours
and Company and Bagcraft Corporation of America, with
amendment dated April 30, 1996
10.15* Lease, dated November 19, 1999, between 6501 Corporation and
Packaging Dynamics, L.L.C.
10.16* ISDA(R) Master Agreement, dated as of May 16, 2001, between
Bank of America, N.A. and Packaging Dynamics, L.L.C.
10.17* Interest Rate Swap Confirmation, dated May 30, 2001, from
Bank of America, N.A. to Packaging Dynamics, L.L.C.
10.18* Interest Rate Swap Confirmation, dated September 25, 2001,
from Bank of America, N.A. to Packaging Dynamics, L.L.C.
10.19* ISDA(R) Master Agreement, dated as of December 4, 1998,
between ABN AMRO Bank, N.V. and Packaging Dynamics, L.L.C.
10.20* Interest Rate Swap Confirmation, dated September 14, 2001,
from ABN AMRO Bank N.V., Chicago ranch, to Packaging
Dynamics, L.L.C.
10.21*** Severance Agreement, dated as of January 23, 2003, between
Packaging Dynamics Corporation and each of Mr. Phillip D.
Harris and Mr. Frank V. Tannura(1)
10.22* Severance Agreement, dated August 1, 2000, between Packaging
Dynamics, L.L.C. and Jeremy S. Lawrence(1)
10.23* Severance Agreement, dated November 18, 1998, between
Bagcraft Acquisition, L.L.C. and Mike Arduino(1)

40

10.24*** Severance Agreement, dated January 23, 2003, between
Packaging Dynamics Corporation and each of Mr. Henry C.
Newell and Mr. Randy L. Van Antwerp(1)
10.25** Form of Severance Agreement between IPMC Acquisition, L.L.C.
and Edward Turner(1)
10.26** Form of Packaging Dynamics 2002 Long Term Incentive Stock
Plan(1)
10.27* Packaging Dynamics, L.L.C. 2002 Incentive Compensation Plan
for Packaging Dynamics Executives(1)
10.28* Packaging Dynamics LLC Employee 401(k) Plan(1)
10.29** Form of Nonqualified Stock Option Agreement(1)
21.1* Subsidiaries of Packaging Dynamics Corporation
23.1*** Consent of PricewaterhouseCoopers
99.1*** Certification of CEO and CFO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

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

* Incorporated by reference to the Registrant's Form 10 filed on April 19,
2002.

** Incorporated by reference to the Registrant's Form 10/A Amendment No. 1
filed on May 21, 2002.

*** Filed herewith.

(1) Management contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Form 10-K pursuant to Item 15 (c) of this report.

(b) Reports on Form 8-K.

Current Report on Form 8-K furnished under Item 9 on October 24, 2002, as
amended by Form 8-K/A on October 29, 2002, incorporating a press release
announcing the financial results for the third quarter and the nine months ended
September 28, 2002 and the acquisition of Wolf Packaging Inc. on October 23,
2002.

41

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON MARCH 27, 2003.

PACKAGING DYNAMICS CORPORATION

By: /s/ PHILLIP D. HARRIS
------------------------------------
Name: Phillip D. Harris
Title: President and Chief Executive
Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES INDICATED ON MARCH 27, 2003.

42

CERTIFICATION FOR
ANNUAL REPORTS ON FORM 10-K

I, Phillip D. Harris, certify that:

1. I have reviewed this annual report on Form 10-K of Packaging Dynamics
Corporation;

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

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

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

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

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

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

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

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

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

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

/s/ PHILLIP D. HARRIS
--------------------------------------
Phillip D. Harris
President and Chief Executive Officer
March 27, 2003

43

CERTIFICATION FOR
ANNUAL REPORTS ON FORM 10-K

I, Henry C. Newell, certify that:

1. I have reviewed this annual report on Form 10-K of Packaging Dynamics
Corporation;

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

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

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

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

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

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

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

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

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

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

/s/ HENRY C. NEWELL
--------------------------------------
Henry C. Newell
Vice President and Chief Financial
Officer
March 27, 2003

44

PACKAGING DYNAMICS CORPORATION

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
(PARENT COMPANY ONLY)

BALANCE SHEETS
(DOLLARS IN THOUSANDS)

See Notes to Consolidated Financial Statements in Item 8.
45

PACKAGING DYNAMICS CORPORATION

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
(PARENT COMPANY ONLY)

STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)

See Notes to Consolidated Financial Statements in Item 8.
46

PACKAGING DYNAMICS CORPORATION

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
(PARENT COMPANY ONLY)

STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

See Notes to Consolidated Financial Statements in Item 8.
47

PACKAGING DYNAMICS CORPORATION

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
(PARENT COMPANY ONLY)

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY/MEMBERS' EQUITY
(DOLLARS IN THOUSANDS)

See Notes to Consolidated Financial Statements in Item 8.
48

PACKAGING DYNAMICS CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)

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

(1) Reflects additions of $32 associated with the acquisition of Wolf.

49