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PROSPECTUS
OWENS-BROCKWAY GLASS CONTAINER INC.
OFFER TO EXCHANGE
$1,000,000,000 AGGREGATE PRINCIPAL AMOUNT OF ITS
8 7/8% SENIOR SECURED NOTES DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING 8 7/8% SENIOR SECURED NOTES DUE 2009
------------------
- The exchange offer expires at 5:00 p.m., New York City time, on July 31,
2002, unless extended.
- We will exchange all outstanding notes that are validly tendered and not
validly withdrawn for an equal principal amount of a new series of notes
which are registered under the Securities Act.
- The exchange offer is not subject to any conditions other than that it not
violate applicable law or any applicable interpretation of the staff of
the SEC.
- You may withdraw tenders of outstanding notes at any time before the
exchange offer expires.
- The exchange of notes will not be a taxable event for U.S. federal income
tax purposes.
- We will not receive any proceeds from the exchange offer.
- The terms of the new series of notes are substantially identical to the
outstanding notes, except for transfer restrictions and registration
rights relating to the outstanding notes.
- The notes are fully and unconditionally guaranteed, jointly and severally,
on a senior basis by our indirect parent, Owens-Illinois Group, Inc. and
by certain domestic subsidiaries of Owens-Illinois Group, Inc. so long as
they continue to guarantee the secured credit agreement. If we cannot make
payments on the notes when they are due, the guarantors must make them
instead. Under certain circumstances the guarantees may be released
without action by, or consent of, the holders of the notes.
- The notes and guarantees are secured, subject to the terms of the
collateral documents under the secured credit agreement, on a PARI PASSU
basis with obligations under the secured credit agreement by: (1) a
security interest in substantially all the assets (other than intercompany
debt and securities) of Owens-Illinois Group, Inc. and of substantially
all the domestic subsidiaries of Owens-Illinois Group, Inc.; and (2) a
pledge by Owens-Illinois Group, Inc. of the stock of, and intercompany
debt owing to Owens-Illinois Group, Inc. by, all its direct subsidiaries
(other than the stock of, and intercompany debt owing to Owens-Illinois
Group, Inc. by, OI General FTS Inc.), and a pledge by Owens-Brockway
Packaging, Inc. of the stock of, and intercompany debt owing to
Owens-Brockway Packaging, Inc. by, Owens-Brockway Glass Container Inc.
Certain additional collateral secures the obligations under the secured
credit agreement. Under certain circumstances, the collateral securing the
notes and guarantees may be released without action by, or consent of, the
holders of the notes. The trustee does not control the dispostion or
release of the collateral.
- You may tender outstanding notes only in denominations of $1,000 and
multiples of $1,000.
- Our affiliates may not participate in the exchange offer.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 16 OF THIS PROSPECTUS FOR
A DESCRIPTION OF THE RISKS YOU SHOULD CONSIDER WHEN EVALUATING THIS INVESTMENT.
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
We are not making this exchange offer in any state where it is not
permitted.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF THE NOTES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is July 2, 2002.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 16
Forward-Looking Statements.................................. 26
The Exchange Offer.......................................... 28
Use of Proceeds............................................. 37
Capitalization of Owens-Illinois Group, Inc................. 38
Selected Consolidated Financial Data of Owens-Illinois
Group, Inc................................................ 39
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Owens-Illinois Group, Inc.... 42
Business.................................................... 55
Management.................................................. 69
Compensation of Executive Officers and Directors............ 72
Security Ownership and Certain Beneficial Owners and
Management................................................ 77
Certain Relationships and Related Party Transactions........ 79
Description of Certain Indebtedness......................... 80
Description of Notes........................................ 84
Certain U.S. Federal Tax Considerations..................... 133
Plan of Distribution........................................ 133
Legal Matters............................................... 135
Experts..................................................... 135
Where You Can Find More Information......................... 135
Index to Financial Statements............................... F-1
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We have not authorized any dealer, salesperson or other person to give any
information or to make any representations to you other than the information
contained in this prospectus. You must not rely on any information or
representations not contained in this prospectus as if we had authorized it.
This prospectus does not offer to sell or solicit an offer to buy any securities
other than the registered notes to which it relates, nor does it offer to buy
any of these notes in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction.
The information contained in this prospectus is current only as of the date
on the cover page of this prospectus, and may change after that date.
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MARKET, RANKING AND OTHER DATA
The data included in this prospectus regarding markets and ranking,
including the size of certain markets and our position, the position of
Owens-Illinois Group, Inc. and the position of our competitors and competitors
of Owens-Illinois Group, Inc. within these markets, are based on independent
industry publications, reports of government agencies or other published
industry sources and our estimates and those of Owens-Illinois Group, Inc. based
on each of our management's knowledge and experience in the markets in which we
and Owens-Illinois Group, Inc. operate. Our estimates and those of
Owens-Illinois Group, Inc. have been based on information obtained from
customers, suppliers, trade and business organizations and other contacts in the
markets in which we and Owens-Illinois Group, Inc. operate. We and
Owens-Illinois Group, Inc. believe these estimates to be accurate as of the date
of this prospectus. However, this information may prove to be inaccurate because
of the method by which we or Owens-Illinois Group, Inc. obtained some of the
data for these estimates or because this information cannot always be verified
with complete certainty due to the limits on the availability and reliability of
raw data, the voluntary nature of the data gathering process and other
limitations and uncertainties inherent in a survey of market size.
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS THE INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF
THIS OFFERING, WE ENCOURAGE YOU TO READ THIS ENTIRE PROSPECTUS AND THE DOCUMENTS
TO WHICH WE REFER YOU. YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE
MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO
THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
SPECIFIED OR THE CONTEXT REQUIRES OTHERWISE, REFERENCE IN THIS PROSPECTUS TO:
- "COMPANY" OR "WE," "US" OR "OUR" REFERS TO OWENS-BROCKWAY GLASS
CONTAINER INC., THE ISSUER OF THE NOTES, AND ITS DIRECT AND INDIRECT
SUBSIDIARIES ON A CONSOLIDATED BASIS; AND
- "OI GROUP" REFERS TO OWENS-ILLINOIS GROUP, INC., THE INDIRECT PARENT OF
OWENS-BROCKWAY GLASS CONTAINER INC., AND ITS DIRECT AND INDIRECT
SUBSIDIARIES ON A CONSOLIDATED BASIS, INCLUDING OWENS-BROCKWAY GLASS
CONTAINER INC.
WE WILL REFER TO THE OFFERING OF THE PRIVATE NOTES AS THE "PRIVATE
OFFERING." UNLESS INDICATED OTHERWISE, THE TERM "NOTES" REFERS TO BOTH THE
PRIVATE NOTES AND THE EXCHANGE NOTES.
INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS." IN ADDITION, SOME STATEMENTS INCLUDE FORWARD-LOOKING INFORMATION WHICH
INVOLVES RISKS AND UNCERTAINTIES.
OWENS-ILLINOIS GROUP, INC.
OI Group is one of the world's leading manufacturers of packaging products.
OI Group is the largest manufacturer of glass containers in North America, South
America, Australia and New Zealand, and one of the largest in Europe. In
addition, OI Group is a leading manufacturer in North America of plastic
containers, plastic closures and plastic prescription containers. OI Group also
has plastics packaging operations in South America, Europe, Australia and New
Zealand. Consistent with its strategy to continue to strengthen its existing
packaging businesses, OI Group has acquired 18 glass container businesses in 18
countries since 1991, including businesses in South America, Central and Eastern
Europe and the Asia Pacific region, and six plastics packaging businesses with
operations in 11 countries. OI Group had net sales of approximately
$5.4 billion and $1.3 billion, Adjusted EBITDA (as defined on page 15) of
approximately $1.3 billion and $0.3 billion and net earnings (loss) of
approximately $357 million and $(397) million, for the year ended December 31,
2001 and for the three months ended March 31, 2002, respectively.
OI Group believes it is a technological leader in the worldwide glass
container and plastics packaging segments of the rigid packaging market. During
the five years ended December 31, 2001, OI Group invested more than
$2.3 billion in capital expenditures (excluding acquisitions) and more than
$342 million in research, development and engineering to, among other things,
improve labor and machine productivity, increase capacity in growing markets and
commercialize technology into new products.
OWENS-BROCKWAY GLASS CONTAINER INC.
We are an indirect, wholly-owned subsidiary of OI Group and a leading
manufacturer of glass containers throughout the world. Approximately one of
every two glass containers made worldwide is made by us, our affiliates or our
licensees. Worldwide glass container sales represented 66% of OI Group's
consolidated net sales for the year ended December 31, 2001 and for the three
months ended March 31, 2002. For the three months ended March 31, 2002, we
manufactured approximately 41% of all glass containers sold by domestic
producers in the U.S., making us the leading manufacturer of glass containers in
the U.S. We are the leading glass container manufacturer in 17 of the 19
countries where we compete in the glass container segment of the rigid packaging
market and the sole manufacturer of glass containers in eight of these
countries. We had net sales of approximately $3.7 billion and
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$0.9 billion, Adjusted EBITDA (as defined on page 15) of approximately
$0.9 billion and $0.2 billion and net earnings (loss) of approximately
$69 million and $(3) million, for the year ended December 31, 2001 and for the
three months ended March 31, 2002, respectively, and our consolidated total
assets were approximately $5.8 billion at March 31, 2002.
We and OI Group are headquartered at One SeaGate, Toledo, Ohio 43666, and
our phone number is (419) 247-5000. We are a Delaware corporation incorporated
on March 9, 1987.
COMPETITIVE STRENGTHS
LEADER IN GLASS AND PLASTICS PACKAGING
- One of the world's leading manufacturers of glass and plastics packaging
- Leading glass container manufacturer in 17 of 19 countries where we
compete and the sole manufacturer of glass containers in 8 of these
countries
- We, our affiliates or our licensees produce approximately 1 of every 2
glass containers made worldwide
- In plastics, we are a leader in custom blow-molded and injection-molded
packaging products
- Leadership in glass and plastics packaging provides opportunity to attract
and retain "blue chip" customers, many of which have a worldwide presence
TECHNOLOGY LEADER AND INNOVATOR
- OI Group's research, development and engineering (RD&E) activities have
yielded significant labor and machine productivity gains over time
- OI Group believes its RD&E expenditures relative to its competitors are
among the highest in the worldwide rigid packaging market
- Often the glass container supplier of choice for multi-national consumer
companies due to leadership in glass technology and status as low-cost
producer
- In plastics packaging, OI Group is a leader in product development and
innovation and one of the few suppliers with capability to provide
customer with "complete package" consisting of the container and the
closure
- OI Group's new product development cycle is one of the shortest in the
plastics packaging industry
- Plastics packaging innovations include the "child resistant" closure for
prescription containers, the plastic Heinz ketchup bottle and a
multi-layer plastic beer bottle being used by Anheuser-Busch, Coors and
Miller Brewing
LOW-COST PRODUCER
- We believe we are the low-cost producer in the glass container segment of
the North American rigid packaging market, as well as the low-cost
producer in most of the international glass container segments in which we
compete
- Much of our cost advantage is due to our proprietary equipment and process
technology
- Over the last 10 years, we have more than doubled our overall glass
container labor and machine productivity in the United States
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- Glass machine development activities and systematic upgrading of
production equipment throughout the 1980's and 1990's have given us
low-cost leadership
WORLDWIDE LICENSEE NETWORK
- We license our proprietary glass container technology to 24 companies in
24 countries
- In plastics packaging, OI Group has technical assistance agreements with
24 companies in 14 countries
- The worldwide licensee network provides a stream of revenue to support OI
Group's development activities and an opportunity to participate in the
rigid packaging market in countries where it does not already have a
direct presence
- OI Group's technical agreements enable it to apply "best practices"
developed by its worldwide licensee network
EXPERIENCED MANAGEMENT TEAM
- OI Group's management team has demonstrated an ability to deploy assets,
improve productivity, and rationalize production capacity, while at the
same time maintaining its leadership position in glass and plastics
packaging
- OI Group is a direct, wholly-owned subsidiary of OI Inc.
- OI Inc.'s 19 executive officers average approximately 30 years of
experience
BUSINESS STRATEGY
OI Group's business strategy is to continue to (1) strengthen its existing
packaging businesses and (2) apply its leading edge technology to improve
quality, service, profitability and cash flow.
CONTINUE TO STRENGTHEN EXISTING PACKAGING BUSINESSES
- OI Group is strengthening its existing packaging businesses and intends to
pursue growth in these businesses
- Targeting stable and growing end-uses in the glass container segment of
the North American rigid packaging market, particularly those such as
beer, that would benefit from our high productivity machines and strategic
plant locations
- In the U.S., we manufacture more glass containers for packaging beer than
any other company
- We believe demographic and economic trends in certain developing regions
of the world, particularly portions of South America, Eastern and Central
Europe and the Asia Pacific region, will lead to an increase in the demand
for glass containers in these markets over time
- OI Group plans to pursue growth opportunities in its plastics packaging
segment, both in the U.S. and internationally
- Focus in plastics packaging will be end-uses where customers seek
distinctive and functional packaging to differentiate or enhance their
products
- In addition, consistent with past practice, OI Group may consider glass or
plastics packaging acquisitions worldwide to enhance its growth
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CONTINUE TO APPLY LEADING EDGE TECHNOLOGY TO IMPROVE QUALITY, SERVICE,
PROFITABILITY AND CASH FLOW
- OI Group's strategy includes continued pursuit of labor and machine
productivity improvements over time in an effort to improve quality,
service, profitability and cash flow
- OI Group intends to develop and employ new technology and improved "best
practices" in an effort to continue to lower production costs, while at
the same time preserving superior product quality
- OI Group believes that maintaining its leadership in technology is key to
being successful in rigid packaging markets around the world
- Over the last ten years, we have more than doubled our overall glass
container labor and machine productivity in the United States
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ORGANIZATIONAL STRUCTURE
[ORGANIZATIONAL STRUCTURE CHART]
- ------------------------------
(1) Owens-Illinois, Inc. ("OI Inc.") is a public company listed on the New York
Stock Exchange. Owens-Illinois, Inc. has $1.7 billion of outstanding public
debt securities.
(2) These subsidiaries (other than OI General FTS Inc.), including six foreign
subsidiaries, may borrow under the $3.0 billion revolving loan facility
portion of the secured credit agreement. Borrowings by the six foreign
subsidiaries under the secured credit agreement are limited to a total of
$1.41 billion. Certain foreign subsidiaries guarantee the borrowings by the
foreign subsidiaries under the secured credit agreement. At March 31, 2002,
Owens-Brockway Glass Container Inc. had $65 million outstanding under the
term loan portion of the secured credit agreement. OI General FTS Inc.
borrowed $455 million under the term loan portion of the secured credit
agreement and has repaid this debt. OI General FTS Inc. is jointly and
severally liable for the Owens-Brockway Glass Container Inc. term loan and
for the revolving loan facility. In April 2002, $500 million of existing
revolving loans were separated into a tranche of funded loans of OI Plastic
Products FTS Inc. under the revolving loan facility portion of the secured
credit agreement.
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THE EXCHANGE OFFER
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The Exchange Offer........................ We are offering to exchange the exchange notes for the
outstanding private notes that are properly tendered and
accepted. You may tender outstanding private notes only
in denominations of $1,000 and multiples of $1,000. We
will issue the exchange notes on or promptly after the
exchange offer expires. As of the date of this
prospectus, $1,000,000,000 principal amount of private
notes is outstanding.
Expiration Date........................... The exchange offer will expire at 5:00 p.m., New York
City time, on July 31, 2002, unless extended, in which
case the expiration date will mean the latest date and
time to which we extend the exchange offer.
Conditions to the Exchange Offer.......... The exchange offer is not subject to any condition other
than that it not violate applicable law or any
applicable interpretation of the staff of the SEC. The
exchange offer is not conditioned upon any minimum
principal amount of private notes being tendered for
exchange.
Procedures for Tendering Private Notes.... If you wish to tender your private notes for exchange
notes pursuant to the exchange offer you must transmit
to U.S. Bank National Association as exchange agent, on
or before the expiration date, either:
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- a computer generated message transmitted through The
Depository Trust Company's Automated Tender Offer
Program system and received by the exchange agent and
forming a part of a confirmation of book-entry
transfer in which you acknowledge and agree to be
bound by the terms of the letter of transmittal; or
- a properly completed and duly executed letter of
transmittal, which accompanies this prospectus, or a
facsimile of the letter of transmittal, together with
your private notes and any other required
documentation, to the exchange agent at its address
listed in this prospectus and on the front cover of
the letter of transmittal.
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If you cannot satisfy either of these procedures on a
timely basis, then you should comply with the guaranteed
delivery procedures described below. By executing the
letter of transmittal, you will make the representations
to us described under "The Exchange Offer--Procedures
for Tendering."
Special Procedures for Beneficial
Owners.................................. If you are a beneficial owner whose private notes are
registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you wish to
tender your private notes in the exchange offer, you
should contact the registered holder promptly and
instruct the registered holder to tender on your behalf.
If you wish to tender on your own
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behalf, you must either (1) make appropriate
arrangements to register ownership of the private notes
in your name or (2) obtain a properly completed bond
power from the registered holder, before completing and
executing the letter of transmittal and delivering your
private notes.
Guaranteed Delivery Procedures............ If you wish to tender your private notes and time will
not permit the documents required by the letter of
transmittal to reach the exchange agent before the
expiration date, or the procedure for book-entry
transfer cannot be completed on a timely basis, you must
tender your private notes according to the guaranteed
delivery procedures described in this prospectus under
the heading "The Exchange Offer--Guaranteed Delivery
Procedures."
Acceptance of the Private Notes and
Delivery of the Exchange Notes.......... Subject to the satisfaction or waiver of the conditions
to the exchange offer, we will accept for exchange any
and all private notes which are validly tendered in the
exchange offer and not withdrawn before 5:00 p.m., New
York City time, on the expiration date.
Withdrawal Rights......................... You may withdraw the tender of your private notes at any
time before 5:00 p.m., New York City time, on the
expiration date, by complying with the procedures for
withdrawal described in this prospectus under the
heading "The Exchange Offer--Withdrawal of Tenders."
Certain U.S. Federal Tax Considerations... The exchange of notes will not be a taxable event for
United States federal income tax purposes. For a
discussion of certain federal tax consideration relating
to the exchange of notes, see "Certain U.S. Federal
Income Tax Considerations."
Exchange Agent............................ U.S. Bank National Association, the trustee under the
indenture governing the notes, is serving as the
exchange agent.
Consequences of Failure to Exchange....... If you do not exchange your private notes for exchange
notes, you will continue to be subject to the
restrictions on transfer provided in the private notes
and in the indenture governing the private notes. In
general, the private notes may not be offered or sold,
unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
securities laws. We do not currently plan to register
the private notes under the Securities Act.
Registration Rights Agreement............. You are entitled to exchange your private notes for
exchange notes with substantially identical terms. This
exchange offer satisfies this right. After the exchange
offer is completed, you will no longer be entitled to
any exchange or registration rights with respect to your
private notes.
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We explain the exchange offer in greater detail beginning on page 28.
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THE EXCHANGE NOTES
THE SUMMARY BELOW DESCRIBES THE PRINCIPAL TERMS OF THE EXCHANGE NOTES.
CERTAIN OF THE TERMS AND CONDITIONS DESCRIBED BELOW ARE SUBJECT TO IMPORTANT
LIMITATIONS AND EXCEPTIONS. THE "DESCRIPTION OF NOTES" SECTION OF THIS
PROSPECTUS CONTAINS A MORE DETAILED DESCRIPTION OF THE TERMS AND CONDITIONS OF
THE EXCHANGE NOTES.
THE FORM AND TERMS OF THE EXCHANGE NOTES ARE THE SAME AS THE FORM AND TERMS
OF THE PRIVATE NOTES, EXCEPT THAT THE EXCHANGE NOTES WILL BE REGISTERED UNDER
THE SECURITIES ACT AND, THEREFORE, THE EXCHANGE NOTES WILL NOT BE SUBJECT TO THE
TRANSFER RESTRICTIONS, REGISTRATION RIGHTS AND PROVISIONS PROVIDING FOR AN
INCREASE IN THE INTEREST RATE APPLICABLE TO THE PRIVATE NOTES. THE EXCHANGE
NOTES WILL EVIDENCE THE SAME DEBT AS THE PRIVATE NOTES, AND BOTH THE PRIVATE
NOTES AND THE EXCHANGE NOTES ARE GOVERNED BY THE SAME INDENTURE.
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Issuer.................................... Owens-Brockway Glass Container Inc., a Delaware
corporation.
Securities................................ $1.0 billion principal amount of 8 7/8% Senior Secured
Notes.
Maturity.................................. February 15, 2009.
Interest.................................. Annual rate: 8 7/8%.
Payment frequency: every six months on February 15 and
August 15. First payment: August 15, 2002.
Guarantees................................ The notes are fully and unconditionally guaranteed,
jointly and severally, on a senior basis by our indirect
parent, OI Group, and by certain domestic subsidiaries
of OI Group so long as they continue to guarantee the
secured credit agreement. If we cannot make payments on
the notes when they are due, the guarantors must make
them instead. As of March 31, 2002, OI Group had
approximately $5.4 billion of total consolidated
indebtedness, which includes approximately $2.5 billion
of secured indebtedness under the secured credit
agreement. As of and for the three months March 31,
2002, the non-guarantor subsidiaries represented in the
aggregate approximately 43% of OI Group's consolidated
net sales, 44% of OI Group's consolidated Adjusted
EBITDA and 44% of OI Group's consolidated total assets.
As of March 31, 2002, the liabilities of the
non-guarantor subsidiaries on a consolidated basis were
approximately $2.2 billion.
Ranking................................... The notes are senior obligations of Owens-Brockway Glass
Container and rank PARI PASSU in right of payment to all
the current and future senior debt of Owens-Brockway
Glass Container, including its obligations under the
secured credit agreement, and rank senior in right of
payment to the subordinated obligations of
Owens-Brockway Glass Container. The guarantees of the
notes rank equal in right of payment to the guarantees
of OI Group and the subsidiary guarantors of their
existing and future senior obligations, including their
obligations under the secured credit agreement, and
senior in right of payment to all subordinated
obligations of those guarantors, which include the
guarantees by OI Group and
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Owens-Brockway Packaging, Inc. ("OI Packaging") of the
obligations of OI Group's parent, OI Inc., related to
$1.7 billion of outstanding public debt securities. The
notes are effectively subordinated to obligations under
the secured credit agreement, under which there were
outstanding borrowings of $2.5 billion at March 31,
2002, certain obligations owing to lenders or their
affiliates as permitted under the secured credit
agreement aggregating $89.6 million at March 31, 2002
and obligations related to OI Inc.'s $1.7 billion of
outstanding public debt securities, to the extent these
obligations are secured by collateral that does not
secure the notes. The notes may also be effectively
subordinated to certain indebtedness incurred to
refinance borrowings under the secured credit agreement
to the extent that such indebtedness is secured by
collateral that does not secure the notes. See "Risk
Factors--Risks Relating to the Notes--Notes Effectively
Subordinated to Certain Secured Credit Agreement
Obligations and Obligations of OI Inc.--The notes are
effectively subordinated to the obligations under the
secured credit agreement, certain obligations owing to
lenders or their affiliates as permitted under the
secured credit agreement and obligations related to OI
Inc.'s $1.7 billion of outstanding public debt
securities to the extent these obligations are secured
by collateral that does not secure the notes." In
addition, the notes and the guarantees of the notes will
be effectively junior to any liabilities, including
trade payables, of any non-guarantor subsidiaries.
Collateral................................ The notes and guarantees of the notes are secured,
subject to the terms of the collateral documents under
the secured credit agreement, on a PARI PASSU basis with
obligations under the secured credit agreement by:
(1) a security interest in substantially all the assets
(other than intercompany debt and securities) of OI
Group and of substantially all the domestic
subsidiaries of OI Group; and
(2) a pledge by OI Group of the stock of, and
intercompany debt owing to OI Group by, all its direct
subsidiaries (other than the stock of, and
intercompany debt owing to OI Group by, OI General
FTS Inc.) and a pledge by OI Packaging of the stock
of, and intercompany debt owing to OI Packaging by,
Owens-Brockway Glass Container.
Certain additional collateral, including the stock of OI
General FTS Inc. owned by OI Group and intercompany debt
owing to OI Group by OI General FTS Inc., secures the
obligations under the secured credit agreement. OI
General FTS Inc. and its subsidiaries do not conduct any
manufacturing operations and are primarily involved in
providing administrative and general corporate services
to OI Group and its subsidiaries.
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Except as permitted and contemplated by, and subject to
the terms of, the secured credit agreement and the
pledge agreement (as amended, modified, replaced or
refunded), OI Group will not further pledge the stock
of, or intercompany debt owing to OI Group by, OI
General FTS Inc. as security or otherwise unless the
notes and guarantees are secured on a PARI PASSU basis
with the applicable indebtedness by this collateral.
Release of Guarantees and Collateral...... Under certain circumstances, the collateral securing the
notes may be released without action by, or consent of,
the holders of the notes or the trustee under the
indenture. In general, the lenders under the secured
credit agreement have the power to terminate and release
the pledges and the security interests under the secured
credit agreement and the notes when the obligations
under the secured credit agreement have been paid in
full, when OI Inc. and OI Group achieve investment grade
debt ratings or upon the approval of the requisite
percentage of lenders under the secured credit
agreement. In addition, any guaranty of the notes may be
released without action by, or consent of, the holders
of the notes or the trustee under the indenture if the
guarantor is no longer a guarantor of obligations:
- under the secured credit agreement;
- owing to lenders or their affiliates as lending
facilities as permitted by the terms of the secured
credit agreement; and
- under interest rate and currency agreements with
lenders or their affiliates as permitted by the
terms of the secured credit agreement.
Upon release of a guarantor of the notes under its
guarantee, the collateral documents provide that the
security interest in the assets of that guarantor
securing the notes and the guarantees will be released
simultaneously. If collateral that secures the notes is
later repledged or guarantees which guaranty the notes
are reinstated under the secured credit agreement
(including any amended and restated secured credit
agreement or new credit agreement), such collateral will
be pledged, subject to the terms of the collateral
documents under the secured credit agreement (including
any amended and restated secured credit agreement or new
credit agreement), on a PARI PASSU basis with
obligations under the secured credit agreement to secure
the notes, and such guarantees will be executed in favor
of the notes.
Optional Redemption....................... On or after February 15, 2006, we may redeem some or all
of the notes at any time at the redemption prices
described in the section entitled "Description of
Notes--Optional
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Redemption." Prior to February 15, 2005, we may use the
net proceeds of certain equity offerings by OI Inc. to
redeem up to 35% of the notes at the price listed in the
section entitled "Description of Notes--Optional
Redemption."
Change of Control......................... If we, OI Inc. or OI Group experience specific kinds of
changes of control, we must offer to repurchase the
notes at 101% of the aggregate principal amount of notes
repurchased plus accrued and unpaid interest and
liquidated damages, if any, unless we have exercised our
right to redeem the notes as described in the section
entitled "Description of Notes--Optional Redemption,"
including our right, prior to February 15, 2006, to
redeem all of the notes in the event of a change of
control.
Basic Covenants of the Indenture.......... The indenture governing the notes contains covenants
which, among other things, restrict the ability of OI
Group and its restricted subsidiaries to:
- borrow money;
- pay dividends on, or redeem or repurchase, stock;
- make investments;
- create liens;
- enter into certain transactions with affiliates;
and
- sell certain assets or merge with or into other
companies.
On and after the one-year anniversary of the
effectiveness of the registration statement required to
be filed by the registration rights agreement, we will
be permitted to assign our obligations under the notes
and the indenture to OI Inc., and we and each guarantor
will thereafter be released from our obligations under
the notes, the guarantees and the indenture, provided
that (1) OI Inc. assumes all of the obligations under
the notes and the indenture and (2) the obligations of
each domestic borrower under the secured credit
agreement have been or will be concurrently assumed by
OI Inc. in accordance with the terms of the secured
credit agreement. Under the secured credit agreement,
the domestic borrowers may assign or transfer their
rights and obligations to OI Inc. and all of OI Inc.'s
subsidiaries will be concurrently released from their
guarantees upon the consent of the requisite lenders if
the term loans have been repaid, if OI Inc. has achieved
and maintains immediately following the assumption
(including the assumption of the notes) the investment
grade ratings specified under the secured credit
agreement and if all obligations of subsidiaries of OI
Inc. in
</Table>
11
<Page>
<Table>
respect of the $1.7 billion of outstanding public debt
securities of OI Inc., the notes and certain other debt
have been released and assumed by OI Inc.
For more information, see the section entitled
"Description of Notes--Certain Covenants."
Use of Proceeds........................... We will not receive any cash proceeds from the exchange
offer.
</Table>
YOU SHOULD REFER TO THE SECTION ENTITLED "RISK FACTORS" FOR AN EXPLANATION
OF THE MATERIAL RISKS OF INVESTING IN THE NOTES.
12
<Page>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
OWENS-ILLINOIS GROUP, INC.
The selected consolidated financial data presented below relates to each of
the five years in the period ended December 31, 2001 and the three months ended
March 31, 2002 and 2001. Such data was derived from the Consolidated Financial
Statements, of which the most recent three years, including balance sheets at
December 31, 2001 and 2000, are included elsewhere in this document and were
audited by Ernst & Young LLP, independent auditors, whose report with respect to
the financial statements appears elsewhere in this document. The financial data
for the three months ended March 31, 2002 and 2001 were derived from unaudited
consolidated financial statements of OI Group. The results for the three months
are not necessarily indicative of the results to be expected for the full year.
For more information, see the "Consolidated Financial Statements" included
elsewhere in this prospectus.
<Table>
<Caption>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- -------------------
2001 2000 1999 1998(A) 1997(B) 2002 2001
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
CONSOLIDATED OPERATING RESULTS:
Net sales........................................ $5,402.5 $5,552.1 $5,522.9 $5,306.3 $4,658.5 $1,310.9 $1,306.1
Other revenue(c)................................. 610.8 262.7 263.8 193.0 169.9 27.4 58.4
-------- -------- -------- -------- -------- -------- --------
6,013.3 5,814.8 5,786.7 5,499.3 4,828.4 1,338.3 1,364.5
Costs and expenses:
Manufacturing, shipping and delivery........... 4,218.4 4,359.1 4,296.4 4,075.6 3,666.4 1,019.8 1,027.7
Research, engineering, selling, administrative
and other(d)................................. 693.7 810.6 566.6 584.7 407.0 108.4 142.3
-------- -------- -------- -------- -------- -------- --------
Earnings before interest expense and items
below........................................ 1,101.2 645.1 923.7 839.0 755.0 210.1 194.5
Interest expense(e)............................ 434.0 486.7 425.9 380.0 302.7 100.9 113.5
-------- -------- -------- -------- -------- -------- --------
Earnings before items below.................... 667.2 158.4 497.8 459.0 452.3 109.2 81.0
Provision for income taxes(f).................. 286.4 64.1 185.5 162.3 148.5 34.5 27.2
Minority share owners' interests in earnings of
subsidiaries................................. 20.1 22.0 13.2 20.2 31.4 4.5 4.9
-------- -------- -------- -------- -------- -------- --------
Earnings before extraordinary items and
cumulative effect of accounting change....... $ 360.7 $ 72.3 $ 299.1 $ 276.5 $ 272.4 $ 70.2 $ 48.9
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Cash provided by (utilized in) operating
activities..................................... $ 620.3 $ 541.7 $ 677.3 $ 716.9 $ 517.2 $ 97.7 $ (6.2)
Investing activities:
Additions to property, plant and equipment..... (531.9) (481.4) (650.4) (573.5) (471.3) (112.3) (93.1)
Other investing activities..................... 420.7 17.3 303.1 (3,659.1) (79.7) 14.6 108.8
-------- -------- -------- -------- -------- -------- --------
Cash provided by (utilized in) investing
activities................................. (111.2) (464.1) (347.3) (4,232.6) (551.0) (97.7) 15.7
Cash provided by (utilized in) financing
activities..................................... (578.9) (153.8) (327.5) 3,573.0 110.3 (42.0) (57.1)
EBIT(g).......................................... 1,074.3 612.6 895.2 809.8 731.4 204.8 188.0
EBITDA(h)........................................ 1,598.1 1,152.0 1,431.6 1,266.3 1,070.8 318.7 319.0
Adjusted EBIT(i)................................. 764.3 860.9 875.2 870.5 729.2 204.8 174.9
Adjusted EBITDA(j)............................... 1,288.1 1,400.3 1,411.6 1,327.0 1,068.6 318.7 305.9
Depreciation..................................... 403.2 412.6 403.7 358.5 283.5 107.4 100.7
Amortization of excess cost and intangibles...... 120.6 126.8 132.7 98.0 55.9 6.5 30.3
Amortization of deferred finance fees (included
in interest expense)........................... 19.9 10.1 8.9 7.4 4.1 5.7 2.5
Ratio of total debt to Adjusted EBITDA........... 4.2x 4.2x 4.2x 4.5x 3.1x -- --
Ratio of Adjusted EBITDA to interest expense..... 3.0x 2.9x 3.3x 3.5x 3.5x 3.2x 2.7x
Ratio of earnings to fixed charges(k)............ 2.5x 1.3x 2.1x 2.1x 2.4x 2.1x 1.7x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.................................. $ 899 $ 881 $ 892 $ 905 $ 660 $ 935 $ 926
Excess of purchase cost over net assets acquired,
net of accumulated amortization (goodwill)..... 2,995 3,101 3,294 3,315 1,295 2,564 2,960
Total assets..................................... 9,993 10,080 10,521 10,818 6,576 9,584 9,732
Total debt....................................... 5,401 5,850 5,939 5,917 3,324 5,431 5,644
Share owner's equity............................. 2,322 2,107 2,327 2,522 1,273 1,855 2,065
</Table>
- ------------------------------
(a) Results of operations and other data since April 1998 include the
acquisition of the worldwide glass and plastics packaging businesses of BTR
plc and the related financings.
13
<Page>
(b) Results of operations and other data since January 1997 include the
acquisition of AVIR S.p.A.
(c) Other revenue in 2001 includes: (1) a gain of $457.3 million
($284.4 million after tax) related to the sale of the Harbor Capital
Advisors business; and (2) gains totaling $13.1 million ($12.0 million after
tax) related to the sale of the label business and the sale of a minerals
business in Australia.
Other revenue for the three months ended March 31, 2001 includes gains
totaling $13.1 million ($12.0 million after tax) related to the sale of the
label business and the sale of a minerals business in Australia.
Other revenue in 1999 includes gains totaling $40.8 million ($23.6 million
after tax and minority share owners' interests) related to the sales of a
U.S. glass container plant and a mold manufacturing business in Colombia.
Other revenue in 1998 includes: (1) a gain of $18.5 million ($11.4 million
after tax) related to the termination of a license agreement, net of charges
for related equipment write-offs and capacity adjustments, under which OI
Group had produced plastic multipack carriers for beverage cans; and (2) a
loss of $5.7 million ($3.5 million after tax) on the sale of a discontinued
operation by an equity investee.
Other revenue in 1997 includes a gain of $16.3 million (pretax and after
tax) from the sale of the remaining 49% interest in Kimble Glass.
(d) Amount for 2001 includes: (1) charges of $82.1 million ($65.3 million after
tax and minority share owners' interests) related to restructuring and
impairment charges at certain international glass operations, principally
Venezuela and Puerto Rico, as well as certain other domestic and
international operations; (2) a charge of $31.0 million (pretax and after
tax) related to the loss on the sale of facilities in India; (3) charges of
$30.9 million ($19.4 million after tax) related to special employee benefit
programs; (4) a charge of $8.5 million ($5.3 million after tax) for certain
contingencies; and (5) a charge of $7.9 million ($4.9 million after tax)
related to restructuring manufacturing capacity in the medical devices
business.
In 2000, OI Group recorded pretax charges totaling $248.3 million
($171.0 million after tax and minority share owners' interests) for the
following: (1) $122.4 million ($77.3 million after tax and minority share
owners' interests) related to the consolidation of manufacturing capacity;
(2) a net charge of $52.4 million ($32.6 million after tax) related to early
retirement incentives and special termination benefits for 350 U.S. salaried
employees; (3) $40.0 million (pretax and after tax) related to the
impairment of property, plant and equipment at facilities in India; and
(4) $33.5 million ($21.1 million after tax and minority share owners'
interests) related principally to the write-off of software and related
development costs.
Amount for 1999 includes charges totaling $20.8 million ($14.0 million after
tax and minority share owners' interests) related principally to
restructuring costs and write-offs of certain assets in Europe and South
America.
In 1998, OI Group recorded: (1) charges of $72.6 million ($47.4 million
after tax and minority share owners' interests) related principally to a
plant closing in the U.K. and restructuring costs at certain international
affiliates; and (2) a net charge of $0.9 million ($0.6 million after tax)
for the settlement of certain environmental litigation and the reduction of
previously established reserves for guarantees of certain lease obligations
of a previously divested business.
In 1997, OI Group recorded charges of $14.1 million ($8.7 million after tax)
principally for guarantees of certain lease obligations of a previously
divested business.
(e) Amount for 2001 includes a net interest charge of $4.0 million
($2.8 million after tax) related to interest on the resolution of the
transfer of pension assets and liabilities for a previous acquisition and
divestiture. Assuming the notes had been issued at the beginning of 2001,
interest expense for the year would have been $30.4 million higher and net
earnings for the year would have been $18.9 million lower.
(f) Amount for 2001 includes a $6.0 million charge to adjust tax liabilities in
Italy as a result of recent legislation.
Amount for 2000 includes a fourth quarter benefit of $9.3 million to adjust
net income tax liabilities in Italy as a result of recent legislation.
In 1998, OI Group recorded a credit of $15.1 million to adjust net deferred
income tax liabilities as a result of a reduction in Italy's statutory
income tax rate.
(g) EBIT consists of consolidated earnings before interest income, interest
expense, provision for income taxes, minority share owners' interests in
earnings of subsidiaries and extraordinary charges.
(h) EBITDA consists of EBIT before depreciation and amortization of excess cost
and intangibles. EBITDA is presented because OI Group believes it is
frequently used by securities analysts, investors and other interested
parties in the evaluation of companies in OI Group's industry. However,
other companies in OI Group's industry may calculate EBITDA differently than
OI Group does. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to cash flow from operating activities or as a measure of
liquidity or an alternative to net income as indicators of OI Group's
operating performance or any other measures of performance derived in
accordance with generally accepted accounting principles. See "Consolidated
Financial Statements--Consolidated Cash Flows."
14
<Page>
(i) OI Group evaluates performance and allocates resources based on EBIT
excluding unusual items ("Adjusted EBIT"). Unusual items consist of the
gains, losses and charges discussed in Notes (c) and (d) above. The
reconciliation from EBIT to Adjusted EBIT is as follows:
<Table>
<Caption>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
EBIT............................................. $1,074.3 $612.6 $895.2 $809.8 $731.4 $204.8 $188.0
Add (deduct):
Gain on sale of Harbor Capital Advisors
business..................................... (457.3)
Gains on sales of label business and minerals
business..................................... (13.1) (13.1)
Gains on sale of glass plant and mold
business..................................... (40.8)
Net gain on termination of license agreement... (18.5)
Sale of discontinued operations by equity
investee..................................... 5.7
Gain on sale of 49% interest in Kimble Glass... (16.3)
Restructuring and impairment, principally
international glass.......................... 82.1
Loss on the sale of facilities in India........ 31.0
Special employee benefit programs.............. 30.9
Settle contingent liabilities.................. 8.5
Restructuring manufacturing capacity in the
medical devices business..................... 7.9
Consolidation of manufacturing capacity........ 122.4
Early retirement incentives/special termination
benefits..................................... 52.4
Impairment of property, plant and equipment in
India........................................ 40.0
Write-off of software and related development
costs........................................ 33.5
Restructuring and asset write-offs in
Europe/South America......................... 20.8
U.K. plant closing and international
restructuring................................ 72.6
Settle environmental litigation/reduce reserve
for guarantees............................... 0.9
Charge for guarantees of lease obligations..... 14.1
-------- ------ ------ ------ ------ ------ ------
Adjusted EBIT.................................... $ 764.3 $860.9 $875.2 $870.5 $729.2 $204.8 $174.9
======== ====== ====== ====== ====== ====== ======
</Table>
(j) Adjusted EBITDA represents EBITDA excluding the unusual gains, losses and
charges discussed in Notes (c) and (d) and summarized in Note (i) above.
Adjusted EBITDA is presented because OI Group believes it is frequently used
by securities analysts, investors and other interested parties in the
evaluation of companies in OI Group's industry. However, other companies in
OI Group's industry may present Adjusted EBITDA differently than OI Group
does. Adjusted EBITDA is not a measurement of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to cash flow from operating activities or as a measure of
liquidity or an alternative to net income as indicators of OI Group's
operating performance or any other measures of performance derived in
accordance with generally accepted accounting principles. See "Consolidated
Financial Statements--Consolidated Cash Flows."
(k) For purposes of these computations, earnings consist of earnings before
income taxes, minority share owners' interests in earnings of subsidiaries
and extraordinary items plus fixed charges. Fixed charges consist primarily
of interest on indebtedness, including amortization of deferred finance
fees, plus that portion of lease rental expense representative of the
interest factor. Pretax earnings and fixed charges also include the
proportional share of 50%-owned investees.
15
<Page>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS IN ADDITION TO THE OTHER
INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE MAKING A DECISION TO EXCHANGE
YOUR PRIVATE NOTES FOR EXCHANGE NOTES IN THE EXCHANGE OFFER. THE RISK FACTORS
SET FORTH BELOW, OTHER THAN THE FIRST RISK FACTOR, ARE GENERALLY APPLICABLE TO
THE PRIVATE NOTES AS WELL AS THE EXCHANGE NOTES.
RISKS RELATING TO THE NOTES
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL INDEBTEDNESS AND THE SUBSTANTIAL
INDEBTEDNESS OF OI GROUP COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT
US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We and OI Group have now and, after the exchange offer, will continue to
have a significant amount of debt. As of March 31, 2002, we and our consolidated
subsidiaries had approximately $2.8 billion of total consolidated debt
outstanding and OI Group had approximately $5.4 billion of total consolidated
debt outstanding, which includes approximately $2.5 billion of secured
indebtedness under the secured credit agreement and approximately $1.7 billion
of outstanding public debt securities of OI Group's parent, OI Inc. OI Group's
ratio of earnings to fixed charges was 2.5x and 2.1x for the year ended
December 31, 2001 and three months ended March 31, 2002, respectively.
This substantial indebtedness could have important consequences to you. For
example, it could:
- make it difficult for us to satisfy our obligations with respect to the
notes;
- increase our vulnerability to general adverse economic and industry
conditions;
- increase our vulnerability to interest rate increases for the portion of
the unhedged debt under the secured credit agreement;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, acquisitions, development efforts and other general
corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the rigid packaging market;
- place us at a competitive disadvantage relative to our competitors that
have less debt; and
- limit, along with the financial and other restrictive covenants in the
documents governing our indebtedness, among other things, our ability to
borrow additional funds.
ABILITY TO SERVICE DEBT--TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness, including
the notes, and to fund working capital, capital expenditures, acquisitions,
development efforts and other general corporate purposes depends on our ability
to generate cash in the future. Similarly, the ability of the guarantors of the
notes to make payments on and refinance their indebtedness will depend on their
ability to generate cash in the future. Neither we nor the guarantors can assure
you that any of us will generate sufficient cash flow from operations, or that
future borrowings will be available under the secured credit agreement, in an
amount sufficient to enable any of us to pay our indebtedness, including the
notes, or to fund other liquidity needs. If short term interest rates increase,
our debt service cost will increase because some of our debt is subject to
changes in short term rates. Our annual interest expense for 2001, on a pro
forma basis assuming the notes had been outstanding all year, would have been
$464.4 million. Based on the amount of variable rate debt outstanding during
2001, after giving pro forma effect to the issuance of the notes, a 1% increase
in variable interest rates for 2001 would have increased our annual pro forma
interest expense by $29.3 million to $493.7 million. The notes are effectively
subordinated to obligations under the secured credit
16
<Page>
agreement, under which there were outstanding borrowings of $2.5 billion at
March 31, 2002, certain obligations owing to lenders or their affiliates as
permitted under the secured credit agreement aggregating $89.6 million at
March 31, 2002 and obligations related to OI Inc.'s $1.7 billion of outstanding
public debt securities, to the extent these obligations are secured by
collateral that does not secure the notes.
Since you will not have a claim as a creditor against the subsidiaries that
are not guarantors of the notes, the indebtedness and other liabilities of those
subsidiaries will be effectively senior to your claims. As of December 31, 2001,
the total indebtedness on a consolidated basis (excluding any indebtness under
the secured credit agreement) of the non-guarantor subsidiaries was
approximately $234.0 million, and their total liabilities on a consolidated
basis were approximately $2.0 billion.
We and the guarantors may need to refinance all or a portion of our
indebtedness, including the notes, on or before maturity. If either we or the
guarantors are unable to generate sufficient cash flow and are unable to
refinance or extend outstanding borrowings on commercially reasonable terms or
at all, we and the guarantors may have to:
- reduce or delay capital expenditures planned for replacements,
improvements and expansions;
- sell assets;
- restructure debt; and/or
- obtain additional debt or equity financing.
We cannot assure you that we or the guarantors could effect or implement any
of these alternatives on satisfactory terms, if at all.
CASH USED TO SATISFY OTHER OBLIGATIONS--A PORTION OF OUR CASH FLOW WILL BE USED
TO MAKE PAYMENTS TO OI INC. TO SATISFY CERTAIN DEBT, PREFERRED STOCK AND
LITIGATION-RELATED OBLIGATIONS, INCLUDING SETTLEMENT OF ASBESTOS-RELATED CLAIMS.
Although our indirect parent, OI Inc., does not conduct any operations, it
has substantial obligations to make payments on its $1.7 billion of outstanding
public debt securities, to pay dividends on its outstanding preferred stock, to
satisfy claims of persons for exposure to asbestos-containing products and
related expenses and to pay other ordinary course obligations. OI Inc. relies
primarily on distributions from its subsidiaries, including us, to meet these
obligations. OI Inc. makes semi-annual interest payments of $64.8 million on its
$1.7 billion of outstanding public debt securities. In addition, OI Inc. pays
quarterly dividends of $5.4 million on 9,050,000 shares of its $2.375
convertible preferred stock. OI Inc.'s asbestos-related payments were
$245.9 million and $61.3 million for the year ended December 31, 2001 and the
three months ended March 31, 2002, respectively. In the first quarter of 2002,
OI Inc. established an additional liability of $475 million (in addition to a
previously established liability of $1.775 billion) to cover its estimated
indemnity payments and legal fees arising from outstanding asbestos personal
injury lawsuits and claims and asbestos personal injury lawsuits and claims
filed in the next several years.
As a result of the magnitude of OI Inc.'s obligations for asbestos-related
lawsuits and its dependence on the cash flows of its subsidiaries, we expect
that a substantial portion of our cash flow will be used to make payments to
OI Inc. to allow it to satisfy these obligations. These payments will reduce the
cash flow we could use to make payments on the notes. For additional information
regarding OI Inc.'s asbestos-related lawsuits, claims and payments, see the
footnote entitled "Contingencies" to Consolidated Financial Statements of OI
Group.
17
<Page>
DEBT RESTRICTIONS--OI GROUP AND ITS SUBSIDIARIES, INCLUDING US, MAY NOT BE ABLE
TO FINANCE FUTURE NEEDS OR ADAPT THEIR BUSINESS PLANS TO CHANGES BECAUSE OF
RESTRICTIONS PLACED ON THEM BY THE SECURED CREDIT AGREEMENT, THE INDENTURE AND
THE INSTRUMENTS GOVERNING OTHER INDEBTEDNESS.
The secured credit agreement and certain of the agreements governing other
indebtedness, including the indenture governing the notes, contain affirmative
and negative covenants that limit the ability of OI Group and its subsidiaries,
including us, to take certain actions. For example, the indenture restricts,
among other things, the ability of OI Group and its restricted subsidiaries to
borrow money, pay dividends on, or redeem or repurchase, stock, make
investments, create liens, enter into certain transactions with affiliates and
sell certain assets or merge with or into other companies. These restrictions
could adversely affect OI Group's and our ability to operate our businesses and
may limit OI Group's and our ability to take advantage of potential business
opportunities as they arise.
Failure to comply with these or other covenants and restrictions contained
in the secured credit agreement, agreements governing other indebtedness or the
indenture could result in a default under those agreements, and the debt under
those agreements, together with accrued interest, could then be declared
immediately due and payable. If a default occurs under the secured credit
agreement, the lenders could cause all of the outstanding debt obligations under
the secured credit agreement to become due and payable, which would result in a
default under the notes and could lead to an acceleration of obligations related
to the notes. A default under the secured credit agreement or agreements
governing other indebtedness or the notes could also lead to an acceleration of
debt under other debt instruments that contain cross acceleration or
cross-default provisions. Upon a default or cross-default, the collateral agent,
at the direction of the lenders under the secured credit agreement could proceed
against the collateral. There may be insufficient collateral to repay the
indebtedness under the secured credit agreement, other senior indebtedness from
time to time secured by the collateral and the notes in full at the time of any
default.
ADDITIONAL BORROWINGS AVAILABLE--DESPITE CURRENT INDEBTEDNESS LEVELS, OI GROUP
AND ITS SUBSIDIARIES MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT. THIS
COULD FURTHER EXACERBATE CERTAIN RISKS DESCRIBED ABOVE.
OI Group and its subsidiaries may be able to incur substantial additional
debt in the future, including debt secured by the collateral that secures the
notes and additional debt under the secured credit agreement. In addition, if OI
Group designates some of its restricted subsidiaries under the indenture as
unrestricted subsidiaries, those unrestricted subsidiaries would be permitted to
borrow beyond the limitations specified in the indenture and engage in other
activities in which restricted subsidiaries may not engage. Based on amounts
outstanding at March 31, 2002, the revolving loan facility under the secured
credit agreement had unused borrowing capacity of $479.5 million. Adding new
debt to current debt levels, could make it difficult for us to satisfy our
obligations with respect to the notes.
NOTES EFFECTIVELY SUBORDINATED TO DEBT OF NON-GUARANTOR SUBSIDIARIES--THE NOTES
ARE EFFECTIVELY SUBORDINATED TO ALL INDEBTEDNESS OF OUR SUBSIDIARIES THAT ARE
NOT GUARANTORS OF THE NOTES.
You will not have any claim as a creditor against the subsidiaries that are
not guarantors of the notes, and the indebtedness and other liabilities,
including trade payables, whether secured or unsecured, of those subsidiaries
will be effectively senior to your claims. As of and for the three months ended
March 31, 2002, the non-guarantor subsidiaries represented in the aggregate
approximately 43% of OI Group's consolidated net sales, 44% of OI Group's
consolidated Adjusted EBITDA and 44% of OI Group's consolidated total assets. As
of March 31, 2002, the liabilities of the non-guarantor subsidiaries on a
consolidated basis were approximately $2.2 billion. The non-guarantor
subsidiaries include the foreign borrowers and foreign guarantors under the
offshore subfacilities under the secured credit agreement. The notes are
effectively subordinated to claims against these foreign subsidiaries under the
secured credit agreement. In the event of a bankruptcy, liquidation,
reorganization or other winding up of any of the non-guarantor subsidiaries,
holders of their indebtedness and their trade creditors will generally be
entitled to payment of their claims from the assets of those subsidiaries before
any assets are made available for distribution to us.
18
<Page>
In addition, under the indenture, non-guarantor subsidiaries are permitted
to incur substantial amounts of additional debt and OI Group and its restricted
subsidiaries are permitted to make an unlimited amount of investments in
non-guarantor subsidiaries. Therefore, the notes would be effectively
subordinated to this additional indebtedness that may be incurred by the
non-guarantor subsidiaries. In addition, if OI Group or its restricted
subsidiaries invest additional amounts in non-guarantor subsidiaries, in the
event of a bankruptcy, liquidation, reorganization or other winding up of any of
the non-guarantor subsidiaries, assets that otherwise could be used to satisfy
our obligations under the notes will first be used to satisfy the obligations of
the non-guarantor subsidiaries.
NOTES EFFECTIVELY SUBORDINATED TO CERTAIN SECURED CREDIT AGREEMENT OBLIGATIONS
AND OBLIGATIONS OF OI INC.--THE NOTES ARE EFFECTIVELY SUBORDINATED TO THE
OBLIGATIONS UNDER THE SECURED CREDIT AGREEMENT, CERTAIN OBLIGATIONS OWING TO
LENDERS OR THEIR AFFILIATES AS PERMITTED UNDER THE SECURED CREDIT AGREEMENT AND
OBLIGATIONS RELATED TO OI INC.'S $1.7 BILLION OF OUTSTANDING PUBLIC DEBT
SECURITIES TO THE EXTENT THESE OBLIGATIONS ARE SECURED BY COLLATERAL THAT DOES
NOT SECURE THE NOTES.
In addition to the collateral securing the notes and guarantees, the
obligations of the domestic borrowers and the domestic guarantors under the
secured credit agreement are secured by certain additional collateral described
in detail under "Description of Notes--Collateral."
As a result, to the extent collateral does not secure the notes, the notes
are effectively subordinated to the obligations under the secured credit
agreement, obligations owing to lenders or their affiliates as lending
facilities as permitted by the terms of the secured credit agreement and
obligations under interest rate and currency agreements with lenders or their
affiliates as permitted by the terms of the secured credit agreement. In the
event of a bankruptcy, liquidation, reorganization or other winding up of us or
OI Group, those assets that do not secure the notes will not be available to pay
our obligations on the notes unless and until payment in full of the obligations
under the secured credit agreement. Likewise, if the lenders under the secured
credit agreement accelerate the obligations under the secured credit agreement,
then those lenders would be entitled to exercise the remedies available to a
secured lender under applicable law, and those lenders would have a claim on
those assets that do not secure the notes before any holder of the notes. You
would participate with respect to those assets ratably with all holders of other
unsecured indebtedness that is deemed to be of the same class as the notes, and
potentially with other general creditors.
Similarly, the guarantees of the notes are effectively subordinated to the
extent of the collateral that does not secure those guarantees.
In addition, OI Inc.'s $1.7 billion of outstanding public debt securities
are secured by a second priority lien on the capital stock owned by, and
intercompany debt owed to, OI Group and OI Packaging. The collateral securing
OI Inc.'s $1.7 billion of outstanding public debt securities includes the
capital stock of, and intercompany debt owing to OI Group by, OI General
FTS Inc., which have not been pledged to secure the notes.
In the event of a foreclosure on the collateral that secures the obligations
under the secured credit agreement, obligations owing to lenders or their
affiliates as lending facilities as permitted by the terms of the secured credit
agreement, obligations under interest rate and currency agreements with lenders
or their affiliates as permitted by the terms of the secured credit agreement,
OI Inc.'s obligations under the $1.7 billion of outstanding public debt
securities and the notes, there could be proceeds from the disposition of that
collateral that would not have to be shared with holders of the notes. As a
result, lenders under the secured credit agreement and holders of OI Inc.'s
$1.7 billion of outstanding public debt securities may recover a greater
percentage of the amounts owed to them than holders of the notes.
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DILUTION OF COLLATERAL--THE COLLATERAL SECURING THE NOTES MAY BE DILUTED UNDER
CERTAIN CIRCUMSTANCES.
The collateral securing the notes secures an aggregate of $65.0 million of
outstanding term loans under the secured credit agreement as of March 31, 2002.
The secured credit agreement also provides for a $3.0 billion revolving loan
facility that is secured by the collateral securing the notes. The commitment
amounts under the secured credit agreement could be increased in the future. In
addition, the collateral securing the notes secures obligations owing to lenders
or their affiliates as lending facilities as permitted by the terms of the
secured credit agreement and obligations under interest rate and currency
agreements with lenders or their affiliates as permitted by the terms of the
secured credit agreement. This collateral may secure additional senior
indebtedness that OI Group or certain of its subsidiaries incurs in the future,
subject to restrictions on their ability to incur debt and liens under the
secured credit agreement and the indenture. Your rights to the collateral would
be diluted by any increase in the indebtedness secured by this collateral.
DISPOSITION AND RELEASE OF COLLATERAL--THE LENDERS UNDER THE SECURED CREDIT
AGREEMENT HAVE THE RIGHT TO CONTROL THE DISPOSITION AND RELEASE OF COLLATERAL IN
THEIR SOLE DISCRETION.
Upon the earlier of:
- payment in full of all obligations under the secured credit agreement and
the cancellation or termination of the secured credit agreement and
related letters of credit and the written election of the applicable
pledgor(s) or grantor(s);
- the first date on which the pledged collateral no longer secures any
obligations under the secured credit agreement and upon the written
election of the applicable pledgor(s) or grantor(s); and
- the achievement of "investment grade" debt ratings for OI Inc.'s and OI
Group's long term unsecured debt (in the case of Moody's Investors
Service, Inc., a rating of Baa3 or higher, and, in the case of Standard &
Poor's Ratings Services, a rating of BBB or higher),
the security interests securing the notes will terminate and the collateral will
be released. In addition, lenders under the secured credit agreement have the
ability to direct the collateral agent to release all or any portion of the
collateral upon the approval of the requisite percentage of lenders under the
secured credit agreement. In addition, in the event of an asset sale not
prohibited by the secured credit agreement or the collateral documents, the
assets subject to such sale will be released as collateral under the secured
credit agreement. None of these actions by the lenders, or the applicable
pledgor(s) or grantor(s) under the secured credit agreement or related
collateral documents, require action by, or the consent of, any holder of the
notes or the trustee under the indenture or constitute a default under the
indenture. The release of collateral would eliminate the security for the notes
and the collateral securing the guarantees of the notes, the secured credit
agreement and any other indebtedness secured thereby.
Because the lenders under the secured credit agreement control the
disposition of the collateral securing the secured credit agreement and the
notes, if there were an event of default under the notes, the lenders could
decide not to proceed against the collateral, regardless of whether or not there
is a default under the secured credit agreement. In such event, the only remedy
available to the holders of the notes would be to sue for payment on the notes
and the guarantees. By virtue of the direction of the administration of the
pledges and security interests and the release of collateral, actions may be
taken under the collateral documents that may be adverse to you.
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RELEASE OF GUARANTEES--THE LENDERS UNDER THE SECURED CREDIT AGREEMENT HAVE THE
DISCRETION TO RELEASE THE GUARANTEES UNDER THE SECURED CREDIT AGREEMENT IN A
VARIETY OF CIRCUMSTANCES.
Any guaranty of the notes may be released without action by, or consent of,
any holder of the notes or the trustee under the indenture, at the discretion of
the then obligor on the notes, if the guarantor is no longer a guarantor of
obligations under the secured credit agreement, of obligations owing to lenders
or their affiliates as lending facilities as permitted by the terms of the
secured credit agreement and of obligations under interest rate and currency
agreements with lenders or their affiliates as permitted by the terms of the
secured credit agreement. The lenders under the secured credit agreement have
the discretion to release the guarantees under the secured credit agreement in a
variety of circumstances. In the case of the release of collateral consisting of
the stock of a guarantor of the notes, that release would cause the guarantor's
guaranty to be released if the release occurs in the context of an asset sale of
such guarantor that is not prohibited by the secured credit agreement or the
collateral documents. Upon release of a guarantor of the notes under its
guarantee, the collateral documents will provide that the security interests in
the assets of that guarantor securing the notes and guarantees will be released
simultaneously. You will not have a claim as a creditor against any subsidiary
that is no longer a guarantor of the notes, and the indebtedness and other
liabilities, including trade payables, whether secured or unsecured, of those
subsidiaries will effectively be senior to your claims.
FURTHER COLLATERAL PLEDGES SUBJECT TO AVOIDANCE--ANY FUTURE PLEDGE OF COLLATERAL
MIGHT BE AVOIDABLE BY A TRUSTEE IN BANKRUPTCY.
Any future pledge of collateral in favor of the collateral agent for the
benefit of the indenture trustee might be avoidable by the pledgor (as debtor in
possession) or by its trustee in bankruptcy if certain events or circumstances
exist or occur, including, among others, if the pledgor is insolvent at the time
of the pledge, the pledge permits the holders of the notes to receive a greater
recovery than if the pledge had not been given and a bankruptcy proceeding in
respect of the pledgor is commenced within 90 days following the pledge, or, in
certain circumstances, a longer period.
COVENANT RELIEF FOR INVESTMENT GRADE RATING--IF THE NOTES RECEIVE AN INVESTMENT
GRADE RATING, WE WILL NO LONGER BE SUBJECT TO MOST OF THE COVENANTS IN THE
INDENTURE.
If at any time the notes receive an "investment grade" rating from
Standard & Poor's Ratings Services and Moody's Investors Service, Inc., subject
to certain additional conditions, OI Group and its restricted subsidiaries will
no longer be subject to most of the covenants set forth in the indenture. In the
event of such release, the covenants will not be restored, even if the notes
were later rated below investment grade by either or both of these rating
agencies. See "Description of Notes--Certain Covenants--Fall-Away Event."
On and after the one-year anniversary of the effectiveness of the
registration statement required to be filed by the registration rights
agreement, we will be permitted to assign our obligations under the notes and
the indenture to OI Inc., and we and each guarantor will thereafter be released
from our obligations under the notes, the guarantees and the indenture, provided
that (1) OI Inc. assumes all of the obligations under the notes and the
indenture and (2) the obligations of each domestic borrower under the secured
credit agreement have been or will be concurrently assumed by OI Inc. in
accordance with the terms of the secured credit agreement. As a result, holders
of the notes could look only to OI Inc. to satisfy the obligations on the notes.
See "Description of Notes--Certain Covenants--Merger, Consolidation or Sale of
Assets."
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FRAUDULENT TRANSFER--FEDERAL AND STATE LAWS PERMIT A COURT TO VOID THE NOTES OR
THE GUARANTEES UNDER CERTAIN CIRCUMSTANCES.
The issuance of the notes and the guarantees may be subject to review under
federal or state fraudulent transfer laws. While the relevant laws may vary from
state to state, under such laws, the payment of consideration or the issuance of
a guarantee will be a fraudulent conveyance if (1) we paid the consideration, or
any guarantor issued guarantees, with the intent of hindering, delaying or
defrauding creditors, or (2) we or any of the guarantors received less than
reasonably equivalent value or fair consideration in return for paying the
consideration or issuing their respective guarantees, and, in the case of
(2) above only, one of the following is also true:
- we or any of the guarantors were insolvent, or became insolvent, when we
or they paid the consideration;
- paying the consideration or issuing the guarantees left us or the
applicable guarantor with an unreasonably small amount of capital; or
- we or the applicable guarantor, as the case may be, intended to, or
believed that we or it would, be unable to pay debts as they matured.
If the payment of the consideration or the issuance of any guarantee were a
fraudulent conveyance, a court could, among other things, void our obligations
regarding the payment of the consideration or void any of the guarantors'
obligations under their respective guarantees, as the case may be, and require
the repayment of any amounts paid thereunder.
Generally, an entity will be considered insolvent if:
- the sum of its debts is greater than the fair value of its property;
- the present fair value of its assets is less than the amount that it will
be required to pay on its existing debts as they become due; or
- it cannot pay its debts as they become due.
We believe that immediately after the issuance of the notes and the
guarantees, we and each of the guarantors will be solvent, will have sufficient
capital to carry on our respective businesses and will be able to pay our
respective debts as they mature. However, we cannot be sure as to what standard
a court would apply in making these determinations or that a court would reach
the same conclusions with regard to these issues.
CHANGE OF CONTROL--THE SECURED CREDIT AGREEMENT PROVIDES THAT CERTAIN CHANGE OF
CONTROL EVENTS CONSTITUTE AN EVENT OF DEFAULT. IN THE EVENT OF A CHANGE OF
CONTROL, WE MAY NOT BE ABLE TO SATISFY ALL OF OUR OBLIGATIONS UNDER THE SECURED
CREDIT AGREEMENT, THE NOTES OR OTHER INDEBTEDNESS.
If we, OI Inc. or OI Group experiences specific kinds of changes of control,
we will be required to offer to repurchase all outstanding notes. However, the
secured credit agreement provides that certain change of control events
constitute an event of default under the secured credit agreement. An event of
default would entitle the lenders thereunder to, among other things, cause all
outstanding debt obligations under the secured credit agreement to become due
and payable and to proceed against their collateral, which includes collateral
securing the notes and the guarantees. We cannot assure you that we would have
sufficient assets or be able to obtain sufficient third party financing on
favorable terms to satisfy all of our obligations under the secured credit
agreement, the notes or other indebtedness.
Any future credit agreements or other agreements relating to indebtedness to
which we become a party may contain restrictions on our ability to offer to
repurchase the notes in connection with a change of control. In the event a
change of control occurs at a time when we are prohibited from
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offering to purchase the notes, we could seek consent to offer to purchase the
notes or attempt to refinance the borrowings that contain such a prohibition. If
we do not obtain the consent or refinance the borrowings, we would remain
prohibited from offering to purchase the notes. In such case, our failure to
offer to purchase the notes would constitute a default under the indenture,
which, in turn, could result in amounts outstanding under any future credit
agreement or other agreements relating to indebtedness being declared due and
payable. Any such declaration could have adverse consequences to us and the
holders of the notes.
The provisions relating to a change of control included in the indenture may
increase the difficulty for a potential acquiror to obtain control of us. In
addition, some important corporate events, such as leveraged recapitalizations,
that would increase the level of our indebtedness, would not constitute a
"change of control" under the indenture.
NO PRIOR MARKET FOR THE EXCHANGE NOTES--YOU CANNOT BE SURE THAT AN ACTIVE
TRADING MARKET WILL DEVELOP FOR THE EXCHANGE NOTES.
The exchange notes are a new issue of securities for which there is
currently no trading market. We do not intend to apply for listing of the
exchange notes on any U.S. Exchange. We have been informed by the initial
purchasers of the private notes that they intend to make a market in the
exchange notes. However, the initial purchasers may cease their market-making at
any time. In addition, the liquidity of the trading market in the exchange
notes, and the market price quoted for these notes, may be adversely affected by
changes in the overall market for high yield securities and by changes in our
financial performance or in the prospects for companies in our industry
generally. As a result, you cannot be sure that an active trading market will
develop for the exchange notes.
RISKS RELATING TO THE BUSINESS OF OI GROUP
INTERNATIONAL OPERATIONS--OI GROUP IS SUBJECT TO RISKS ASSOCIATED WITH OPERATING
IN FOREIGN COUNTRIES.
OI Group operates manufacturing and other facilities throughout the world.
Net sales from international operations in 2001 totaled approximately
$2.3 billion, representing approximately 43% of OI Group's net sales. As a
result of its international operations, OI Group is subject to risks associated
with operating in foreign countries, including:
- political, social and economic instability;
- war, civil disturbance or acts of terrorism;
- taking of property by nationalization or expropriation without fair
compensation;
- changes in government policies and regulations;
- devaluations and fluctuations in currency exchange rates;
- imposition of limitations on conversions of foreign currencies into
dollars or remittance of dividends and other payments by foreign
subsidiaries;
- imposition or increase of withholding and other taxes on remittances and
other payments by foreign subsidiaries;
- hyperinflation in certain foreign countries; and
- impositions or increase of investment and other restrictions or
requirements by foreign governments.
The unusually severe economic, market and/or currency exchange conditions in
South America, Europe and the Asia Pacific region adversely affected operating
results in 1999 and 2000. In addition, OI Group has continued to be negatively
affected in 2001 and the first quarter of 2002 by changing
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foreign currency exchange rates, which reduced U.S. dollar sales of foreign
affiliates by approximately $160.0 million for the year ended December 31, 2001
and $20.8 million for the three months ended March 31, 2002 compared to prior
year periods. The risks associated with operating in foreign countries may have
a material adverse effect on operations.
COMPETITION--WE FACE INTENSE COMPETITION FROM OTHER GLASS CONTAINER PRODUCERS,
AS WELL AS FROM MAKERS OF ALTERNATIVE FORMS OF PACKAGING. COMPETITIVE PRESSURES
COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.
We are subject to significant competition from other glass container
producers, as well as from makers of alternative forms of packaging, such as
aluminum cans and plastic containers. We compete on the basis of price, quality,
service and the marketing attributes of the container in competing with each of
our rigid packaging competitors. Advantages or disadvantages in any of these
competitive factors may be sufficient to cause the customer to consider changing
suppliers and/or to use an alternative form of packaging. For example, during
2001, our sales of glass containers for juice and iced tea products in the U.S.
declined by approximately $27.0 million due to conversions from glass to plastic
containers. Our principal competitors among glass container producers in the
U.S. are Saint-Gobain Containers Co., a wholly-owned subsidiary of Compagnie de
Saint-Gobain, and Anchor Glass Container Corporation.
In supplying glass containers outside of the U.S., we compete directly with
Compagnie de Saint-Gobain in Italy and Brazil, Rexam plc and Ardagh plc in the
U.K., Vetropak in the Czech Republic and Amcor Limited in Australia. In other
locations in Europe, we compete indirectly with a variety of glass container
firms including Compagnie de Saint-Gobain, BSN Glasspack, Vetropak and Rexam
plc.
In addition to competing with other large, well-established manufacturers in
the glass container segment, we compete with manufacturers of other forms of
rigid packaging, principally aluminum cans and plastic containers, on the basis
of quality, price and service. The principal competitors producing metal
containers are Crown Cork & Seal Company, Inc., Rexam plc, Ball Corporation and
Silgan Holdings Inc. The principal competitors producing plastic containers are
Consolidated Container Holdings, LLC, Graham Packaging Company, Plastipak
Packaging, Inc. and Silgan Holdings Inc. We also compete with manufacturers of
non-rigid packaging alternatives, including flexible pouches and aseptic
cartons, in serving the packaging needs of juice customers.
Pressures from competitors and producers of alternative forms of packaging
have resulted in excess capacity in certain countries in the past and have led
to significant pricing pressures in the rigid packaging market.
HIGH ENERGY COSTS--HIGHER ENERGY COSTS WORLDWIDE AND INTERRUPTED POWER SUPPLIES
MAY HAVE A MATERIAL ADVERSE EFFECT ON OPERATIONS.
Electrical power and natural gas are vital to OI Group's operations and it
relies on a continuous power supply to conduct its business. In 2001, higher
energy costs worldwide impacted OI Group's operations and earnings at a level
that it did not anticipate, resulting in an approximate $50 million increase in
energy costs over 2000. If energy costs substantially increase in the future, OI
Group could experience a significant increase in operating costs, which may have
a material adverse effect on future operating income.
In addition, certain locations in which OI Group has operations have
experienced power shortages that resulted in periodic "rolling" blackouts to
maintain the stability of the power grid. Certain of OI Group's facilities are
susceptible to power interruptions as long as any such energy crisis exists.
Frequent power interruptions may have a material adverse effect on operations.
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INTEGRATION RISKS--OI GROUP MAY NOT BE ABLE TO EFFECTIVELY INTEGRATE BUSINESSES
IT ACQUIRES.
OI Group's strategy includes the acquisition of complementary businesses.
Any recent or future acquisitions are subject to various risks and
uncertainties, including:
- the inability to assimilate effectively the operations, products,
technologies and personnel of the acquired companies (some of which are
located in diverse geographic regions);
- the potential disruption of existing business and diversion of
management's attention from day-to-day operations;
- the inability to maintain uniform standards, controls, procedures and
policies;
- the need or obligation to divest portions of the acquired companies; and
- the potential impairment of relationships with customers.
In addition, we cannot assure you that the integration and consolidation of
newly acquired businesses will achieve anticipated cost savings and operating
synergies.
CUSTOMER CONSOLIDATION--THE CONTINUING CONSOLIDATION OF OI GROUP'S CUSTOMER BASE
MAY INTENSIFY PRICING PRESSURES AND HAVE A MATERIAL ADVERSE EFFECT ON
OPERATIONS.
Over the last ten years, many of OI Group's largest customers have acquired
companies with similar or complementary product lines. This consolidation has
increased the concentration of OI Group's business with its largest customers.
In many cases, such consolidation has been accompanied by pressure from
customers for lower prices, reflecting the increase in the total volume of
product purchased or the elimination of a price differential between the
acquiring customer and the company acquired. Increased pricing pressures from OI
Group's customers may have a material adverse effect on operations.
SEASONALITY AND RAW MATERIALS--PROFITABILITY COULD BE AFFECTED BY VARIED
SEASONAL DEMANDS AND THE AVAILABILITY OF RAW MATERIALS.
Due principally to the seasonal nature of the brewing, iced tea and other
beverage industries, in which demand is stronger during the summer months, sales
of OI Group's products have varied and are expected to vary by quarter.
Shipments in the U.S. and Europe are typically greater in the second and third
quarters of the year, while shipments in South America and Asia Pacific are
typically greater in the first and fourth quarters of the year. Unseasonably
cool weather during peak demand periods can reduce demand for certain beverages
packaged in OI Group's containers.
The raw materials that OI Group uses have historically been available in
adequate supply from multiple sources. For certain raw materials, however, there
may be temporary shortages due to weather or other factors, including
disruptions in supply caused by raw material transportation or production
delays. These shortages, as well as material increases in the cost of any of the
principal raw materials that OI Group uses, may have a material adverse effect
on operations.
ENVIRONMENTAL RISKS--OI GROUP IS SUBJECT TO VARIOUS ENVIRONMENTAL LEGAL
REQUIREMENTS AND MAY BE SUBJECT TO NEW LEGAL REQUIREMENTS IN THE FUTURE. THESE
REQUIREMENTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OPERATIONS.
OI Group's operations and properties, both in the U.S. and abroad, are
subject to extensive laws, ordinances, regulations and other legal requirements
relating to environmental protection, including legal requirements governing
investigation and clean-up of contaminated properties as well as water
discharges, air emissions, waste management and workplace health and safety.
Such legal requirements frequently change and are different in every
jurisdiction. OI Group's operations and properties, both in
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the U.S. and abroad, must comply with these legal requirements. These
requirements may have a material adverse effect on operations.
OI Group has incurred, and expects to incur, costs for its operations to
comply with environmental legal requirements, and these costs could increase in
the future. Many environmental legal requirements provide for substantial fines,
orders (including orders to cease operations), and criminal sanctions for
violations. These legal requirements may apply to conditions at properties that
OI Group presently or formerly owned or operated, as well as at other properties
for which OI Group may be responsible, including those at which wastes
attributable to OI Group were disposed. A significant order or judgment against
OI Group, the loss of a significant permit or license or the imposition of a
significant fine may have a material adverse effect on operations.
A number of governmental authorities both in the U.S. and abroad have
enacted, or are considering, legal requirements that would mandate certain rates
of recycling, the use of recycled materials, and/or limitations on certain kinds
of packaging materials such as plastics. In addition, some companies with
packaging needs have responded to such developments, and /or to perceived
environmental concerns of consumers, by using containers made in whole or in
part of recycled materials. Such developments may reduce the demand for some of
OI Group's products, and/or increase OI Group's costs, which may have a material
adverse effect on operations.
LABOR RELATIONS--OI GROUP IS PARTY TO COLLECTIVE BARGAINING AGREEMENTS WITH
LABOR UNIONS. ORGANIZED STRIKES OR WORK STOPPAGES BY UNIONIZED EMPLOYEES MAY
HAVE A MATERIAL ADVERSE EFFECT ON OPERATIONS.
OI Group is party to a number of collective bargaining agreements with labor
unions, the principal one of which will expire in April 2005, and at March 31,
2002, covered approximately 90% of OI Group's union affiliated employees in the
U.S. Upon the expiration of any collective bargaining agreement, OI Group's
inability to negotiate acceptable contracts with labor unions could result in
strikes by the affected workers and increased operating costs as a result of
higher wages or benefits paid to union members. If the unionized workers were to
engage in a strike or other work stoppage, OI Group could experience a
significant disruption of operations and/or higher ongoing labor costs, which
may have a material adverse effect on operations.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties, and assumptions about us and our subsidiaries, and Owens-Illinois
Group, Inc. and its subsidiaries, including, among other things, factors
discussed under the heading "Risk Factors" and the following:
- foreign currency fluctuations relative to the U.S. dollar;
- change in capital availability or cost, including interest rate
fluctuations;
- general political, economic and competitive conditions in markets and
countries where we have operations or sell products, including competitive
pricing pressures, inflation or deflation, and changes in tax rates;
- consumer preferences for alternative forms of packaging;
- fluctuations in raw material and labor costs;
- availability of raw materials;
- costs and availability of energy;
- transportation costs;
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- consolidation among competitors and customers;
- the ability to integrate operations of acquired businesses;
- unanticipated expenditures with respect to environmental, safety and
health laws;
- performance by customers of their obligations under supply agreements; and
- timing and occurrence of events, including events related to
asbestos-related claims against OI Inc., which are beyond our control.
We caution you that although we believe that the assumptions on which the
forward-looking statements contained herein are based are reasonable, any of
those assumptions could prove to be inaccurate and, as a result, the
forward-looking statements also could be materially incorrect. In light of these
and other uncertainties, you should not regard the inclusion of a
forward-looking statement in this prospectus as a representation by us or
Owens-Illinois Group, Inc. that our plans and objectives or those of
Owens-Illinois Group, Inc. will be achieved, and you should not place undue
reliance on these forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus might not occur.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
We issued the private notes on January 24, 2002 to Banc of America
Securities LLC, Goldman, Sachs & Co., Deutsche Banc Alex. Brown Inc., Morgan
Stanley & Co. Incorporated and Scotia Capital (USA) Inc., the initial
purchasers, pursuant to a purchase agreement. The initial purchasers
subsequently sold the private notes to "qualified institutional buyers," as
defined in Rule 144A under the Securities Act, in reliance on Rule 144A, and
outside the United States under Regulation S of the Securities Act. As a
condition to the sale of the private notes, we entered into a registration
rights agreement with the initial purchasers on January 24, 2002. Pursuant to
the registration rights agreement, we agreed that we would:
(1) file an exchange offer registration statement with the SEC on or prior
to May 24, 2002;
(2) use our commercially reasonable efforts to have the exchange offer
registration statement declared effective by the SEC on or prior to
August 12, 2002;
(3) keep the exchange offer open for a period of not less than the minimum
period required under applicable law, but in no event for less than 20
business days;
(4) use our commercially reasonable efforts to consummate the exchange offer
on or prior to September 21, 2002.
Upon the effectiveness of the exchange offer registration statement, we will
offer the exchange notes in exchange for the private notes. We filed a copy of
the registration rights agreement as an exhibit to the registration statement.
RESALE OF THE EXCHANGE NOTES
Based upon an interpretation by the staff of the SEC contained in no-action
letters issued to third parties, we believe that you may exchange private notes
for exchange notes in the ordinary course of business. For further information
on the SEC's position, see EXXON CAPITAL HOLDINGS CORPORATION, available
May 13, 1988, MORGAN STANLEY & CO. INCORPORATED, available June 5, 1991 and
SHEARMAN & STERLING, available July 2, 1993, and other interpretive letters to
similar effect. You will be allowed to resell exchange notes to the public
without further registration under the Securities Act and without delivering to
purchasers of the exchange notes a prospectus that satisfies the requirements of
Section 10 of the Securities Act so long as you do not participate, do not
intend to participate, and have no arrangement with any person to participate,
in a distribution of the exchange notes. However, the foregoing does not apply
to you if you are:
- a broker-dealer who purchased the exchange notes directly from us to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act; or
- you are an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act.
In addition, if:
- you are a broker-dealer; or
- you acquire exchange notes in the exchange offer for the purpose of
distributing or participating in the distribution of the exchange
notes,
you cannot rely on the position of the staff of the SEC contained in the
no-action letters mentioned above and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, unless an exemption from registration is otherwise
available.
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Each broker-dealer that receives exchange notes for its own account in
exchange for private notes, which the broker-dealer acquired as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of the exchange notes.
The letter of transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. A broker-dealer may use
this prospectus, as it may be amended or supplemented from time to time, in
connection with resales of exchange notes received in exchange for private notes
which the broker-dealer acquired as a result of market-making or other trading
activities.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept any and all private notes
validly tendered and not withdrawn before the expiration date. We will issue
$1,000 principal amount of exchange notes in exchange for each $1,000 principal
amount of outstanding private notes surrendered pursuant to the exchange offer.
You may tender private notes only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and terms
of the private notes except that:
- we will register the exchange notes under the Securities Act and,
therefore, the exchange notes will not bear legends restricting their
transfer; and
- holders of the exchange notes will not be entitled to any of the rights of
holders of private notes under the registration rights agreement, which
rights will terminate upon the completion of the exchange offer.
The exchange notes will evidence the same debt as the private notes and will be
issued under the same indenture, so the exchange notes and the private notes
will be treated as a single class of debt securities under the indenture.
As of the date of this prospectus, $1,000,000,000 in aggregate principal
amount of the private notes are outstanding and registered in the name of
Cede & Co., as nominee for The Depository Trust Company. Only registered holders
of the private notes, or their legal representative or attorney-in-fact, as
reflected on the records of the trustee under the indenture, may participate in
the exchange offer. We will not set a fixed record date for determining
registered holders of the private notes entitled to participate in the exchange
offer.
You do not have any appraisal or dissenters' rights under the indenture in
connection with the exchange offer. We intend to conduct the exchange offer in
accordance with the provisions of the registration rights agreement and the
applicable requirements of the Securities Act, the Exchange Act and the rules
and regulations of the SEC.
We will be deemed to have accepted validly tendered private notes when, as
and if we had given oral or written notice of acceptance to the exchange agent.
The exchange agent will act as your agent for the purposes of receiving the
exchange notes from us.
If you tender private notes in the exchange offer you will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
letter of transmittal, transfer taxes with respect to the exchange of private
notes pursuant to the exchange offer. We will pay all charges and expenses,
other than the applicable taxes described below, in connection with the exchange
offer.
29
<Page>
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term expiration date will mean 5:00 p.m., New York City time on
July 31, 2002, unless we, in our sole discretion, extend the exchange offer, in
which case the term expiration date will mean the latest date and time to which
we extend the exchange offer.
To extend the exchange offer, we will:
- notify the exchange agent of any extension orally or in writing; and
- mail to each registered holder an announcement that will include
disclosure of the approximate number of private notes deposited to date,
each before 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date.
We reserve the right, in our reasonable discretion:
- to delay accepting any private notes:
- to extend the exchange offer; or
- if any conditions listed below under "--Conditions" are not satisfied, to
terminate the exchange offer by giving oral or written notice of the
delay, extension or termination to the exchange agent.
We will follow any delay in acceptance, extension or termination as promptly
as practicable by oral or written notice to the registered holders. If we amend
the exchange offer in a manner we determine constitutes a material change, we
will promptly disclose the amendment in a prospectus supplement that we will
distribute to the registered holders. We will also extend the exchange offer for
a period of five to ten business days, depending upon the significance of the
amendment and the manner of disclosure, if the exchange offer would otherwise
expire during the five to ten business day period.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest at the same rate and on the same terms
as the private notes. Consequently, the exchange notes will bear interest at a
rate equal to 8 7/8% per annum (calculated using a 360-day year). Interest will
be payable semi-annually on each February 15 and August 15, commencing
August 15, 2002.
You will receive interest on August 15, 2002 from the date of initial
issuance of the exchange notes, plus an amount equal to the accrued interest on
the private notes from the date of delivery to the date of exchange.
PROCEDURES FOR TENDERING
You may tender private notes in the exchange offer only if you are a
registered holder of private notes. To tender in the exchange offer, you must:
- complete, sign and date the letter of transmittal or a facsimile of the
letter of transmittal;
- have the signatures guaranteed if required by the letter of transmittal;
and
- mail or otherwise deliver the letter of transmittal or the facsimile to
the exchange agent at the address listed below under "--Exchange Agent"
for receipt before the expiration date.
30
<Page>
In addition, either:
- the exchange agent must receive certificates for the private notes along
with the letter of transmittal into its account at the depositary pursuant
to the procedure for book-entry transfer described below before the
expiration date;
- the exchange agent must receive a timely confirmation of a book-entry
transfer of the private notes, if the procedure is available, into its
account at the depositary pursuant to the procedure for book-entry
transfer described below before the expiration date; or
- you must comply with the guaranteed delivery procedures described below.
Your tender, if not withdrawn before the expiration date, will constitute an
agreement between you and us in accordance with the terms and subject to the
conditions described in this prospectus and in the letter of transmittal.
The method of delivery of private notes and the letter of transmittal and
all other required documents to the exchange agent is at your election and risk.
We recommend that instead of delivery by mail, you use an overnight or hand
delivery service, properly insured. In all cases, you should allow sufficient
time to assure delivery to the exchange agent before the expiration date. You
should not send letters of transmittal or private notes to us. You may request
your respective brokers, dealers, commercial banks, trust companies or nominees
to effect the transactions described above for you.
If you are a beneficial owner of private notes whose private notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and you wish to tender your notes, you should contact the
registered holder promptly and instruct the registered holder to tender on your
behalf. If you wish to tender on your own behalf, before completing and
executing the letter of transmittal and delivering the private notes you must
either:
- make appropriate arrangements to register ownership of the private notes
in your name; or
- obtain a properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable time. Unless the
private notes are tendered:
(1) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or the box entitled "Special Delivery
Instructions" on the letter of transmittal; or
(2) for the account of:
- a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;
- a commercial bank or trust company having an office or correspondent in
the United States; or
- an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act that is a member of one of the recognized
signature guarantee programs identified in the letter of transmittal,
an eligible guarantor institution must guarantee the signatures on a letter of
transmittal or a notice of withdrawal described below under "--Withdrawal of
Tenders."
If the letter of transmittal is signed by a person other than the registered
holder, the private notes must be endorsed or accompanied by a properly
completed bond power, signed by the registered holder as the registered holder's
name appears on the private notes.
31
<Page>
If the letter of transmittal or any private notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, they
should so indicate when signing, and unless waived by us, they must submit
evidence satisfactory to us of their authority to so act with the letter of
transmittal.
The exchange agent and the depositary have confirmed that any financial
institution that is a participant in the depositary's system may utilize the
depositary's Automated Tender Offer Program to tender notes.
We will determine in our sole discretion all questions as to the validity,
form, eligibility, including time of receipt, acceptance and withdrawal of
tendered private notes, which determination will be final and binding. We
reserve the absolute right to reject any and all private notes not properly
tendered or any private notes our acceptance of which would, in the opinion of
our counsel, be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular private notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, you must cure any defects or irregularities in
connection with tenders of private notes within the time we determine. Although
we intend to notify you of defects or irregularities with respect to tenders of
private notes, neither we, the exchange agent nor any other person will incur
any liability for failure to give you that notification. Unless waived, we will
not deem tenders of private notes to have been made until you cure the defects
or irregularities.
While we have no present plan to acquire any private notes that are not
tendered in the exchange offer or to file a registration statement to permit
resales of any private notes that are not tendered in the exchange offer, we
reserve the right in our sole discretion to purchase or make offers for any
private notes that remain outstanding after the expiration date. We also reserve
the right to terminate the exchange offer, as described below under
"--Conditions," and, to the extent permitted by applicable law, purchase private
notes in the open market, in privately negotiated transactions or otherwise. The
terms of any of those purchases or offers could differ from the terms of the
exchange offer.
If you wish to tender private notes in exchange for exchange notes in the
exchange offer, we will require you to represent that:
- you are not an affiliate of ours;
- you will acquire any exchange notes in the ordinary course of your
business; and
- at the time of completion of the exchange offer, you have no arrangement
with any person to participate in the distribution of the exchange notes.
In addition, in connection with the resale of exchange notes, any
participating broker-dealer who acquired the private notes for its own account
as a result of market-making or other trading activities must deliver a
prospectus meeting the requirements of the Securities Act. The SEC has taken the
position that participating broker-dealers may fulfill their prospectus delivery
requirements with respect to the exchange notes, other than a resale of an
unsold allotment from the original sale of the notes, with this prospectus.
RETURN OF NOTES
If we do not accept any tendered private notes for any reason described in
the terms and conditions of the exchange offer or if you withdraw or submit
private notes for a greater principal amount than you desire to exchange, we
will return the unaccepted, withdrawn or non-exchanged notes without expense to
you as promptly as practicable. In the case of private notes tendered by
book-entry transfer into the exchange agent's account at the depositary pursuant
to the book-entry transfer
32
<Page>
procedures described below, we will credit the private notes to an account
maintained with the depositary as promptly as practicable.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the private notes at the depositary for purposes of the exchange offer within
two business days after the date of this prospectus, and any financial
institution that is a participant in the depositary's systems may make
book-entry delivery of private notes by causing the depositary to transfer the
private notes into the exchange agent's account at the depositary in accordance
with the depositary's procedures for transfer. However, although delivery of
private notes may be effected through book-entry transfer at the depositary, you
must transmit and the exchange agent must receive, the letter of transmittal or
a facsimile of the letter of transmittal, with any required signature guarantees
and any other required documents, at the address below under "--Exchange Agent"
on or before the expiration date or pursuant to the guaranteed delivery
procedures described below.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your private notes and (1) the notes are not
immediately available or (2) you cannot deliver the private notes, the letter of
transmittal or any other required documents to the exchange agent before the
expiration date, you may effect a tender if:
(1) the tender is made through an eligible guarantor institution;
(2) before the expiration date, the exchange agent receives from the
eligible guarantor institution a properly completed and duly executed
notice of guaranteed delivery, substantially in the form provided by us,
that:
- states your name and address, the certificate number(s) of the private
notes and the principal amount of private notes tendered,
- states that the tender is being made by that notice of guaranteed
delivery, and
- guarantees that, within three New York Stock Exchange trading days
after the expiration date, the eligible guarantor institution will
deposit with the exchange agent the letter of transmittal, together
with the certificate(s) representing the private notes in proper form
for transfer or a confirmation of a book-entry transfer, as the case
may be, and any other documents required by the letter of transmittal;
and
(3) within five New York Stock Exchange trading days after the expiration
date, the exchange agent receives a properly executed letter of
transmittal, as well as the certificate(s) representing all tendered
private notes in proper form for transfer and all other documents
required by the letter of transmittal.
Upon request, the exchange agent will send to you a notice of guaranteed
delivery if you wish to tender your notes according to the guaranteed delivery
procedures described above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw tenders of
private notes at any time before 5:00 p.m. on the expiration date.
To withdraw a tender of private notes in the exchange offer, the exchange
agent must receive a written or facsimile transmission notice of withdrawal at
its address listed in this prospectus before the expiration date. Any notice of
withdrawal must:
- specify the name of the person who deposited the private notes to be
withdrawn;
33
<Page>
- identify the private notes to be withdrawn, including the certificate
number(s) and principal amount of the private notes; and
- be signed in the same manner as the original signature on the letter of
transmittal by which the private notes were tendered, including any
required signature guarantees.
We will determine in our sole discretion all questions as to the validity,
form and eligibility of the notices, and our determination will be final and
binding on all parties. We will not deem any properly withdrawn private notes to
have been validly tendered for purposes of the exchange offer, and we will not
issue exchange notes with respect to those private notes, unless you validly
retender the withdrawn private notes. You may retender properly withdrawn
private notes by following one of the procedures described above under
"--Procedures for Tendering" at any time before the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange the exchange notes for, any private
notes, and may terminate the exchange offer as provided in this prospectus
before the acceptance of the private notes, if, in our reasonable judgment, the
exchange offer violates applicable law, rules or regulations or an applicable
interpretation of the staff of the SEC.
If we determine in our reasonable discretion that any of these conditions
are not satisfied, we may:
- refuse to accept any private notes and return all tendered private notes
to you;
- extend the exchange offer and retain all private notes tendered before the
exchange offer expires, subject, however, to your rights to withdraw the
private notes; or
- waive the unsatisfied conditions with respect to the exchange offer and
accept all properly tendered private notes that have not been withdrawn.
If the waiver constitutes a material change to the exchange offer, we will
promptly disclose the waiver by means of a prospectus supplement that we will
distribute to the registered holders of the private notes, and we will extend
the exchange offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
holders, if the exchange offer would otherwise expire during the five to ten
business day period.
TERMINATION OF RIGHTS
All of your rights under the registration rights agreement will terminate
upon consummation of the exchange offer except with respect to our continuing
obligations:
- to indemnify you and parties related to you against liabilities, including
liabilities under the Securities Act; and
- to provide, upon your request, the information required by
Rule 144A(d)(4) under the Securities Act to permit resales of the notes
pursuant to Rule 144A.
SHELF REGISTRATION
If:
(1) we and the guarantors are not permitted to consummate the exchange offer
because the exchange offer is not permitted by applicable law or SEC
policy; or
34
<Page>
(2) any holder of transfer restricted securities notifies us prior to the
20th day following consummation of the exchange offer that:
(a) it is prohibited by law or SEC policy from participating in the
exchange offer; or
(b) that it may not resell the exchange notes acquired by it in the
exchange offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration statement is
not appropriate or available for such resales; or
(c) that it is a broker-dealer and owns private notes acquired directly
from us or an affiliate of us,
we and the guarantors will file with the SEC a shelf registration statement to
cover resales of the private notes by the holders thereof who satisfy certain
conditions relating to the provision of information in connection with the shelf
registration statement.
For purposes of the preceding, "transfer restricted securities" means each
private note until:
(1) the date on which such note has been exchanged by a person other than a
broker-dealer for an exchange note in the exchange offer;
(2) following the exchange by a broker-dealer in the exchange offer of a
private note for an exchange note, the date on which such exchange note
is sold to a purchaser who receives from such broker-dealer on or prior
to the date of such sale a copy of the prospectus contained in the
exchange offer registration statement;
(3) the date on which such private note has been effectively registered
under the Securities Act and disposed of in accordance with the shelf
registration statement; or
(4) the date on which such private note is distributed to the public
pursuant to Rule 144 under the Securities Act.
LIQUIDATED DAMAGES
If:
(1) we and the guarantors fail to file any of the registration statements
required by the registration rights agreement on or before the date
specified for such filing; or
(2) any of such registration statements is not declared effective by the SEC
on or prior to the date specified for such effectiveness; or
(3) we and the guarantors fail to consummate the exchange offer within
40 days after the exchange offer registration statement is declared
effective; or
(4) the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales or exchanges of transfer restricted
securities during the periods specified in the registration rights
agreement (each such event referred to in clauses (1) through (4) above,
a "registration default");
then we and the guarantors will pay liquidated damages to each holder of
outstanding notes ("liquidated damages") during the period of one or more
registration defaults, with respect to the first 90-day period immediately
following the occurrence of the first registration default in an amount equal to
0.25% per annum (which amount will be increased by an additional 0.25% per annum
for each subsequent 90-day period that any liquidated damages continue to
accrue; provided that the amounts at which liquidated damages accrue may in no
event exceed 1.0% per annum) in respect of the transfer restricted securities
held by such holder until the applicable registration statement is filed, the
exchange
35
<Page>
offer registration statement is declared effective and the exchange offer is
consummated or the shelf registration statement is declared effective or again
becomes effective, as the case may be.
EXCHANGE AGENT
We have appointed U.S. Bank National Association as exchange agent for the
exchange offer. You should direct questions and requests for assistance,
requests for additional copies of this prospectus or the letter of transmittal
and requests for a notice of guaranteed delivery to the exchange agent addressed
as follows:
<Table>
BY REGISTERED OR CERTIFIED MAIL: BY HAND DELIVERY:
U.S. Bank National Association U.S. Bank National Association
180 East Fifth Street 180 East Fifth Street
St. Paul, Minnesota 55101 St. Paul, Minnesota 55101
Attention: Corporate Trust Administration Attention: Corporate Trust Administration
BY OVERNIGHT DELIVERY: BY FACSIMILE:
U.S. Bank National Association (651) 244-0711
180 East Fifth Street Attn: Corporate Trust Administration
St. Paul, Minnesota 55101 CONFIRM BY TELEPHONE:
Attention: Corporate Trust Administration (651) 244-8677
</Table>
Delivery to an address other than the one stated above or transmission via a
facsimile number other than the one stated above will not constitute a valid
delivery.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. We are making the principal
solicitation by mail; however, our officers and regular employees may make
additional solicitations by facsimile, telephone or in person.
We have not retained any dealer manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses.
We will pay the cash expenses incurred in connection with the exchange offer
which we estimate to be approximately $250,000. These expenses include
registration fees, fees and expenses of the exchange agent and the trustee,
accounting and legal fees and printing costs, among others.
We will pay all transfer taxes, if any, applicable to the exchange of notes
pursuant to the exchange offer. If, however, a transfer tax is imposed for any
reason other than the exchange of the private notes pursuant to the exchange
offer, then you must pay the amount of the transfer taxes. If you do not submit
satisfactory evidence of payment of the taxes or exemption from payment with the
letter of transmittal, we will bill the amount of the transfer taxes directly to
you.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the exchange offer is voluntary. We urge you to consult
your financial and tax advisors in making your decisions on what action to take.
Private notes that are not exchanged for
36
<Page>
exchange notes pursuant to the exchange offer will remain restricted securities.
Accordingly, those private notes may be resold only:
- to a person whom the seller reasonably believes is a qualified
institutional buyer in a transaction meeting the requirements of
Rule 144A;
- in a transaction meeting the requirements of Rule 144 under the Securities
Act;
- outside the United States to a foreign person in a transaction meeting the
requirements of Rule 903 or 904 of Regulation S under the Securities Act;
- in accordance with another exemption from the registration requirements of
the Securities Act and based upon an opinion of counsel if we so request;
- to us; or
- pursuant to an effective registration statement.
In each case, the private notes may be resold only in accordance with any
applicable securities laws of any state of the United States or any other
applicable jurisdiction.
USE OF PROCEEDS
The exchange offer satisfies an obligation under the registration rights
agreement. We will not receive any cash proceeds from the exchange offer.
The net proceeds from the sale of the private notes, after deducting
discounts, commissions and offering expenses, were $980.0 million. The net
proceeds were used to repay a portion of the outstanding term loan under the
secured credit agreement, which matures on March 31, 2004. The interest rate on
the outstanding term loan at December 31, 2001 was 4.50%.
37
<Page>
CAPITALIZATION OF OWENS-ILLINOIS GROUP, INC.
The following table presents, as of March 31, 2002, the consolidated
capitalization of OI Group. You should read this table in conjunction with the
Consolidated Financial Statements and the notes thereto included elsewhere in
this prospectus. For more information, see also the section entitled "Selected
Consolidated Financial Data of Owens-Illinois Group, Inc."
<Table>
<Caption>
AT MARCH 31,
2002
-------------
(IN MILLIONS)
Current debt:
Short-term loans.......................................... $ 57.5
Long-term debt due within one year........................ 28.9
--------
Total current debt........................................ $ 86.4
========
Long-term debt:
Senior Secured Credit Facility:
Revolving Credit Agreement (a).......................... $2,424.1
Term Loan............................................... 65.0
--------
Total Senior Secured Credit Facility.................. 2,489.1
8 7/8% Senior Secured Notes............................... 1,000.0
Payable to OI Inc......................................... 1,700.0
Other..................................................... 155.6
--------
Total long-term debt.................................. 5,344.7
Share owner's equity:
Common stock, par value $.01 per share, 1,000 shares
authorized, 100 shares issued and outstanding........... --
Capital in excess of par value............................ 1,693.4
Retained earnings......................................... 766.7
Accumulated other comprehensive income (loss)............. (605.3)
--------
Total share owner's equity............................ 1,854.8
--------
Total capitalization........................................ $7,285.9
========
</Table>
- --------------------------
(a) At March 31, 2002, OI Group had unused borrowing capacity of $479.5 million
available under the secured credit agreement.
38
<Page>
SELECTED CONSOLIDATED FINANCIAL DATA OF
OWENS-ILLINOIS GROUP, INC.
The selected consolidated financial data presented below relates to each of
the five years in the period ended December 31, 2001 and the three months ended
March 31, 2002 and 2001. Such data was derived from the Consolidated Financial
Statements, of which the most recent three years, including balance sheets at
December 31, 2001 and 2000, are included elsewhere in this document and were
audited by Ernst & Young LLP, independent auditors, whose report with respect to
the financial statements appears elsewhere in this document. The financial data
for the three months ended March 31, 2002 and 2001 were derived from unaudited
consolidated financial statements of OI Group. The results for the three months
are not necessarily indicative of the results to be expected for the full year.
For more information, see the "Consolidated Financial Statements" included
elsewhere in this prospectus.
<Table>
<Caption>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- -------------------
2001 2000 1999 1998(A) 1997(B) 2002 2001
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
CONSOLIDATED OPERATING RESULTS:
Net sales.................................... $5,402.5 $5,552.1 $5,522.9 $5,306.3 $4,658.5 $1,310.9 $1,306.1
Other revenue(c)............................. 610.8 262.7 263.8 193.0 169.9 27.4 58.4
-------- -------- -------- -------- -------- -------- --------
6,013.3 5,814.8 5,786.7 5,499.3 4,828.4 1,338.3 1,364.5
Costs and expenses:
Manufacturing, shipping and delivery....... 4,218.4 4,359.1 4,296.4 4,075.6 3,666.4 1,019.8 1,027.7
Research, engineering, selling,
administrative and other(d).............. 693.7 810.6 566.6 584.7 407.0 108.4 142.3
-------- -------- -------- -------- -------- -------- --------
Earnings before interest expense and items
below.................................... 1,101.2 645.1 923.7 839.0 755.0 210.1 194.5
Interest expense(e)........................ 434.0 486.7 425.9 380.0 302.7 100.9 113.5
-------- -------- -------- -------- -------- -------- --------
Earnings before items below................ 667.2 158.4 497.8 459.0 452.3 109.2 81.0
Provision for income taxes(f).............. 286.4 64.1 185.5 162.3 148.5 34.5 27.2
Minority share owners' interests in
earnings of subsidiaries................. 20.1 22.0 13.2 20.2 31.4 4.5 4.9
-------- -------- -------- -------- -------- -------- --------
Earnings before extraordinary items and
cumulative effect of accounting change... 360.7 72.3 299.1 276.5 272.4 70.2 48.9
Extraordinary charges from early
extinguishment of debt, net of applicable
income taxes............................. (4.1) (0.8) (14.1) (104.5) (6.7)
Cumulative effect of accounting change..... (460.0)
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss)........................ $ 356.6 $ 72.3 $ 298.3 $ 262.4 $ 167.9 $ (396.5) $ 48.9
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Cash provided by (utilized in) operating
activities................................. $ 620.3 $ 541.7 $ 677.3 $ 716.9 $ 517.2 $ 97.7 $ (6.2)
Investing activities:
Additions to property, plant, and
equipment................................ (531.9) (481.4) (650.4) (573.5) (471.3) (112.2) (93.1)
Other investing activities................. 420.7 17.3 303.1 (3,659.1) (79.7) 14.6 108.8
-------- -------- -------- -------- -------- -------- --------
Cash provided by (utilized in) investing
activities............................. (111.2) (464.1) (347.3) (4,232.6) (551.0) (97.7) 15.7
Cash provided by (utilized in) financing
activities................................. (578.9) (153.8) (327.5) 3,573.0 110.3 (42.0) (57.1)
EBIT(g)...................................... 1,074.3 612.6 895.2 809.8 731.4 204.8 188.0
EBITDA(h).................................... 1,598.1 1,152.0 1,431.6 1,266.3 1,070.8 318.7 319.0
Adjusted EBIT(i)............................. 764.3 860.9 875.2 870.5 729.2 204.8 174.9
Adjusted EBITDA(j)........................... 1,288.1 1,400.3 1,411.6 1,327.0 1,068.6 318.7 305.9
Depreciation................................. 403.2 412.6 403.7 358.5 283.5 107.4 100.7
Amortization of excess cost and
intangibles................................ 120.6 126.8 132.7 98.0 55.9 6.5 30.3
Amortization of deferred finance fees
(included in interest expense)............. 19.9 10.1 8.9 7.4 4.1 5.7 2.5
Ratio of total debt to Adjusted EBITDA....... 4.2x 4.2x 4.2x 4.5x 3.1x -- --
Ratio of Adjusted EBITDA to interest
expense.................................... 3.0x 2.9x 3.3x 3.5x 3.5x 3.2x 2.7x
Ratio of earnings to fixed charges(k)........ 2.5x 1.3x 2.1x 2.1x 2.4x 2.1x 1.7x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.............................. $ 899 $ 881 $ 892 $ 905 $ 660 $ 935 $ 926
Excess of purchase cost over net assets
acquired, net of accumulated amortization
(goodwill)................................. 2,995 3,101 3,294 3,315 1,295 2,564 2,960
Total assets................................. 9,993 10,080 10,521 10,818 6,576 9,584 9,732
Total debt................................... 5,401 5,850 5,939 5,917 3,324 5,431 5,644
Share owner's equity......................... 2,322 2,107 2,327 2,522 1,273 1,855 2,065
</Table>
- ------------------------------
(a) Results of operations and other data since April 1998 include the
acquisition of the worldwide glass and plastics packaging businesses of BTR
plc and the related financings.
39
<Page>
(b) Results of operations and other data since January 1997 include the
acquisition of AVIR S.p.A.
(c) Other revenue in 2001 includes: (1) a gain of $457.3 million
($284.4 million after tax) related to the sale of the Harbor Capital
Advisors business; and (2) gains totaling $13.1 million ($12.0 million after
tax) related to the sale of the label business and the sale of a minerals
business in Australia.
Other revenue in 1999 includes gains totaling $40.8 million ($23.6 million
after tax and minority share owners' interests) related to the sales of a
U.S. glass container plant and a mold manufacturing business in Colombia.
Other revenue in 1998 includes: (1) a gain of $18.5 million ($11.4 million
after tax) related to the termination of a license agreement, net of charges
for related equipment write-offs and capacity adjustments, under which OI
Group had produced plastic multipack carriers for beverage cans; and (2) a
loss of $5.7 million ($3.5 million after tax) on the sale of a discontinued
operation by an equity investee.
Other revenue in 1997 includes a gain of $16.3 million (pretax and after
tax) from the sale of the remaining 49% interest in Kimble Glass.
Other revenue for the three months ended March 31, 2001 includes gains of
$13.1 million ($12.0 million after tax) related to the sale of the label
business and the sale of a minerals business in Australia.
(d) Amount for 2001 includes: (1) charges of $82.1 million ($65.3 million after
tax and minority share owners' interests) related to restructuring and
impairment charges at certain international glass operations, principally
Venezuela and Puerto Rico, as well as certain other domestic and
international operations; (2) a charge of $31.0 million (pretax and after
tax) related to the loss on the sale of facilities in India; (3) charges of
$30.9 million ($19.4 million after tax) related to special employee benefit
programs; (4) a charge of $8.5 million ($5.3 million after tax) for certain
contingencies; and (5) a charge of $7.9 million ($4.9 million after tax)
related to restructuring manufacturing capacity in the medical devices
business.
In 2000, OI Group recorded pretax charges totaling $248.3 million
($171.0 million after tax and minority share owners' interests) for the
following: (1) $122.4 million ($77.3 million after tax and minority share
owners' interests) related to the consolidation of manufacturing capacity;
(2) a net charge of $52.4 million ($32.6 million after tax) related to early
retirement incentives and special termination benefits for 350 U.S. salaried
employees; (3) $40.0 million (pretax and after tax) related to the
impairment of property, plant and equipment at facilities in India; and
(4) $33.5 million ($21.1 million after tax and minority share owners'
interests) related principally to the write-off of software and related
development costs.
Amount for 1999 includes charges totaling $20.8 million ($14.0 million after
tax and minority share owners' interests) related principally to
restructuring costs and write-offs of certain assets in Europe and South
America.
In 1998, OI Group recorded: (1) charges of $72.6 million ($47.4 million
after tax and minority share owners' interests) related principally to a
plant closing in the U.K. and restructuring costs at certain international
affiliates; and (2) a net charge of $0.9 million ($0.6 million after tax)
for the settlement of certain environmental litigation and the reduction of
previously established reserves for guarantees of certain lease obligations
of a previously divested business.
In 1997, OI Group recorded charges of $14.1 million ($8.7 million after tax)
principally for guarantees of certain lease obligations of a previously
divested business.
(e) Amount for 2001 includes a net interest charge of $4.0 million
($2.8 million after tax) related to interest on the resolution of the
transfer of pension assets and liabilities for a previous acquisition and
divestiture. Assuming the notes had been issued at the beginning of 2001,
interest expense for the year would have been $30.4 million higher and net
earnings for the year would have been $18.9 million lower.
(f) Amount for 2001 includes a $6.0 million charge to adjust tax liabilities in
Italy as a result of recent legislation.
Amount for 2000 includes a fourth quarter benefit of $9.3 million to adjust
net income tax liabilities in Italy as a result of recent legislation.
In 1998, OI Group recorded a credit of $15.1 million to adjust net deferred
income tax liabilities as a result of a reduction in Italy's statutory
income tax rate.
(g) EBIT consists of consolidated earnings before interest income, interest
expense, provision for income taxes, minority share owners' interests in
earnings of subsidiaries and extraordinary charges.
(h) EBITDA consists of EBIT before depreciation and amortization of excess cost
and intangibles. EBITDA is presented because OI Group believes it is
frequently used by securities analysts, investors and other interested
parties in the evaluation of companies in OI Group's industry. However,
other companies in OI Group's industry may calculate EBITDA differently than
OI Group does. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to cash flow from operating activities or as a measure of
liquidity or an alternative to net income as indicators of OI Group's
operating performance or any other measures of performance derived in
accordance with generally accepted accounting principles. See "Consolidated
Financial Statements--Consolidated Cash Flows."
(i) OI Group evaluates performance and allocates resources based on EBIT
excluding unusual items ("Adjusted EBIT"). Unusual items consist of the
gains, losses and charges discussed in Notes (c) and (d) above. The
reconciliation from EBIT to Adjusted EBIT is as follows:
40
<Page>
<Table>
<Caption>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
EBIT......................................... $1,074.3 $612.6 $895.2 $809.8 $731.4 $204.8 $188.0
Add (deduct):
Gain on sale of Harbor Capital Advisors
business................................. (457.3)
Gains on sales of label business and
minerals business........................ (13.1) (13.1)
Gains on sale of glass plant and mold
business................................. (40.8)
Net gain on termination of license
agreement................................ (18.5)
Sale of discontinued operations by equity
investee................................. 5.7
Gain on sale of 49% interest in Kimble
Glass.................................... (16.3)
Restructuring and impairment, principally
international glass...................... 82.1
Loss on the sale of facilities in India.... 31.0
Special employee benefit programs.......... 30.9
Charges related to certain contingencies... 8.5
Restructuring manufacturing capacity in the
medical devices business................. 7.9
Consolidation of manufacturing capacity.... 122.4
Early retirement incentives/special
termination benefits..................... 52.4
Impairment of property, plant and equipment
in India................................. 40.0
Write-off of software and related
development costs........................ 33.5
Restructuring and asset write-offs in
Europe/ South America.................... 20.8
U.K. plant closing and international
restructuring............................ 72.6
Settle environmental litigation/reduce
reserve for guarantees................... 0.9
Charge for guarantees of lease
obligations.............................. 14.1
-------- ------ ------ ------ ------ ------ ------
Adjusted EBIT................................ $ 764.3 $860.9 $875.2 $870.5 $729.2 $204.8 $174.9
======== ====== ====== ====== ====== ====== ======
</Table>
- ------------------------------
(j) Adjusted EBITDA represents EBITDA excluding the unusual gains, losses and
charges discussed in Notes (c) and (d) and summarized in Note (i) above.
Adjusted EBITDA is presented because OI Group believes it is frequently used
by securities analysts, investors and other interested parties in the
evaluation of companies in OI Group's industry. However, other companies in
OI Group's industry may present Adjusted EBITDA differently than OI Group
does. Adjusted EBITDA is not a measurement of financial performance under
generally accepted accounting principles and should not be considered as an
alternative to cash flow from operating activities or as a measure of
liquidity or an alternative to net income as indicators of OI Group's
operating performance or any other measures of performance derived in
accordance with generally accepted accounting principles. See "Consolidated
Financial Statements--Consolidated Cash Flows."
(k) For purposes of these computations, earnings consist of earnings before
income taxes, minority share owners' interests in earnings of subsidiaries
and extraordinary items plus fixed charges. Fixed charges consist primarily
of interest on indebtedness, including amortization of deferred finance
fees, plus that portion of lease rental expense representative of the
interest factor. Pretax earnings and fixed charges also include the
proportional share of 50%-owned investees.
41
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
OWENS-ILLINOIS GROUP, INC.
RESULTS OF OPERATIONS
FIRST THREE MONTHS 2002 COMPARED WITH FIRST THREE MONTHS 2001
OI Group recorded net earnings before extraordinary items and cumulative
effect of accounting change of $70.2 million for the first quarter of 2002
compared to net earnings of $48.9 million for the first quarter of 2001. The net
loss for the first quarter of 2002 of $396.5 million reflects $6.7 million of
extraordinary charges from the early extinguishment of debt and $460.0 million
from the cumulative effect of the change in accounting for goodwill. Excluding
the effects of the 2002 extraordinary item and cumulative effect of the change
in accounting for goodwill, OI Group's first quarter 2002 net earnings of
$70.2 million increased $10.2 million, or 17.0% from 2001 first quarter pro
forma earnings excluding unusual items of $60.0 million, adjusted on a pro forma
basis for the goodwill accounting change. Consolidated EBIT for the first
quarter of 2002 was $204.8 million, an increase of $6.8 million, or 3.4%,
compared to the first quarter of 2001 pro forma EBIT of $198.0 million adjusted
on a pro forma for the goodwill accounting change. The increase is principally
due to higher EBIT for the Glass Containers segment, partially offset by lower
EBIT of the Plastics Packaging segment, both as further discussed below.
Interest expense, net of interest income, decreased $11.4 million from the 2001
period due to both lower interest rates and decreased levels of debt. OI Group's
estimated effective tax rate for the first quarter of 2002 was 31.6%. This
compares with a rate of 28.7% for the first quarter of 2001 and 30.3% for the
full year of 2001, adjusted on a pro forma basis to exclude the effects of
goodwill amortization and unusual items. The increase in the 2002 estimated rate
compared to the full year of 2001 is primarily the result of decreased
international and domestic tax benefits and credits and a shift in estimated
international earnings toward countries with higher effective tax rates.
Capsule segment results (in millions of dollars) for the first quarter of
2002 and 2001 were as follows:
<Table>
<Caption>
NET SALES
(UNAFFILIATED
CUSTOMERS) EBIT
------------------- ---------------------
2002 2001 2002 2001(A)(B)
-------- -------- -------- ----------
Glass Containers....................................... $ 870.1 $ 841.5 $151.1 $142.4
Plastics Packaging..................................... 440.8 457.6 74.8 78.9
Other.................................................. 7.0 3.0
-------- -------- ------ ------
Segment totals......................................... 1,310.9 1,306.1 225.9 224.3
Eliminations and other retained items................ (21.1) (13.2)
------ ------
Consolidated EBIT before goodwill amortization......... 204.8 211.1
Amortization of goodwill............................... (23.1)
-------- -------- ------ ------
Consolidated totals.................................... $1,310.9 $1,306.1 $204.8 $188.0
======== ======== ====== ======
</Table>
- ------------------------
(a) EBIT for 2001 includes gains totaling $13.1 related to the sale of OI
Group's label business and the sale of a minerals business in Australia.
These items increased segment EBIT as follows: Glass Containers -
$10.3 million; Other - $2.8 million.
(b) In accordance with FAS No. 142, goodwill is no longer amortized beginning in
2002. In order to facilitate comparisons, goodwill amortization for 2001 has
been reclassified out of the Glass Containers and Plastics Packaging
segments and reported separately.
42
<Page>
Consolidated net sales for the first quarter of 2002 increased
$4.8 million, or 0.4%, over the prior year. Net sales of the Glass Containers
segment increased $28.3 million, or 3.4%, over 2001. In North America, the
additional sales from the October 2001 acquisition of the Canadian glass
container operations were partially offset by decreased shipments of containers
for beer. The combined U.S. dollar sales of the segment's other foreign
affiliates decreased from the prior year. Increased shipments in Venezuela, Peru
and Poland were more than offset by lower shipments in portions of Europe, South
America, and the Asia Pacific region affected by fewer shipping days resulting
from extended holiday closings, the absence of the glass container operations in
India, and the effects of a strong U.S. dollar. The effect of changing foreign
currency exchange rates reduced U.S. dollar sales of the segment's foreign
affiliates by approximately $19 million. Net sales of the Plastics Packaging
segment decreased $19.0 million, or 4.1%, from 2001, reflecting increased
shipments of plastic containers for food, juices and health care and closures
for food and beverages, which were more than offset by lower shipments of
containers for personal care and prescription packaging and the effects of lower
resin costs on pass-through arrangments with customers. The effects of lower
resin cost pass-throughs decreased sales approximately $7 million compared to
the first quarter of 2001.
Excluding the effects of the 2001 unusual items, consolidated EBIT for the
first quarter of 2002 increased $6.8 million, or 3.4%, to $204.8 million from
the 2001 pro forma EBIT of $198.0 million, adjusted on a pro forma basis to
exclude goodwill amortization. EBIT of the Glass Containers segment increased
$19.0 million to $151.1 million, compared to pro forma EBIT of $132.1 million in
2001. The combined U.S. dollar EBIT of the segment's foreign affiliates
decreased slightly from prior year. Decreased shipments from OI Group's
operations throughout most of Europe, South America and the Asia Pacific region
were partially offset by lower energy costs worldwide and higher shipments from
OI Group's operations in Venezuela, Peru and Poland. In North America, Glass
Container EBIT increased over 2001 principally as a result of lower costs for
energy and the addition of the Canadian glass container operations in the fourth
quarter of 2001, partially offset by lower shipments of containers for beer and
the conversion of certain food and beverage containers to plastic packaging.
EBIT of the Plastics Packaging segment decreased $4.1 million, or 5.2%, to
$74.8 million compared to pro forma EBIT of $78.9 million in 2001. Increased
shipments of plastic containers for food, juices and health care and closures
for food and beverages were more than offset by lower shipments of containers
for personal care and prescription packaging. EBIT from eliminations and other
retained items decreased $7.9 million from 2001 reflecting lower net financial
services income due to the sale of the Company's Harbor Capital Advisors
business in the second quarter of 2001.
The first quarter of 2001 includes pretax gains totaling $13.1 million
($12.0 million after tax) related to the sale of OI Group's label business and
the sale of a minerals business in Australia.
COMPARISON OF 2001 WITH 2000
For the year ended December 31, 2001, OI Group recorded earnings of
$360.7 million before an extraordinary item compared to net earnings of
$72.3 million for 2000. Net earnings of $356.6 million for 2001 reflect
$4.1 million of an extraordinary charge from the early extinguishment of debt.
Excluding the effects of unusual items for both 2001 and 2000 discussed in the
table below, OI Group's 2001 earnings of $199.0 million before an extraordinary
item decreased $35.0 million, or 15.0%, from 2000 earnings of $234.0 million.
The following table lists unusual items (in millions of dollars) recorded in
2001 and 2000, and their related effects on both EBIT and earnings before
extraordinary items. EBIT is defined as earnings
43
<Page>
before interest income, interest expense, provision for income taxes, minority
share owners' interest in earnings of subsidiaries, and extraordinary charges.
<Table>
<Caption>
2001 2000
------------------------ -------------------
EARNINGS
BEFORE
EXTRAORDINARY
EBIT ITEM EBIT EARNINGS
-------- ------------- -------- --------
As reported.......................................... $1,074.3 $ 360.7 $612.6 $ 72.3
Unusual items--charges (credits):
Gain on the sale of the Harbor Capital Advisors
business......................................... (457.3) (284.4)
Gain on the sale of the label business and the sale
of a minerals business in Australia.............. (13.1) (12.0)
Restructuring and impairment charges at certain
international and domestic operations............ 82.1 65.3
Loss on the sale of facilities in India............ 31.0 31.0
Special employee benefit programs.................. 30.9 19.4
Charges related to certain contingencies........... 8.5 5.3
Restructuring manufacturing capacity in the medical
devices business................................. 7.9 4.9
Charges to adjust net income tax liabilities in
Italy............................................ 6.0
Net interest on the resolution of the transfer of
pension assets and liabilities for a previous
acquisition...................................... 2.8
Charges related to consolidation of manufacturing
capacity......................................... 122.4 77.3
Charges related to early retirement incentives and
special termination benefits..................... 52.4 32.6
Charges related to impairment of property, plant,
and equipment in India........................... 40.0 40.0
Other charges, principally related to the write-off
of software...................................... 33.5 21.1
Benefit related to an adjustment of tax liabilities
in Italy as a result of recent legislation....... (9.3)
-------- ------- ------ ------
Before unusual items............................... $ 764.3 $ 199.0 $860.9 $234.0
======== ======= ====== ======
</Table>
Consolidated EBIT, excluding unusual items, for 2001 was $764.3 million, a
decrease of $96.6 million, or 11.2%, compared to 2000 EBIT, excluding unusual
items, of $860.9 million. The decrease is attributable to lower EBIT for both
the Glass Containers segment and the Plastics Packaging segment. Results of both
segments are discussed further below. Interest expense, net of interest income
and unusual items, decreased $51.1 million from 2000 due principally to lower
interest rates and decreased levels of debt. Exclusive of the adjustment for net
income tax liabilities in Italy and other unusual items previously discussed,
the effective tax rate for 2001 was 38.1%. This compares with a rate of 36.9%
for 2000, excluding the adjustment for net income tax liabilities in Italy and
other unusual items. The increase in the 2001 rate compared to 2000 is primarily
the result of the non-recurrence of certain international and domestic tax
benefits and credits.
44
<Page>
Capsule segment results (in millions of dollars) for 2001 and 2000 were as
follows (a):
<Table>
<Caption>
NET SALES TO UNAFFILIATED CUSTOMERS 2001 2000
- ----------------------------------- -------- --------
Glass Containers............................................ $3,571.2 $3,695.6
Plastics Packaging.......................................... 1,817.5 1,787.6
Other....................................................... 13.8 68.9
-------- --------
Segment and consolidated net sales.......................... $5,402.5 $5,552.1
-------- --------
</Table>
<Table>
<Caption>
EBIT(B) 2001(C) 2000(D)
- ------- -------- --------
Glass Containers............................................ $ 489.9 $ 401.2
Plastics Packaging.......................................... 218.1 238.0
Other....................................................... (13.3) 1.1
-------- --------
Segment EBIT................................................ 694.7 640.3
Eliminations and other retained items..................... 379.6 (27.7)
-------- --------
Consolidated EBIT........................................... $1,074.3 $ 612.6
-------- --------
</Table>
- ------------------------
(a) See "Consolidated Financial Statements--Segment Information."
(b) EBIT consists of consolidated earnings before interest income, interest
expense, provision for income taxes, minority share owners' interests in
earnings of subsidiaries and extraordinary charges.
(c) Amount for 2001 includes: (1) a gain of $457.3 million related to the sale
of the Harbor Capital Advisors business; (2) a $10.3 million gain from the
sale of a minerals business in Australia; (3) a $2.8 million gain from the
sale of the label business; (4) charges of $82.1 million related to
restructuring and impairment charges at certain international glass
operations, principally Venezuela and Puerto Rico, as well as certain other
domestic and international operations; (5) a charge of $31.0 million related
to the loss on the sale of facilities in India; (6) charges of
$30.9 million related to special employee benefit programs; (7) a charge of
$8.5 million for certain contingencies; and (8) a charge of $7.9 million
related to restructuring manufacturing capacity in the medical devices
business.
Such charges (gains) are included as follows in consolidated EBIT for 2001
(in millions of dollars):
<Table>
Glass Containers............................................ $ 92.6
Plastics Packaging.......................................... 29.8
Other....................................................... 5.1
--------
Total Product Segments.................................... 127.5
Eliminations and other retained items....................... (437.5)
--------
Consolidated Totals....................................... $ (310.0)
========
</Table>
(d) Amount for 2000 includes charges totaling $248.3 million for the following:
(1) $122.4 million related to the consolidation of manufacturing capacity;
(2) a net charge of $52.4 million related to early retirement incentives and
special termination benefits for 350 U.S. salaried employees;
(3) $40.0 million related to the impairment of property, plant and equipment
at facilities in India; and (4) $33.5 million related principally to the
write-off of software and related development costs.
45
<Page>
These items were recorded in the third quarter of 2000. Such items are
included as follows in consolidated EBIT for 2000 (in millions of dollars):
<Table>
Glass Containers............................................ $186.0
Plastics Packaging.......................................... 11.2
------
Total Product Segments.................................... 197.2
Eliminations and other retained items....................... 51.1
------
Consolidated Totals....................................... $248.3
======
</Table>
Consolidated net sales for 2001 decreased $149.6 million, or 2.7%, over the
prior year. Net sales of the Glass Containers segment decreased $124.4 million
from 2000. In North America, the additional sales from the acquisition of the
Canadian operations were more than offset by decreased shipments of containers
for beer producers and conversions of certain juice and iced tea from glass to
plastic containers. The combined U.S. dollar sales of the segment's foreign
affiliates decreased from the prior year. Increased shipments from operations
throughout most of Europe and South America were more than offset by the effects
of a strong U.S. dollar and lower shipments from operations in the United
Kingdom and most of the Asia Pacific region. The effect of changing foreign
currency exchange rates reduced U.S. dollar sales of the segment's foreign
affiliates by approximately $140 million. Net sales of the Plastics Packaging
segment increased $29.9 million, or 1.7%, over 2000, reflecting increased
shipments of plastic containers and closures for food and health care, as well
as prescription products, and the effects of higher resin costs on pass-through
arrangements with customers, partially offset by lower shipments of plastic
containers for juice and other beverages and the effect of changing foreign
currency exchange rates, principally in Australia. The effects of higher resin
costs increased sales by approximately $32 million compared to 2000.
Segment EBIT for 2001, excluding the 2001 and 2000 unusual items, decreased
$15.3 million to $822.2 million, or 15.2% of net sales, from 2000 segment EBIT
of $837.5 million, or 15.1% of net sales. Consolidated operating expense
(consisting of selling and administrative, engineering, and research and
development expenses) as a percentage of net sales was 7.7% in 2001 compared to
6.5% in 2000. The increase in operating expenses is attributed to lower pension
income and higher costs of certain employee benefit programs. EBIT of the Glass
Containers segment decreased $4.7 million, or 0.8%, to $582.5 million, compared
to $587.2 million in 2000. The combined U.S. dollar EBIT of the segment's
foreign affiliates increased from prior year. Increased shipments from
operations throughout most of Europe and South America were partially offset by
the effects of a strong U.S. dollar, higher energy costs worldwide, and lower
shipments from operations in the United Kingdom and most of the Asia Pacific
region. In the United States, Glass Container EBIT decreased from 2000
principally due to higher energy costs, which have not been fully recovered
through price adjustments. EBIT of the Plastics Packaging segment decreased
$1.3 million, or 0.5%, to $247.9 million, compared to $249.2 million in 2000.
Increased shipments of plastic containers and closures for food and health care,
as well as prescription products, were more than offset by lower shipments of
plastic containers for juice and other beverages and one-time costs associated
with the relocation of a U.S. manufacturing operation to a new and larger
facility to accommodate a growing business base.
Eliminations and other retained items, excluding the 2001 and 2000 unusual
items, declined $81.3 million from 2000 reflecting lower net financial services
income due to the sale of the Harbor Capital Advisors business, higher spending
on information systems, and certain employee benefit costs increases.
The 2001 results include a net pretax gain of $310.0 million
($170.5 million after tax and minority share owners' interest) for the
following: (1) a gain of $457.3 million ($284.4 million after tax) related to
the sale of the Harbor Capital Advisors business; (2) gains totaling
$13.1 million ($12.0 million after tax) related to the sale of the label
business and the sale of a minerals business in Australia;
46
<Page>
(3) charges of $82.1 million ($65.3 million after tax and minority share owners'
interests) related to restructuring and impairment charges at certain
international glass operations, principally Venezuela and Puerto Rico, as well
as certain other domestic and international operations; (4) a charge of
$31.0 million (pretax and after tax) related to the loss on the sale of
facilities in India; (5) charges of $30.9 million ($19.4 million after tax)
related to special employee benefit programs; (6) a charge of $8.5 million
($5.3 million after tax) for certain contingencies; and (7) a charge of
$7.9 million ($4.9 million after tax) related to restructuring manufacturing
capacity in the medical devices business.
The 2000 results include pretax charges totaling $248.3 million
($171.0 million after tax and minority share owners' interests) for the
following: (1) $122.4 million ($77.3 million after tax and minority share
owners' interests) related to the consolidation of manufacturing capacity;
(2) a net charge of $52.4 million ($32.6 million after tax) related to early
retirement incentives and special termination benefits for 350 United States
salaried employees; (3) $40.0 million (pretax and after tax) related to the
impairment of property, plant and equipment at facilities in India; and
(4) $33.5 million ($21.1 million after tax and minority share owners' interests)
related principally to the write-off of software and related development costs.
COMPARISON OF 2000 WITH 1999
For the year ended December 31, 2000, OI Group recorded net earnings of
$72.3 million compared to earnings before extraordinary items of $299.1 million
for 1999. Net earnings of $298.3 million for 1999 reflect $0.8 million of
extraordinary charges from the early extinguishment of debt. Excluding the
effects of unusual items for both 2000 and 1999 discussed in the table below, OI
Group's 2000 earnings of $234.0 million decreased $55.5 million, or 19.2%, from
1999 earnings before extraordinary items of $289.5 million.
The 2000 results include the unusual items discussed above. The 1999 results
included the following unusual items: (1) gains totaling $40.8 million
($23.6 million after tax and minority share owners' interests) related to the
sales of a U.S. glass container plant and a mold manufacturing business in
Colombia and (2) charge totaling $20.8 million ($14.0 million after tax and
minority share owners' interests) related principally to restructuring costs and
write-offs of certain assets in Europe and South America.
Consolidated EBIT, excluding unusual items, for 2000 was $860.9 million, a
decrease of $14.3 million, or 1.6%, compared to consolidated EBIT for 1999,
excluding unusual items, of $875.2 million. The decrease is attributable to
lower EBIT for the Plastics Packaging segment, partially offset by slightly
higher EBIT for the Glass Containers segment. Results of both segments are
discussed further below. Interest expense, net of interest income, increased
$56.8 million from the 1999 period due principally to higher interest rates. The
$8.8 million increase in minority share owners' interests in earnings of
subsidiaries resulted from higher net earnings of certain foreign affiliates,
principally the affiliates in Colombia, Venezuela and Brazil. Exclusive of the
adjustment for net income tax liabilities in Italy and other unusual items
previously discussed, the effective tax rate for 2000 was 36.9%. This compares
with a rate of 36.9% for 1999, excluding unusual items.
47
<Page>
Capsule segment results (in millions of dollars) for 2000 and 1999 were as
follows (a):
<Table>
<Caption>
NET SALES TO UNAFFILIATED CUSTOMERS 2000 1999
- ----------------------------------- -------- --------
Glass Containers............................................ $3,695.6 $3,762.6
Plastics Packaging.......................................... 1,787.6 1,686.7
Other....................................................... 68.9 73.6
-------- --------
Segment and consolidated net sales.......................... $5,552.1 $5,522.9
-------- --------
</Table>
<Table>
<Caption>
EBIT 2000(B) 1999
- ---- -------- --------
Glass Containers............................................ $ 401.2 $ 602.4(c)
Plastics Packaging.......................................... 238.0 277.7
Other....................................................... 1.1 9.2
-------- --------
Segment EBIT................................................ 640.3 889.3
Eliminations and other retained items..................... (27.7) 5.9
-------- --------
Consolidated EBIT........................................... $ 612.6 $ 895.2
-------- --------
</Table>
- ------------------------
(a) See "Consolidated Financial Statements--Segment Information."
(b) EBIT for 2000 includes charges totaling $248.3 million for the following:
(1) $122.4 million related to the consolidation of manufacturing capacity;
(2) a net charge of $52.4 million related to early retirement incentives and
special termination benefits for 350 U.S. salaried employees;
(3) $40.0 million related to the impairment of property, plant and equipment
at facilities in India; and (4) $33.5 million related principally to the
write-off of software and related development costs. These items were
recorded in the third quarter of 2000. These items decreased segment EBIT as
follows: Glass Containers--$186.0 million; Plastics
Packaging--$11.2 million; Eliminations and other retained
items--$51.1 million.
(c) EBIT for 1999 includes: (1) gains totaling $40.8 million related to the
sales of a U.S. glass container plant and a mold manufacturing business in
Colombia; and (2) charges totaling $20.8 million related principally to
restructuring costs and write-offs of certain assets in Europe and South
America.
Consolidated net sales for 2000 increased $29.2 million, or 0.5%, over the
prior year. Net sales of the Glass Containers segment decreased $67.0 million
from 1999. In the U.S., the effect of increased shipments of containers for beer
producers was partially offset by lower shipments of certain food containers.
The combined U.S. dollar sales of the segment's foreign affiliates decreased
from the prior year due to the strength of the U.S. dollar. Increased shipments
from the operations throughout most of Europe, South America and the Asia
Pacific region were more than offset by lower shipments from the operations in
the U.K. and the effects of a strong U.S. dollar. The effect of changing foreign
currency exchange rates reduced U.S. dollar sales of the segment's foreign
affiliates by approximately $230 million. Net sales of the Plastics Packaging
segment increased $100.9 million, or 6.0%, over 1999, reflecting increased
shipments of plastic containers for juices, closures for food and beverages, and
the effects of higher resin costs on pass-through arrangements with customers,
partially offset by lower shipments of household, health care and personal care
containers. The effects of higher resin costs increased sales by approximately
$90 million compared to 1999.
Segment EBIT for 2000, excluding the 2000 and 1999 unusual items, decreased
$31.8 million to $837.5 million, or 15.1% of net sales, from 1999 segment EBIT
of $869.3 million, or 15.7% of net sales. Consolidated operating expense
(consisting of selling and administrative, engineering, and research and
development expenses) as a percentage of net sales was 6.5% in 2000 compared to
6.8% in 1999. EBIT of the Glass Containers segment increased $4.8 million, or
0.8%, to $587.2 million, compared to $582.4 million in 1999. The combined U.S.
dollar EBIT of the segment's foreign affiliates increased
48
<Page>
from the prior year. Increased shipments from the operations throughout most of
Europe, South America, and the Asia Pacific region, and a gain from the
restructuring of the ownership in two small joint ventures in South America were
partially offset by the effects of a strong U.S. dollar, higher energy costs
worldwide, and expenses associated with the scheduled rebuild of a glass melting
furnace in Australia. In the U.S., Glass Container EBIT decreased from 1999
principally due to higher energy costs and conversions of juice and iced tea
bottles from glass to plastic containers, partially offset by further
improvements in cost structure. EBIT of the Plastics Packaging segment decreased
$28.5 million, or 10.3%, to $249.2 million, compared to $277.7 million in 1999.
Increased shipments of plastic containers for juices and closures for food and
beverages were more than offset by lower shipments of household, health care,
and personal care containers and costs incurred in connection with the start-up
of new custom polyethylene terephthalate (PET) capacity, including a new plastic
bottle plant.
Eliminations and other retained items improved $17.5 million from 1999
principally due to higher net financial services income.
The 2000 results included pretax charges totaling $248.3 million
($171.0 million after tax and minority share owners' interests) for the
following: (1) $122.4 million ($77.3 million after tax and minority share
owners' interests) related to the consolidation of manufacturing capacity;
(2) a net charge of $52.4 million ($32.6 million after tax) related to early
retirement incentives and special termination benefits for 350 U.S. salaried
employees; (3) $40.0 million ($40.0 million after tax) related to the impairment
of property, plant and equipment at facilities in India; and (4) $33.5 million
($21.1 million after tax and minority share owners' interests) related
principally to the write-off of software and related development costs.
The 1999 results included the following unusual items: (1) gains totaling
$40.8 million ($23.6 million after tax and minority share owners' interests)
related to the sales of a U.S. glass container plant and a mold manufacturing
business in Colombia; and (2) charges totaling $20.8 million ($14.0 million
after tax and minority share owners' interests) related principally to
restructuring costs and write-offs of certain assets in Europe and South
America.
RESTRUCTURING AND IMPAIRMENT CHARGES
The 2001 operating results include pretax charges of $90.0 million related
to the following: (1) charges of $82.1 million principally related to a
restructuring program and impairment at certain of the international and
domestic operations. The charge includes the impairment of assets at OI Group's
affiliate in Puerto Rico and the consolidation of manufacturing capacity and the
closing of a facility in Venezuela. The program also includes consolidation of
capacity at certain other international and domestic facilities in response to
decisions about pricing and market strategy and (2) a charge of $7.9 million
related to restructuring manufacturing capacity in the medical devices business.
OI Group expects its actions related to these restructuring and impairment
charges to be completed during the next several quarters. The cost savings
resulting from the 2001 restructuring are not expected to be material on an
annual basis.
2000 operating results included a pretax charge of $248.3 million recorded
in the third quarter, principally related to a restructuring and capacity
realignment program. The restructuring and capacity realignment program,
initiated in the third quarter of 2000, included the consolidation of
manufacturing capacity and a reduction of 350 employees in the U.S. salaried
work force, or about 10%, principally as a result of early retirement
incentives. Also included in the charge was a write-down of plant and equipment
for OI Group's glass container affiliate in India and certain other asset
write-offs, including $27.9 million for software which had been abandoned.
Manufacturing capacity consolidations principally involved U.S. glass container
facilities and reflect technology-driven improvements in productivity,
conversions from some juice and similar products to plastic containers,
decisions regarding pricing and volume, and the further concentration of
production in the most strategically-located facilities.
49
<Page>
CAPITAL RESOURCES AND LIQUIDITY
Total debt at March 31, 2002 was $5.43 billion, compared to $5.40 billion at
December 31, 2001, and $5.64 billion at March 31, 2001.
During April 2001, certain of OI Group's subsidiaries entered into the
secured credit agreement with a group of banks, which expires on March 31, 2004.
The secured credit agreement provides for a $3.0 billion revolving credit
facility and a term loan of $65.0 million (initially $1.5 billion). The
borrowers under the term loan used the proceeds therefrom to repay intercompany
amounts owed to OI Inc., which in turn used the proceeds from the repayment of
such intercompany amounts to repay amounts outstanding under, and terminate, its
existing credit agreement.
At March 31, 2002, term loans and the available credit totaled
$3.065 billion under the secured credit agreement, of which $479.5 million had
not been utilized. At December 31, 2001, $491.4 million of available credit had
not been utilized under the secured credit agreement. Cash provided by operating
activities was $36.4 million for the first three months of 2002 compared to
$36.8 million for the first three months of 2001.
In June 2001, OI Group completed the sale of its Harbor Capital Advisors
business to Robeco Groep N.V. Harbor Capital Advisors is the adviser to the
Harbor Fund family of mutual funds and the pension funds of several companies,
including OI Inc. OI Group used substantially all the net cash proceeds from the
sale to reduce the outstanding term loan under the secured credit agreement by
$455 million.
On October 1, 2001, one of OI Group's subsidiaries completed the acquisition
of the Canadian glass container assets of Consumers Packaging Inc. for a
purchase price of approximately $150 million and the assumption of certain
liabilities. The Ontario Superior Court of Justice approved the transaction as
part of a restructuring plan by Consumers Packaging. The purchase price was
financed by borrowings under the secured credit agreement.
During January 2002, the Company completed the private placement of the
notes. Net cash proceeds were used to reduce the outstanding term loan under the
secured credit agreement by $980.0 million. As a result, the Company wrote off
unamortized deferred financing fees in January 2002 related to the term loan and
recorded an extraordinary charge totaling $10.9 million less applicable income
taxes of $4.2 million.
OI Inc. has substantial obligations related to semiannual interest payments
on $1.7 billion of outstanding public debt securities. In addition, OI Inc. pays
aggregate annual dividends of $21.5 million on 9,050,000 shares of its $2.375
convertible preferred stock. OI Inc. also makes, and expects in the future to
make, substantial indemnity payments and payments for legal fees and expenses in
connection with asbestos-related lawsuits and claims. OI Inc.'s asbestos-related
payments for the year ended December 31, 2001, was $245.9 million. OI Inc.
expects that the gross amount of total asbestos-related payments will be
moderately lower in 2002 compared to 2001. OI Inc. relies primarily on
distributions from OI Group to meet these obligations. Based on OI Inc.'s
expectations regarding future payments for lawsuits and claims, and also based
on OI Group's expected operating cash flow, OI Group believes that the payments
to OI Inc. for any deferred amounts of previously settled or otherwise
determined lawsuits and claims, and the resolution of presently pending and
anticipated future lawsuits and claims associated with asbestos, will not have a
material adverse effect upon OI Group's liquidity on a short-term or long-term
basis.
The secured credit agreement contains covenants and provisions that, among
other things, restrict the ability of OI Group and its subsidiaries to dispose
of assets, incur additional indebtedness, prepay other indebtedness or amend
certain debt instruments, pay dividends, create liens on assets, enter into
contingent obligations, enter into sale and leaseback transactions, make
investments, loans or advances, make acquisitions, engage in mergers or
consolidations, change the business conducted by OI Group
50
<Page>
and its subsidiaries, engage in certain transactions with affiliates and
otherwise restrict certain corporate activities. In addition, the secured credit
agreement contains financial covenants that require OI Group and its
subsidiaries to maintain, based upon the financial statements of OI Inc. and its
subsidiaries on a consolidated basis, specified financial ratios and tests,
including minimum fixed charge coverage ratios, maximum leverage ratios, minimum
net worth and specified capital expenditure tests.
OI Group anticipates that cash flow from its operations and from utilization
of credit available through March 2004 under the secured credit agreement will
be sufficient to fund its operating and seasonal working capital needs, debt
service, and other obligations including payments to OI Inc. described above.
The indenture for the notes will restrict, among other things, the ability
of OI Group and its restricted subsidiaries to borrow money, pay dividends on,
or redeem or repurchase, stock, make investments, create liens, enter into
certain transactions with affiliates and sell certain assets or merge with or
into other companies.
The following information summarizes OI Group's significant contractual cash
obligations at December 31, 2001 (millions of dollars).
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
-------------------------------------------
LESS THAN
TOTAL ONE YEAR 1-3 YEARS 4+ YEARS
-------- --------- --------- --------
Contractual cash obligations:
Long-term debt............................................ $5,358.3 $30.8 $2,848.6 $2,478.9
Capital lease obligations................................. 2.2 2.2
Operating leases.......................................... 243.1 62.0 120.1 61.0
-------- ----- -------- --------
Total contractual cash obligations...................... $5,603.6 $92.8 $2,970.9 $2,539.9
======== ===== ======== ========
</Table>
<Table>
<Caption>
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
-------------------------------------------
LESS THAN
TOTAL ONE YEAR 1-3 YEARS 4+ YEARS
-------- --------- --------- --------
Other commercial commitments:
Lines of credit........................................... $2,410.4 $2,410.4
Standby letters of credit................................. 98.2 $ 98.2
Guarantees................................................ 35.3 $35.3
-------- --------- -------- -----
Total commercial commitments............................ $2,543.9 $ 98.2 $2,410.4 $35.3
======== ========= ======== =====
</Table>
CRITICAL ACCOUNTING ESTIMATES
EXCESS OF PURCHASE COST OVER NET ASSETS ACQUIRED
The excess of purchase cost over net assets acquired, net of accumulated
amortization ("goodwill") was $2.6 billion, $3.0 billion and $3.1 billion at
March 31, 2002, and December 31, 2001 and 2000, respectively. This represents
27%, 30% and 31% of total assets, and 138%, 129% and 147% of share owner's
equity at March 31, 2002, and December 31, 2001 and 2000, respectively. Goodwill
represents the excess of purchase price and related costs over the fair values
assigned to the net tangible and identifiable intangible assets of businesses
acquired, and under accounting standards in effect through 2001, was amortized
over 40 years. In assigning a benefit period to goodwill, OI Group considers
regulatory provisions, the technological environment in which the acquired
company operates, including barriers to new competing entities, the maturity of
the products manufactured by the businesses acquired, and the effects of
obsolescence, demand, competition and other economic factors. OI Group has
determined that no events or circumstances occurred in 2001 to warrant revised
estimates of the goodwill benefit period.
51
<Page>
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations," which is
effective for business combinations initiated after June 30, 2001. Also in
July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"), which is effective for goodwill acquired after June 30, 2001.
For goodwill acquired prior to June 30, 2001, SFAS No. 142 will be effective for
fiscal years beginning after December 15, 2001. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives will no longer be amortized but will be
reviewed annually (or more frequently if impairment indicators arise) for
impairment.
Beginning in 2002, OI Group will evaluate goodwill annually (or more
frequently if impairment indicators arise) for impairment. Goodwill impairment
testing is performed using the business enterprise value ("BEV") of each
reporting unit which is calculated as of a measurement date, by determining the
present value of debt-free, after tax future cash flows, discounted at the
weighted average cost of capital of a hypothetical third party buyer. This BEV
is then compared to the book value of each reporting unit as of the measurement
date to assess whether an impairment exists under FAS 142. If certain
assumptions in the BEV change, such as EBIT projections, cash flow projections,
or risk adjusted cost of capital, goodwill may have to be written down.
PENSION BENEFIT PLANS FUNDED STATUS
Because of their funded status, OI Group's principal pension benefit plans
contributed pretax credits to earnings of $97.0 million in 2001, $105.4 million
in 2000 and $74.4 million in 1999. OI Group expects that the amount of such
credits for 2002 will be approximately 15% lower than in 2001. The decrease in
pretax pension credits is attributed to lower expected return on assets and the
addition of certain pension plans from the acquisition of the Canadian glass
container assets of Consumers Packaging Inc. A one-half percentage point change
in the actuarial assumption regarding the expected return on assets would result
in a change of approximately $15 million in pretax pension credits. The funded
status of the plans provides assurance of benefits for participating employees,
but future effects on operating results depend on economic conditions and
investment performance.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to OI Group's operations result primarily from
fluctuations in foreign currency exchange rates, changes in interest rates, and
changes in commodity prices, principally natural gas. OI Group uses certain
derivative instruments to mitigate a portion of the risk associated with
changing foreign currency exchange rates and fluctuating natural gas prices.
FOREIGN CURRENCY EXCHANGE RATE RISK
A substantial portion of OI Group's operations consists of manufacturing and
sales activities conducted by affiliates in foreign jurisdictions. The primary
foreign markets served by OI Group's affiliates are in Australia, South America
(principally Colombia, Brazil and Venezuela) and Europe (principally Italy, the
U.K. and Poland). In general, revenues earned and costs incurred by OI Group's
major foreign affiliates are denominated in their respective local currencies.
Consequently, OI Group's reported financial results could be affected by factors
such as changes in foreign currency exchange rates or highly inflationary
economic conditions in the foreign markets in which OI Group's affiliates
operate. When the U.S. dollar strengthens against foreign currencies, the
reported dollar value of local currency EBIT generally decreases; when the U.S.
dollar weakens against foreign currencies, the reported U.S. dollar value of
local currency EBIT generally increases.
Subject to other business and tax considerations, OI Group's strategy is to
mitigate the economic effects of currency exchange rate fluctuations on that
portion of foreign currency EBIT which is expected to be invested elsewhere or
remitted to the parent company. OI Group's foreign affiliates
52
<Page>
generally invest their excess funds in U.S. dollars or dollar-based instruments,
where such instruments are available with acceptable interest rates and terms.
In those countries where the local currency is the designated functional
currency, however, this strategy exposes OI Group to reported losses or gains in
the event the foreign currency strengthens or weakens against the U.S. dollar.
OI Group believes that the benefit of investing excess cash in U.S. dollars or
their equivalent outweighs the risk of reporting losses or gains from currency
exchange rate fluctuations. In those countries with hyper-inflationary
economies, where the U.S. dollar is the designated functional currency, this
investment strategy for excess funds mitigates the risk of reported losses or
gains.
Because most of OI Group's foreign affiliates operate within their local
economic environment, OI Group believes it is appropriate to finance those
operations with local currency borrowings to the extent practicable.
Considerations which influence the amount of such borrowings include long- and
short-term business plans, tax implications, and the availability of borrowings
with acceptable interest rates and terms. In those countries where the local
currency is the designated functional currency, this strategy mitigates the risk
of reported losses or gains in the event the foreign currency strengthens or
weakens against the U.S. dollar. In those countries where the U.S. dollar is the
designated functional currency, however, local currency borrowings expose OI
Group to reported losses or gains in the event the foreign currency strengthens
or weakens against the U.S. dollar.
OI Group's secured credit agreement provides for U.S. dollar borrowings by
certain foreign affiliates. As of March 31, 2002, amounts outstanding under the
secured credit agreement borrowed by foreign affiliates were:
<Table>
<Caption>
MILLIONS OF
AFFILIATE LOCATION U.S. DOLLARS
- ------------------ ------------
Australia................................................... $828.1
United Kingdom.............................................. 106.0
------
$934.1
======
</Table>
A significant portion of the above borrowings along with U.S. dollar
borrowings through intercompany loans, has been swapped into local currencies
using currency swaps. OI Group accounts for these swaps as fair value hedges. As
such, the changes in the value of the swaps are included in other expense and
are expected to substantially offset any exchange rate gains or losses on the
related U.S. dollar borrowings.
As of March 31, 2002, OI Group's affiliate in Australia has swapped
$650.0 million of borrowings into $1,275.0 million of Australian dollars. This
swap matures on March 31, 2003, with interest resets every 90 days. The interest
reset terms of the swap approximate the terms of the U.S. dollar borrowings.
This derivative instrument swaps both the interest and principal from U.S.
dollars to Australian dollars and also swaps the interest rate from a U.S. based
rate to an Australian based rate. OI Group's affiliate in the United Kingdom has
swapped $200.0 million of borrowings into 139.0 million British pounds. This
swap also matures on March 31, 2003, with interest resets every 90 days. This
derivative instrument swaps both the interest and principal from U.S. dollars to
British pounds and also swaps the interest rate from a U.S. based rate to a
British based rate.
On October 1, 2001, OI Group completed the acquisition of the Canadian glass
container assets of Consumers Packaging Inc. for a purchase price of
approximately $150 million and the assumption of certain liabilities. OI Group
financed this purchase through borrowings under the secured credit agreement,
which were transferred to Canada through intercompany loans in U.S. dollars. OI
Group's affiliate in Canada has entered into swap transactions to manage the
affiliate's exposure to fluctuating foreign exchange rates by swapping the
principal and interest portion of the intercompany loan. At March 31, 2002, the
Canadian affiliate has swapped $90.0 million of U.S. dollar borrowings into
$142.0 million Canadian dollars. This swap matures on October 1, 2003. This
derivative instrument
53
<Page>
swaps both the interest and principal from U.S. dollars to Canadian dollars and
also swaps the interest rate from a U.S. based rate to a Canadian based rate.
The affiliate has also entered into a forward hedge related to the fourth
quarter interest receivable and payable related to the previous swap. The
affiliate has also entered in forward hedges which effectively swap $10 million
of U.S. dollar borrowings into $16 million Canadian dollars. These hedges swap
both the interest and principal from U.S. dollars to Canadian dollars and mature
monthly.
The remaining portion of OI Group's consolidated debt which was denominated
in foreign currencies was not significant.
OI Group believes it does not have material foreign currency exchange rate
risk related to local currency denominated financial instruments (I.E., cash,
short-term investments and long-term debt) of its foreign affiliates.
INTEREST RATE RISK
OI Group's interest expense is most sensitive to changes in the general
level of U.S. interest rates applicable to its U.S. dollar indebtedness. To
mitigate the impact of fluctuations in variable interest rates, OI Group could,
at its option, convert to fixed interest rates by either refinancing variable
rate debt with fixed rate debt or entering into interest rate swaps.
The following table provides information about OI Group's significant
interest rate risk at March 31, 2002.
<Table>
<Caption>
OUTSTANDING FAIR VALUE
----------- ----------
(MILLIONS OF DOLLARS)
Variable rate debt:
Secured Credit Agreement, matures March 31, 2004:
Revolving Loans, interest at a Eurodollar based rate plus
2.00%................................................... $2,424.1 $2,424.1
Term Loan, interest at a Eurodollar based rate plus
2.50%................................................... $ 65.0 $ 65.0
</Table>
The fair value of the OI Inc. debt being guaranteed by OI Group at
March 31, 2002 was $1,603.5 million.
COMMODITY RISK
OI Group is exposed to fluctuation of various commodity prices, most
significantly, the changes in prices related to natural gas. OI Group purchases
a significant amount of natural gas at nationally quoted market prices. OI Group
uses commodity futures contracts related to a portion of its forecasted future
natural gas requirements. The objective of these futures contracts is to limit
the fluctuations in prices paid and the potential volatility in earnings or cash
flows from future price movements. During January of 2002, OI Group entered into
commodity futures contracts for approximately 50% of its domestic natural gas
usage (approximately 800 million BTUs) through the end of 2002. OI Group has
also entered into additional contracts during 2002 in order to hedge its natural
gas needs through the end of 2002. At March 31, 2002, an unrealized net gain of
$3.0 million (net of tax) related to these commodity futures contracts was
included in OCI. There was no ineffectiveness recognized during the three months
ended March 31, 2002.
54
<Page>
BUSINESS
OI Group is one of the world's leading manufacturers of packaging products.
OI Group is the largest manufacturer of glass containers in North America, South
America, Australia and New Zealand, and one of the largest in Europe. In
addition, OI Group is a leading manufacturer in North America of plastic
containers, plastic closures and plastic prescription containers. OI Group also
has plastics packaging operations in South America, Europe, Australia and New
Zealand. Consistent with its strategy to continue to strengthen its existing
packaging businesses, OI Group has acquired 18 glass container businesses in 18
countries since 1991, including businesses in South America, Central and Eastern
Europe and the Asia Pacific region, and six plastics packaging businesses with
operations in 11 countries.
OI Group believes it is a technological leader in the worldwide glass
container and plastics packaging segments of the rigid packaging market. During
the five years ended December 31, 2001, OI Group invested more than
$2.3 billion in capital expenditures (excluding acquisitions) and more than
$342.0 million in research, development and engineering to, among other things,
improve labor and machine productivity, increase capacity in growing markets and
commercialize technology into new products.
OI Group is a holding company with subsidiaries operating in two product
segments:
- glass containers, manufactured by us; and
- plastics packaging, manufactured principally by subsidiaries of OI Plastic
Products FTS Inc.
GLASS CONTAINERS
We are an indirect, wholly-owned subsidiary of OI Group and a leading
manufacturer of glass containers throughout the world. Approximately one of
every two glass containers made worldwide is made by us, our affiliates or our
licensees. Worldwide glass container sales represented 66% of OI Group's
consolidated net sales for the year ended December 31, 2001 and 66% of those
sales for the three months ended March 31, 2002. For the three months ended
March 31, 2002, we manufactured approximately 41% of all glass containers sold
by domestic producers in the U.S., making us the leading manufacturer of glass
containers in the U.S. We are the leading glass container manufacturer in 17 of
the 19 countries where we compete in the glass container segment of the rigid
packaging market and the sole manufacturer of glass containers in eight of these
countries.
PRODUCTS AND SERVICES
In the U.S., we produce glass containers for malt beverages including beer
and ready to drink low alcohol refreshers, food, tea, juice, liquor, wine and
pharmaceuticals. We also produce glass containers for soft drinks, principally
outside the U.S. We manufacture these products in a wide range of sizes, shapes
and colors. As a leader in glass container innovation, we are active in new
product development.
CUSTOMERS
In most of the countries where we compete, we have the leading position in
the glass container segment of the rigid packaging market (based on units sold).
Our largest customers include many of the leading manufacturers and marketers of
glass packaged products in the world. In the U.S., the majority of our customers
for glass containers are brewers, food producers, distillers and wine vintners.
Outside of the U.S., glass container customers also include soft drink bottlers.
Our largest U.S. glass container customers include (in alphabetical order)
Anheuser-Busch, Cadbury, Coors, Gerber, H.J. Heinz and Miller Brewing. Our
largest international glass container customers include Diageo, Foster's,
Heineken, Labatt, Lion Nathan and Molson. We are the sole glass container
supplier to many of these "blue chip" customers.
55
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We sell most of our glass container products directly to customers under
annual or multi-year supply agreements. We also sell some of our products
through distributors. Glass containers are typically scheduled for production in
response to customers' orders for their quarterly requirements.
MARKETS AND COMPETITIVE CONDITIONS
The principal markets for our glass container products are in North America,
South America, Europe and the Asia Pacific region. We believe we are the
low-cost producer in the glass container segment of the North American rigid
packaging market, as well as the low-cost producer in most of the international
glass container segments in which we compete. Much of this cost advantage is due
to the proprietary equipment and process technology we use. Our machine
development activities and systematic upgrading of production equipment in the
1980's and 1990's have given us low-cost leadership in the glass container
segment in many of the countries in which we compete, a key strength to
competing successfully in the rigid packaging market.
We have the leading share of the glass container segment of the U.S. rigid
packaging market based on units sold by domestic producers in the U.S., with our
sales representing approximately 41% of that segment for the three months ended
March 31, 2002. Our principal glass container competitors in the U.S. are
Saint-Gobain Containers Co., a wholly-owned subsidiary of Compagnie de
Saint-Gobain, and Anchor Glass Container Corporation.
In supplying glass containers outside of the U.S., we compete directly with
Compagnie de Saint-Gobain in Italy and Brazil, Rexam plc and Ardagh plc in the
U.K., Vetropak in the Czech Republic and Amcor Limited in Australia. In other
locations in Europe, we compete indirectly with a variety of glass container
firms including Compagnie de Saint-Gobain, BSN Glasspack, Vetropak and Rexam
plc. Except as mentioned above, we do not compete with any large, multi-national
glass container manufacturers in South America or the Asia Pacific region.
In addition to competing with other large, well-established manufacturers in
the glass container segment, we compete with manufacturers of other forms of
rigid packaging, principally aluminum cans and plastic containers, on the basis
of quality, price and service. The principal competitors producing metal
containers are Crown Cork & Seal Company, Inc., Rexam plc, Ball Corporation and
Silgan Holdings Inc. The principal competitors producing plastic containers are
Consolidated Container Holdings, LLC, Graham Packaging Company, Plastipak
Packaging, Inc. and Silgan Holdings Inc. We also compete with manufacturers of
non-rigid packaging alternatives, including flexible pouches and aseptic
cartons, in serving the packaging needs of juice customers.
Our unit shipments of glass containers in countries outside of the U.S. have
grown substantially from levels of the early 1990's. We have added to our
international operations by acquiring glass container companies, many of which
have leading positions in growing or established markets, increasing capacity at
select foreign affiliates, and maintaining the global network of glass container
companies that license our technology. In many developing countries, our
international glass operations have benefited in the last ten years from
increased consumer spending power, a trend toward the privatization of industry,
a favorable climate for foreign investment, lowering of trade barriers and
global expansion programs by multi-national consumer companies. Due to the
weighting of labor as a production cost, glass containers have a significant
cost advantage over plastic and metal containers in developing countries where
labor wage rates are relatively low.
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Our majority ownership positions in international glass affiliates are
summarized below:
<Table>
<Caption>
COMPANY/COUNTRY OWNERSHIP %
- --------------- -----------
ACI Operations Pty. Ltd., Australia......................... 100.0
ACI Operations New Zealand Ltd., New Zealand................ 100.0
Avirunion, a.s., Czech Republic............................. 100.0
Karhulan Lasi Oy, Finland................................... 100.0
Manufacturera de Vidrios Planos, C.A., Venezuela............ 100.0
OI Canada Corp., Canada..................................... 100.0
United Glass Ltd., United Kingdom........................... 100.0
United Hungarian Glass, Hungary............................. 100.0
Vidrieria Rovira S.A., Spain................................ 100.0
A/S Jarvakandi Klaas, Estonia............................... 99.9
AVIR S.p.A., Italy.......................................... 99.7
Huta Szkla Jaroslaw S.A., Poland............................ 99.4
Huta Szkla Antoninek Sp.zo.o, Poland........................ 98.7
Vidrios Industriales S.A., Peru............................. 96.0
PT Kangar Consolidated Industries, Indonesia................ 93.9
Companhia Industrial Sao Paulo e Rio, Brazil................ 79.4
Owens-Illinois de Venezuela, C.A., Venezuela................ 74.0
ACI Guangdong Glass Company Ltd., China..................... 70.0
ACI Shanghai Glass Company Ltd., China...................... 70.0
Wuhan Owens Glass Container Company Ltd., China............. 70.0
Cristaleria del Ecuador S.A., Ecuador....................... 69.0
Cristaleria Peldar S.A., Colombia........................... 58.4
</Table>
NORTH AMERICA. In addition to our glass container operations in the U.S.,
our affiliate in Canada is the sole manufacturer of glass containers in that
country.
SOUTH AMERICA. Our affiliates in Colombia, Ecuador and Peru are the sole
manufacturers of glass containers in those countries. In both Brazil and
Venezuela, we are the leading manufacturer of glass containers. In South
America, there is a large infrastructure for returnable/refillable glass
containers. However, with improving economic conditions in South America after
the recessions of the late 1990's, our unit sales of non-returnable glass
containers have grown in Venezuela, Colombia and Brazil.
EUROPE. Our European glass container business has operations in eight
countries and is one of the largest in Europe. In Italy, our wholly-owned
affiliate, AVIR, is the leading manufacturer of glass containers and operates 13
glass container plants. AVIR accounted for approximately 49% of our total
European glass container sales in 2001. United Glass, our affiliate in the U.K.,
is a leading manufacturer of glass containers for the U.K. spirits business. In
Poland, we are the leading glass container manufacturer and currently operate
two plants. Our affiliate in the Czech Republic, Avirunion, is the leading glass
container manufacturer in that country and also ships a portion of its beer
bottle production to Germany. In Hungary, we are the sole glass container
manufacturer and serve the Hungarian food industry. In Finland and the Baltic
country of Estonia, we are the only manufacturer of glass containers. We
coordinate our production activities between Finland and Estonia in order to
efficiently serve the Finnish, Baltic and Russian markets. In recent years,
Western European brewers have been establishing beer production facilities in
Central Europe and the Russian Republic. Because these new beer plants use
high-speed filling lines, they require high quality glass containers in order to
operate properly. We believe we are well-positioned to meet this growing demand.
In Spain, we serve the market for wine bottles in the Barcelona area.
ASIA PACIFIC. We have glass operations in four countries in the Asia
Pacific region: Australia, New Zealand, Indonesia and China. Our Asia Pacific
affiliates are the leading manufacturers of glass containers in most of the
countries in which they compete. In Australia, we operate five glass container
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plants, including a plant focused on serving the needs of the rapidly growing
Australian wine industry. In New Zealand, we are the sole glass container
manufacturer. In Indonesia, our affiliate supplies the Indonesian market and
exports glass containers for food and pharmaceutical products to Australian
customers. In China, the glass container segments of the packaging market are
regional and highly fragmented with a number of local competitors. We have three
modern glass container plants in China manufacturing high-quality beer bottles
to serve Foster's as well as Anheuser-Busch, which is now producing
Budweiser-Registered Trademark- in and for the Chinese market.
We continue to focus on serving the needs of leading multi-national consumer
companies as they pursue international growth opportunities. We believe that we
and our affiliates are often the glass container partner of choice for such
multi-national consumer companies due to our leadership in glass technology and
our status as a low-cost producer in most of the markets we serve.
MANUFACTURING
We believe we are the low-cost producer in the glass container segment of
the North American rigid packaging market, as well as the low-cost producer in
most of the international glass segments in which we compete. Much of this cost
advantage is due to the proprietary equipment and process technology we use. We
believe our glass forming machines, developed and refined by our engineering
group, are significantly more efficient and productive than those used by our
competitors. Our machine development activities and systematic upgrading of
production equipment in the 1980's and 1990's have given us low-cost leadership
in the glass container segment in most of the countries in which we compete, a
key strength to competing successfully in the rigid packaging market.
Over the last ten years, we have more than doubled our overall glass
container labor and machine productivity in the U.S., as measured by output
produced per man-hour. By applying our technology and worldwide "best
practices," during this period we decreased the number of production employees
required per glass-forming machine line in the U.S. by over 35%, and we
increased the daily output of our glass-forming machines by approximately 40%.
METHODS OF DISTRIBUTION
Due to the significance of transportation costs and the importance of timely
delivery, glass container manufacturing facilities are generally located close
to customers. In the U.S., most of our glass container products are shipped by
common carrier to customers within a 250-mile radius of a given production site.
In addition, our glass container operations outside the U.S. export some
products to customers beyond their national boundaries, which may include
transportation by rail and ocean delivery in combination with common carriers.
We also operate several machine and mold shops that manufacture
high-productivity glass-forming machines, molds and related equipment.
SUPPLIERS AND RAW MATERIALS
The primary raw materials used in our glass container operations are sand,
soda ash and limestone. Each of these materials, as well as the other raw
materials we use to manufacture glass containers, have historically been
available in adequate supply from multiple sources. For certain raw materials,
however, there may be temporary shortages due to weather or other factors,
including disruptions in supply caused by raw material transportation or
production delays.
Worldwide suppliers of sand used in the production of glass containers
include Unimin Corporation, SCR Sibelco, U.S. Silica and Quarzwerke. There are a
number of suppliers of limestone and other minerals; these firms are regional
rather than worldwide in scope. Historically, prices for sand, limestone and
other minerals have not been subject to dramatic fluctuations.
Worldwide suppliers of soda ash include Solvay, FMC Corporation, OCI
Chemical, IMC Corporation and General Chemical Partners. Historically, prices
for soda ash have not been subject to dramatic fluctuations, except for
temporary spikes or troughs from time to time.
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GLASS RECYCLING
We are an important contributor to the recycling effort in the U.S. and
continue to melt substantial recycled glass tonnage in our glass furnaces. If
sufficient high-quality recycled glass were available on a consistent basis, we
have the technology to operate using 100% recycled glass. Using recycled glass
in our manufacturing process reduces energy costs and prolongs the operating
life of our glass melting furnaces.
FACILITIES
We have glass container operations located in 19 countries. The following
table lists the locations of our glass container plants and related facilities:
<Table>
<Caption>
NORTH AMERICA EUROPE ASIA PACIFIC SOUTH AMERICA
- ------------- ------------------------ ------------------------ ------------------------
CALIFORNIA CZECH REPUBLIC AUSTRALIA BRAZIL
Hayward Sokolov Adelaide Descalvado (#)
Los Angeles Teplice Brisbane Manaus (+)
Oakland ESTONIA Melbourne Rio de Janeiro
Tracy Jarvakandi Melbourne (Section) Sao Paulo
COLORADO FINLAND Perth COLOMBIA
Wheat Ridge (*) Karhula Sydney Buga
GEORGIA HUNGARY CHINA Cali (+)
Atlanta Oroshaza Guangzhou Envigado
ILLINOIS ITALY Shanghai Soacha
Godfrey (+) Asti Tianjin (Section) Zipaquira
Streator Bari Wuhan Zipaquira (#)
INDIANA Bologna INDONESIA ECUADOR
Lapel Milan (2 plants) Jakarta Guayaquil
MICHIGAN Napoli NEW ZEALAND PERU
Charlotte Napoli (Section) Auckland Callao
NEW YORK Pordenone VENEZUELA
Auburn Rome La Victoria
NORTH CAROLINA Termi Valencia
Winston-Salem Trento (2 plants) Valera
OHIO Treviso
Zanesville POLAND
OKLAHOMA Antoninek
Muskogee Jaroslaw
OREGON SPAIN
Portland Barcelona
PENNSYLVANIA UNITED KINGDOM
Brockway (+) Alloa
Clarion Birmingham (+)
Crenshaw Devilla (#)
TEXAS Harlow
Waco
VIRGINIA
Danville
Toano
PUERTO RICO
Vega Alta
CANADA
British Columbia
New Brunswick
Ontario (3 plants)
Quebec
</Table>
- --------------------------
(*) A 50-50 joint venture with Coors Brewing Company
(+) Machine manufacturing
(#) Silica sand plant
(Section) Mold shop
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PLASTICS PACKAGING
OI Group is a leading manufacturer in North America of plastic containers,
plastic closures and plastic prescription containers. OI Group also has plastics
packaging operations in South America, Europe, Australia and New Zealand.
Plastics packaging sales represented 34% of OI Group's consolidated net sales
for the year ended December 31, 2001 and 34% of those sales for the three months
ended March 31, 2002.
MANUFACTURING AND PRODUCTS
The plastics packaging business utilizes two basic manufacturing processes:
- Blow-Molded Plastics Packaging
Blow-molding is a plastics manufacturing process where pre-heated plastic is
captured inside a hollow mold and using pressurized air is blown, much like a
balloon, into a container. After being cooled, the mold is opened and the
plastic product is removed.
In blow-molded plastics packaging, OI Group is a leading U.S. manufacturer
of high density polyethylene (HDPE) containers. OI Group manufactures these
containers for products for the food and beverage, household, personal care,
health care and chemical and automotive fluid end-use categories.
OI Group is also a leading worldwide manufacturer of PET blow-molded
containers. Many of these PET containers are manufactured using multiple layers
of plastic, with each layer having a different function. Some of these plastic
layers have "barrier" properties, effectively blocking the escape of carbon
dioxide out of, and the permeation of oxygen into, the packaged product thereby
maintaining product quality and extending shelf life. Examples of products
packaged in multi-layer PET containers include Heinz ketchup and
Gatorade-Registered Trademark- sports drink. Major brewers, such as
Anheuser-Busch, Coors and Miller Brewing, are now marketing beer packaged in OI
Group's multi-layer PET beer bottles.
- Injection-Molded Plastics Packaging
Injection molding is a plastics manufacturing process where plastic resin in
the form of pellets or powder is melted and then injected or otherwise forced
under pressure into a mold. The mold is then cooled and the product is removed
from the mold.
OI Group develops and produces injection-molded plastic closures and closure
systems, which typically incorporate functional features such as tamper evidence
and child resistance or dispensing. Other products include trigger sprayers for
household cleaning products, finger and lotion pumps for fragrances and
cosmetics, as well as injection-molded containers for deodorant and toothpaste.
The prescription product unit manufactures injection-molded plastic
prescription containers. These products are sold primarily to drug wholesalers,
major drug chains and mail order pharmacies. Containers for prescriptions
include ovals, vials, ointment jars, dropper bottles and automation friendly
prescription containers.
CUSTOMERS
OI Group's largest customers (in alphabetical order) for plastic containers
and closures include Bristol-Myers Squibb, H.J. Heinz, Johnson & Johnson,
PepsiCo (Dole-Registered Trademark-, Gatorade-Registered Trademark-,
Tropicana-Registered Trademark-), Procter & Gamble and Unilever. The largest
customers for prescription containers include AmeriSourceBergen, Cardinal
Health, Eckerd Drug, McKesson, Merck-Medco, Rite-Aid and Walgreen.
OI Group sells most plastic containers, plastic closures and plastic
prescription containers directly to customers under annual or multi-year supply
agreements. These supply agreements typically allow a pass-through of resin
price increases and decreases, except for the prescription business. OI Group
also sells some of its products through distributors.
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MARKETS AND COMPETITIVE CONDITIONS
Major markets for plastics packaging include the food and beverage,
household products, personal care products, health care products and chemical
and automotive fluid industries.
The plastics segment of the rigid packaging market is competitive and
fragmented due to generally available technology, low costs of entry and
customer emphasis on low package cost. A large number of competitors exist on
both a national and regional basis. OI Group competes with other manufacturers
in the plastic containers segment on the basis of quality, price, service and
product design. The principal competitors producing plastic containers are
Consolidated Container Holdings, LLC, Graham Packaging Company, Plastipak
Packaging, Inc. and Silgan Holdings Inc. OI Group emphasizes total package
supply (I.E., bottle and closure system), diversified market positions,
proprietary technology and products, new package development and packaging
innovation. The plastic closures segment is divided into various categories in
which several suppliers compete for business on the basis of quality, price,
service and product design.
OI Group's approach has been to identify and serve areas of the plastics
packaging segment where customers seek distinctive and functional packaging to
differentiate their products among an array of choices offered to consumers. OI
Group believes it is a leader in technology and development of custom products
and has a leading market position in the U.S. for such products. OI Group
believes its plastic containers and plastic closures businesses have a
competitive advantage as a result of one of the shortest new product development
cycles in the industry, enabling it to respond quickly to customer needs in the
rapidly changing custom plastic containers and closures segments. OI Group's
product innovations in plastics packaging include in-mold labeling for
custom-molded bottles and multi-layer bottles containing post-consumer recycled
(PCR) plastic.
MANUFACTURING
The exact type of blow-molding manufacturing process OI Group uses is
dependent on the plastic product type and package requirements. These
blow-molding processes include: various types of extrusion blow-molding for
medium- and large-sized HDPE, low density polyethelene (LDPE), polypropylene and
polyvinyl chloride (PVC) containers; stretch blow-molding for medium-sized PET
containers; injection blow-molding for small health care and personal care
containers in various materials; two-stage PET blow-molding for high volume,
high performance mono-layer, multi-layer and heat-set PET containers; and
proprietary blow-molding for drain-back systems and other specialized
applications.
Injection-molding is used in the manufacture of plastic closures, trigger
sprayers, deodorant canisters, ink cartridges and vials. Compression-molding, an
advanced type of injection-molding, is used for high volume carbonated soft
drink and other beverage closures that require tamper evidence.
METHODS OF DISTRIBUTION
In the U.S., most of OI Group's plastic containers, plastic closures and
plastic prescription containers are shipped by common carrier. In addition, OI
Group's plastics packaging operations outside the U.S. export some products to
customers beyond their national boundaries, which may include transportation by
rail and ocean delivery in combination with common carriers.
SUPPLIERS AND RAW MATERIALS
OI Group manufactures containers and closures using HDPE, LDPE,
polypropylene, PVC, PET and various other plastic resins. OI Group also
purchases large quantities of master batch colorants, corrugated materials and
labels. In general, these raw materials are available in adequate supply from
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multiple sources. However, for certain raw materials, there may be temporary
shortages due to market conditions and other factors.
Worldwide suppliers of plastic resins used in the production of plastics
packaging include Voridian (formerly Eastman Chemical), Dow Chemical,
ExxonMobil, Basell, Chevron Phillips and BP Solvay. Historically, prices for
plastic resins have been subject to dramatic fluctuations. However, resin cost
pass-through provisions are typical in OI Group's supply contracts with its
plastics packaging customers.
With the exceptions of PolyOne, Ampacet and Clariant, each of which do
business worldwide, most suppliers of batch colorants are regional in scope.
Historically, prices for these raw materials have been subject to dramatic
fluctuations. However, cost recovery for batch colorants is included in resin
pass-through provisions which are typical in OI Group's supply contracts with
its plastics packaging customers.
Worldwide suppliers of corrugated materials include International Paper,
Georgia-Pacific, Weyerhaeuser, Temple-Inland, Stone-Smurfit Container and
Jefferson Smurfit Group. Historically, prices for corrugated materials have not
been subject to dramatic fluctuations, except for temporary spikes or troughs
from time to time.
With the exception of Fuji Seal (Japan) and its subsidiary, American Fuji
Seal, most suppliers of plastic labels are regional in scope. Historically,
prices for these raw materials have not been subject to dramatic fluctuations.
RECYCLING
Recycling content legislation, which has been enacted in several states,
requires that a certain specified minimum percentage of recycled plastic be
included in certain new plastic containers. OI Group has met such legislated
standards in part due to its material and multi-layer process technology. OI
Group's plastic containers are made with PCR plastic constituting somewhere
between 25% and 100% of the material used to produce the container. In addition,
its plastics plants also recycle virtually all of the internal scrap generated
in the production process.
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FACILITIES
OI Group has 38 plastics manufacturing plants in the U.S. and Puerto Rico,
as well as plastics packaging operations located in nine countries outside of
the U.S. The following table lists the locations of the plastics packaging
plants:
<Table>
<Caption>
NORTH AMERICA EUROPE ASIA PACIFIC SOUTH AMERICA
- ----------------------------------------- ------------------ ---------------------- ------------------
ARIZONA NEVADA FINLAND AUSTRALIA BRAZIL
Tolleson Henderson Ryttyla Adelaide Sorocaba
CALIFORNIA NEW HAMPSHIRE HUNGARY Berri Valencia
LaMirada Bedford Gyor Brisbane (3 plants)
Modesto Nashua Netherlands Drouin
CONNECTICUT NEW JERSEY Etten-Leur Melbourne (5 plants)
Bridgeport Belvidere UNITED KINGDOM Perth (2 plants)
FLORIDA Edison Chalgrove Sydney (2 plants)
Kissimmee Washington Wadonga
GEORGIA NORTH CAROLINA NEW ZEALAND
Cartersville Hamlet Auckland
Rossville Rocky Mount Christchurch
ILLINOIS OHIO
Chicago Berlin
Vandalia Bowling Green
INDIANA Cincinnati
Franklin Findlay
Sullivan Fremont
KENTUCKY PENNSYLVANIA
Florence Brookville
(2 plants) Erie
MARYLAND Hazleton
Baltimore SOUTH CAROLINA
MICHIGAN Greenville
Constantine TEXAS
MISSOURI El Paso
Kansas City Rockwall
St. Louis VIRGINIA
Harrisonburg
PUERTO RICO
Las Piedras
MEXICO
Mexico City
Pachuca
</Table>
In addition, three plastics packaging plants are under construction: (1) a
compression molding facility in Hattiesburg, Mississippi for beverage and juice
closures; (2) a facility for the manufacture and assembly of plastic ink
cartridges in Singapore; and (3) a plastic container facility in Iowa City,
Iowa.
TECHNICAL ASSISTANCE LICENSE AGREEMENTS
We license our proprietary glass container technology to 24 companies in 24
countries. In plastics packaging, OI Group has technical assistance agreements
with 24 companies in 14 countries. These agreements cover areas ranging from
manufacturing and engineering assistance, to support in functions such as
marketing, sales and administration. The worldwide licensee network provides a
stream of revenue to support OI Group's development activities and gives it the
opportunity to participate in the rigid packaging market in countries where it
does not already have a direct presence. In addition, OI
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Group's technical agreements enable it to apply "best practices" developed by
its worldwide licensee network. For the year ended December 31, 2001 and the
three months ended March 31, 2002, OI Group earned $24.6 million and
$6.8 million, respectively, in royalties and net technical assistance revenue.
RESEARCH AND DEVELOPMENT
Research and development constitutes an important part of OI Group's
activities. Research and development expenditures were $41.2 million,
$46.7 million and $37.5 million for 2001, 2000 and 1999, respectively. In
addition, engineering expenditures were $31.4 million, $31.3 million and
$42.2 million for 2001, 2000 and 1999, respectively. OI Group's research,
development and engineering activities include new products, manufacturing
process control, automatic inspection and further automation.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION
OI Group's worldwide operations, in common with those of the industry
generally, are subject to extensive laws, ordinances, regulations and other
legal requirements relating to environmental protection, including legal
requirements governing investigation and clean-up of contaminated properties as
well as water discharges, air emissions, waste management and workplace health
and safety. Capital expenditures for property, plant and equipment for
environmental control activities were not material during 2001 or for the three
months ended March 31, 2002.
In August 1998, the Company received a Notice of Violation from the United
States Environmental Protection Agency regarding alleged opacity violations at
its Oakland, California glass container plant from the period of 1994 through
1997. Certain furnaces at the plant are equipped with monitors that continuously
monitor opacity. During this period, these furnaces had occasional upset and
breakdown conditions that caused opacity excursions that were reported to the
local air quality management district. This action by the EPA involves the same
incidents that were resolved with the local air quality management district. The
ultimate resolution of this matter is not expected to require any capital
expenditure or change in operations.
In September 2001, the Virginia Department of Environmental Quality issued a
Notice of Violation to the Company's plant located in Toano, Virginia, alleging
violations of certain regulations in connection with certain changes that were
made to the furnaces during repairs. The Company is currently attempting to
resolve the issues by negotiating a settlement with the Virginia Department of
Environmental Quality. As part of the proposed settlement, the Company would
agree to certain production capacity limitations and may have to install
abatement devices on the furnaces, which would require less than $2 million in
capital expenditures.
A number of governmental authorities, both in the U.S. and abroad, have
enacted, or are considering, legal requirements that would mandate certain rates
of recycling, the use of recycled materials and/or limitations on certain kinds
of packaging materials such as plastics. OI Group believes that governmental
authorities in both the U.S. and abroad will continue to enact and develop such
legal requirements.
In the U.S., sales of non-refillable glass beverage bottles and other
convenience packages are affected by mandatory deposit laws and other types of
restrictive legislation. As of January 1, 2002, there were nine states with
mandatory deposit laws in effect. A number of states and local governments have
enacted or are considering legislation to promote curbside recycling and
recycled content legislation as alternatives to mandatory deposit laws. Although
such legislation is not uniformly developed, OI Group believes that states and
local governments will continue to enact and develop curbside recycling and
recycling content legislation.
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Plastic containers have also been the subject of legislation in various
states, which requires that a certain specified minimum percentage of recycled
plastic be included in new plastic products. OI Group utilizes recycled plastic
resin in its manufacturing processes.
Although OI Group is unable to predict what environmental legal requirements
may be adopted in the future, it has not made, and does not anticipate making,
material expenditures with respect to environmental protection. However, the
compliance costs associated with environmental legal requirements may result in
future additional costs to operations.
INTELLECTUAL PROPERTY RIGHTS
The Company has a large number of patents that relate to a wide variety of
products and processes, has a substantial number of patent applications pending,
and is licensed under several patents of others. While in the aggregate the
Company's patents are of material importance to its businesses, the Company does
not consider that any patent or group of patents relating to a particular
product or process is of material importance when judged from the standpoint of
any segment or its businesses as a whole.
The Company has a number of intellectual property rights, comprised of both
patented and proprietary technology, that make the Company's glass forming
machines more efficient and productive than those used by our competitors. In
addition, the efficiency of the Company's glass forming machines is enhanced by
the Company's overall approach to cost efficient manufacturing technology, which
extends from batch house to warehouse. This technology is proprietary to the
Company through a combination of issued patents, pending applications,
copyrights, trade secret and proprietary know-how.
Upstream of the glass forming machine, there is technology to deliver molten
glass to the forming machine at high rates of flow and fully conditioned to be
homogeneous in consistency, viscosity and temperature for efficient forming into
glass containers. The Company has proprietary know-how in (a) the batch house,
where raw materials are stored, measured and mixed, (b) the furnace control
system and furnace combustion, and (c) the forehearth and feeding system to
deliver such homogeneous glass to the forming machines.
In the Company's glass container manufacturing processes, computer control
and electro-mechanical mechanisms are commonly used for feeding molten glass to
the forming machines. Various patents held by the Company describe
electro-mechanical mechanisms and related technology used for feeding molten
glass to the forming machines. Others represent electro-mechanical mechanisms
and related technology used by the Company for shearing glass gobs for delivery
to the forming machines. Additional U.S. patents and various pending
applications represent technology used by the Company for measuring and
precisely delivering glass gobs to the forming machines.
Downstream of the glass forming machines there is patented and unpatented
technology for ware handling, annealing, coating and inspection, which further
enhance the overall efficiency of the manufacturing process.
While the above patents and intellectual property rights are representative
of the technology used in the Company's glass manufacturing operations, there
are numerous other pending patent applications, trade secrets and other
proprietary know-how and technology, as supplemented by administrative and
operational best practices, which contribute to the Company's competitive
advantage. As noted above, however, the Company does not consider that any
patent or group of patents relating to a particular product or process is of
material importance when judged from the standpoint of any segment or its
businesses as a whole.
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SEASONALITY
Sales of particular glass container and plastics packaging products such as
beer and food containers are seasonal. Shipments in the U.S. and Europe are
typically greater in the second and third quarters of the year, while shipments
in South America and the Asia Pacific region are typically greater in the first
and fourth quarters of the year.
EMPLOYEES
OI Group employed approximately 29,700 persons at December 31, 2001. A
majority of OI Group's hourly workers are covered by collective bargaining
agreements. The principal collective bargaining agreement, which at
December 31, 2001, covered approximately 90% of OI Group's union affiliated
employees in the U.S., was extended and ratified in March 2002 and will expire
on April 1, 2005. OI Group considers its employee relations to be good.
LEGAL PROCEEDINGS--OI GROUP
Certain litigation is pending against OI Group, in many cases involving
ordinary and routine claims incidental to the business of OI Group and in others
presenting allegations that are nonroutine and involve compensatory, punitive or
treble damage claims as well as other types of relief. The ultimate legal and
financial liability of OI Group in respect to this pending litigation cannot be
estimated with certainty. However, OI Group believes, based on its examination
and review of such matters and experience to date, that such ultimate liability
will not have a material adverse effect on its results of operations or
financial condition.
LEGAL PROCEEDINGS--OI INC.
OI Inc. is one of a number of defendants (typically from 20 to 100 or more)
in a substantial number of lawsuits filed in numerous state and federal courts
by persons alleging bodily injury (including death) as a result of exposure to
dust from asbestos fibers. OI Inc. relies primarily on distributions from its
subsidiaries, including the Company, to fund its indemnity payments and legal
fees related to these lawsuits.
From 1948 to 1958, one of OI Inc.'s former business units commercially
produced and sold approximately $40 million of a high-temperature,
calcium-silicate based pipe and block insulation material containing asbestos.
OI Inc. exited the pipe and block insulation business in April 1958. The
traditional asbestos personal injury lawsuits and claims relating to such
production and sale of asbestos material typically allege various theories of
liability, including negligence, gross negligence and strict liability and seek
compensatory and, in some cases, punitive damages in various amounts (herein
referred to as "asbestos claims").
As of March 31, 2002, OI Inc. estimates that it is a named defendant in
asbestos lawsuits and claims involving approximately 24,000 plaintiffs and
claimants. The total amount of relief sought by plaintiffs and claimants cannot
be determined because the amount is often not required to be stated in an
initial claim or lawsuit and because settlements are often reached before claims
and lawsuits advance to the point where such amounts would be required.
Additionally, OI Inc. has claims-handling agreements in place with many
plaintiffs' counsel throughout the country. These agreements require evaluation
and negotiation regarding whether particular claimants qualify under the
criteria established by such agreements. The criteria for such claims include
verification of a compensable illness and a reasonable probability of exposure
to a product manufactured by OI Inc.'s former business unit during its
manufacturing period ending in 1958. OI Inc. believes that the bankruptcies of
additional co-defendants, as discussed below, have resulted in an acceleration
of the presentation and disposition of a number of claims under such agreements,
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which claims would otherwise have been presented and disposed of over the next
several years. This acceleration is reflected in an increased number of pending
asbestos claims and, to the extent disposed, contributes to an increase in
asbestos-related payments which is expected to continue in the near term.
OI Inc. is also a defendant in other asbestos-related lawsuits or claims
involving maritime workers, medical monitoring claimants, co-defendants and
property damage claimants. Based upon its past experience, OI Inc. believes that
these categories of lawsuits and claims will not involve any material liability
and they are not included in the above description of pending matters.
Since receiving its first asbestos claim, OI Inc., as of March 31, 2002, has
disposed of the asbestos claims of approximately 272,000 plaintiffs and
claimants at an average indemnity payment per claim of approximately $5,300.
OI Inc.'s indemnity payments for these claims have varied on a per claim basis,
and are expected to continue to vary considerably over time. As discussed above,
a part of OI Inc.'s objective is to achieve, where possible, resolution of
asbestos claims pursuant to claims-handling agreements. Under such agreements,
qualification by meeting certain illness and exposure criteria has tended to
reduce the number of claims presented to OI Inc. that would ultimately be
dismissed or rejected due to the absence of impairment or product exposure
evidence. OI Inc. expects that as a result, although aggregate spending may be
lower, there may be an increase in the per claim average indemnity payment
involved in such resolution. In this regard, although the average of such
payments has been somewhat higher following the implementation of the
claims-handling agreements in the mid-1990s, the annual average amount has not
varied materially from year to year.
OI Inc. believes that its ultimate asbestos-related contingent liability
(i.e., its indemnity or other claim disposition costs plus related legal fees)
cannot be estimated with certainty. In 1993, OI Inc. established a liability of
$975 million to cover indemnity payments and legal fees associated with the
resolution of outstanding and expected future asbestos lawsuits and claims. In
1998, an additional liability of $250 million was established. During the third
quarter of 2000, OI Inc. established an additional liability of $550 million to
cover OI Inc.'s estimated indemnity payments and legal fees arising from
outstanding asbestos personal injury lawsuits and claims and asbestos personal
injury lawsuits and claims expected to be filed in the ensuing several years.
OI Inc.'s ability to reasonably estimate its liability has been significantly
affected by the volatility of asbestos-related litigation in the United States,
the expanding list of non-traditional defendants that have been sued in this
litigation and found liable for substantial damage awards, the continued use of
litigation screenings to generate new lawsuits, the large number of claims
asserted or filed by parties who claim prior exposure to asbestos materials but
have no present physical impairment as a result of such exposure, and the
growing number of co-defendants that have filed for bankruptcy. Since the
beginning of 2000, A. P. Green Industries, Inc., Armstrong World Industries,
Babcock & Wilcox, Federal-Mogul Corporation, Fibreboard Corporation, G-I
Holdings (GAF), Harbison-Walker Refractories Group, Kaiser Aluminum Corporation,
North American Refractories Co., Owens Corning, Pittsburgh-Corning, Plibrico
Company, Porter Hayden Company, USG Corporation, W. R. Grace & Co. and several
other smaller companies have sought protection under Chapter 11 of the
Bankruptcy Code.
OI Inc. has continued to monitor trends which may affect its ultimate
liability and has continued to analyze the developments and variables affecting
or likely to affect the resolution of pending and future asbestos claims against
OI Inc. OI Inc. expects that the gross amount of total asbestos-related payments
will be moderately lower in 2002 compared to 2001 and will continue to decline
thereafter as the number of potential claimants continues to decrease. However,
the trend toward lower aggregate annual payments has not occurred as soon as had
been anticipated when the additional liability was established in 2000. In
addition, the number of claims and lawsuits filed against OI Inc. has exceeded
the number anticipated at that time. In early March 2002, OI Inc. initiated a
comprehensive review to determine whether further adjustment of asbestos-related
liabilities was appropriate. At the conclusion of this review in April, OI Inc.
determined that an additional charge of $475 million would be appropriate to
adjust the reserve for estimated future asbestos-related costs. The material
components
67
<Page>
of OI Inc.'s accrual, including this additional accrued amount, are the
following: (i) OI Inc.'s estimate at that date of the reasonably probable
contingent liability for asbestos claims already asserted against OI Inc.,
(ii) OI Inc.'s estimate at that date of the contingent liability for preexisting
but unasserted asbestos claims for prior periods arising under its
administrative claims-handling agreements with various plaintiffs' counsel,
(iii) OI Inc.'s estimate at that time of the contingent liability for asbestos
claims not yet asserted against OI Inc., but which OI Inc. believes it is
reasonably probable will be asserted in the future, to the degree that such an
estimation as to future claims is possible, and (iv) OI Inc.'s estimate of legal
defense costs likely to be incurred in connection with the foregoing types of
claims.
The significant assumptions underlying the material components of OI Inc.'s
accrual are:
a) the extent to which settlements are limited to claimants who were
exposed to OI Inc.'s asbestos-containing insulation prior to its exit from
that business in 1958;
b) the extent to which claims are resolved under OI Inc.'s
administrative claims agreements or on terms comparable to those set forth
in those agreements;
c) the extent of reduction in the inventory of pending serious disease
cases;
d) the extent to which OI Inc. is able to successfully defend itself at
trial;
e) the extent of actions by courts to eliminate or reduce the diversion
of financial resources for unimpaired claimants and so-called forum
shopping;
f) the extent to which additional defendants with substantial resources
and assets are required to participate significantly in the resolution of
future asbestos cases and claims;
g) the number and timing of co-defendant bankruptcies; and
h) the extent to which the resolution of co-defendant bankruptcies
divert resources to unimpaired claimants.
OI Inc. believes that any possible loss or range of loss in addition to the
foregoing charge cannot be reasonably estimated. While OI Inc. cannot reasonably
estimate the precise timing of payment, OI Inc. believes that its liabilities
for the next several years will not exceed the amount accrued based on its
expectation of moderate declines in annual spending for asbestos-related costs.
OI Inc. has previously pursued recovery of its losses from third parties,
particularly its insurance carriers, and has largely resolved all of its
significant coverage claims. OI Inc. expects some further recovery from deferred
payment provisions of existing settlement agreements and from pursuing certain
additional reimbursement claims. However, OI Inc. does not expect to recover
additional material amounts in excess of the recorded receivable of
$37.0 million at March 31, 2002.
The ultimate amount of distributions which may be required to be made by the
Company and other subsidiaries of OI Inc. to fund OI Inc.'s asbestos-related
payments cannot be estimated with certainty. OI Inc.'s reported results of
operation for 2002 have been materially affected by the $475 million first
quarter charge and asbestos-related payments continue to be substantial. Any
possible future additional accrual would likewise materially affect OI Inc.'s
results of operations in the period in which it might be recorded. Also, the
continued use of significant amounts of cash for asbestos-related costs has
affected and will continue to affect OI Inc.'s cost of borrowing and its ability
to pursue global or domestic acquisitions. However, OI Inc. believes that its
operating cash flows and other sources of liquidity will be sufficient to pay
its obligations for asbestos-related costs and to fund its working capital and
capital expenditure requirements on a short-term and long-term basis.
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<Page>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
We are an indirect, wholly-owned subsidiary of OI Inc. All of our executive
officers and directors hold the same position with OI Inc. and receive no
separate compensation from the Company. The following table sets forth certain
information with respect to our executive officers and directors as of
April 30, 2002.
<Table>
<Caption>
NAME AND AGE POSITION
- ------------ --------
EXECUTIVE OFFICERS
Joseph H. Lemieux (71)................. Chairman and Chief Executive Officer
R. Scott Trumbull (53)................. Executive Vice President and Chief Financial Officer
Terry L. Wilkison (61)................. Executive Vice President, Plastics Group General Manager
Thomas L. Young (58)................... Executive Vice President, Administration and General
Counsel
John Bachey (53)....................... Vice President, Glass Container Sales and Marketing
James W. Baehren (51).................. Vice President, Director of Finance and Secretary
Joseph V. Conda (60)................... Vice President, General Manager of Prescription Products
L. Richard Crawford (41)............... Vice President, Global Glass Technology
Jeffrey A. Denker (54)................. Treasurer
Larry A. Griffith (56)................. Vice President, General Manager of Plastic Containers
W. Bruce Larsen (48)................... Vice President, General Manager of Food and Beverage
Gerald J. Lemieux (44)................. Vice President, Corporate Strategy
Michael D. McDaniel (53)............... Vice President, General Manager of Closure and
Specialty Products
Philip McWeeny (62).................... Vice President, General Counsel--Corporate and
Assistant Secretary
Gilberto Restrepo (61)................. Vice President, General Manager of Latin American Glass
Container Operations
Peter J. Robinson (58)................. Vice President, General Manager of Asia Pacific Operations
Robert A. Smith (60)................... Vice President, General Manager of Domestic Glass
Container
Franco Todisco (58).................... Vice President, General Manager of Europe Operations
Edward C. White (54)................... Vice President and Controller
DIRECTORS
Joseph H. Lemieux (71)................. Chairman and Chief Executive Officer
Thomas L. Young (58)................... Director and Executive Vice President, Administration and
General Counsel
George R. Roberts (58)................. Director
Michael W. Michelson (51).............. Director
James H. Greene, Jr. (51).............. Director
Edward A. Gilhuly (42)................. Director
Robert J. Dineen (72).................. Director
John J. McMackin, Jr. (50)............. Director
Anastasia D. Kelly (52)................ Director
</Table>
Mr. Lemieux has been Chairman of the Board of the Company since 1991, Chief
Executive Officer of the Company since 1990 and a director since 1987.
Mr. Lemieux was President and Chief Operating Officer of the Company and its
predecessor from 1986 to 1990. Mr. Lemieux is a director of Manor Care Inc. He
is chairman of the Executive Committee.
Mr. Trumbull has been Executive Vice President and Chief Financial Officer
since 2001. He previously served as Executive Vice President--International
Operations (1993-1998) and as Executive Vice President--Corporate Development
(1998-2001).
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Mr. Wilkison has been Executive Vice President, Plastics Group General
Manager since 2000. He previously served as Executive Vice President, Latin
American Operations (1998-2000), Executive Vice President (1993-1997) and
Executive Vice President, Domestic Packaging Operations (1993-1996).
Mr. Young has been Executive Vice President, Administration and General
Counsel and a director since 1998. He previously served as Executive Vice
President, Administration, General Counsel, and Secretary (1993-1998).
Mr. Young is a director of Manor Care Inc.
Mr. Bachey has been Vice President since 1997 and Vice President of Glass
Container Sales and Marketing since 2000. He previously served as General
Manager, European and Latin American Plastics Operations (1999-2000), General
Manager, Europe and Latin America, Continental PET Technologies (1998-1999) and
Vice President of Glass Container Sales and Marketing (1996-1997).
Mr. Baehren has been Corporate Secretary since 1998 and Vice President,
Director of Finance since 2001. He previously served as Associate General
Counsel (1996-2001).
Mr. Conda has been Vice President since 1998 and Vice President and General
Manager of Prescription Products since 2000. He previously served as Vice
President of Glass Container Sales and Marketing (1997-2000) and Vice President
and General Manager of Prescription Products (1996-1997).
Mr. Crawford has been Vice President since 2000 and Vice President, Global
Glass Technology since 2002. He previously served as Manufacturing Manager of
Domestic Glass Container (2000-2002), Vice President of Domestic Glass Container
and Area Manufacturing Manager, West Coast (1997-2000) and Domestic Glass
Container Area Manufacturing Manager (1994-1997).
Mr. Denker has been Treasurer since 1998. He previously served as Assistant
Treasurer, (1988-1998) and Director of International Finance (1987-1998).
Mr. Griffith has been Vice President since 1990 and Vice President and
General Manager of Plastic Containers since 2001. He previously served as Vice
President and General Manager of Closure and Specialty Products (1998-2001),
Vice President of International Operations (1997-1998), Vice President and Chief
Information Officer (1996-1998) and General Manager of Plastic Components
Operations (1996-1997).
Mr. Larsen has been Vice President since 1997 and Vice President, General
Manager of Food and Beverage since 2002. He previously served as Vice President
and General Manager of Continental PET Technologies (2001-2002), as Vice
President and General Manager of Plastic Containers (1999-2001), as Vice
President and Director of Operations, Plastic Containers (1998-1999) and as Vice
President and Director of Manufacturing, Plastic Containers (1993-1998).
Mr. Gerald J. Lemieux has been Vice President since 1997 and Vice President,
Corporate Strategy since 2002. He previously served as Vice President, General
Manager of Domestic Glass Container (1997-2002) and as Vice President, Domestic
Glass Container Finance and Administration (1992-1997). Mr. Gerald J. Lemieux is
the son of Mr. Joseph H. Lemieux.
Mr. McDaniel has been Vice President since 1992 and Vice President and
General Manager of Closure and Specialty Products since 2001. He previously
served as Vice President and General Manager of Continental PET Technologies
(1998-2001) and Vice President and General Manager of Closure and Specialty
Products (1991-1998).
Mr. McWeeney has been Vice President and General Counsel--Corporate since
1988.
Mr. Restrepo has been Vice President since 2000 and General Manager of Latin
American Glass Container Operations since 2000. He previously served as Vice
President of International Operations and General Manager, Western Region--Latin
America (1997-2000). Mr. Restrepo has been the President of Cristaleria Peldar,
S.A. since 1982.
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<Page>
Mr. Robinson has been Vice President since 1999 and General Manager of Asia
Pacific Operations since 1998. Prior to joining the Company, Mr. Robinson served
as Chief Executive of ACI Packaging Group (1988-1998).
Mr. Smith has been Vice President since 1993 and Vice President, General
Manager of Domestic Glass Container since 2000. He previously served as Vice
President and Technical Director (1998-2002), Vice President of International
Operations (1997-1998) and Vice President of Glass Container Manufacturing
(1993-1997).
Mr. Todisco has been Vice President since 1999 and General Manager Europe
Operations since 1999. Prior to joining the Company, Mr. Todisco served as
President of AVIR S.p.A., (1994-1999).
Mr. White has been Vice President since 2002 and Controller since 1999. He
previously served as Vice President and Director of Finance, Planning, and
Administration--International Operations, (1997-1999) and Financial Director of
OI Group's affiliates in Finland and Poland (1996-1997).
Mr. Roberts has been a director since 1987. Mr. Roberts is a Founding
Partner of Kohlberg Kravis Roberts & Co., L.P. and, effective January 1, 1996,
he became a managing member of the limited liability company which is the
general partner of Kohlberg Kravis Roberts & Co., L.P. Mr. Roberts also is a
general partner of KKR Associates, L.P. Mr. Roberts is a director of Accuride
Corporation, Alliance Imaging, Inc., Amphenol Corporation, Borden, Inc., The
Boyds Collection, Ltd., DPL Inc., Evenflo Company Inc., IDEX Corporation,
KinderCare Learning Centers, Inc., KSL Recreation Group, Inc., PRIMEDIA, Inc.,
Safeway Inc. and Spalding Holdings Corporation. He is a member of the Executive
Committee.
Mr. Michelson has been a director since 1987. Mr. Michelson has been a
member of the limited liability company which is the general partner of Kohlberg
Kravis Roberts & Co., L.P. since January 1, 1996. Prior thereto, he was a
general partner of Kohlberg Kravis Roberts & Co., L.P. Mr. Michelson also is a
general partner of KKR Associates, L.P. Mr. Michelson is a director of Alliance
Imaging, Inc., Amphenol Corporation, AutoZone, Inc. and KinderCare Learning
Centers, Inc. He is chairman of the Compensation Committee and a member of the
Executive Committee.
Mr. Greene has been a director since 1987. Mr. Greene was a general partner
of Kohlberg Kravis Roberts & Co., L.P. from January 1, 1993 until January 1,
1996, when he became a member of the limited liability company which is the
general partner of Kohlberg Kravis Roberts & Co., L.P. Mr. Greene has been a
general partner of KKR Associates, L.P. since January 1, 1993, and prior thereto
was a limited partner of KKR Associates, L.P. and an executive of Kohlberg
Kravis Roberts & Co., L.P. Mr. Greene is a director of Accuride Corporation,
Birch Telecom, Inc., Safeway Inc. and Shoppers Drug Mart Corporation. He is a
member of the Compensation Committee.
Mr. Gilhuly has been a director since 1987. Mr. Gilhuly was a general
partner of Kohlberg Kravis Roberts & Co., L.P. from January 1, 1995 until
January 1, 1996, when he became a member of the limited liability company which
is the general partner of Kohlberg Kravis Roberts & Co., L.P. Mr. Gilhuly has
been a general partner of KKR Associates, L.P. since January 1, 1995, and prior
thereto was a limited partner of KKR Associates, L.P. and an executive of
Kohlberg Kravis Roberts & Co., L.P. Mr. Gilhuly is a director of Layne
Christensen Company, MedCath Corporation and Rockwood Specialties, Inc. He is a
member of the Executive and Compensation Committees.
Mr. McMackin has been a director since 1994. Mr. McMackin has been a member
of Williams & Jensen for more than five years. He is a member of the Audit
Committee.
Mr. Dineen has been a director since 1994. Mr. Dineen has been Chairman of
the Board of Directors of Layne Christensen Company since 1992. Prior to 1993,
Mr. Dineen was President and Chief Executive Officer of The Marley Company for
more than five years. Mr. Dineen is a director of Layne Christensen Company. He
is chairman of the Audit Committee.
71
<Page>
Ms. Kelly has been a director since 2002. Ms. Kelly has been an executive
officer of Sears, Roebuck and Co. since 1999, currently serving as Senior Vice
President. She previously served as Senior Vice President (1996-1999) and
General Counsel and Secretary (1995-1999) of Fannie Mae, a financial services
company. She was appointed as a member of the Audit Committee effective
April 1, 2002.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
DIRECTOR COMPENSATION
All of the Company's directors are also directors of OI Inc. Directors who
are not officers of OI Inc. and the Company are paid a fee of $55,000 annually
plus expenses associated with meetings of OI Inc.'s and the Company's Boards and
receive no separate compensation from the Company. In addition, each director
who is not an officer of the Company receives a grant under OI Inc.'s Directors
Stock Option Plan of an option for 5,000 shares of OI Inc.'s Common Stock
annually on the day immediately following the date of the annual meeting of
share owners. Options are priced at the fair market value of the Common Stock on
the date of grant, have a term of ten years and one day and vest on the first
anniversary of the grant date.
EXECUTIVE COMPENSATION
All of our executive officers hold the same position with OI Inc. and
receive no separate compensation from the Company. The following table shows,
for the years ended December 31, 1999, 2000 and 2001, the cash compensation paid
by OI Inc. and its subsidiaries, as well as certain other compensation paid or
accrued for those years, to the Chief Executive Officer and the four most highly
compensated executive officers of the Company and OI Inc. (the "named executive
officers") in all capacities in which they served.
<Table>
<Caption>
LONG TERM COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ------------------------------ ----------
OTHER RESTRICTED SECURITIES LONG-TERM
ANNUAL STOCK UNDERLYING INCENTIVE
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SAR'S PAYOUTS
PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($)(3) ($) (#)(4) ($)(5)
- ------------------------ -------- -------- -------- -------------- ---------- -------------- ----------
Joseph H. Lemieux....... 2001 $696,667 $525,000 $1,125,954(7) $1,307,468(8) 160,000 $335,644
Chairman and Chief 2000 650,797 137,500 346,287 856,286 160,000 100,358
Executive Officer 1999 625,697 278,750 77,681 2,322,094 160,000 105,651
Peter J. Robinson....... 2001 432,401(11) 544,063(12) 598,911 602,000(13) 75,000 146,096
V.P., General Manager, 2000 471,726 405,879 0 0 100,000 124,616
Asia Pacific 1999 480,168 463,543 0 558,750 100,000 0
Operations
R. Scott Trumbull....... 2001 311,667 240,000 467,216 451,500(15) 75,000 108,202
Executive V.P.--Chief 2000 292,500 180,000 104,202 0 75,000 94,502
Financial Officer 1999 277,500 160,000 29,846 419,063 75,000 97,718
Terry L. Wilkison....... 2001 315,833 250,000 413,241 451,500(16) 100,000 108,272
Executive 2000 292,500 200,000 33,005 0 75,000 73,093
V.P.--Plastics 1999 277,500 160,000 11,791 419,063 75,000 78,778
Group General Manager
Thomas L. Young......... 2001 315,833 250,000 459,331 451,500(17) 100,000 107,848
Executive V.P.-- 2000 292,500 200,000 85,921 0 75,000 91,763
Administration 1999 276,333 160,000 29,057 558,750 75,000 93,600
and General Counsel
<Caption>
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION ($)(6)
- ------------------------ --------------
Joseph H. Lemieux....... $66,449(9)(10)
Chairman and Chief 64,163
Executive Officer 54,243
Peter J. Robinson....... 4,404(14)
V.P., General Manager, 4,446
Asia Pacific 4,555
Operations
R. Scott Trumbull....... 12,976(10)
Executive V.P.--Chief 12,594
Financial Officer 11,100
Terry L. Wilkison....... 8,489(10)
Executive 5,956
V.P.--Plastics 883
Group General Manager
Thomas L. Young......... 8,106(10)
Executive V.P.-- 12,948
Administration 11,053
and General Counsel
</Table>
- ----------------------------------
(1) Includes amounts deferred at the election of the named executive officer
pursuant to the salary reduction provisions of the Stock Purchase and
Savings Program.
(2) Except as otherwise provided in footnote 12 below, the amounts disclosed in
this column represent awards under the Owens-Illinois, Inc. Senior
Management Incentive Plan for the year indicated. Except as otherwise
provided in footnote 8 below, amounts, if any, deferred at the election of
a named executive officer are included in the year earned.
(3) The amounts disclosed in this column represent amounts reimbursed during
the year for the payment of taxes, including taxes due in connection with
the grant in 2001 of shares of restricted stock under OI Inc.'s 1997 Equity
Participation Plan in the following amounts: Mr. Lemieux, $974,049;
Mr. Robinson, $566,932; Mr. Trumbull, $436,818; Mr. Wilkison, $385,527; and
Mr. Young, $436,818.
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<Page>
(4) No SAR's were granted to any of the named executive officers during 2001.
(5) The amounts disclosed in this column represent awards under the
Owens-Illinois, Inc. Performance Award Plan for the year indicated. Except
as otherwise provided in footnote 8 below, amounts, if any, deferred at the
election of an executive officer are included in the year earned.
(6) Except as otherwise provided in footnotes 9, 10 and 14 below, the amounts
disclosed in this column for 2001 represent matching cash contributions by
OI Inc. to the Stock Purchase and Savings Program ("SPASP") and the
Executive Deferred Savings Plan, both defined contribution plans. The SPASP
is a tax-qualified defined contribution plan intended to satisfy the
requirements of Section 401(k) of the Internal Revenue Code of 1986. OI
Inc. contributes to each participant's account maintained under the SPASP
an amount of OI Inc. stock equal to 50% of the participant's contributions
to the SPASP but not more than 4% of (a) the participant's earnings or
(b) $170,000 for 2001, whichever is lower. The difference between the
theoretical OI Inc. matching contribution under the SPASP for each
participant, without regard to the legally imposed maximum, and the maximum
contribution permitted under law is used to determine the number of
theoretical shares of OI Inc. Common Stock which would have been purchased
for the participants account in the absence of the IRS limitation on
participant's earnings in excess of $170,000 for 2001. Amounts deferred
into the Executive Deferred Savings Plan at the election of the participant
may be credited to either a cash deferral account earning interest at a
prescribed rate or an OI Inc. stock deferral account. Any balance in the
plan is paid in cash to the individual at termination of employment.
(7) The amount shown reflects $1,065,060 reimbursed to Mr. Lemieux in 2001 for
the payment of taxes, including the amount of $974,049 representing taxes
due in connection with the grant of 160,000 shares of restricted stock in
2001. The amount shown also reflects the values of certain perquisites
provided by OI Inc. to Mr. Lemieux totaling $60,894, of which $28,359 is
attributable to his personal use of OI Inc. aircraft and $19,819 is
attributable to financial planning provided by OI Inc.
(8) Represents 188,689 shares of restricted stock granted to Mr. Lemieux under
OI Inc.'s 1997 Equity Participation Plan of which 28,689 was granted in
lieu of cash payments in the amounts of $175,000 and $111,881 pursuant to
elections by Mr. Lemieux under OI Inc.'s Senior Management Incentive Plan
and Performance Award Plan, respectively. As of December 31, 2001,
Mr. Lemieux held 390,105 shares of restricted stock of OI Inc. with a value
of $3,897,149 (determined by the closing price of the Common Stock on the
New York Stock Exchange on December 31, 2001).
(9) Also includes a premium of $37,270 paid by OI Inc. on a whole life
insurance policy owned by Mr. Lemieux.
(10) Includes the following amounts equal to the value of premiums paid by OI
Inc. in connection with life insurance policies issued pursuant to the
Owens-Illinois Executive Life Insurance Plan and Participation Agreements
entered into between OI Inc. and certain named executive officers during
2001: Mr. Lemieux, $9,328; Mr. Trumbull, $926; Mr. Wilkison, $1,689; and
Mr. Young, $1,306.
(11) Includes payment in the amount of $84,124, which payments were made to
Mr. Robinson in lieu of contributions on his behalf to a superannuation
fund to provide post-retirement pension benefits.
(12) Includes $119,265 paid to Mr. Robinson under the ACI Packaging Services
Pty Limited Senior Executive Retention and Confidentiality Agreement.
Mr. Robinson's bonus is provided under a separate bonus plan relating to
OI Inc.'s Asia Pacific business.
(13) As of December 31, 2001, Mr. Robinson held phantom stock units under OI
Inc.'s 1997 Equity Participation Plan with respect to 20,000 shares of
Common Stock of OI Inc. and 100,000 shares of restricted stock of OI Inc.
with a combined value of $1,198,800 (determined by the closing price of
the Common Stock on the New York Stock Exchange on December 31, 2001).
(14) Represents the statutory minimum amounts contributed by OI Inc. to a
superannuation fund on behalf of Mr. Robinson.
(15) As of December 31, 2001, Mr. Trumbull held 90,000 shares of restricted
stock of OI Inc. with a value of $899,100 (determined by the closing price
of the Common Stock on the New York Stock Exchange on December 31, 2001).
(16) As of December 31, 2001, Mr. Wilkison held 90,000 shares of restricted
stock of OI Inc. with a value of $899,100 (determined by the closing price
of the Common Stock on the New York Stock Exchange on December 31, 2001).
(17) As of December 31, 2001, Mr. Young held 95,000 shares of restricted stock
of OI Inc. with a value of $949,050 (determined by the closing price of
the Common Stock on the New York Stock Exchange on December 31, 2001).
OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)
The following table provides information on option grants for OI Common
Stock in 2001 to the named executive officers.
<Table>
<Caption>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATES
SECURITIES % OF TOTAL OF STOCK PRICE
UNDERLYING OPTIONS/SARS APPRECIATION FOR
OPTIONS/SARS GRANTED TO EXERCISE OR OPTION TERM(3)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5% 10%
- ---- ------------ ------------ ----------- ---------- ---------- ----------
Joseph H. Lemieux.................... 160,000(2) 9.3% $5.6875 01/03/11 $ 572,294 $1,450,306
Peter J. Robinson.................... 75,000(2) 4.3% 5.6875 01/03/11 268,263 679,831
R. Scott Trumbull.................... 75,000(2) 4.3% 5.6875 01/03/11 268,263 679,831
Terry L. Wilkison.................... 100,000(2) 5.8% 5.6875 01/03/11 357,684 906,441
Thomas L. Young...................... 100,000(2) 5.8% 5.6875 01/03/11 357,684 906,441
</Table>
- --------------------------
(1) No SARs were granted to any of the named executive officers during 2001.
(2) Exercises of one-half of the options are permitted after each of the fifth
and sixth anniversaries of the date of the grant; provided, options shall
become exercisable after the first anniversary of the date of the grant
73
<Page>
thereof at the time when the average fair market value per share (as
evidenced by the closing price of the underlying stock on the principal
exchange on which it is traded) for any period of 20 consecutive trading
days (commencing after such first anniversary) is at least equal to the
product of the fair market value per share on the date of grant times the
amount shown below under "Stock Price Multiple" as to the percentage of the
shares of stock initially subject to the option shown below under "Exercise
Percentage."
<Table>
<Caption>
STOCK PRICE RESULTING
MULTIPLE STOCK PRICE EXERCISE PERCENTAGE
- --------------------- ----------- -------------------
120% $ 6.83 25%
144% 8.19 50%
172% 9.78 75%
206% 11.72 100%
</Table>
Under the Second Amended and Restated Stock Option Plan for Key Employees of
Owens-Illinois, Inc., for all options granted between January 1, 1992 and
December 31, 1996, rights to receive Additional Options, as defined in the
Second Amended and Restated Stock Option Plan for Key Employees of
Owens-Illinois, Inc., are attached to each option and Additional Options
will be granted upon exercise, subject to certain conditions, if the
exercise price is paid using shares of Common Stock owned by the optionee or
the related tax obligation is paid using shares of Common Stock owned by the
optionee or by relinquising Common Stock which the optionee is entitled to
receive upon the exercise of the options. Under the 1997 Equity
Participation Plan of Owens-Illinois, Inc., for all options granted under
the plan, rights to receive Additional Options, as defined in the 1997
Equity Participation Plan of Owens-Illinois, Inc., are attached to each
option and Additional Options will be granted upon exercise, subject to
certain conditions, if the exercise price is paid using shares of Common
Stock owned by the optionee or the related tax obligation is paid using
shares of Common Stock owned by the optionee or by relinquishing Common
Stock which the optionee is entitled to receive upon the exercise of the
options.
(3) Based on actual option term and annual compounding. The assumed annual rates
of appreciation of 5 and 10 percent would result in the price of OI Inc.'s
Common Stock increasing to $9.264 and $14.752, respectively.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
Shown below is information with respect to the unexercised options to
purchase OI Inc.'s Common Stock granted in 2001 and prior years to the named
executive officers and held by them at December 31, 2001. No options were
exercised by named executive officers in 2001.
<Table>
<Caption>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
DECEMBER 31, 2001 AT DECEMBER 31, 2001(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
Joseph H. Lemieux................................... 325,000 790,000 $0 $688,400
Peter J. Robinson................................... 0 375,000 0 322,688
R. Scott Trumbull................................... 47,500 326,250 0 322,688
Terry L. Wilkison................................... 0 325,000 0 430,250
Thomas L. Young..................................... 83,491 381,250 0 430,250
</Table>
- --------------------------
(1) Based on the closing price of OI Inc.'s Common Stock on the New York Stock
Exchange on that date of $9.99.
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
The named executive officers are covered by OI Inc.'s Performance Award Plan
("PAP") under which eligible employees receive annual cash awards payable at the
end of the three-year period covered by the grant of the award. Award payouts
under PAP are based on the average annual attainment of the performance
objectives set by the Compensation Committee of OI Inc.'s Board. For the
2001-2003 award period, performance will be evaluated in comparison to OI Inc.'s
attained level of earnings per share relative to objectives for that period. The
target amounts shown below are earned by OI Inc. performance at the level of
100% of the established objectives, with such payment percentage
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increasing or decreasing four percentage points for each single percentage point
increase or decrease, respectively, in performance.
<Table>
<Caption>
PERFORMANCE
OR OTHER ESTIMATED FUTURE PAYOUTS UNDER
PERIOD UNTIL NON-STOCK PRICE-BASED PLANS
MATURATION -------------------------------
NAME OR PAYOUT THRESHOLD TARGET MAXIMUM
- ---- ------------ --------- -------- --------
Joseph H. Lemieux......................................... 2001-2003 $106,750 $543,750 (1)
Peter J. Robinson......................................... 2001-2003 29,120 145,600 (1)
R. Scott Trumbull......................................... 2001-2003 26,080 130,400 (1)
Terry L. Wilkison......................................... 2001-2003 26,496 132,480 (1)
Thomas L. Young........................................... 2001-2003 26,400 132,000 (1)
</Table>
- --------------------------
(1) The maximum dollar amount that may be earned under PAP is not capped.
PENSION PLANS
The following table illustrates the estimated annual benefits payable under
the Owens-Illinois Salary Retirement Plan (the "Retirement Plan") and
nonqualified retirement plans in various average earnings classifications upon
normal retirement at age 65:
<Table>
<Caption>
YEARS OF CREDITED SERVICE
HIGHEST THREE-YEAR ---------------------------------------------------------------------
AVERAGE ANNUAL EARNINGS 20 25 30 35 40 45
- ----------------------- -------- -------- -------- ---------- ---------- ----------
$ 200,000 $ 52,532 $ 65,664 $ 78,797 $ 91,930 $ 104,050 $ 116,170
400,000 108,594 135,743 162,891 190,040 213,330 237,570
600,000 165,737 207,171 248,606 290,040 322,610 358,970
800,000 222,880 278,600 334,320 390,040 431,890 480,370
1,000,000 280,023 350,029 420,034 490,040 541,170 601,770
1,200,000 337,166 421,457 505,749 590,040 650,450 723,170
1,400,000 394,309 492,886 591,463 690,040 759,730 844,570
1,600,000 451,451 564,314 677,177 790,040 869,010 965,970
1,800,000 508,594 635,743 762,891 890,040 978,290 1,087,370
2,000,000 565,737 707,171 848,606 990,040 1,087,570 1,208,770
2,200,000 622,880 778,600 934,320 1,090,040 1,196,850 1,330,170
</Table>
The above pension table illustrates benefits calculated on a straight-life
annuity basis, and reflects the greater of the regular benefit or the
"grandfathered" benefit available under the formula in effect prior to
January 1, 1989. The regular benefit does not contain an offset for social
security or other amounts, whereas the "grandfathered" benefit does provide for
a partial offset for social security benefits.
The compensation covered by the plans under which the benefits are
summarized in the table above equals the sum of base salary, Senior Management
Incentive Plan and Performance Award Plan payments, as reported in the Summary
Compensation Table for the named executive officers for the last three fiscal
years, and is equal to the highest three-year average of such amounts. At
January 31, 2002, Mr. Lemieux had 44 years of credited service, Mr. Trumbull had
30 years of credited service, Mr. Wilkison had 3 years of credited service and
Mr. Young had 25 years of credited service under the Retirement Plan. To the
extent that benefits in the preceding table cannot, under the limitations of the
Code, be provided under the Retirement Plan, such benefits will be provided
under OI Inc.'s Supplemental Retirement Benefit Plan (the "SRBP"). Peter J.
Robinson is not covered by an OI Inc.-sponsored pension plan.
A significant portion of the pension benefits payable to certain named
executive officers is provided under the SRBP. Such benefits have historically
represented an unfunded liability of OI Inc. OI Inc. previously provided for
funding of a significant portion of the retirement benefits due under
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the SRBP through cash payments to certain participants in the plan. Such funding
arrangements offset the liabilities under the SRBP at the time of such funding.
EMPLOYMENT AGREEMENTS. OI Inc. entered into employment agreements with
certain officers, including the named executive officers listed above, that
entitle the participants to receive their base salaries and to participate in
designated benefit plans of OI Inc. The agreements provide for termination of
employment at any time, with or without cause, and the benefit plans designated
therein and each employee's rights to receive salary and bonuses pursuant
thereto are subject to modification by OI Inc. in its sole discretion.
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<Page>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of OI Inc. Common Stock as of March 11, 2002 (except as otherwise
noted in the footnotes below) by each beneficial owner of more than five percent
of OI Inc.'s outstanding Common Stock known to OI Inc., each of OI Inc.'s
directors, each of the named executive officers and all directors and executive
officers of OI Inc. Joseph H. Lemieux, R. Scott Trumbull and Gerald J. Lemieux
own 28,473, 18,982 and 2,373 shares of OI Inc.'s $2,375 Convertible Preferred
Stock, respectively, which shares are reflected in the totals shown below at a
conversion rate of 0.9491 shares of Common Stock for each share of Convertible
Preferred Stock. No other director, nominee for director, named executive
officer or other executive officer beneficially owned any of OI Inc.'s preferred
stock.
<Table>
<Caption>
NUMBER OF
NAME AND ADDRESS SHARES BENEFICIALLY
OF BENEFICIAL OWNER OWNED(1) PERCENTAGE
- ------------------------------------------------------------ ------------------- ----------
KKR Associates, L.P.(2)..................................... 36,000,000 24.5%
9 West 57th Street
New York, New York 10019
Alliance Capital Management L.P.(3)......................... 18,235,104 12.4
1290 Avenue of the Americas
New York, New York 10104
FMR Corp.(4)................................................ 7,642,679 5.2
82 Devonshire Street
Boston, Massachusetts 02109
Massachusetts Financial Services Company(5)................. 7,626,133 5.2
500 Boylston Street
Boston, Massachusetts 02116
State Street Bank and Trust Company(6)...................... 20,370,812 13.9
225 Franklin Street
Boston, MA 02110
Joseph H. Lemieux(1)........................................ 1,398,508(7)(8) 1.0
Thomas L. Young(1).......................................... 325,511(7)(8) 0.2
Robert J. Dineen(1)......................................... 27,282 --
Edward A. Gilhuly(2)........................................ 10,000 --
James H. Greene, Jr.(2)..................................... -- --
Anastasia D. Kelly.......................................... -- --
John J. McMackin, Jr.(1).................................... 28,019 --
Michael W. Michelson(2)(9).................................. 20,000 --
George R. Roberts(2)........................................ -- --
Peter J. Robinson(1)........................................ 203,000(7)(8) 0.1
R. Scott Trumbull(1)........................................ 352,529(7)(8) 0.2
Terry L. Wilkison(1)........................................ 235,129(7)(8) 0.2
All directors and executive officers as a group (other than
as set forth in relation to KKR Associates, L.P.) (26
persons)(1)............................................... 3,890,214(7)(8) 2.6
</Table>
- ------------------------
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date if such person has
the right to acquire such shares within 60 days after such date. For
purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, any security which
such person or persons has the right to acquire within 60 days after such
date is deemed to be outstanding, but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person. The
information includes: all currently exercisable options granted to
Messrs. Lemieux,
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Young, Dineen, McMackin, Robinson, Trumbull and Wilkison. The number of
shares beneficially owned includes 485,000 shares subject to options granted
to Mr. Lemieux; 164,491 shares subject to options granted to Mr. Young;
18,182 shares subject to options granted to Mr. Dineen; 18,391 shares
subject to options granted to Mr. McMackin; 75,000 shares subject to options
granted to Mr. Robinson; 122,500 shares subject to options granted to
Mr. Trumbull; 100,000 shares subject to options granted to Mr. Wilkison; and
1,595,839 shares subject to options granted to all directors and officers as
a group (other than as set forth in relation to KKR Associates, L.P.). For
purposes of this table, Mr. Robinson is deemed to have "beneficial
ownership" of 20,000 phantom stock units issued under OI Inc.'s 1997 Equity
Participation Plan.
(2) Shares shown as owned by KKR Associates, L.P. are owned of record by three
limited partnerships of which KKR Associates, L.P. is the sole general
partner and as to which it possesses sole voting and investment power. KKR
Associates is a limited partnership of which George R. Roberts, Michael W.
Michelson, James H. Greene, Jr., Edward A. Gilhuly (all directors of the
Company), Henry R. Kravis, Robert I. MacDonnell, Paul E. Raether, Michael T.
Tokarz, Perry Golkin, and Scott Stuart are the general partners. Such
persons may be deemed to share beneficial ownership of the shares shown as
owned by KKR Associates, L.P. The foregoing persons disclaim beneficial
ownership of such shares of OI Inc.
(3) The Schedule 13G received by OI Inc. from AXA Financial, Inc. indicated that
Alliance Capital Management L.P. is the beneficial owner of 18,235,104
shares of the Common Stock on behalf of client discretionary investment
advisory accounts, with sole power to vote or to direct the vote on
11,575,848 shares, shared power to vote or direct the vote on 1,158,867
shares and the sole power to dispose or to direct the disposition of
18,235,104 shares. Alliance Capital Management L.P. is majority owned by AXA
Financial, Inc. In turn, AXA Financial, Inc. is majority owned by AXA, which
is controlled by AXA Conseil Vie Assurance Mutuelle, AXA Assurances I.A.R.D.
Mutuelle, AXA Assurances Vie Mutuelle and AXA Courtage Assurance Mutuelle.
(4) The Schedule 13G received by OI Inc. from FMR Corp. ("FMR"), Edward C.
Johnson 3d, Abigail P. Johnson and Fidelity Management & Research Company
("Fidelity"), a wholly-owned subsidiary of FMR, indicated that FMR is the
beneficial owner of 7,642,679 shares of the Common Stock, with sole power to
vote or to direct the vote of 858,700 shares and the sole power to dispose
or to direct the disposition of 7,642,679 shares. Fidelity is the beneficial
owner of 6,783,979 shares of the Common Stock as a result of acting as
investment adviser to various investment companies registered under
Section 8 of the Investment Company Act of 1940. That number includes
749,409 shares of Common Stock resulting from the assumed conversion of
789,600 shares of OI Inc.'s $2.375 Convertible Preferred Stock (0.9491
shares of Common Stock for each share of Convertible Preferred Stock).
Edward C. Johnson 3d, FMR Corp., through its control of Fidelity, and the
funds each has sole power to dispose of the 6,783,979 shares owned by the
Funds. Neither FMR Corp. nor Edward C. Johnson 3d, Chairman of FMR Corp.,
has the sole power to vote or direct the voting of the shares owned directly
by the Fidelity Funds. Fidelity Management Trust Company, a wholly-owned
subsidiary of FMR Corp. is the beneficial owner of 269,600 shares of Common
Stock as a result of its serving as investment manager of the institutional
account(s). Edward C. Johnson 3d and FMR Corp., through its control of
Fidelity Management Trust Company, each has sole dispositive power over
269,600 shares and sole power to vote or to direct the voting of 269,600
shares of Common Stock owned by the institutional account(s) as reported
above. Fidelity International Limited is the beneficial owner of 589,100
shares of Common Stock.
(5) The Schedule 13G received by OI Inc. from Massachusetts Financial Services
Company ("MFS") indicated that MFS, together with certain other
non-reporting entities, is the beneficial owner of 7,626,133 shares of the
Common Stock, with sole power to vote or to direct the vote on 7,626,133
shares and the sole power to dispose or to direct the disposition of
7,626,133 shares. That number includes 325,873 shares of Common Stock
resulting from the assumed conversion of 343,350 shares
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<Page>
of OI Inc.'s $2.375 Convertible Preferred Stock (0.9491 shares of Common
Stock for each share of Convertible Preferred Stock).
(6) The Schedule 13G received by OI Inc. from State Street Bank and Trust
Company ("State Street"), acting in various fiduciary capacities, indicated
it is beneficial owner of 20,370,812 shares of Common Stock, with sole
voting power with respect to 1,315,886 shares of Common Stock, shared voting
power with respect to 18,959,672 shares of Common Stock, sole dispositive
power with respect to 12,639,310 shares of Common Stock, and shared
dispositive power with respect to 7,731,502 shares of Common Stock. The
majority of the shares with respect to which State Street is the beneficial
owner are owned on behalf of (a) the Owens-Illinois Hourly Supplemental
Retirement Plan, (b) the Owens-Illinois Non-Union Retirement and Savings
Plan, (c) the Owens-Illinois Stock Purchase and Savings Program, and
(d) the Owens-Illinois Long Term Savings Plan.
(7) The table includes the number of shares of Common Stock that Joseph H.
Lemieux, Thomas L. Young, R. Scott Trumbull, Terry L. Wilkison and all
directors and officers as a group (other than as set forth in relation to
KKR Associates, L.P.) held in the Stock Purchase and Savings Program as of
February 28, 2002. No shares are held in such program for Peter J. Robinson.
(8) The number of shares shown as beneficially owned includes the following
number of shares of unvested restricted stock over which the following
persons or group had voting, but not investment, power as of March 11, 2002;
Mr. Lemieux--389,143 shares; Mr. Young--95,000 shares; Mr. Robinson--100,000
shares; Mr. Trumbull--90,000 shares; Mr. Wilkison--90,000 shares; and all
directors and officers as a group (other than as set forth in relation to
KKR Associates, L.P.)--1,111,002 shares. The number of shares shown as
beneficially owned by Mr. Robinson also includes 20,000 phantom stock units
issued under OI Inc.'s 1997 Equity Participation Plan.
(9) Does not include 3,000 shares of Common Stock held in an irrevocable trust
created by Mr. Michelson for the benefit of his children with respect to
which Mr. Michelson disclaims any beneficial ownership. The limited
partnership agreements pursuant to which two of the limited partnerships
noted in footnote 2 above (the "KKR Partnerships") were organized, by their
terms, expired on December 31, 2000. The limited partnership agreement may
be amended by all of the limited partners to extend the term beyond such
date. No such amendment has been adopted. There can be no assurance that KKR
Associates, L.P., as general partner of the KKR Partnerships, will seek an
amendment or, if sought, that an amendment will be approved by the limited
partners. In connection with the dissolution and winding up of the limited
partnerships, KKR Associates, L.P. has sole discretion regarding the timing
(which may be one or more years after the expiration of the partnership
agreements) and manner of the disposition of any Common Stock held by such
limited partnerships, including public or private sales of such Common
Stock, the distribution of such Common Stock to the limited partners of the
limited partnerships or a combination of the foregoing.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2001, the law firm of Williams & Jensen, P.C., of which Mr. McMackin
is a member, received fees for legal services in connection with various
matters. It is anticipated that OI Inc. will continue to utilize the services of
Williams & Jensen, P.C. on various matters.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
THE SECURED CREDIT AGREEMENT
As of March 31, 2002, the secured credit agreement consisted of an aggregate
of $3.065 billion in financing under (1) a $65 million term loan (the "Term
Facility") extended to Owens-Brockway Glass Container Inc. and (2) a
$3.0 billion revolving loan facility (including the subfacilities described
below, the "Revolving Facility") available to OI Plastic Products FTS Inc. and
Owens-Brockway Glass Container Inc. (collectively, with OI General FTS Inc., the
"Domestic Borrowers"). In April 2002, $500.0 million of existing revolving loans
were separated into a tranche of funded loans of OI Plastic Products FTS Inc.
under the Revolving Facility. OI General FTS Inc. has repaid in full its term
loan under the secured credit agreement but remains jointly and severally liable
for the Owens-Brockway Glass Container Inc. term loan and all revolving loans.
Each Domestic Borrower is jointly and severally liable for loans made to any
borrower under the Revolving Facility. The Revolving Facility also includes:
- a $300.0 million subfacility (the "U.K. Subfacility") available to certain
of OI Group's U.K. subsidiaries (the "U.K. Borrowers");
- a $1.1 billion subfacility (the "Australian Subfacility") available to
certain of OI Group's Australian subsidiaries (the "Australian
Borrowers"); and
- a $10.0 million subfacility (the "Italian Subfacility") available to
certain of OI Group's Italian subsidiaries (the "Italian Borrowers").
Each U.K. Borrower is jointly and severally liable for the obligations of each
other U.K. Borrower. Each Australian Borrower is jointly and severally liable
for the obligations of each other Australian Borrower. Each Italian Borrower is
jointly and severally liable for the obligations of each other Italian Borrower.
In addition, the Revolving Facility includes a $500.0 million letter of credit
subfacility available to the Domestic Borrowers, the U.K. Borrowers and the
Australian Borrowers and certain overdraft facilities.
The Term Facility and the Revolving Facility expire on March 31, 2004. As of
March 31, 2002, loans of $65 million were outstanding under the Term Facility,
loans of $2.42 billion were outstanding under the Revolving Facility and
$96.4 million of issued but undrawn letters of credit was outstanding.
Loans under the Term Facility bear interest, generally at our option, at
(i) the higher of (A) the prime rate or (B) 50 basis points over an averaged
federal funds rate, PLUS in either case 150 basis points per annum or (ii) a
reserve-adjusted Eurodollar rate PLUS 250 basis points per annum.
Loans under the Revolving Facility bear interest, generally at the
applicable borrower's option, at:
- the higher of (A) the prime rate or (B) 50 basis points over an averaged
federal funds rate, PLUS in either case 75 basis points, if the applicable
leverage ratio then in effect under the secured credit agreement is less
than 3.5:1, or 100 basis points, if the applicable leverage ratio is
greater than or equal to 3.5:1; or
- a reserve adjusted Eurodollar rate PLUS 175 basis points, if the
applicable leverage ratio then in effect under the secured credit
agreement is less than 3.5:1, or 200 basis points, if the applicable
leverage ratio is greater than or equal to 3.5:1.
In the event the loans under the Term Facility have not been repaid in full
on or prior to March 31, 2003, the interest rate margins on loans under the Term
Facility and the Revolving Facility increase by 50 basis points until repayment
in full of the term loans under the secured credit agreement.
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<Page>
Each Domestic Borrower has guaranteed the obligations of each borrower under
the secured credit agreement (including the offshore subfacilities). In
addition, the secured credit agreement (including the offshore subfacilities) is
guaranteed by OI Group and substantially all other direct and indirect domestic
subsidiaries of OI Group. The U.K. Borrowers have guaranteed the obligations of
the Australian Borrowers and the Italian Borrowers under the secured credit
agreement. In addition, certain wholly-owned U.K. subsidiaries of the U.K.
Borrowers (the "U.K. Guarantors") have guaranteed the obligations of the U.K.
Borrowers under the U.K. Subfacility; and certain wholly-owned Australian
subsidiaries of the Australian Borrowers (the "Australian Guarantors") have
guaranteed the obligations of the Australian Borrowers under the Australian
Subfacility.
The secured credit agreement and the domestic guaranties of the secured
credit agreement, subject to certain exceptions and limitations, are secured on
a first priority basis by substantially all of the assets of OI Group and
substantially all of the assets of substantially all present and future direct
and indirect domestic subsidiaries of OI Group, including the stock and
intercompany debt of such subsidiaries. In addition, the U.K. Subfacility and
the guaranties of the U.K. Borrowers and U.K. Guarantors are secured by
substantially all of the assets of the U.K. Borrowers and U.K. Guarantors, and
the Australian Subfacility and the guaranties of the Australian Borrowers and
the Australian Guarantors are secured by substantially all of the assets of the
Australian Borrowers and the Australian Guarantors. Real property with an
acquisition cost or insurable value of less than $25.0 million has generally
been excluded. The secured credit agreement also requires under certain
circumstances certain additional existing and future subsidiaries to guaranty
the secured credit agreement and grant security interests in their assets to
secure the secured credit agreement. The secured credit agreement and related
collateral documents provide that, subject to certain conditions, the domestic
guaranties and liens supporting the secured credit agreement may be shared from
time to time with specified types of other obligations owing to lenders or
affiliates of lenders party to the secured credit agreement incurred or
guaranteed by OI Group or its subsidiaries as lending facilities and interest
rate and currency agreements and certain other indebtedness permitted by the
secured credit agreement, including the notes. In the event the rating for
OI Inc.'s and OI Group's long term unsecured debt from Standard & Poor's Ratings
Services and Moody's Investors Service, Inc. is BBB- and Baa3 or higher,
respectively, and acknowledged by the collateral agent, the security interests
in the collateral securing the secured credit agreement will terminate, provided
that no default exists and all of OI Inc.'s outstanding public debt securities,
the notes and other institutional debt shall be and remain unsecured. The
Domestic Borrowers may assign or transfer their rights and obligations under the
secured credit agreement to OI Inc. and all of OI Inc.'s subsidiaries will be
concurrently released from their guarantees upon the consent of the requisite
percentage of lenders under the secured credit agreement if all loans under the
Term Facility have been repaid, OI Inc. has achieved, and immediately following
such assumption maintains, specified investment grade ratings and all
obligations of subsidiaries of OI Inc. in respect of OI Inc.'s outstanding
public debt securities, the notes and certain other debt have been released and
assumed by OI Inc.
Loans and commitments under the secured credit agreement are subject to
mandatory prepayment and reduction under certain circumstances from proceeds of
permitted asset sales (including sales of receivables), the sale or issuance of
permitted debt securities, the sale or issuance of certain equity securities,
and from insurance and condemnation proceeds, in each case received by OI Group
and/or OI Group's subsidiaries (with certain exceptions for non-U.S.
subsidiaries), and in some cases by OI Inc. Voluntary prepayment of any of the
loans under the secured credit agreement is permitted in whole or in part with
prior notice and without premium or penalty (other than funding losses), subject
to limitations as to minimum amounts.
The secured credit agreement contains covenants and provisions that, among
other things, restrict the ability of OI Group and its subsidiaries to dispose
of assets, incur additional indebtedness, prepay other indebtedness or amend
certain debt instruments, pay dividends, create liens on assets, enter into
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<Page>
contingent obligations, enter into sale and leaseback transactions, make
investments, loans or advances, make acquisitions, engage in mergers or
consolidations, change the business conducted by OI Group and its subsidiaries,
engage in certain transactions with affiliates and otherwise restrict certain
corporate activities.
In addition, the secured credit agreement contains financial covenants that
require OI Group and its subsidiaries to maintain, based upon the financial
statements of OI Inc. and its subsidiaries on a consolidated basis, the
following financial ratios and tests:
The fixed charge coverage ratio (the ratio of cash flow available for
fixed charges to fixed charges) must be at least 1.20 to 1.0 for any fiscal
quarter through March 31, 2002 and at least 1.25 to 1.0 for any fiscal
quarter through September 30, 2003.
The leverage ratio (the ratio of total debt to adjusted EBITDA) may not
exceed 4.50 to 1.0 as of the last day of each fiscal quarter through March
31, 2003.
Consolidated net worth may not at any time be less than the sum of
(i) $1.65 billion plus (ii) 60% of consolidated adjusted net income plus
(iii) 90% of any after-tax gains or losses attributable to asset sales.
Capital expenditures cannot exceed $600 million in 2001, $615 million in
2002 and $625 million in 2003.
At March 31, 2002, the borrowers under the secured credit agreement were
in compliance with all of these requirements.
Events of default under the secured credit agreement include, among other
matters: (1) any failure to pay principal when due or to reimburse letters of
credit when reimbursement is due, or to pay interest, fees or other amounts
within five days after the date due; (2) any failure by OI Inc. or any of its
subsidiaries to pay when due principal or interest on certain indebtedness that
gives rise to a right of acceleration, and other breaches or defaults by
OI Inc. or its subsidiaries under such indebtedness similarly giving rise to
acceleration rights; (3) the breach by OI Group or certain of its subsidiaries
of certain covenants, representations or warranties in the secured credit
agreement; (4) any other default by OI Group or certain subsidiaries under the
secured credit agreement that has not been remedied or waived within 30 days of
the requisite notice; (5) certain events of bankruptcy, insolvency or
dissolution of OI Inc., OI Group, any borrower or any material subsidiary, and
certain material judgments entered against the same; (6) a change of control of
OI Inc., OI Group or the Company as defined in the secured credit agreement;
(7) certain ERISA and pension-related matters and liabilities; (8) material
impairment of the guarantees or the collateral security; and (9) certain changes
in the activities of OI Inc.
INDEBTEDNESS OF OI INC.
OI Inc. has issued the following outstanding public debt securities:
$300 million of 7.85% Senior Notes due 2004
$350 million of 7.15% Senior Notes due 2005
$300 million of 8.10% Senior Notes due 2007
$250 million of 7.35% Senior Notes due 2008
$250 million of 7.50% Senior Debentures due 2010
$250 million of 7.80% Senior Debentures due 2018
OI Inc.'s obligations under these outstanding public debt securities are
guaranteed on a subordinated basis by OI Group and OI Packaging. The guarantees
and the outstanding public debt securities are secured by a second priority lien
on the intercompany debt and capital stock owned by OI Group and OI Packaging.
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The guarantees by OI Group and OI Packaging are subordinated to the prior
payment in full in cash of all obligations of these guarantors under the secured
credit agreement, obligations owing to lenders or their affiliates as lending
facilities as permitted by the terms of the secured credit agreement and
obligations under interest rate and currency agreements with lenders or their
affiliates as permitted by the terms of the secured credit agreement. The
guarantees will also be subordinated to the guarantees by OI Group and OI
Packaging of our obligations under the notes. Each of OI Group and OI Packaging
will be released and relieved of any obligations under its guarantee of
OI Inc.'s outstanding public debt securities (1) in the event of a sale or other
disposition of all or substantially all of the assets of such guarantor, by way
of merger, consolidation or otherwise, or a sale or other disposition of all of
its capital stock, to a person that is not a subsidiary of OI Inc., or (2) at
the discretion of OI Inc., in the event that the guarantor is no longer a
guarantor of: (A) the obligations under the secured credit agreement;
(B) obligations under certain interest rate and currency agreements with lenders
or their affiliates as permitted by the terms of the secured credit agreement;
and (C) obligations owing to lenders or their affiliates as lending facilities
as permitted by the terms of the secured credit agreement.
The security interests are second in priority to the liens granted to the
senior secured parties under the pledge agreement, which currently consist of
the collateral agent for the benefit of the lenders under the secured credit
agreement, lenders or their affiliates party to certain interest rate and
currency agreements as permitted by the terms of the secured credit agreement
and lenders and their affiliates under lending facilities as permitted by the
terms of the secured credit agreement, and which will include the holders of the
notes. The security interests securing OI Inc.'s outstanding public debt
securities will terminate and the collateral will be released upon the earlier
of:
- payment in full of all obligations under the secured credit agreement and
the cancellation or termination of the secured credit agreement and
related letters of credit and the written election of OI Group and OI
Packaging;
- the first date on which the pledged collateral no longer secures any
obligations under the secured credit agreement and upon the written
election of OI Group and OI Packaging; and
- the achievement of "investment grade" debt ratings for OI Inc.'s and OI
Group's long term unsecured debt (in the case of Moody's Investors
Service, Inc., a rating of Baa3 or higher, and, in the case of Standard &
Poor's Ratings Services, a rating of BBB- or higher).
In addition, lenders under the secured credit agreement have the ability to
direct the collateral agent to release the collateral upon the approval of the
requisite percentage of lenders under the secured credit agreement.
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description under
the subheading "--Certain Definitions." In this description, the word "Company"
refers only to Owens-Brockway Glass Container Inc. and not to any of its
Subsidiaries, the term "OI Packaging" refers to Owens-Brockway Packaging, Inc.,
the Company's direct parent, and not to any of its Subsidiaries and the term "OI
Group" refers to Owens-Illinois Group, Inc., the Company's indirect parent, and
not to any of its Subsidiaries. OI Group and certain of the Subsidiaries of OI
Group guarantee the notes and therefore are subject to many of the provisions
contained in this Description of Notes.
The Company issued the private notes, and will issue the exchange notes
under an Indenture (the "Indenture") among itself, the Guarantors and U.S. Bank
National Association, as trustee (the "Trustee"). The terms of the notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
The following description is a summary of the material provisions of the
Indenture and the Collateral Documents (as defined below). It does not restate
those agreements in their entirety. We urge you to read the Indenture and the
Collateral Documents because they, and not this description, define your rights
as Holders of the notes. Certain defined terms used in this description but not
defined below under "--Certain Definitions" have the meanings assigned to them
in the Indenture.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
THE NOTES
The notes:
- are senior obligations of the Company secured on the basis described
below;
- are PARI PASSU in right of payment with existing, and any future, senior
Indebtedness of the Company; and
- are guaranteed on a senior basis by the Guarantors.
THE GUARANTEES
The notes are guaranteed by OI Group and all Domestic Subsidiaries of OI
Group that guarantee the Credit Agreement and will be guaranteed by any future
Domestic Subsidiaries of OI Group that guarantee the Credit Agreement. As of the
date of the Indenture, all of OI Group's Subsidiaries, other than its Foreign
Subsidiaries, were "Domestic Subsidiaries." In the future, OI Group may have
additional Subsidiaries which are not Domestic Subsidiaries and may also have
additional Domestic Subsidiaries which do not guarantee the notes.
Each Guarantee of the notes:
- is a senior obligation of the Guarantor secured on the basis described
below; and
- is PARI PASSU in right of payment with existing, and any future, senior
Indebtedness of the Guarantor.
As of the date of the Indenture, all of OI Group's Subsidiaries were
"Restricted Subsidiaries." However, under the circumstances described below
under the subheading "--Certain Covenants--Designation of Restricted and
Unrestricted Subsidiaries," OI Group will be permitted to designate certain of
its subsidiaries as "Unrestricted Subsidiaries." The Unrestricted Subsidiaries
will not be subject to any of the restrictive covenants in the Indenture and
will not guarantee the notes.
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PRINCIPAL, MATURITY AND INTEREST
The Indenture does not limit the maximum aggregate principal amount of notes
that the Company may issue thereunder. The Company will issue an aggregate
principal amount of $1.0 billion of notes in this offering. The Company may
issue additional notes (the "additional notes") from time to time after this
offering. The notes and any additional notes subsequently issued under the
Indenture would be treated as a single series for all purposes under the
Indenture, including, without limitation, waivers, amendments, redemptions and
offers to purchase.
In addition to the notes and any additional notes, the Company may issue
additional series of debt securities under the Indenture. The terms of any
additional debt securities issued under the Indenture will be established
pursuant to a resolution of the Board of Directors of the Company and set forth
or determined in the manner provided in an officer's certificate or by a
supplemental indenture. Any offering of additional notes or additional debt
securities under the Indenture is subject to the covenant described below under
the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock."
The Company will issue notes in denominations of $1,000 and integral
multiples of $1,000. The notes will mature on February 15, 2009.
Interest on the notes will accrue at the rate of 8 7/8% per annum and will
be payable semi-annually in arrears on February 15 and August 15, commencing on
August 15, 2002. The Company will make each interest payment to the Holders of
record on the immediately preceding February 1, and August 1.
Interest on the exchange notes will accrue from the last interest payment
date on which interest was paid, or, if no interest was paid on the private
notes, from the date of issuance of the private notes, which was January 24,
2002. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder has given wire transfer instructions to the Company, the Company
will pay all principal, interest and premium and liquidated damages, if any, on
that Holder's notes in accordance with those instructions. All other payments on
notes will be made at the office or agency of the paying agent and registrar
within the City and State of New York unless the Company elects to make interest
payments by check mailed to the Holders at their addresses set forth in the
register of Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The Trustee will initially act as paying agent and registrar. The Company
may change the paying agent or registrar without prior notice to the Holders,
and the Company or any of its Subsidiaries may act as paying agent or registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the Indenture.
The registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any note selected
for redemption. Also, the Company is not required to transfer or exchange any
note for a period of 15 days before a selection of notes to be redeemed.
The registered Holder of a note will be treated as the owner of it for all
purposes.
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GUARANTEES
The Guarantors jointly and severally guarantee the due and punctual payment
of principal and of interest on the notes and all other obligations of the
Company under the Indenture. The Guarantees of the notes (including the payment
of principal of, premium, if any, and interest on the notes) are senior
obligations of such Guarantors and rank PARI PASSU in right of payment with all
existing and future senior obligations of the Guarantors and rank senior to all
subordinated obligations of such Guarantors. The Guarantees are secured to the
extent set forth below under "--Collateral." The obligations of each Guarantor
under its Guarantee are limited as necessary to prevent that Guarantee from
constituting a fraudulent conveyance under applicable law. See "Risk
Factors--Risks Relating to the Notes--Fraudulent Transfer--Federal and state
laws permit a court to void the notes or the guarantees under certain
circumstances."
Until such time as all Guarantees of the notes by the Guarantors have been
released in accordance with the terms of the Indenture, OI Group will cause each
Domestic Subsidiary that guarantees the Company's obligations under the Credit
Agreement to become a Guarantor under the Indenture and thereby guarantee the
notes on the terms and conditions set forth in the Indenture. Upon the release
of a Guarantee by a Domestic Subsidiary under the Credit Agreement, the
Guarantee of such Domestic Subsidiary under the Indenture will be released and
discharged at such time. In the event any such Domestic Subsidiary thereafter
guarantees obligations under the Credit Agreement (or such released Guarantee
under the Credit Agreement is reinstated or renewed), then such Domestic
Subsidiary will guarantee the notes on the terms and conditions set forth in the
Indenture.
A Guarantor may not sell or otherwise dispose of all or substantially all of
its assets to, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person, other than the Company or
another Guarantor, unless:
(1) immediately after giving effect to that transaction, no Event of Default
exists under the Indenture; and
(2) either:
(a) the Person acquiring the property in any such sale or disposition or
the Person formed by or surviving any such consolidation or merger is
organized or existing under the laws of the United States, any state
thereof or the District of Columbia and assumes all the obligations
of that Guarantor under the Indenture, its Guarantee, the Collateral
Documents and the Registration Rights Agreement pursuant to a
supplemental indenture satisfactory to the Trustee; or
(b) such sale or other disposition complies with the "Asset Sale"
provisions of the Indenture, including the application of the Net
Proceeds therefrom.
The Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or substantially
all of the assets of that Guarantor (including by way of merger or
consolidation) to a Person that is not (either before or after giving
effect to such transaction) a Restricted Subsidiary of OI Group, if the
sale or other disposition of all or substantially all of the assets of
that Guarantor complies with the "Asset Sale" provisions of the
Indenture;
(2) in connection with any sale of all of the Capital Stock of a Guarantor
to a Person that is not (either before or after giving effect to such
transaction) a Restricted Subsidiary of OI Group, if the sale of all such
Capital Stock of that Guarantor complies with the "Asset Sale" provisions
of the Indenture; or
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(3) if OI Group properly designates any Restricted Subsidiary that is a
Guarantor as an Unrestricted Subsidiary.
The Guarantees will also be released in the circumstances described below
under the caption "--Certain Covenants--Merger, Consolidation or Sale of
Assets."
The Collateral Documents provide that, upon the release of a Guarantee under
the Indenture, the security interests in the assets of that Guarantor securing
the notes and Guarantees of the notes will be released simultaneously.
RANKING
The notes are senior obligations of the Company and rank PARI PASSU in right
of payment with all existing and future senior obligations of the Company
(including Indebtedness of the Company under the Credit Agreement) and rank
senior in right of payment to all subordinated obligations of the Company. The
notes are secured to the extent set forth below under "--Collateral" and
guaranteed by the Guarantors to the extent set forth above under "--Guarantees."
The Guarantees of the notes rank equal in right of payment to the Guarantees of
OI Group and the other Guarantors of their existing and future senior
obligations, including their obligations under the Credit Agreement, and senior
in right of payment to all subordinated obligations of the Guarantors, including
the guarantees of OI Group and OI Packaging of the obligations of OI Group's
parent, OI Inc., related to $1.7 billion of outstanding public debt securities.
The notes are effectively subordinated to obligations under the Credit Agreement
and the OI Inc. Senior Notes to the extent such obligations are secured by
collateral that does not secure the notes. The notes may also be effectively
subordinated to certain Indebtedness incurred to refinance borrowings under the
Credit Agreement to the extent that such Indebtedness is secured by collateral
that does not secure the notes.
As of and for three months ended March 31, 2002, the non-guarantor
Subsidiaries represented approximately:
- 43% of OI Group's net sales;
- 44% of OI Group's Consolidated Adjusted EBITDA; and
- 44% of OI Group's consolidated assets.
The liabilities of the non-guarantor Subsidiaries on a consolidated basis
were approximately $2.2 billion as of March 31, 2002.
As of March 31, 2002, OI Group had approximately $5.4 billion of total
consolidated indebtedness, which includes approximately $2.5 billion of secured
indebtedness under the Credit Agreement.
COLLATERAL
COLLATERAL SECURING THE NOTES. The notes and the Guarantees of the notes
are secured, subject to the terms of the Collateral Documents, on a PARI PASSU
basis with the Indebtedness of the Company under the Credit Agreement, related
documents and liabilities owing to lenders or affiliates of lenders party to the
Credit Agreement and in connection with interest rate and currency agreements
and certain other Indebtedness permitted by the Credit Agreement.
The notes and Guarantees of the notes are secured by:
- a security interest in substantially all the assets (other than
Intercompany Indebtedness and Capital Stock) of OI Group and of
substantially all the Domestic Subsidiaries of OI Group; and
- a pledge by OI Group of the Capital Stock of all its direct Subsidiaries
and Intercompany Indebtedness owing to OI Group by such direct
Subsidiaries (other than the Capital Stock of OI
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General FTS Inc. ("OI General FTS") owned by OI Group and Intercompany
Indebtedness owing to OI Group by OI General FTS) and a pledge by OI
Packaging of the Capital Stock of the Company and Intercompany
Indebtedness owing to OI Packaging by the Company (the "Additional
Collateral").
NEGATIVE PLEDGE. Except as permitted and contemplated by, and subject to
the terms of, the Credit Agreement and the Pledge Agreement, OI Group will not
further pledge the Capital Stock of OI General FTS or the Intercompany
Indebtedness of OI General FTS owing to OI Group, as security or otherwise,
unless the notes and the Guarantees of the notes are secured on a PARI PASSU
basis with the applicable Indebtedness by this collateral.
ADDITIONAL COLLATERAL SECURES THE CREDIT AGREEMENT. In addition to the
Collateral securing the obligations under the notes and the Guarantees of the
notes, the obligations of the Credit Agreement Domestic Borrowers and the
domestic guarantors under the Credit Agreement are further secured by:
- a pledge by OI Group of the Capital Stock of OI General FTS and
Intercompany Indebtedness owing to OI Group by OI General FTS;
- a pledge of the Capital Stock of substantially all of the Domestic
Subsidiaries of OI General FTS, OI Plastic Products FTS Inc. and the
Company;
- a pledge of the Intercompany Indebtedness owed to OI General FTS, OI
Plastic Products FTS Inc. and the Company and substantially all of their
Domestic Subsidiaries; and
- a pledge of 65% of the stock of the first-tier Foreign Subsidiaries.
In addition to being secured by the above, the offshore subfacilities and
related Guarantees under the Credit Agreement are also secured by the assets
(including stock and intercompany debt) of certain wholly-owned U.K. and
Australian Subsidiaries and by the remaining 35% of the stock of the first-tier
Foreign Subsidiaries. See "Risk Factors--Risks Relating to the Notes--Notes
Effectively Subordinated to Certain Secured Credit Agreement Obligations and
Obligations of OI Inc.--The notes are effectively subordinated to the
obligations under the secured credit agreement, certain obligations owing to
lenders or their affiliates as permitted under the secured credit agreement and
obligations related to OI Inc.'s $1.7 billion outstanding public debt securities
to the extent these obligations are secured by collateral that does not secure
the notes."
SUFFICIENCY OF COLLATERAL. The fair market value of the Collateral is
subject to fluctuations based on factors that include, among others, the
condition of the packaging products industry, the ability to sell the Collateral
in an orderly sale, the condition of the international, national and local
economies, the availability of buyers and similar factors. In the event of
foreclosure on the collateral, the proceeds from the sale of the collateral,
including the Collateral securing the notes and the Guarantees of the notes, may
not be sufficient to satisfy in full the Company's obligations under both the
Notes and the Credit Agreement and any senior, secured indebtedness ranking PARI
PASSU with the notes. The amount to be received upon such a sale would be
dependent on numerous factors, including but not limited to the timing and the
manner of the sale. In addition, the book value of the Collateral should not be
relied on as a measure of realizable value for such assets. By its nature,
portions of the Collateral may be illiquid and may have no readily ascertainable
market value. Accordingly, there can be no assurance that the Collateral can be
sold in a short period of time in an orderly manner. A significant portion of
the Collateral includes assets that may only be usable, and thus retain value,
as part of the existing operating businesses of OI Group and its Subsidiaries.
Accordingly, any such sale of the Collateral separate from the sale of certain
of OI Group's and its Subsidiaries' operating businesses may not be feasible or
of significant value. To the extent that third parties enjoy Liens permitted by
the Indenture such third parties may have rights and remedies with respect to
the assets or property subject to such Liens that, if exercised, could adversely
affect the value of the Collateral. In addition, in the event of a
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bankruptcy, the ability of the Holders to realize upon any of the Collateral may
be subject to certain bankruptcy law limitations. See "Risk Factors--Risks
Relating to the Notes--Notes Effectively Subordinated to Certain Secured Credit
Agreement Obligations and Obligations of OI Inc.--The notes are effectively
subordinated to the obligations under the secured credit agreement, certain
obligations owing to lenders or their affiliates as permitted under the secured
credit agreement and obligations related to OI Inc.'s $1.7 billion of
outstanding public debt securities to the extent these obligations are secured
by collateral that does not secure the notes."
The Company has the ability to issue additional notes as part of the same
series of these notes or in one or more different series, all of which may be
secured with the notes by the Collateral. OI Group and its Restricted
Subsidiaries can increase their Indebtedness but there can be no assurance that
there will be a proportionate increase in the value of the Collateral as a
percentage of the aggregate principal amount of outstanding notes.
CERTAIN BANKRUPTCY LIMITATIONS
The right of the Collateral Agent to repossess and dispose of the Collateral
upon the occurrence of an Event of Default would be significantly impaired by
applicable bankruptcy law in the event that a bankruptcy case were to be
commenced by or against the Company, OI Group, or any of the Guarantors prior to
the Collateral Agent having repossessed and disposed of the Collateral. Upon the
commencement of a case for relief under Title 11 of the United States Code, as
amended (the "Bankruptcy Code"), a secured creditor such as the Collateral Agent
is prohibited from repossessing its security from a debtor in a bankruptcy case,
or from disposing of security repossessed from the debtor, without bankruptcy
court approval. Moreover, the Bankruptcy Code permits the debtor to continue to
retain and use Collateral even though the debtor is in default under the
applicable debt instruments PROVIDED that the secured creditor is given adequate
protection. The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the Collateral and may include cash payments or the
granting of additional security, if and at such times as the court in its
discretion determines, for any diminution in the value of the Collateral as a
result of the stay or repossession or disposition or any use of the Collateral
by the debtor during the pendency of the bankruptcy case. A bankruptcy court may
determine that a secured creditor may not require compensation for a diminution
in the value of the Collateral if the value of the Collateral exceeds the debt
it secures.
In view of the broad equitable powers of a bankruptcy court, it is
impossible to predict how long payments under the notes could be delayed
following commencement of a bankruptcy case, whether or when the Collateral
Agent could repossess or dispose of the Collateral, the value of the Collateral
at the time of the bankruptcy petition or whether or to what extent Holders of
the notes would be compensated for any delay in payment or loss of value of the
Collateral through the requirement of "adequate protection." Any disposition of
the Collateral during a bankruptcy case would also require permission from the
bankruptcy court. Furthermore, in the event a bankruptcy court determines the
value of the Collateral is not sufficient to repay all amounts due on the notes,
the Holders of the notes would hold secured claims to the extent of the value of
the Collateral to which the Holders of the notes are entitled, and unsecured
claims with respect to such shortfall. The Bankruptcy Code only permits the
payment and/or accrual of post-petition interest, costs and attorney's fees to a
secured creditor during a debtor's bankruptcy case to the extent the value of
the Collateral is determined by the bankruptcy court to exceed the aggregate
outstanding principal amount of the obligations secured by the Collateral.
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OPTIONAL REDEMPTION
Except as described below, the notes are not redeemable at the Company's
option prior to February 15, 2006. The Company cannot predict with any certainty
the criteria that it will use in determining whether to redeem the notes. The
general economic environment, the Company's capitalization, the interest rate
environment and the Company's cash flow are just a few of the many factors that
may influence the Company's decision. The Company may, for example, be more
likely to redeem the notes if interest rates are low or if the Company has
substantial excess cash flow.
After February 15, 2006, the Company may redeem all or a part of the notes
upon not less than 30 nor more than 60 days notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and liquidated damages, if any, thereon, to the applicable
redemption date, if redeemed during the twelve-month period beginning on
February 15, 2006 of the years indicated below:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2006........................................................ 104.438%
2007........................................................ 102.219%
2008 and thereafter......................................... 100.000%
</Table>
At any time prior to February 15, 2005, the Company may redeem on any one or
more occasions up to 35% of the aggregate principal amount of notes (calculated
after giving effect to any issuance of additional notes) issued under the
Indenture at a redemption price of 108.875% of the principal amount thereof,
plus accrued and unpaid interest and liquidated damages, if any, to the
redemption date, with the net cash proceeds of one or more Equity Offerings by
OI Inc. to the extent the net cash proceeds thereof are contributed to the
Company or used to purchase from the Company Capital Stock (other than
Disqualified Stock) of the Company; PROVIDED that:
(1) at least 65% of the aggregate principal amount of notes issued under the
Indenture remains outstanding immediately after the occurrence of such
redemption (excluding notes held by OI Inc. and its Subsidiaries); and
(2) the redemption must occur within 60 days of the date of the closing of
such Equity Offering.
In addition, at any time prior to February 15, 2006, the notes may also be
redeemed, in whole but not in part, at the option of the Company upon the
occurrence of a Change of Control, upon not less than 30 nor more than 60 days
prior notice (but in no event more than 90 days after the occurrence of such
Change of Control or transfer event) mailed by first-class mail to each Holder's
registered address, at a redemption price equal to 100% of the principal amount
of notes redeemed plus the Applicable Premium as of, and accrued and unpaid
interest and liquidated damages, if any, to, the date of redemption (subject to
the right of Holders of record on the relevant record date to receive interest
due on the notes on the relevant interest payment date).
"APPLICABLE PREMIUM" means, with respect to any note on any redemption date,
the greater of:
(1) 1.0% of the principal amount of such note; or
(2) the excess of:
(a) the present value at such redemption date of (1) the redemption price
of such note at February 15, 2006 (such redemption price being set
forth in the table above) plus (2) all required interest payments due
on such note through February 15, 2006, (including accrued but unpaid
interest) computed using a discount rate equal to the Treasury Rate
on such redemption date plus 50 basis points; over
(b) the principal amount of such note.
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"TREASURY RATE" means, as of any redemption date, the yield to maturity as
of such redemption date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15(519) that has become publicly available at least two
business days prior to the redemption date (or, if such statistical release is
no longer published, any publicly available source of similar market data)) most
nearly equal to the period from the redemption date to February 15, 2006;
PROVIDED, HOWEVER, that if the period from the redemption date to February 15,
2006 is less than one year, the weekly average yield on actually traded United
States Treasury securities adjusted to a constant maturity of one year shall be
used.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, unless the Company has exercised its right to
redeem the notes as described under "Optional Redemption," each Holder of notes
has the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of that Holder's notes pursuant to a
change of control offer on the terms set forth in the Indenture (a "Change of
Control Offer"). In the Change of Control Offer, the Company will offer a
payment in cash equal to 101% of the aggregate principal amount of notes
repurchased plus accrued and unpaid interest and liquidated damages, if any,
thereon, to the date of purchase (the "Change of Control Payment"). Within
30 days following any Change of Control, the Company will mail a notice to each
Holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase notes on the date specified in such notice
(the "Change of Control Payment Date"), which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed, pursuant
to the procedures required by the Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the notes as
a result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the Change of Control provisions of
the Indenture, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
Change of Control provisions of the Indenture by virtue of such conflict.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the Trustee the notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of notes or portions thereof being purchased by the Company.
The paying agent will promptly mail to each Holder of notes so tendered the
Change of Control Payment for such notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; PROVIDED that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof.
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The Company will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
The Credit Agreement currently prohibits the Company from voluntarily
purchasing any notes, and also provides that certain change of control events
with respect to OI Inc., OI Group and the Company would constitute a default
under that agreement. In the event a Change of Control occurs at a time when the
Company is prohibited from purchasing notes, the Company could seek consent to
purchase the notes or could attempt to refinance its borrowings under the Credit
Agreement. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Credit Agreement.
The provisions described above that require the Company to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the notes to require that the
Company repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all notes validly tendered and not withdrawn under such Change of
Control Offer.
ASSET SALES
OI Group will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) OI Group (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such Fair Market Value is determined in good faith by OI Group and a
certification to that effect is set forth in an Officers' Certificate
delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by OI Group or such
Restricted Subsidiary is in the form of cash. For purposes of this
provision, each of the following shall be deemed to be cash:
(a) any liabilities (as shown on OI Group's or such Restricted
Subsidiary's most recent balance sheet) of OI Group or any Restricted
Subsidiary of OI Group (other than liabilities that are by their
terms subordinated to the notes or any Guarantee of the notes) that
are assumed by the transferee of any such assets which assumption
releases OI Group or such Restricted Subsidiary from further
liability;
(b) any securities, notes or other obligations received by OI Group or
any such Restricted Subsidiary from such transferee that are
converted within 180 days by OI Group or such Restricted Subsidiary
into cash (to the extent of the cash received in that conversion);
and
(c) any Designated Noncash Consideration received by OI Group or any
Restricted Subsidiary of OI Group in such Asset Sale having an
aggregate Fair Market Value, taken together with all other Designated
Noncash Consideration received pursuant to this clause (c) that is at
that time outstanding, not to exceed 5.0% of Tangible Assets at the
time of the receipt of such Designated Noncash Consideration (with
the Fair Market
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Value of each item of Designated Noncash Consideration being measured
at the time received and without giving effect to subsequent changes
in value);
PROVIDED, that the 75% limitation referred to in clause (3) above will not apply
to any Asset Sale in which the cash portion of such consideration received
therefore on an after-tax basis, determined in accordance with clause (3) above,
is equal to or greater than what the after-tax net proceeds would have been had
such transaction complied with such 75% limitation.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale, OI
Group or such Restricted Subsidiary may apply such Net Proceeds at its option:
(1) to repay senior Indebtedness of the Company or any Guarantor and, if the
senior Indebtedness of the Company or any Guarantor repaid is revolving
credit Indebtedness, to correspondingly reduce commitments with respect
thereto, if the terms of such revolving credit Indebtedness would require
such a commitment reduction; PROVIDED, HOWEVER, that a non-Guarantor
Restricted Subsidiary may use the Net Proceeds from an Asset Sale to
repay senior Indebtedness of OI Group or any Restricted Subsidiary of OI
Group;
(2) to make payments required to be made with respect to the outstanding
OI Inc. Senior Notes;
(3) to acquire all or substantially all of the assets of, or a majority of
the Voting Stock of, a Permitted Business;
(4) to make a capital expenditure in or that is used or useful in a
Permitted Business;
(5) to acquire other long-term assets in or that are used or useful in a
Permitted Business; or
(6) to make an Investment in any one or more businesses (PROVIDED that such
Investment in any business may be in the form of the acquisition of
Capital Stock so long as it results in OI Group or a Restricted
Subsidiary of OI Group, as the case may be, owning a majority of the
Capital Stock of such business), properties or assets that replace the
businesses, properties and assets that are the subject of such Asset
Sale; PROVIDED, HOWEVER, that any such business, properties and assets of
OI Group or a Guarantor that are the subject of an Asset Sale are
invested in one or more businesses, properties or assets that constitute
or are owned or will be owned by a Guarantor or a Restricted Subsidiary
that becomes a Guarantor.
Notwithstanding the foregoing, with respect to any Asset Sale by the Company or
any Guarantor, such Net Proceeds may only be applied pursuant to items (1) or
(6) above and, to the extent such Net Proceeds are applied to, or with respect
to, the Company, a Guarantor or a Person or a Restricted Subsidiary that becomes
a Guarantor, items (3), (4) or (5) above. Pending the final application of any
such Net Proceeds, OI Group or the applicable Restricted Subsidiary may
temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $25.0 million, the Company will make
an offer (an "Asset Sale Offer") to all Holders of notes and all Holders of
other Indebtedness that is PARI PASSU with the notes containing provisions
similar to those set forth in the Indenture with respect to offers to purchase
or redeem with the proceeds of sales of assets to purchase the maximum principal
amount of notes and such other PARI PASSU Indebtedness that may be purchased out
of the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to
100% of principal amount plus accrued and unpaid interest and liquidated
damages, if any, to the date of purchase, and will be payable in cash. If any
Excess Proceeds remain after consummation of an Asset Sale Offer, the Company
may use such Excess Proceeds for any purpose not otherwise prohibited by the
Indenture. If the aggregate principal amount of notes and such other PARI PASSU
Indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess
Proceeds, the Trustee shall select the notes and such other PARI PASSU
Indebtedness to be purchased on a pro rata basis based on the principal amount
of notes and such other PARI PASSU Indebtedness tendered. Upon completion of
each Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
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The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with each
repurchase of notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the Asset Sales
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Asset Sale provisions of the Indenture by virtue of such
conflict.
The agreements governing OI Group's Indebtedness or the Company's other
Indebtedness contain prohibitions of certain events, including events that would
constitute a Change of Control or an Asset Sale. In addition, the exercise by
the Holders of notes of their right to require the Company to repurchase the
notes upon a Change of Control or an Asset Sale could cause a default under
these other agreements, even if the Change of Control or Asset Sale itself does
not, due to the financial effect of such repurchases on the Company or OI Group.
Finally, the Company's ability to pay cash to the Holders of notes upon a
repurchase may be limited by the Company's or OI Group's then existing financial
resources.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the Trustee
will select notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of the
principal national securities exchange on which the notes are listed; or
(2) if the notes are not so listed, on a pro rata basis, by lot or by such
method as the Trustee shall deem fair and appropriate.
No notes of $1,000 or less will be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the original note will be issued in the name of the Holder thereof upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
CERTAIN COVENANTS
FALL-AWAY EVENT
If at any time the notes have achieved the Investment Grade Ratings, OI
Group and the Restricted Subsidiaries of OI Group will thereafter no longer be
subject to the covenants under "--Repurchase at the Option of Holders--Change of
Control" and "--Repurchase at the Option of Holders--Asset Sales" or the
following provisions of the Indenture under the heading "--Certain Covenants"
(even if the notes subsequently cease to have the Investment Grade Ratings):
"--Restricted Payments,"
"--Incurrence of Indebtedness and Issuance of Preferred Stock,"
"--Liens,"
"--Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries,"
"--Transactions with Affiliates,"
"--Additional Guarantees/Pledges," and
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"--Payments for Consent"
(collectively, the "Extinguished Covenants"), PROVIDED that if upon the receipt
by the notes of the Investment Grade Ratings, a Default or Event of Default has
occurred and is continuing under the Indenture, the Company will continue to be
subject to the Extinguished Covenants until such time as no Default or Event of
Default is continuing.
Notwithstanding the foregoing, at the time OI Group and the Restricted
Subsidiaries are no longer subject to the Extinguished Covenants, neither OI
Group nor any of its Domestic Subsidiaries will create, incur, or permit to
exist, any Lien on any of their respective assets, whether now owned or
hereafter acquired, in order to secure any Indebtedness of either of OI Group or
any of its Domestic Subsidiaries, without effectively providing that the notes
shall be equally and ratably secured until such time as such Indebtedness is no
longer secured by such Lien, except: (i) Liens on cash and Cash Equivalents
securing obligations in respect of letters of credit in accordance with the
terms of the Credit Agreement; (ii) Liens existing on the Issue Date;
(iii) Liens granted after the Issue Date on any assets of OI Group or any of its
Domestic Subsidiaries securing Indebtedness of OI Group or any of its Domestic
Subsidiaries created in favor of the Holders of the notes; (iv) Liens securing
Indebtedness which is incurred to extend, renew or refinance Indebtedness which
is secured by Liens permitted to be incurred under the Indenture; PROVIDED that
such Liens do not extend to or cover any assets of OI Group or any of its
Domestic Subsidiaries other than the assets securing the Indebtedness being
extended, renewed or refinanced and that the principal or commitment amount of
such Indebtedness does not exceed the principal or commitment amount of the
Indebtedness being extended, renewed or refinanced at the time of such
extension, renewal or refinancing, or at the time the Lien was issued, created
or assumed or otherwise permitted; (v) Investment Grade Permitted Liens; or
(vi) Liens created in substitution of or as replacement for any Liens permitted
by the preceding clauses (i) through (v) or this clause (vi), PROVIDED that,
based on a good faith determination of an officer of the Company, the assets
encumbered under any such substitute or replacement Lien is substantially
similar in value to the assets encumbered by the otherwise permitted Lien which
is being replaced. Upon the assignment of the Company's obligations under the
Indenture to OI Inc. as described in the last paragraph of the covenant
described below under the caption "--Merger, Consolidation or Sale of Assets,"
the limitations described in this paragraph will apply to Liens securing
Indebtedness of OI Inc. and its Domestic Subsidiaries in lieu of Liens securing
Indebtedness of OI Group and its Domestic Subsidiaries.
RESTRICTED PAYMENTS
OI Group will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other distribution on account of
OI Group's or any of its Restricted Subsidiaries' Equity Interests
(including, without limitation, any payment in connection with any merger
or consolidation involving OI Group or any of its Restricted
Subsidiaries) or to the direct or indirect holders of OI Group's or any
of its Restricted Subsidiaries' Equity Interests in their capacity as
such (other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of OI Group or such Restricted
Subsidiaries); PROVIDED that the foregoing will not limit or preclude:
(a) the declaration or payment of dividends or distributions to OI Group,
the Company or any Guarantor; (b) the declaration or payment of dividends
or distributions to holders of Equity Interests of a Guarantor (other
than OI Group or a Subsidiary of OI Group) on a pro rata basis with all
other holders; or (c) the declaration or payment of dividends or
distributions by non-Guarantor Restricted Subsidiaries to the holders of
their Equity Interests on a pro rata basis;
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(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving OI Group or any of its Restricted Subsidiaries) any Equity
Interests of OI Group or any direct or indirect parent of OI Group;
(3) purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the notes or the Guarantees of the
notes, except for (a) payments of or related to Intercompany Indebtedness
(other than Intercompany Indebtedness owing to OI Inc. by OI Group),
(b) a payment of interest or principal at the Stated Maturity thereof
(other than Intercompany Indebtedness owing to OI Inc. by OI Group) or
(c) the purchase, repurchase, defeasance, acquisition or retirement for
value of Indebtedness of a Foreign Subsidiary by a Foreign Subsidiary; or
(4) make any Restricted Investment (all such payments and other actions set
forth in clauses (1) through (4) above being collectively referred to as
"Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
(2) OI Group would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at
the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the
covenant described below under the caption "--Incurrence of Indebtedness
and Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by OI Group and its Restricted Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted
by clauses (2), (3), (6) and (7) of the next succeeding paragraph), is
less than the sum, without duplication, of:
(a) 50% of the Consolidated Net Income of OI Group for the period (taken
as one accounting period) from the beginning of the first fiscal
quarter commencing after the date of the Indenture to the end of OI
Group's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), PLUS
(b) 100% of the aggregate net cash proceeds and the Fair Market Value of
marketable securities received by OI Group since the date of the
Indenture as a contribution to its common equity capital or from the
issue or sale of Equity Interests of OI Group (other than
Disqualified Stock) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of OI Group that have been converted into or exchanged for
such Equity Interests (other than Equity Interests (or Disqualified
Stock or debt securities) sold to a Subsidiary of OI Group); PLUS
(c) to the extent that any Restricted Investment that was made after the
date of the Indenture is sold or otherwise liquidated, the cash plus
the Fair Market Value of any marketable securities received upon the
sale or liquidation of such Restricted Investment (less the cost of
disposition, if any); PLUS
(d) $15.0 million.
So long as (solely with respect to clauses (2), (3), (5) and (7) below) no
Event of Default has occurred and is continuing or would be caused thereby, the
preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have complied
with the provisions of the Indenture;
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(2) the redemption, repurchase, retirement, defeasance or other acquisition
of any Indebtedness of OI Group or any Restricted Subsidiary of OI Group
or of any Equity Interests of OI Group in exchange for, or out of the net
cash proceeds of the substantially concurrent sale (other than to a
Subsidiary of OI Group) of, Equity Interests of OI Group (other than
Disqualified Stock); PROVIDED that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from
clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of the
OI Inc. Senior Notes;
(4) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of OI Group (other than the OI Inc. Senior
Notes) or any Restricted Subsidiary of OI Group with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(5) the repurchase, redemption or other acquisition or retirement (or
dividends or distributions to OI Inc. or payments of Intercompany
Indebtedness, in each case, to finance such repurchase, retirement or
other acquisition) for value of any Equity Interests of OI Inc., OI Group
or any Restricted Subsidiary of OI Group held by any member of
OI Inc.'s, OI Group's or any Restricted Subsidiary of OI Group's
management; PROVIDED that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $5.0 million in any twelve-month period;
(6) any OI Inc. Ordinary Course Payment; and
(7) dividends or distributions to OI Inc. or payments of Intercompany
Indebtedness to allow OI Inc. to pay cash dividends on any shares of
preferred stock of OI Inc. outstanding on the date of the Indenture, plus
dividends on any subsequently issued shares of preferred stock of
OI Inc. in an amount not to exceed $25.0 million in any twelve-month
period.
The amount of all Restricted Payments (other than cash) shall be the Fair
Market Value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued to or by OI Group or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The Fair
Market Value of any assets or securities that are required to be valued by this
covenant shall be determined in good faith by OI Group.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
OI Group will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and OI Group
will not issue any Disqualified Stock and OI Group will not permit any of its
Restricted Subsidiaries to issue any Disqualified Stock or preferred stock;
PROVIDED, HOWEVER, that OI Group and any of its Restricted Subsidiaries may
incur Indebtedness (including Acquired Debt) and may issue preferred stock, if
the Fixed Charge Coverage Ratio for OI Group's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
would have been at least 2.00 to 1.00, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred at the beginning of such four-quarter
period.
The first paragraph of this covenant will not prohibit the incurrence of any
of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by OI Group or its Restricted Subsidiaries of
Indebtedness under Credit Facilities (and the incurrence of Guarantees
thereof) in an aggregate principal amount at any one time outstanding
(with letters of credit being deemed to have a principal amount equal to
the maximum potential liability of the Company and its Restricted
Subsidiaries thereunder)
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not to exceed $4.5 billion (of which not more than $1.41 billion of such
Indebtedness shall be incurred by Restricted Subsidiaries that are not
Guarantors);
(2) the incurrence by OI Group and any Restricted Subsidiary of OI Group of
the Existing Indebtedness;
(3) the incurrence by OI Group, the Company and the Guarantors of
Indebtedness represented by the private notes and the related Guarantees
be issued on the date of the Indenture and the exchange notes to be
issued pursuant the exchange offer;
(4) the incurrence by OI Group or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, in an aggregate
principal amount at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (4), not to exceed 3.0% of
Tangible Assets;
(5) the incurrence by OI Group or any of its Restricted Subsidiaries of
Indebtedness incurred to finance all or any part of the purchase price or
cost of construction or improvement of property, plant or equipment used
in the business of OI Group or such Restricted Subsidiary, in an
aggregate principal amount at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or
replace any Indebtedness incurred pursuant to this clause (5), not to
exceed 5.0% of Tangible Assets, as measured after giving effect to such
transaction;
(6) provided that so long as no Default shall have occurred or be continuing
or would be caused thereby, the incurrence by OI Group or any of its
Restricted Subsidiaries of Indebtedness, the proceeds of which are or
will be used to refund, refinance or replace the $300.0 million aggregate
principal amount of 7.85% Senior Notes due 2004, the $350.0 million
aggregate principal amount of 7.15% Senior Notes due 2005, the
$300.0 million aggregate principal amount of 8.10% Senior Notes due 2007,
the $250.0 million aggregate principal amount of 7.35% Senior Notes due
2008 and the $250.0 million aggregate principal amount of 7.50% Senior
Debentures due 2010, in each case of OI Inc.;
(7) the incurrence by OI Group or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are or will be used to refund, refinance or replace Indebtedness
(other than Intercompany Indebtedness) that was permitted by the
Indenture to be incurred under the first paragraph of this covenant or
clauses (2), (3), (6) or (7) of this paragraph;
(8) the incurrence by OI Group or any of its Restricted Subsidiaries of
Intercompany Indebtedness between or among OI Group and any of its
Restricted Subsidiaries and with respect to OI Group only, between OI
Group and OI Inc.; PROVIDED, HOWEVER, that:
(a) if OI Group, the Company or any Guarantor is the obligor on such
Indebtedness, such Indebtedness must be expressly subordinated to the
prior payment in full in cash of all Obligations with respect to the
notes, in the case of the Company, or the Guarantees of the notes, in
the case of OI Group or a Guarantor;
(b) any incurrence by OI Group of Intercompany Indebtedness to OI Inc.
after the Issue Date will be in exchange for cash loans or advances
from OI Inc. in the ordinary course of business consistent with past
practices; and
(c) (i) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than OI
Group or a Restricted Subsidiary thereof and (ii) any sale or other
transfer of any such Indebtedness to a Person that is not either OI
Group or a Restricted Subsidiary thereof, shall be deemed, in each
case, to constitute an incurrence of such Indebtedness by OI Group or
such Restricted Subsidiary, as the case may be, that was not
permitted by this clause (8);
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(9) the incurrence by OI Group or any of its Restricted Subsidiaries of
Hedging Obligations;
(10) provided that so long as no Default shall have occurred or be
continuing or would be caused thereby, the incurrence by any Foreign
Subsidiary of OI Group of Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time outstanding, not to exceed
$300.0 million, in addition to the $1.41 billion of Indebtedness that may
be incurred under clause (1) of this paragraph;
(11) (i) the Guarantee by the Company or any of the Guarantors of
Indebtedness of OI Group or any Restricted Subsidiary of OI Group and
(ii) the Guarantee by any Foreign Subsidiary of Indebtedness of OI Group
or any Restricted Subsidiary of OI Group, in each case, that was
permitted to be incurred by another provision of this covenant;
(12) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form
of additional Indebtedness with the same terms and the payment of
dividends on Disqualified Stock in the form of additional shares of the
same class of Disqualified Stock will not be deemed to be an incurrence
of Indebtedness for purposes of this covenant or an issuance of
Disqualified Stock; PROVIDED, in each such case, that the amount thereof
is included in Fixed Charges of OI Group as accrued;
(13) the incurrence by OI Group or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (13), not to exceed
$300.0 million;
(14) Indebtedness arising from agreements of OI Group or a Restricted
Subsidiary of OI Group providing for indemnification, adjustment of
purchase price or similar obligations, in each case, incurred or assumed
in connection with the disposition of any business, assets or a
Subsidiary, other than Guarantees of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or a Subsidiary for
the purpose of financing such acquisition; PROVIDED, HOWEVER, that
(i) such Indebtedness is not reflected on the balance sheet of OI Group
or any such Restricted Subsidiary of OI Group (contingent obligations
referred to in a footnote to financial statements and not otherwise
reflected on the balance sheet will not be deemed to be reflected on such
balance sheet for purposes of this clause (i)) and (ii) the maximum
assumable liability in respect of all such Indebtedness that is permitted
to be incurred pursuant to this clause (14) shall at no time exceed the
gross proceeds including noncash proceeds (the Fair Market Value of such
noncash proceeds being measured at the time received and without giving
effect to any subsequent changes in value) actually received by OI Group
and its Restricted Subsidiaries in connection with such disposition;
(15) the incurrence by OI Group or any of its Restricted Subsidiaries of
Indebtedness incurred or deemed incurred or cash consideration received
from the sale of accounts receivable by OI Group or any of its Restricted
Subsidiaries or a special purpose vehicle established by any of them to
purchase and sell such receivables;
(16) obligations in respect of performance and surety bonds and completion
guarantees provided by OI Group or any of its Restricted Subsidiaries in
the ordinary course of business;
(17) Indebtedness incurred by OI Group or any of its Restricted Subsidiaries
constituting reimbursement obligations with respect to letters of credit
issued in the ordinary course of business, including without limitation
letters of credit in respect of workers' compensation claims, or other
Indebtedness with respect to reimbursement type obligations regarding
workers' compensation claims; PROVIDED, HOWEVER, that upon the drawing of
such letters of credit or the incurrence of such Indebtedness, such
obligations are reimbursed within 30 days following such drawing or
incurrence; and
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(18) the incurrence by OI Group or any of its Restricted Subsidiaries of
Acquired Debt, in an aggregate principal amount at any time outstanding,
including all Permitted Refinancing Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this
clause (18), not to exceed 5.0% of Tangible Assets, as measured after
giving effect to the transaction for which the Acquired Debt was
incurred.
The Company will not incur any Indebtedness (including Permitted Debt) after
the date of the Indenture that is contractually subordinated in right of payment
to any other Indebtedness of the Company unless such Indebtedness is also
contractually subordinated in right of payment to the notes on substantially
similar terms; PROVIDED, HOWEVER, that no Indebtedness of the Company shall be
deemed to be contractually subordinated in right of payment to any other
Indebtedness of the Company solely by virtue of being unsecured.
OI Group will not, and will not permit any Guarantor to, incur any
Indebtedness (including Permitted Debt) after the date of the Indenture that is
contractually subordinated in right of payment to any other Indebtedness of OI
Group or the Guarantors, as the case may be, unless such Indebtedness is also
contractually subordinated in right of payment to the obligations under the
notes or Guarantees of the notes on substantially similar terms; PROVIDED,
HOWEVER, that no Indebtedness of OI Group or the Guarantors shall be deemed to
be contractually subordinated in right of payment to any other Indebtedness of
OI Group or the Guarantors solely by virtue of being unsecured.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant, in the event that any proposed
Indebtedness meets the criteria of more than one of the categories of Permitted
Debt described in clauses (1) through (18) above, or is entitled to be incurred
pursuant to the first paragraph of this covenant, the Company will be permitted
to classify such item of Indebtedness on the date of its incurrence in any
manner that complies with this covenant, or later reclassify all or a portion of
such item of Indebtedness. Indebtedness under Credit Facilities outstanding on
the date on which notes are first issued and authenticated under the Indenture
shall be deemed to have been incurred on such date in reliance on the exception
provided by clauses (1) or (2) of the definition of Permitted Debt above.
LIENS
Neither OI Group nor any Restricted Subsidiary of OI Group will create,
incur, or permit to exist, any Lien on any of their respective assets, whether
now owned or hereafter acquired, in order to secure any Indebtedness of either
of OI Group or any Restricted Subsidiary of OI Group, without effectively
providing that the notes shall be equally and ratably secured until such time as
such Indebtedness is no longer secured by such Lien, except:
(1) Liens on cash and Cash Equivalents securing obligations in respect of
letters of credit in accordance with the terms of the Credit Agreement;
(2) Liens existing on the Issue Date;
(3) Liens granted after the Issue Date on any assets of OI Group or any of
its Restricted Subsidiaries securing Indebtedness of OI Group or any of
its Restricted Subsidiaries created in favor of the Holders of the notes;
(4) Liens securing Indebtedness of OI Group or any Restricted Subsidiary of
OI Group which is incurred to extend, renew or refinance Indebtedness
which is secured by Liens permitted to be incurred under the Indenture;
PROVIDED that such Liens do not extend to or cover any assets of OI Group
or any Restricted Subsidiary of OI Group other than the assets securing
the Indebtedness being extended, renewed or refinanced and that the
principal or commitment amount of such Indebtedness does not exceed the
principal or commitment amount of the Indebtedness being extended,
renewed or refinanced at the time of such extension, renewal or
refinancing, or at the time the Lien was issued, created or assumed or
otherwise permitted;
(5) Permitted Liens; and
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(6) Liens created in substitution of or as replacements for any Liens
permitted by the preceding clauses (1) through (5) or this clause (6),
PROVIDED that, based on a good faith determination of an officer of the
Company, the assets encumbered under any such substitute or replacement
Lien is substantially similar in value to the assets encumbered by the
otherwise permitted Lien which is being replaced.
For purposes of the Indenture, the notes and the Guarantees of the notes, so
long as the Credit Agreement is in effect, the notes will be considered equally
and ratably secured if they are secured pursuant to terms and provisions,
including any exclusions or exceptions described therein, no less favorable to
the holders of notes than those set forth in, or contemplated by, the Credit
Agreement.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
OI Group will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any such Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to OI
Group or any of its Restricted Subsidiaries, or with respect to any other
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to OI Group or any of its Restricted Subsidiaries;
(2) make loans or advances to OI Group or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to OI Group or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness, Credit Facilities, charter
documents and shareholder agreements as in effect on the date of the
Indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings thereof,
PROVIDED that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings are no
more restrictive, taken as a whole, with respect to such dividend and
other payment restrictions than those contained in such Existing
Indebtedness, Credit Facilities, charter documents and shareholders
agreements as in effect on the date of the Indenture;
(2) the Indenture, the notes, the Collateral Documents, the Offshore
Collateral Documents and the Guarantees of the notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by OI Group or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition),
which encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired, PROVIDED that, in the case
of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations, including Capital Lease Obligations and
obligations under mortgages, for property acquired in the ordinary course
of business that impose restrictions on the property so acquired of the
nature described in clause (3) of the first paragraph of this covenant;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary of OI Group that restricts any of the foregoing by that
Restricted Subsidiary pending its sale or other disposition;
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(8) Permitted Refinancing Indebtedness, PROVIDED that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
and
(9) Permitted Liens or Investment Grade Permitted Liens securing
Indebtedness that limit the right of the debtor to dispose of the assets
subject to such Lien.
Nothing contained in this covenant shall prevent OI Group or a Restricted
Subsidiary of OI Group from entering into any agreement (x) permitting or
providing for the incurrence of Liens otherwise permitted by the "Liens"
covenant or (y) restricting the sale or other disposition of property securing
Indebtedness.
MERGER, CONSOLIDATION OR SALE OF ASSETS
OI Group will not, in any transaction or series of transactions, merge or
consolidate with or into, or, directly or indirectly, sell, assign, convey,
transfer, lease or otherwise dispose of all or substantially all of its
properties and assets to, any Person or Persons, and OI Group will not permit
any of its Restricted Subsidiaries to enter into any such transaction or series
of transactions if such transaction or series of transactions, in the aggregate,
would result in a sale, assignment, conveyance, transfer, lease or other
disposition of all or substantially all of the properties and assets of OI Group
and its Restricted Subsidiaries, on a consolidated basis, to any other Person or
Persons, unless at the time and after giving effect thereto:
(1) either: (a) OI Group or such Restricted Subsidiary, as the case may be,
is the surviving corporation; or (b) the Person formed by or surviving
any such consolidation or merger (if other than OI Group or such
Restricted Subsidiary) (the "Successor Company") or to which such sale,
assignment, transfer, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia;
(2) the Successor Company (if other than OI Group or such Restricted
Subsidiary) or the Person to which such sale, assignment, transfer,
conveyance or other disposition shall have been made assumes all the
obligations of OI Group or such Restricted Subsidiary (if such Restricted
Subsidiary is a Guarantor), as the case may be, under the notes, the
Indenture, the Collateral Documents and the Registration Rights Agreement
pursuant to agreements reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) OI Group or the Successor Company formed by or surviving any such
consolidation or merger (if other than OI Group), or the Person to which
such sale, assignment, transfer, conveyance or other disposition shall
have been made, will have, immediately after such transaction, a Fixed
Charge Coverage Ratio equal to or greater than such ratio for OI Group
immediately prior to such transaction.
This "Merger, Consolidation or Sale of Assets" covenant will not apply to
(i) a merger or consolidation of OI Group, the Company or any of the Guarantors
with or into any other of the Company, OI Group or any of the Guarantors or the
sale, assignment, conveyance, transfer, lease or other disposition of assets
between or among the Company, OI Group and any of its Guarantors and (ii) a
merger or consolidation of any Foreign Subsidiary with or into OI Group or any
of its Restricted Subsidiaries or the sale, assignment, conveyance, transfer,
lease or other disposition of assets from any Foreign Subsidiary to OI Group or
any of its Restricted Subsidiaries.
On and after the one-year anniversary of the date of this prospectus, the
Company will be permitted to assign its obligations under the notes and the
Indenture to OI Inc., and the Company and each Guarantor will thereafter be
released from its obligations under the notes, the Guarantees of the notes and
the Indenture provided that (1) OI Inc. assumes all of the obligations under the
notes and the Indenture, and (2) the obligations of each Credit Agreement
Domestic Borrower under the Credit
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Agreement have been or will be concurrently assumed by OI Inc. in accordance
with the terms of the Credit Agreement. Under the Credit Agreement, the Credit
Agreement Domestic Borrowers may assign or transfer their rights and obligations
thereunder to OI Inc. and all of OI Inc.'s subsidiaries will be concurrently
released from their guarantees upon the consent of the requisite lenders
thereunder if the term loans have been repaid, if OI Inc. has achieved and
maintains immediately following such assumption (including the assumption of the
notes) the investment grade ratings specified under the Credit Agreement and if
all obligations of Subsidiaries of OI Inc. in respect of the OI Inc. Senior
Notes, the notes and certain other debt have been released and assumed by
OI Inc.
TRANSACTIONS WITH AFFILIATES
OI Group will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each, an
"Affiliate Transaction") involving aggregate payments in consideration in excess
of $5.0 million, unless:
(1) such Affiliate Transaction is on terms that are no less favorable to OI
Group or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by OI Group or such Restricted
Subsidiary with an unrelated Person; and
(2) OI Group delivers to the Trustee with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, a resolution of the
Board of Directors set forth in an Officers' Certificate certifying that
such Affiliate Transaction complies with this covenant and that such
Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) transactions between or among OI Group and/or its Restricted
Subsidiaries;
(2) transactions between OI Group and/or its Restricted Subsidiaries on the
one hand, and OI Inc. on the other, that are in the ordinary course of
business consistent with past practices;
(3) payment of reasonable directors fees;
(4) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption "--Restricted Payments";
(5) the payment of customary annual management, consulting, monitoring and
advisory fees and related expenses to KKR and its Affiliates;
(6) the payment of reasonable and customary fees paid to, and indemnity
provided on behalf of, officers, directors, employees or consultants of
OI Group, any of its direct or indirect parent corporations or any
Restricted Subsidiary of OI Group;
(7) payments by OI Group or any of its Restricted Subsidiaries to KKR and
its Affiliates for any financial advisory, financing, underwriting or
placement services or in respect of other investment banking activities,
including, without limitation, in connection with acquisitions or
divestitures which payments are approved by a majority of the Board of
Directors of OI Group in good faith;
(8) transactions in which OI Group or any of its Restricted Subsidiaries, as
the case may be, delivers to the Trustee a letter from an investment
banking firm of nationally recognized standing stating that such
transaction is fair to OI Group or such Restricted Subsidiary from a
financial point of view or meets the requirements of clause (1) of the
preceding paragraph;
(9) in addition to any payments referred to in (6) above, payments or loans
to officers, directors and employees of OI Group, any of its direct or
indirect parent corporations or any Restricted Subsidiary of OI Group for
business or personal purposes and other loans and advances, in
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accordance with any policy of OI Group which shall have been approved by
the Board of Directors of OI Group in good faith from time to time, to
such officers, directors and employees for travel, entertainment, moving
and other relocation expenses made in the ordinary course of business of
OI Group, any of its direct or indirect parent corporations or any
Restricted Subsidiary of OI Group;
(10) any agreement in effect as of the Issue Date or any amendment thereto
(so long as such amendment is not disadvantageous to the Holders in any
material respect) or any transaction contemplated thereby;
(11) transactions with customers, clients, suppliers or purchasers or
sellers of goods or services, in each case in the ordinary course of
business which are fair to OI Group or its Restricted Subsidiaries, in
the reasonable determination of the Board of Directors of OI Group or the
senior management thereof;
(12) the issuance of Equity Interests (other than Disqualified Stock) of OI
Group or the Company to any Principal; and
(13) transactions involving the sale of accounts receivables by OI Group or
any of its Restricted Subsidiaries or a special purpose vehicle
established by any of them to purchase and sell receivables.
ADDITIONAL GUARANTEES/PLEDGES
If a Domestic Subsidiary of OI Group or any of its Restricted Subsidiaries
guarantees Indebtedness under the Credit Agreement, including the reinstatement
or renewal of a Guarantee of Indebtedness under the Credit Agreement previously
released under the Credit Agreement, then that Domestic Subsidiary must become a
Guarantor and execute a supplemental indenture and deliver an Opinion of Counsel
to the Trustee within 10 business days of the date on which it executes a
guarantee under the Credit Agreement.
If, on or after the Issue Date, any Domestic Subsidiary of OI Group pledges
any property or assets to secure obligations under the Credit Agreement (other
than pursuant to the Collateral Documents or as contemplated by the Credit
Agreement), then such property or assets will, subject to certain exceptions,
also secure the notes.
DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Board of Directors of OI Group may designate any Restricted Subsidiary
to be an Unrestricted Subsidiary if that designation would not cause a Default;
PROVIDED that in no event shall the business currently operated by the Company
be transferred to or held by an Unrestricted Subsidiary. If a Restricted
Subsidiary is designated as an Unrestricted Subsidiary, the aggregate Fair
Market Value of all outstanding Investments owned by OI Group and its Restricted
Subsidiaries in the Subsidiary so designated will be deemed to be a Restricted
Investment made as of the time of such designation and that designation will
only be permitted if such Investment would be permitted at that time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors of OI Group may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of OI Group of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (1) such Indebtedness
is permitted under the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period; and (2) no Default or Event of
Default would be in existence following such designation.
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LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
OI Group will not permit any of its Domestic Subsidiaries, directly or
indirectly, to guarantee the payment of any other Indebtedness of the Company or
OI Group unless such Domestic Subsidiary simultaneously executes and delivers a
supplemental indenture providing for the Guarantee of the payment of the notes
by such Domestic Subsidiary, which Guarantee shall be senior to or PARI PASSU
with such Subsidiary's Guarantee of such other Indebtedness.
Notwithstanding the preceding paragraph, any Guarantee will provide by its
terms that it will be automatically and unconditionally released and discharged
under the circumstances described above under the caption "--Guarantees." The
form of the Guarantee will be attached as an exhibit to, or included in, the
Indenture.
PAYMENTS FOR CONSENT
OI Group will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, pay or cause to be paid any consideration to or for
the benefit of any Holder of notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the Indenture, the
notes or the Guarantees unless such consideration is offered to be paid and is
paid to all Holders of the notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
REPORTS
Whether or not required by the SEC, so long as any notes are outstanding, OI
Group will furnish to the Holders of the notes, within the time periods
specified in the SEC's rules and regulations:
(1) all quarterly and annual financial information that would be required to
be contained in a filing with the SEC on Forms 10-Q and 10-K if OI Group
were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report on the annual financial
statements by OI Group's certified independent accountants; and
(2) all current reports that would be required to be filed with the SEC on
Form 8-K if OI Group were required to file such reports.
In addition, whether or not required by the SEC, OI Group will file a copy
of all of the information and reports referred to in clauses (1) and (2) above
with the SEC for public availability within the time periods specified in the
SEC's rules and regulations (unless the SEC will not accept such a filing) and
make such information available to securities analysts and prospective investors
upon request. In addition, the Company and the Guarantors have agreed that, for
so long as any notes remain outstanding, they will furnish to the Holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
liquidated damages, if any, with respect to, the notes;
(2) default in payment when due of the principal of, or premium, if any, on
the notes;
(3) failure by OI Group or any of its Restricted Subsidiaries to comply with
the provisions described under the captions "--Repurchase at the Option
of Holders--Change of Control," "--Repurchase at the Option of
Holders--Asset Sales" or "--Certain Covenants--Merger, Consolidation or
Sale of Assets";
(4) failure by OI Group or any of its Restricted Subsidiaries for 60 days
after notice to comply with any of the other agreements in the Indenture,
the notes, the Guarantees of the notes
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(with respect to any Guarantor) and the Collateral Documents (with
respect to any Restricted Subsidiary which has pledged assets or property
to secure its obligations under the Indenture and the notes);
(5) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by OI Group or any Restricted Subsidiary
(or the payment of which is guaranteed by OI Group or any of its
Restricted Subsidiaries) whether such Indebtedness or Guarantee now
exists, or is created after the date of the Indenture, if that default:
(a) is caused by a failure to pay principal of, or interest or premium,
if any, on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a
"Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its express
maturity; PROVIDED, that an Event of Default will not be deemed to
occur with respect to any such accelerated Indebtedness which is
repaid or prepaid within 20 business days after such declaration;
and, in any individual case, the principal amount of any such
Indebtedness is equal to or in excess of $50.0 million, or such
Indebtedness together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $100.0 million or more;
(6) any final judgment or order for payment of money in excess of
$50.0 million in any individual case and $100.0 million in the aggregate
at any time shall be rendered against OI Group or any of its Restricted
Subsidiaries and such judgment shall not have been paid, discharged or
stayed for a period of 60 days;
(7) except as permitted by the Indenture or the Collateral Documents, any
Guarantee of the notes shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full
force and effect or any Guarantor, or any Person acting on behalf of any
Guarantor, shall deny or disaffirm its obligations under its Guarantee of
the notes;
(8) certain events of bankruptcy or insolvency with respect to the Company,
OI Group or any Significant Subsidiary of OI Group; and
(9) except as permitted by the Collateral Documents, any amendments thereto
and the provisions of the Indenture, any of the Collateral Documents
ceases to be in full force and effect or ceases to be effective, in all
material respects, to create the Lien purported to be created in the
Collateral in favor of the Holders for 60 days after notice.
In the case of an Event of Default arising from certain events of bankruptcy
or insolvency, with respect to OI Group or any Significant Subsidiary of OI
Group, all outstanding notes will become due and payable immediately without
further action or notice. If any other Event of Default occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the then outstanding notes may declare all the notes to be due and payable
immediately.
A Holder of notes may not pursue any remedy with respect to the Indenture,
the notes, any Guarantee or any Collateral Document unless: (1) the Holder gives
to the Trustee written notice of a continuing Event of Default; (2) the Holders
of at least 25% in principal amount of such notes outstanding make a written
request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to
the Trustee indemnity satisfactory to the Trustee against any loss, liability or
expense; (4) the Trustee does not comply with the request within 30 days after
receipt of the request and the offer of indemnity; and (5) during such 30-day
period the Holders of a majority in principal amount of the outstanding notes do
not give the Trustee a direction which is inconsistent with the request. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest or liquidated damages) if it determines
that withholding notice is in their interest.
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The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest or liquidated damages on, or the principal of, the notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture. Upon becoming aware of any Default or
Event of Default, the Company is required to deliver to the Trustee a statement
specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor, as such, shall have any liability for any obligations of the
Company or the Guarantors under the notes, the Indenture, the Guarantees of the
notes, the Collateral Documents or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of notes by accepting
a note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the notes. The waiver may not be effective
to waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all obligations
of the Guarantors discharged with respect to their Guarantees of the notes
("Legal Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and liquidated
damages, if any, on such notes when such payments are due from the trust
referred to below;
(2) the Company's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee, and
the Company's and the Guarantors' obligations in connection therewith;
and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company and the Guarantors released with respect to
certain covenants that are described in the Indenture ("Covenant Defeasance")
and thereafter any omission to comply with those covenants shall not constitute
a Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, or interest and
premium and liquidated damages, if any, on the outstanding notes on the
stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the notes are being defeased to
maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, the Company shall have delivered to the
Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that (a) the Company has received
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from, or there has been published by, the Internal Revenue Service a
ruling or (b) since the date of the Indenture, there has been a change in
the applicable federal income tax law, in either case to the effect that,
and based thereon such Opinion of Counsel shall confirm that, the Holders
of the outstanding notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will
be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that the Holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
either: (a) on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit); or (b) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under any material agreement or
instrument to which OI Group or the Company or any of their Restricted
Subsidiaries are a party or by which OI Group or the Company or any of
such Restricted Subsidiaries are bound;
(6) the Company must have delivered to the Trustee an Opinion of Counsel to
the effect that, assuming no intervening bankruptcy of the Company or any
Guarantor between the date of deposit and the 91st day following the
deposit and assuming that no Holder is an "insider" of the Company under
applicable bankruptcy law, after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally;
(7) the Company must deliver to the Trustee an Officers' Certificate stating
that the deposit was not made by the Company with the intent of
preferring the Holders of notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors
of the Company or others; and
(8) the Company must deliver to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent relating
to the Legal Defeasance or the Covenant Defeasance have been complied
with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, the
notes or the Guarantees of the notes may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the notes
then outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, notes), and any
existing default or compliance with any provision of the Indenture, the notes or
the Guarantees of the notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding notes (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, notes). Amendments to the Collateral Documents will be
made in accordance with their terms.
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Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions, or waive any payment, with respect to the
redemption of the notes;
(3) reduce the rate of or change the time for payment of interest on any
Note;
(4) waive a Default or Event of Default in the payment of principal of, or
interest or premium, or liquidated damages, if any, on the notes (except
a rescission of acceleration of the notes by the Holders of at least a
majority in aggregate principal amount of the notes and a waiver of the
payment default that resulted from such acceleration);
(5) make any note payable in money other than U.S. dollars;
(6) make any change in the provisions of the Indenture relating to waivers
of past Defaults or the rights of Holders of notes to receive payments of
principal of, or interest or premium or liquidated damages, if any, on
the notes;
(7) release any Guarantor from any of its obligations under its Guarantee,
the Indenture or any Collateral Document, except in accordance with the
terms of the Guarantee, the Indenture and any Collateral Document;
(8) impair the right to institute suit for the enforcement of any payment on
or with respect to the notes, the Guarantees of the notes or the
Collateral Documents;
(9) amend, change or modify the obligation of the Company to make and
consummate an Asset Sale Offer with respect to any Asset Sale in
accordance with the "--Repurchase at the Option of Holders--Asset Sales"
covenant or the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control in accordance with
the "--Repurchase at the Option of Holders--Change of Control" covenant,
including, in each case, amending, changing or modifying any definition
relating thereto;
(10) except as otherwise permitted under the "--Merger, Consolidation and
Sale of Assets" covenant, consent to the assignment or transfer by OI
Group, the Company or any Guarantor of any of their rights or obligations
under the Indenture;
(11) amend or modify any of the provisions of the Indenture or any Guarantee
of the notes in a manner material and adverse to the Holders of the notes
except (a) in accordance with the terms of the Indenture or such
Guarantee or (b) as permitted by the following paragraph;
(12) amend or modify any of the provisions of the Collateral Documents
except (a) in accordance with the terms of such documents or (b) as
permitted by the following paragraph; or
(13) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any Holder of notes,
the Company, the Guarantors and the Trustee may amend or supplement the
Indenture, the notes, the Guarantees and the Collateral Documents:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of the Company's or any Guarantor's
obligations to Holders of notes in the case of a merger or consolidation
or sale of all or substantially all the Company's or such Guarantor's
assets;
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(4) to provide for the assumption of the Company's obligations to Holders of
the notes by OI Inc. in accordance with the provisions of the Indenture;
(5) to make any change that would provide any additional rights or benefits
to the Holders of notes or that does not adversely affect the legal
rights under the Indenture, the Guarantees of the notes or the Collateral
Documents of any such Holder (including, but not limited to, adding a
Guarantor under the Indenture and adding additional collateral for the
benefit of the Holders of the notes); or
(6) to comply with requirements of the SEC in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act.
The consent of the Holders of the notes is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the Holders of the notes a notice briefly describing such
amendment. However, the failure to give such notice to all the Holders of the
notes, or any defect therein, will not impair or affect the validity of the
amendment.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated (except lost, stolen or
destroyed Notes that have been replaced or paid and notes for whose
payment money has theretofore been deposited in trust and thereafter
repaid to the Company) have been delivered to the Trustee for
cancellation; or
(b) all notes that have not been delivered to the Trustee for
cancellation have become due and payable by reason of the making of a
notice of redemption or otherwise or will become due and payable
within one year and the Company or any Guarantor has irrevocably
deposited or caused to be deposited with the Trustee as trust funds
in trust solely for the benefit of the Holders, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient without consideration of any
reinvestment of interest, to pay and discharge the entire
indebtedness on the notes not delivered to the Trustee for
cancellation for principal, premium and liquidated damages, if any,
and accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit or shall occur as a result of such deposit and
such deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which the Company or any Guarantor
is a party or by which the Company or any Guarantor is bound;
(3) the Company or any Guarantor has paid or caused to be paid all sums
payable by it under the Indenture; and
(4) the Company has delivered irrevocable instructions to the Trustee under
the Indenture to apply the deposited money toward the payment of the
notes at maturity or the redemption date, as the case may be.
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In addition, the Company must deliver an Officers' Certificate and an
Opinion of Counsel to the Trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
INTERCREDITOR AGREEMENT
The Intercreditor Agreement governs, among other things, (i) the direction
of the Collateral Agent with respect to the exercise of remedies under the
Pledge Agreement, the Security Agreement and the Mortgages, (ii) the
distribution of the proceeds of certain asset sales of collateral by OI Group
and its subsidiaries and the proceeds of insurance and condemnation awards, and
(iii) the distribution of proceeds of any foreclosure upon and sale of
collateral under the Pledge Agreement, the Security Agreement and the Mortgages.
Pursuant to the Intercreditor Agreement, the lenders under the Credit Agreement
direct the Collateral Agent with respect to decisions relating to the exercise
of remedies under the Pledge Agreement, the Security Agreement and the
Mortgages, including whether to foreclose on the collateral following a default
on the notes. Holders of the notes are generally not entitled to share in the
proceeds of any asset sales of Collateral by OI Group or any subsidiary or
insurance or condemnation proceeds unless pursuant to enforcement actions under
the Collateral Documents. Net proceeds of any sales of collateral from an
enforcement action are first shared ratably among the senior secured parties
(including the Holders of the notes to the extent secured at such time by the
collateral giving rise to such proceeds) based upon the relevant amounts due and
payable to such senior secured party (less, in the case of the Holders of the
notes, proceeds with respect to prior sales held by the Trustee, but not applied
to payments on the notes). Amendments to the Intercreditor Agreement necessary
to permit the incurrence of additional indebtedness secured by the collateral
and to add additional secured parties thereto may be made without the consent of
the Trustee or the Holders of the notes, insofar as the foregoing is not
prohibited under the Indenture.
THE PLEDGE AGREEMENT
The Pledge Agreement provides for the pledge by OI Group and OI Packaging of
the Capital Stock of, and Intercompany Indebtedness owed to OI Group and OI
Packaging by, their respective direct Subsidiaries to secure OI Group's and its
Subsidiaries' obligations, including OI Packaging, under or in respect of the
Credit Agreement and certain other senior indebtedness, and under or in respect
of the notes, including their respective Guarantees, in each case on a senior
basis, and the obligations under or in respect of OI Inc.'s outstanding public
debt securities on a junior basis. The notes will not be secured by the Capital
Stock of OI General FTS Inc. and the Intercompany Indebtedness owed by OI
General FTS Inc. to OI Group, which is pledged to the lenders under the Pledge
Agreement. See "Risk Factors--Risks Relating to the Notes--Notes Effectively
Subordinated to Certain Secured Credit Agreement Obligations and Obligations of
OI Inc.--The notes are effectively subordinated to the obligations under the
secured credit agreement, certain obligations owing to lenders or their
affiliates as permitted under the secured credit agreement and obligations
related to OI Inc.'s $1.7 billion of outstanding public debt securities to the
extent these obligations are secured by collateral that does not secure the
notes." Upon the occurrence of an Event of Default (as defined in the Pledge
Agreement), the Pledge Agreement provides for the foreclosure upon and sale of
the pledged collateral, including the Collateral pledged to secure the notes, by
the Collateral Agent and the ratable distribution of the net proceeds of any
such sale (to the extent secured by the applicable collateral) first to the
holders of the senior secured obligations and second to the holders of the
junior secured obligations, in each case in accordance with the Intercreditor
Agreement. In general, the lenders under the Credit Agreement have the power to
terminate the Pledge Agreement and release the collateral pledged thereunder
when the obligations under the Credit Agreement have been paid in full, when the
collateral thereunder no longer secures the obligations under the Credit
Agreement, or when OI Inc. and OI Group achieve the investment grade ratings
specified in the Credit Agreement and the Collateral Agent acknowledges such
ratings. In addition, all or any portion of the collateral pledged under the
Pledge Agreement may be released upon the approval of lenders under the Credit
Agreement.
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SECURITY AGREEMENT AND MORTGAGES
The Security Agreement and the Mortgages provide for the granting of
security interests and liens by OI Group and substantially all its Domestic
Subsidiaries in substantially all of their respective personal property
(excluding the collateral pledged under the Pledge Agreement) and real property
consisting of fee or ground leasehold interests with an individual value in
excess of $25.0 million subject to certain exceptions. Subject to certain
limitations and exceptions, the security interests granted under the Security
Agreement secure the obligations of OI Group and its Subsidiaries under or in
respect of the Credit Agreement, certain other senior indebtedness and the
notes, including their respective Guarantees, and the liens granted by the
Mortgages secure the obligations of the applicable mortgagor under or in respect
of the Credit Agreement, certain other senior indebtedness and the notes,
including their respective guarantees. The collateral under the Security
Agreement consisting of the Capital Stock of substantially all of the Domestic
Subsidiaries of Credit Agreement Domestic Borrowers, Intercompany Indebtedness
owed to the Credit Agreement Domestic Borrowers and substantially all of their
Domestic Subsidiaries, and the Capital Stock of the first-tier foreign
subsidiaries will not secure the notes. See "Risk Factors--Risks Relating to the
Notes--Notes Effectively Subordinated to Certain Secured Credit Agreement
Obligations and Obligations of OI Inc.--The notes are effectively subordinated
to the obligations under the secured credit agreement, certain obligations owing
to lenders or their affiliates as permitted under the secured credit agreement
and obligations related to OI Inc.'s $1.7 billion of outstanding public debt
securities to the extent these obligations are secured by collateral that does
not secure the notes." Upon the occurrence of an Event of Default (as defined in
the Security Agreement and the Mortgages, as applicable), the Security Agreement
and the Mortgages provide for the foreclosure upon and sale of the applicable
collateral, including the Collateral pledged to secure the notes, by the
Collateral Agent and the distribution of the net proceeds of any such sale (to
the extent secured by the applicable collateral) first to the holders of the
secured obligations in each case in accordance with the Intercreditor Agreement.
In general, the lenders under the Credit Agreement have the power to terminate
the Security Agreement and Mortgages and release the collateral thereunder when
the obligations under the Credit Agreement have been paid in full, when the
collateral thereunder no longer secures the obligations under the Credit
Agreement, or when OI Inc. and OI Group achieve the investment grade ratings
specified in the Credit Agreement and the Collateral Agent acknowledges such
ratings. In addition, all or any portion of the collateral under the Security
Agreement and the Mortgages may be released upon the approval of lenders under
the Credit Agreement.
RELEASES OF COLLATERAL
Under the terms of the Collateral Documents, the lenders under the Credit
Agreement determine the circumstances and manner in which the collateral,
including the Collateral securing the notes and the Guarantees of the notes,
shall be disposed of, including, but not limited to, the determination of
whether to release all or any portion of the Collateral from the Liens created
by the Collateral Documents and whether to foreclose on the Collateral following
a default on the notes. Generally, upon any sale, transfer or other disposition
of Collateral in a transaction not prohibited by the Credit Agreement and the
Collateral Documents, including an Asset Sale, the Collateral will be released
from the Liens created by the Collateral Documents. Moreover, when the
obligations under the Credit Agreement have been paid in full, when the
collateral under the Collateral Documents no longer secures the obligations
under the Credit Agreement and upon election of the applicable grantors or
pledgors, or when OI Inc. and OI Group achieve the investment grade ratings
specified in the Credit Agreement and the Collateral Agent acknowledges such
ratings, each of the Collateral Documents may be terminated and the collateral,
including the Collateral securing the notes and the Guarantees of the notes,
thereunder released. The Holders of the notes, however, are entitled, under
certain circumstances, to their ratable share of the distribution of the
proceeds of the Collateral as described in the Intercreditor Agreement. In
connection with releases of collateral, the Company will comply with
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Section 314(d)(1) of the Trust Indenture Act, as applicable. See
"--Intercreditor Agreement." In addition, the Collateral Documents provide that
upon release of a Guarantee under the Indenture, the security interest in the
assets of that Guarantor securing the notes and the Guarantees of the notes will
be released simultaneously. Under the indemnification provisions contained in
the Intercreditor Agreement, any pro rata payments due to the Collateral Agent
from the Holders of the notes will be deducted from their portion of the
proceeds from the Collateral prior to the distribution of such proceeds. The
amount of indebtedness secured under the Collateral Documents may be increased
without the consent of the Trustee or the Holders of the notes.
CONCERNING THE TRUSTEE
If the Trustee becomes a creditor of the Company or any Guarantor, the
Indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur and be continuing, the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder of notes, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the Indenture
without charge by writing to Owens-Brockway Glass Container Inc., One SeaGate,
Toledo, Ohio 43666, Attention: Investor Relations.
BOOK-ENTRY, DELIVERY AND FORM
The exchange notes will be issued in registered, global form in minimum
denominations of $1,000 and integral multiples of $1,000 in excess thereof. The
exchange notes will be represented by one or more exchange notes in registered,
global form without interest coupons (collectively, the "Global Notes"). The
Global Notes will be deposited upon issuance with the Trustee as custodian for
The Depository Trust Company ("DTC"), in New York, New York, and registered in
the name of DTC or its nominee, in each case for credit to an account of a
direct or indirect participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
exchange notes in certificated form except in the limited circumstances
described below. See "--Exchange of Book-Entry Notes for Certificated Notes."
Except in the limited circumstances described below, owners of beneficial
interests in the Global Notes will not be entitled to receive physical delivery
of exchange notes in certificated form.
Transfers of beneficial interests in the Global Notes will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants
(including, if applicable, those of Euroclear and Clearstream), which may change
from time to time.
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DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC, Euroclear
and Clearstream are provided solely as a matter of convenience. These operations
and procedures are solely within the control of the respective settlement
systems and are subject to changes by them. The Company takes no responsibility
for these operations and procedures and urges investors to contact the system or
their participants directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interests
in, and transfers of ownership interests in, each security held by or on behalf
of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Company that, pursuant to procedures established by
it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the exchange agent with portions of the
principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on, and
the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners
of beneficial interest in the Global Notes).
Investors in the Global Notes who are Participants in DTC's system may hold
their interests therein directly through DTC. Investors in the Global Notes who
are not Participants may hold their interests therein indirectly through
organizations (including Euroclear and Clearstream) which are Participants in
such system. Euroclear and Clearstream will hold interests in the Global Notes
on behalf of their participants through customers' securities accounts in their
respective names on the books of their respective depositories, which are Morgan
Guaranty Trust Company of New York, Brussels office, as operator of Euroclear,
and Citibank, N.A., as operator of Clearstream. All interests in a Global Note,
including those held through Euroclear or Clearstream, may be subject to the
procedures and requirements of DTC. Those interests held through Euroclear or
Clearstream may also be subject to the procedures and requirements of such
systems. The laws of some states require that certain Persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer beneficial interests in a Global Note to such Persons will
be limited to that extent. Because DTC can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants, the ability of a Person
having beneficial interests in a Global Note to pledge such interests to Persons
that do not participate in the DTC system, or otherwise take actions in respect
of such interests, may be affected by the lack of a physical certificate
evidencing such interests.
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EXCEPT AS DESCRIBED BELOW, OWNERS OF AN INTEREST IN THE GLOBAL NOTES WILL
NOT HAVE EXCHANGE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF EXCHANGE NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE
REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and interest and premium and
liquidated damages, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee will treat the Persons in whose names the notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving
payments and for all other purposes. Consequently, neither the Company, the
Trustee nor any agent of the Company or the Trustee has or will have any
responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interest in the Global Notes or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or
Indirect Participant's records relating to the beneficial ownership
interests in the Global Notes; or
(2) any other matter relating to the actions and practices of DTC or any of
its Participants or Indirect Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the exchange notes (including principal
and interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of exchange
notes will be governed by standing instructions and customary practices and will
be the responsibility of the Participants or the Indirect Participants and will
not be the responsibility of DTC, the Trustee or the Company. Neither the
Company nor the Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the notes, and the Company
and the Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and Clearstream will be effected in accordance with
their respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on the one hand, and
Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant Global Note in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the notes as to
which such Participant or Participants has or have given such direction.
However, if
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there is an Event of Default under the notes, DTC reserves the right to exchange
the Global Notes for legended notes in certificated form, and to distribute such
notes to its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Notes among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform such procedures, and may discontinue such
procedures at any time. Neither the Company nor the Trustee nor any of their
respective agents will have any responsibility for the performance by DTC,
Euroclear or Clearstream or their respective Participants or Indirect
Participants of their respective obligations under the rules and procedures
governing their operations.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies the Company that it is unwilling or unable to continue
as depositary for the Global Notes and the Company fails to appoint a
successor depositary or (b) has ceased to be a clearing agency registered
under the Exchange Act;
(2) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of the Certificated Notes; or
(3) there shall have occurred and be continuing a Default or Event of
Default with respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the Indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures) and will bear the applicable restrictive legend referred to in
"Notice to Investors," unless that legend is not required by applicable law.
SAME DAY SETTLEMENT AND PAYMENT
The Company will make payments in respect of the notes represented by the
Global Notes (including principal, premium, if any, interest and liquidated
damages, if any) by wire transfer of immediately available funds to the accounts
specified by the Global Note Holder. The Company will make all payments of
principal, interest and premium and liquidated damages, if any, with respect to
Certificated Notes by wire transfer of immediately available funds to the
accounts specified by the Holders thereof or, if no such account is specified,
by mailing a check to each such Holder's registered address. The notes
represented by the Global Notes are eligible to trade in DTC's Same-Day Funds
Settlement System, and any permitted secondary market trading activity in such
notes will, therefore, be required by DTC to be settled in immediately available
funds. The Company expects that secondary trading in any Certificated Notes will
also be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a Global Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
the Company that cash received in Euroclear or Clearstream as a result of sales
of interests in a Global Note by or through a Euroclear or Clearstream
participant to a Participant in DTC will be received with value on the
settlement date of
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DTC but will be available in the relevant Euroclear or Clearstream cash account
only as of the business day for Euroclear or Clearstream following DTC's
settlement date.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other Person
is merged with or into or became a Restricted Subsidiary of such
specified Person, whether or not such Indebtedness is incurred in
connection with, or in contemplation of, such other Person merging with
or into, or becoming a Restricted Subsidiary of, such specified Person;
and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise. For purposes of this definition, the terms
"controlling," "controlled by" and "under common control with" shall have
correlative meanings.
"ASSET SALE" means:
(1) the sale, lease, conveyance or other disposition of any assets; PROVIDED
that the sale, conveyance or other disposition of all or substantially
all of the assets of OI Group and its Restricted Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above
under the caption "--Certain Covenants--Merger, Consolidation or Sale of
Assets" and not by the provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of OI Group's Restricted
Subsidiaries or the sale of Equity Interests in any of OI Group's
Restricted Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that involves
assets or Equity Interests having a Fair Market Value of less than
$10.0 million;
(2) a transfer of assets between or among OI Group and its Restricted
Subsidiaries;
(3) an issuance of Equity Interests by a Restricted Subsidiary of OI Group
to OI Group or to another Restricted Subsidiary of OI Group;
(4) the sale or lease of equipment, inventory, accounts receivable or other
assets in the ordinary course of business;
(5) the sale, lease, conveyance or other disposition of any assets securing
the Indenture or the Credit Agreement in connection with the enforcement
of the security interests contained therein pursuant to the terms of the
Intercreditor Agreement;
(6) the sale or other disposition of cash or Cash Equivalents;
(7) a Restricted Payment that is permitted by the covenant described above
under the caption "--Certain Covenants--Restricted Payments"; and
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(8) the exchange of assets held by OI Group or a Restricted Subsidiary of OI
Group for assets held by any Person or entity (including Equity Interests
of such Person or entity), provided that (i) the assets received by OI
Group or such Restricted Subsidiary of OI Group in any such exchange will
immediately constitute, be part of, or be used in a Permitted Business;
and (ii) any such assets received are of a comparable Fair Market Value
to the assets exchanged as determined in good faith by OI Group.
"BOARD OF DIRECTORS" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the Board of Directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of such Person
serving a similar function.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company, partnership
or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"CASH EQUIVALENTs" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof and
(a) backed by the full faith and credit of the United States or
(b) having a rating of at least AAA from S&P or at least Aaa from
Moody's, in each case maturing not more than one year from the date of
acquisition;
(3) securities issued by any state of the United States of America or any
political subdivision of any such state or any public instrumentality
thereof maturing within one year of the date of acquisition thereof and,
at the time of acquisition, having the highest rating obtainable from
either S&P or Moody's;
(4) certificates of deposit and eurodollar time deposits with maturities of
one year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding one year and overnight bank deposits, in each
case, with any lender under the Credit Agreement or any domestic
commercial bank having capital and surplus of not less than
$250.0 million;
(5) repurchase and reverse repurchase obligations for underlying securities
of the types described in clauses (2) and (4) above entered into with any
financial institution meeting the qualifications specified in clause (4)
above;
(6) commercial paper having the highest rating obtainable from Moody's or
S&P and in each case maturing within one year from the date of creation
thereof; and
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(7) money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (1) through (6) of this
definition or that has a rating of at least AAA from S&P or at least Aaa
from Moody's.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) OI Inc. or OI Group becomes aware of (by way of a report or any other
filing pursuant to Section 13(d) of the Exchange Act, proxy, vote,
written notice or otherwise) the acquisition by any Person or group
(within the meaning of Section 13(d)(3) or Section 14(d)(2) of the
Exchange Act, or any successor provision), including any group acting for
the purpose of acquiring, holding or disposing of securities (within the
meaning of Rule 13d-5(b)(1) under the Exchange Act), other than the
Principals and their Related Parties, in a single transaction or in a
related series of transactions, by way of merger, consolidation or other
business combination or purchase of beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act, or any successor provision)
of 35% or more of the total voting power of the Voting Stock of OI Inc.;
or
(2) the first day on which a majority of the members of the Board of
Directors of OI Inc. are not Continuing Directors; or
(3) the Company consolidates with, or merges with or into, any Person, or
any Person consolidates with, or merges with or into the Company, in any
such event pursuant to a transaction in which any of the outstanding
Voting Stock of the Company or such other Person is converted into or
exchanged for cash, securities or other property, other than any such
transaction where (A) the Voting Stock of the Company outstanding
immediately prior to such transaction is converted into or exchanged for
Voting Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding shares of
such Voting Stock of such surviving or transferee Person (immediately
after giving effect to such issuance) and (B) immediately after such
transaction, no "person" or "group" (as such terms are used in
Section 13(d) and 14(d) of the Exchange Act), other than the Principals
and their Related Parties, becomes, directly or indirectly, the
beneficial owner (as defined above) of 35% or more of the voting power of
all classes of Voting Stock of the Company; or
(4) the first day on which OI Inc. fails to own 100% of the issued and
outstanding Equity Interests of OI Group.
"COLLATERAL" means all of the property from time to time in which Liens are
purported to be granted to secure the notes or Guarantees of the notes pursuant
to the Collateral Documents.
"COLLATERAL AGENT" shall have the meaning given to it in the Credit
Agreement.
"COLLATERAL DOCUMENTS" means, collectively, the Intercreditor Agreement, the
Pledge Agreement and the Security Agreement, each as in effect on the Issue Date
and as amended, amended and restated, modified, renewed, replaced or
restructured from time to time and the Mortgages each as in effect on the Issue
Date and any additional Mortgages created from time to time, and as amended,
amended and restated, modified, renewed or replaced from time to time.
"CONSOLIDATED CASH FLOW" means, with respect to any specified Person for any
period, the Consolidated Net Income of such Person for such period PLUS:
(1) an amount equal to any extraordinary loss realized by such Person or any
of its Restricted Subsidiaries in connection with any sale or other
disposition of assets, to the extent such losses were deducted in
computing such Consolidated Net Income; PLUS
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(2) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; PLUS
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including without limitation amortization of debt issuance
costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net of the effect
of all payments made or received pursuant to Hedging Obligations), to the
extent that any such expense was deducted in computing such Consolidated
Net Income; PLUS
(4) depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) and other non-cash charges and expenses
(excluding any amortization of a prepaid cash expense that was paid in a
prior period) of such Person and its Restricted Subsidiaries for such
period to the extent that such depreciation, amortization and other
non-cash charges and expenses were deducted in computing such
Consolidated Net Income; MINUS
(5) an amount equal to any extraordinary gain realized by such person or any
of its Restricted Subsidiaries in connection with any sale or other
disposition of assets, to the extent such gains were included in
computing such Consolidated Net Income; MINUS
(6) pension expenses, retiree medical expenses and any other material
non-cash items increasing Consolidated Net Income for such period that
are disclosed in such Person's financial statements, other than accrual
of revenue in the ordinary course of business, in each case without
duplication, on a consolidated basis and determined in accordance with
GAAP; MINUS
(7) net cash payments to OI Inc. by OI Group for (i) claims of persons for
exposure to asbestos containing products and expenses related thereto and
(ii) dividends on any outstanding preferred stock of OI Inc., in each
case without duplication, on a consolidated basis and determined in
accordance with GAAP.
Notwithstanding the preceding, the provision for taxes based on the income
or profits of, and the depreciation, amortization and other non-cash charges and
expenses of, a Restricted Subsidiary of OI Group will be added to Consolidated
Net Income to compute Consolidated Cash Flow of OI Group only to the extent that
a corresponding amount would be permitted at the date of determination to be
dividended to OI Group by such Restricted Subsidiary without prior governmental
approval (that has not been obtained), and would not be prohibited, directly or
indirectly, by the operation of the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders, other
than agreements, instruments, judgments, decrees, orders, statutes, rules and
government regulations existing on the Issue Date.
"CONSOLIDATED NET INCOME" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting
will be included only to the extent of the amount of dividends or
distributions paid in cash to the specified Person or a Wholly Owned
Restricted Subsidiary of the specified Person;
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(2) the Net Income of any Restricted Subsidiary will be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental
approval (that has not been obtained) or, is prohibited, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders,
other than agreements, instruments, judgments, decrees, orders, statutes,
rules and government regulations existing on the Issue Date;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will be
excluded;
(4) the cumulative effect of a change in accounting principles under GAAP
will be excluded;
(5) all extraordinary, unusual or nonrecurring gains and losses (including
without limitation any one-time costs incurred in connection with
acquisitions) (together with any related provision for taxes) will be
excluded;
(6) any gain or loss (together with any related provision for taxes)
realized upon the sale or other disposition of any property, plant or
equipment of the specified Person or its Restricted Subsidiaries
(including pursuant to any sale and leaseback arrangement) which is not
sold or otherwise disposed of in the ordinary course of business and any
gain or loss (together with any related provision for taxes) realized
upon the sale or other disposition by the specified Person or any
Restricted Subsidiary of the specified Person of any Capital Stock of any
Person or any Asset Sale will be excluded to the extent that any such
gain or loss exceeds $5.0 million with respect to any one occurrence or
$15.0 million in the aggregate with respect to gains or losses during any
twelve-month period;
(7) the Net Income of any Unrestricted Subsidiary will be excluded, whether
or not distributed to the specified Person or one of its Subsidiaries;
and
(8) any deduction for minority owners' interest in earnings of Subsidiaries
will be excluded.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of OI Inc., who:
(1) was a member of such Board of Directors on the date of the Indenture; or
(2) was nominated for election or elected to such Board of Directors with
the approval of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election.
"CREDIT AGREEMENT" means that certain Secured Credit Agreement, dated as of
April 23, 2001, by and among the Borrowers named therein, OI Group and
Owens-Illinois General, Inc., as Borrower's Agent, Deutsche Banc Alex. Brown and
Banc of America Securities, LLC, as Joint Lead Arrangers and Joint Book
Managers, Deutsche Bank AG, London Branch, as UK Administrative Agent, Bankers
Trust Company, as Administrative Agent, and the other Agents and the other
Lenders named therein, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, amended and restated, modified, renewed, refunded,
replaced, substituted or refinanced or otherwise restructured (including but not
limited to, the inclusion of additional borrowers thereunder) from time to time.
"CREDIT AGREEMENT DOMESTIC BORROWERS" means the Company, OI General
FTS Inc. and OI Plastic Products FTS Inc., to the extent at the time of
determination such entity is a borrower under the Credit Agreement and any other
Domestic Subsidiary of OI Group that is, at the relevant time, a borrower under
the Credit Agreement.
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"CREDIT FACILITIES" means (1) one or more debt facilities (including,
without limitation, the Credit Agreement) or commercial paper facilities, in
each case with banks or other lenders providing for revolving credit loans, term
loans, bankers acceptances, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced, refinanced or
otherwise restructured in whole or in part from time to time (collectively,
"Bank Facilities"); and (2) notes, debentures or other financing instruments or
any combination thereof incurred after the Issue Date ("Non-Bank Refinancing"),
including any refinancing thereof, to the extent such Non-Bank Refinancing
replaces, refinances or otherwise restructures Indebtedness under Credit
Facilities PROVIDED that after giving effect to the issuance and use of proceeds
of such Non-Bank Refinancing, OI Group and/or its Restricted Subsidiaries will
have available borrowings under the Bank Facilities of at least $2.5 billion.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"DESIGNATED NONCASH CONSIDERATION" means the noncash consideration received
by OI Group or one of its Restricted Subsidiaries in connection with an Asset
Sale that is so designated as Designated Noncash Consideration pursuant to an
Officers' Certificate setting forth the basis of such valuation, executed by an
officer of OI Group or the Company, less the amount of cash or Cash Equivalents
received in connection with a subsequent sale of such Designated Noncash
Consideration.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the Holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable (other than as a
result of a change of control or asset sale), pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof
(other than as a result of a change of control or asset sale), in whole or in
part, on or prior to the date that is 91 days after the date on which the notes
mature or are no longer outstanding. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
Holders thereof have the right to require OI Group or the Company to repurchase
such Capital Stock upon the occurrence of a change of control or an asset sale
shall not constitute Disqualified Stock if the terms of such Capital Stock
provide that OI Group or the Company may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or redemption
complies with the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"DOMESTIC SUBSIDIARY" means any Restricted Subsidiary of OI Group other than
a Foreign Subsidiary.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EQUITY OFFERING" means any public or private sale of common stock (other
than Disqualified Stock) of OI Inc. (other than public offerings with respect to
common stock registered on Form S-8 or otherwise relating to equity securities
issuable under any employee benefit plan of OI Inc.).
"EXISTING INDEBTEDNESS" means the aggregate principal or commitment amount
of Indebtedness of OI Group and its Subsidiaries (other than Indebtedness under
the Credit Agreement) in existence on the date of the Indenture, until such
amounts are repaid or terminated.
"EXISTING IRBS" means the Holmes County Ohio 5.85% Industrial Revenue Bonds
due 2007, the Kansas City, Missouri Industrial Development Revenue Bonds due
2008 and the City of Mentor, Ohio Industrial Development Bonds due 2004, and any
extensions, renewals or refinancings thereof to the extent that such extensions,
renewals and refinancings thereof do not result in an increase in the aggregate
principal amount of such Existing IRBs.
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"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length transaction, for cash, between a
willing seller and a willing and able buyer, neither of whom is under pressure
or compulsion to complete the transaction.
"FIXED CHARGE COVERAGE RATIO" means with respect to any specified Person and
its Restricted Subsidiaries for any period, the ratio of the Consolidated Cash
Flow of such Person and its Restricted Subsidiaries for such period to the Fixed
Charges of such Person and its Restricted Subsidiaries for such period. In the
event that the specified Person or any of its Restricted Subsidiaries incurs,
assumes, guarantees, repays, repurchases or redeems any Indebtedness or issues,
repurchases or redeems preferred stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated and on or
prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee, repayment, repurchase or redemption of Indebtedness, or
such issuance, repurchase or redemption of preferred stock, and the use of the
proceeds therefrom as if the same had occurred at the beginning of the
applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions and dispositions that have been made by the specified
Person or any of its Restricted Subsidiaries, including through mergers
or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference
period and on or prior to the Calculation Date shall be given pro forma
effect as if they had occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period
shall be calculated on a pro forma basis in accordance with
Regulation S-X under the Securities Act;
(2) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded;
(3) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior
to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations
of the specified Person or any of its Subsidiaries following the
Calculation Date;
(4) the consolidated interest expense attributable to interest on any
Indebtedness computed on a pro forma basis and (a) bearing a floating
interest rate shall be computed as if the rate in effect on the date of
computation had been the applicable rate for the entire period and
(b) that was not outstanding during the period for which the computation
is being made but which bears, at the option of such Person, a fixed or
floating rate of interest, shall be computed by applying at the option of
such Person either the fixed or floating rate; and
(5) the consolidated interest expense attributable to interest on any
working capital borrowings under a revolving credit facility computed on
a pro forma basis shall be computed based upon the average daily balance
of such working capital borrowings during the applicable period.
"FIXED CHARGES" means, with respect to any specified Person and its
Restricted Subsidiaries for any period, the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, including, without
limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect
to attributable debt, commissions, discounts
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and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net of the effect of all payments
made or received pursuant to Hedging Obligations; PLUS
(2) the consolidated interest of such Person and its Restricted Subsidiaries
that was capitalized during such period; PLUS
(3) interest actually paid by the Company or any such Restricted Subsidiary
under any Guarantee of Indebtedness or other obligation of any other
Person; PLUS
(4) the product of (a) all dividends, whether paid or accrued and whether or
not in cash, on any series of Disqualified Stock or preferred stock of
such Person or any of its Restricted Subsidiaries, other than dividends
on Equity Interests payable solely in Equity Interests of OI Group (other
than Disqualified Stock) or to OI Group or a Restricted Subsidiary of OI
Group, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal,
state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with
GAAP.
"FOREIGN SUBSIDIARY" means any Restricted Subsidiary of OI Group which is
organized under the laws of a jurisdiction other than the United States of
America or any State thereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America, and the payment for which the
United States pledges its full faith and credit.
"GUARANTEE" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, through letters of credit
or reimbursement agreements in respect thereof, of all or any part of any
Indebtedness.
"GUARANTORS" means:
(1) OI Group;
(2) each direct or indirect Domestic Subsidiary of OI Group (other than the
Company) that guarantees the Credit Agreement as of the date of the
Indenture; and
(3) each future direct or indirect Domestic Subsidiary of OI Group that
guarantees the Credit Agreement and executes a Guarantee of the notes in
accordance with the provisions of the Indenture;
and their respective successors and assigns.
"HEDGING OBLIGATIONS" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements interest
rate collar agreements and other agreements or arrangements designed to
protect such Person against fluctuations in interest rates;
(2) currency exchange swap agreements, currency exchange cap agreements,
currency exchange collar agreements and other agreements or arrangements
designed to protect such Person against fluctuations in currency values;
and
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(3) commodity swap agreements; commodity cap agreements, commodity collar
agreements and other agreements or arrangements designed to protect such
Person against fluctuations in commodity prices.
"HOLDER" means a Person in whose name a note is registered on the
registrar's books.
"INDEBTEDNESS" means, with respect to any specified Person, any indebtedness
of such Person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any property,
except any such balance that constitutes an accrued liability or trade
payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes the lesser of the Fair Market Value on the date of
incurrence of any asset of the specified Person subject to a Lien securing the
Indebtedness of others and the amount of such Indebtedness secured and, to the
extent not otherwise included, the Guarantee by the specified Person of any
indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount; and
(2) the principal amount thereof, in the case of any other Indebtedness.
"INTERCOMPANY INDEBTEDNESS" means any Indebtedness of OI Group or any
Subsidiary of OI Group which, in the case of OI Group, is owing to OI Inc. or
any Subsidiary of OI Group and, in the case of any Subsidiary of OI Group, is
owing to OI Group or any other Subsidiary of OI Group.
"INTERCREDITOR AGREEMENT" means the intercreditor agreement, dated as of
April 23, 2001, by and among Bankers Trust Company, as administrative agent for
the lenders party to the Credit Agreement, Bankers Trust Company, as Collateral
Agent and any other parties thereto, as amended, amended and restated or
otherwise modified from time to time.
"INVESTMENT GRADE PERMITTED LIENS" means:
(1) Liens arising under the Collateral Documents other than Liens securing
the OI Inc. Senior Notes on the Issue Date;
(2) Liens incurred after the Issue Date on the assets (including shares of
Capital Stock and Indebtedness) of OI Group or any Domestic Subsidiary of
OI Group; PROVIDED, HOWEVER, that the aggregate amount of Indebtedness
and other obligations at any time outstanding secured by such Liens
pursuant to clause (1) above and this clause (2) shall not exceed the sum
of $5.5 billion plus 50% of Tangible Assets acquired by the Company or
any Domestic Subsidiary after the Issue Date;
(3) Liens in favor of OI Group or any Domestic Subsidiary of OI Group;
(4) Liens on property or shares of capital stock of a Person existing at the
time such Person is merged with or into or consolidated with OI Group or
any Domestic Subsidiary of OI Group;
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PROVIDED that such Liens were not incurred in connection with or in
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with OI
Group or the Domestic Subsidiary;
(5) Liens on property or shares of capital stock existing at the time of
acquisition thereof by OI Group or any Domestic Subsidiary of OI Group,
PROVIDED that such Liens were not incurred in connection with or in
contemplation of such acquisition and do not extend to any property other
than the property so acquired by OI Group or the Domestic Subsidiary;
(6) Liens (including extensions and renewals thereof) upon real or personal
(whether tangible or intangible) property acquired after the Issue Date,
PROVIDED that:
(a) such Lien is created solely for the purpose of securing Indebtedness
incurred to finance all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment subject
thereto and such Lien is created prior to, at the time of or within
12 months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property,
plant or equipment or to refinance any such Indebtedness previously
so secured;
(b) the principal amount of the Indebtedness secured by such Lien does
not exceed 100% of such cost; and
(c) any such Lien shall not extend to or cover any property or assets
other than such item of property or assets and any improvements on
such item;
(7) Liens to secure any Capital Lease Obligation or operating lease;
(8) Liens encumbering customary initial deposits and margin deposits;
(9) Liens securing Indebtedness under Hedging Obligations;
(10) Liens arising out of conditional sale, title retention, consignment or
similar arrangements for the sale of goods entered into by OI Group or
any of its Domestic Subsidiaries in the ordinary course of business of OI
Group and its Domestic Subsidiaries;
(11) Liens on or sales of receivables and customary cash reserves
established in connection therewith;
(12) Liens securing OI Group's or any of its Domestic Subsidiary's
obligations in respect of bankers' acceptances issued or created to
facilitate the purchase, shipment or storage of inventory or other goods;
and
(13) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
PROVIDED that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor.
"INVESTMENT GRADE RATINGS" means a debt rating of the notes of BBB- or
higher by S&P and Baa3 or higher by Moody's or the equivalent of such ratings by
S&P or Moody's or in the event S&P or Moody's shall cease rating the notes and
the Company shall select any other Rating Agency, the equivalent of such ratings
by such other Rating Agency.
"INVESTMENTS" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons in the forms of loans (including
Guarantees thereof), advances or capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items that
are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If OI Group or any Restricted Subsidiary of OI Group sells
or otherwise disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of OI
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Group such that, after giving effect to any such sale or disposition, such
Person is no longer a Restricted Subsidiary of OI Group, OI Group shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the Fair Market Value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--Certain
Covenants--Restricted Payments." The acquisition by OI Group or any Restricted
Subsidiary of OI Group of a Person that holds an Investment in a third Person
shall be deemed to be an Investment by OI Group or such Restricted Subsidiary in
such third Person in an amount equal to the Fair Market Value of the Investment
held by the acquired Person in such third Person in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
"ISSUE DATE" means January 24, 2002, the date of the original issuance of
the private notes.
"KKR" means Kohlberg Kravis Roberts & Co., L.P., a Delaware limited
partnership.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any agreement to give a security interest in and any filing of or
agreement to give any financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction.
"MOODY'S" means Moody's Investors Service, Inc. or any successor rating
agency.
"MORTGAGES" means mortgages as defined under the Credit Agreement securing
real property in the United States of America.
"NET INCOME" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends.
"NET PROCEEDS" means the aggregate cash proceeds received by OI Group or any
of its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of any bona fide direct costs
relating to such Asset Sale, including, without limitation, reasonable legal,
accounting and investment banking fees, reasonable sales commissions, any
reasonable relocation expenses incurred as a result thereof, taxes paid or
payable as a result thereof, in each case, after taking into account any
available tax credits or deductions and any tax sharing arrangements, and
amounts required to be applied to the repayment of Indebtedness that is paid
with the proceeds of such Asset Sale and any reasonable reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP and for the after-tax cost of any indemnification payments (fixed and
contingent) attributable to sellers' indemnities to the purchaser.
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither OI Group nor any of its Restricted Subsidiaries
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness), (b) is
directly or indirectly liable as a guarantor or otherwise, or
(c) constitutes the lender;
(2) no default with respect to which (including any rights that the Holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any Holder of
any other Indebtedness of OI Group or any of its Restricted Subsidiaries
to declare a default on such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of OI Group or any of its
Restricted Subsidiaries.
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"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFSHORE COLLATERAL DOCUMENTS" means the Offshore Security Agreements and
the Mortgages securing real property outside of the United States of America.
"OFFSHORE SECURITY AGREEMENTS" has the meaning assigned to such term in the
Credit Agreement.
"OI INC. ORDINARY COURSE PAYMENTS" means dividends or other distributions
by, or payments of Intercompany Indebtedness from, OI Group to OI Inc. necessary
to permit OI Inc. to pay any of the following items which are then due and
payable: (i) Permitted OI Inc. Debt Obligations; (ii) claims of persons for
exposure to asbestos-containing products and expenses related thereto;
(iii) consolidated tax liabilities of OI Inc. and its Subsidiaries; and
(iv) general administrative costs and other on-going expenses of OI Inc. in the
ordinary course of business consistent with past practices.
"OI INC. SENIOR NOTES" means the Indebtedness of OI Inc. outstanding as of
any date pursuant to its $300.0 million aggregate principal amount of 7.85%
Senior Notes due 2004, $350.0 million aggregate principal amount of 7.15% Senior
Notes due 2005, $300.0 million aggregate principal amount of 8.10% Senior Notes
due 2007, $250.0 million aggregate principal amount of 7.35% Senior Notes due
2008, $250.0 million aggregate principal amount of 7.50% Senior Debentures due
2010, and $250.0 million aggregate principal amount of 7.80% Senior Debentures
due 2018.
"PERMITTED BUSINESS" means any business conducted or proposed to be
conducted (as described in the offering memorandum relating to the private
notes) by OI Group and its Restricted Subsidiaries on the date of the Indenture
and other businesses reasonably related or ancillary thereto.
"PERMITTED INVESTMENTS" means:
(1) any Investment in the Company, OI Group or in a Restricted Subsidiary of
OI Group;
(2) any Investment in cash or Cash Equivalents and, with respect to Foreign
Subsidiaries, short term Investments similar to Cash Equivalents
customarily used in the countries in which such Foreign Subsidiaries are
located;
(3) any Investment by OI Group or any Restricted Subsidiary of OI Group in a
Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of OI Group; or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, OI Group or a Restricted Subsidiary of OI Group;
(4) any Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with the
covenant described above under the caption "--Repurchase at the Option of
Holders--Asset Sales";
(5) any acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Stock) of OI Inc., the Company or OI
Group;
(6) Hedging Obligations;
(7) advances to employees, officers and directors not in excess of
$2.0 million outstanding at any one time, in the aggregate;
(8) obligations of employees, officers and directors, not in excess of
$2.0 million outstanding at any one time, in the aggregate, in connection
with such employees', officers' or directors' acquisition of shares of
OI Inc. common stock, so long as no cash is actually advanced to such
employees, officers or directors in connection with the acquisition of
any such shares;
(9) any Investment existing on the Issue Date; and
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(10) other Investments in any Person having an aggregate Fair Market Value
(measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all
other such Investments outstanding at any such time, not to exceed
$150.0 million.
"PERMITTED LIENS" means:
(1) Liens arising under the Collateral Documents other than Liens securing
the OI Inc. Senior Notes on the Issue Date;
(2) Liens incurred after the Issue Date on the assets (including shares of
Capital Stock and Indebtedness) of OI Group or any Restricted Subsidiary
of OI Group; PROVIDED, HOWEVER, that the aggregate amount of Indebtedness
and other obligations at any time outstanding secured by such Liens
pursuant to clause (1) above and this clause (2) shall not exceed the sum
of $5.5 billion plus 50% of Tangible Assets acquired by the Company or
any Guarantor or that are owned by any Restricted Subsidiary that becomes
a Guarantor after the Issue Date;
(3) Liens in favor of OI Group or any Restricted Subsidiary of OI Group;
(4) Liens on property or shares of capital stock of a Person existing at the
time such Person is merged with or into or consolidated with OI Group or
any Restricted Subsidiary of OI Group; PROVIDED that such Liens were not
incurred in connection with or in contemplation of such merger or
consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with OI Group or the Restricted
Subsidiary;
(5) Liens on property or shares of capital stock existing at the time of
acquisition thereof by OI Group or any Restricted Subsidiary of OI Group,
PROVIDED that such Liens were not incurred in connection with or in
contemplation of such acquisition and do not extend to any property other
than the property so acquired by OI Group or the Restricted Subsidiary;
(6) Liens on property or shares of capital stock of any Foreign Subsidiary,
including shares of capital stock of any Foreign Subsidiary owned by a
Domestic Subsidiary, to secure Indebtedness of a Foreign Subsidiary
permitted to be incurred under the Indenture;
(7) Liens (including extensions and renewals thereof) upon real or personal
(whether tangible or intangible) property acquired after the Issue Date,
PROVIDED that:
(a) such Lien is created solely for the purpose of securing Indebtedness
incurred to finance all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment subject
thereto and such Lien is created prior to, at the time of or within
12 months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property,
plant or equipment or to refinance any such Indebtedness previously
so secured;
(b) the principal amount of the Indebtedness secured by such Lien does
not exceed 100% of such cost; and
(c) any such Lien shall not extend to or cover any property or assets
other than such item of property or assets and any improvements on
such item;
(8) Liens to secure any Capital Lease Obligation or operating lease;
(9) Liens encumbering customary initial deposits and margin deposits;
(10) Liens securing Indebtedness under Hedging Obligations;
(11) Liens arising out of conditional sale, title retention, consignment or
similar arrangements for the sale of goods entered into by OI Group or
any of its Restricted Subsidiaries in the ordinary course of business of
OI Group and its Restricted Subsidiaries;
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(12) Liens on or sales of receivables and customary cash reserves
established in connection therewith;
(13) Liens securing OI Group's or any of its Restricted Subsidiaries'
obligations in respect of bankers' acceptances issued or created to
facilitate the purchase, shipment or storage of inventory or other goods;
and
(14) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
PROVIDED that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor.
"PERMITTED OI INC. DEBT OBLIGATIONS" means Obligations with respect to the
OI Inc. Senior Notes and any refinancings of the $300.0 million aggregate
principal amount of 7.85% Senior Notes due 2004, the $350.0 million aggregate
principal amount of 7.15% Senior Notes due 2005 of OI Inc., the $300.0 million
aggregate principal amount of 8.10% Senior Notes due 2007, the $250.0 million
aggregate principal amount of 7.35% Senior Notes due 2008 and the
$250.0 million aggregate principal amount of 7.50% Senior Debentures due 2010,
and the Existing IRBs and up to an additional $50.0 million of IRB financing.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of OI Group or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund such
other Indebtedness of OI Group or any of its Restricted Subsidiaries (other than
Intercompany Indebtedness); PROVIDED that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal or
commitment amount (or accreted value, if applicable) of the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus
all accrued interest thereon and the amount of any premiums necessary to
accomplish such refinancing and such expenses incurred in connection
therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes,
such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment
to, the notes on terms at least as favorable to the Holders of notes as
those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"PLEDGE AGREEMENT" means the Pledge Agreement, dated as of April 23, 2001,
between OI Group, OI Packaging, and Bankers Trust Company, as Collateral Agent,
as amended, amended and restated or otherwise modified from time to time.
"PRINCIPALS" means KKR and its Affiliates.
"RATING AGENCY" means any of:
(1) S&P;
(2) Moody's; or
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(3) if S&P or Moody's or both shall not make a rating of the notes publicly
available, a security rating agency or agencies, as the case may be,
nationally recognized in the United States, selected by the Company,
which shall be substituted for S&P or Moody's or both, as the case may
be, and, in each case, any successors thereto.
"RELATED PARTY" means:
(1) any controlling stockholder, partner, member, 80% (or more) owned
Subsidiary, or immediate family member (in the case of an individual) of
any Principal; or
(2) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or
more controlling interest of which consist of any one or more Principals
and/or such other Persons referred to in the immediately preceding
clause (1).
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Services, a division of McGraw
Hill Inc., a New York corporation, or any successor rating agency.
"SECURITY AGREEMENT" means the Security Agreement, dated as of April 23,
2001, entered into by and among OI Group, each of the direct and indirect
subsidiaries of OI Group signatory thereto, each additional grantor that may
become a party thereof, and Bankers Trust Company, as Collateral Agent, as
amended, amended and restated, or otherwise modified from time to time.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of OI Group that
would be a "significant subsidiary" as defined in Article I, Rule 1-02 of
Regulation S-X promulgated pursuant to the Securities Act, as such Regulation is
in effect as of the date of the Indenture.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more than
50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned
or controlled, directly or indirectly, by such Person or one or more of
the other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or one or more
Subsidiaries of such Person (or any combination thereof).
"TANGIBLE ASSETS" means the total consolidated assets, LESS goodwill and
intangibles, of OI Group and its Restricted Subsidiaries, as shown on the most
recent balance sheet of OI Group.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of OI Group that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
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(2) is not party to any agreement, contract, arrangement or understanding
with OI Group or any Restricted Subsidiary of OI Group unless the terms
of any such agreement, contract, arrangement or understanding are no less
favorable to OI Group or such Restricted Subsidiary than those that might
be obtained at the time from Persons who are not Affiliates of OI Group;
(3) is a Person with respect to which neither OI Group nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of OI Group or any of its Restricted
Subsidiaries; and
(5) has at least one director on its Board of Directors that is not a
director or executive officer of OI Group or any of its Restricted
Subsidiaries and has at least one executive officer that is not a
director or executive officer of OI Group or any of its Restricted
Subsidiaries.
Any designation of a Restricted Subsidiary of OI Group as an Unrestricted
Subsidiary shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "--Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of OI Group as of such
date and, if such Indebtedness is not permitted to be incurred as of such date
under the covenant described under the caption "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock," OI Group shall be in default
of such covenant.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of each
then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
shall at the time be owned by such Person and/or by one or more Wholly Owned
Restricted Subsidiaries of such Person.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
considerations relating to the exchange your private notes for exchange notes in
the exchange offer, but does not purport to be a complete analysis of all the
potential tax considerations relating thereto. This summary is based on laws,
regulations, rulings and decisions now in effect, all of which are subject to
change or differing interpretation possibly with retroactive effect. We have not
sought any ruling from the Internal Revenue Service or an opinion of counsel
with respect to the statements made and the conclusions reached in the following
summary, and there can be no assurance that the Internal Revenue Service will
agree with such statements and conclusions.
This discussion only applies to you if you exchange your private notes for
exchange notes in the exchange offer. This discussion also does not address the
tax considerations arising under the laws of any foreign, state or local
jurisdiction. In addition, this discussion does not address all tax
considerations applicable to your particular circumstances or if you are subject
to special tax rules, including, without limitation, if you are:
- a bank;
- a holder subject to the alternative minimum tax;
- a tax-exempt organization;
- an insurance company;
- a foreign person or entity;
- a dealer in securities or currencies;
- a person that will hold notes as a position in a hedging transaction,
"straddle" or "conversion transaction" for tax purposes; or
- a person deemed to sell notes under the constructive sale provisions of
the Internal Revenue Code.
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE APPLICATION OF
THE UNITED STATES FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATION AS WELL
AS ANY TAX CONSEQUENCES ARISING UNDER THE FEDERAL ESTATE OR GIFT TAX RULES OR
UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR
UNDER ANY APPLICABLE TAX TREATY.
The exchange of private notes for exchange notes will be treated as a
"non-event" for federal income tax purposes because the exchange notes will not
be considered to differ materially in kind or extent from the private notes. As
a result, no material federal income tax consequences will result to you from
exchanging private notes for exchange notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the exchange notes. Broker-dealers may use this
prospectus, as it may be amended or supplemented from time to time, in
connection with the resale of exchange notes received in exchange for private
notes where the broker-dealer acquired the private notes as a result of
market-making activities or other trading activities. We have agreed that for a
period of up to 90 days after the date that this registration statement is
declared effective by the SEC, we will make this prospectus, as amended or
supplemented, available to any broker-dealer that requests it in the letter of
transmittal for use in connection with any such resale.
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We will not receive any proceeds from any sale of exchange notes by
broker-dealers or any other persons. Broker-dealers may sell exchange notes
received by broker-dealers for their own account pursuant to the exchange offer
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the exchange notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to the prevailing market prices or negotiated
prices. Broker-dealers may resell exchange notes directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any broker-dealer and/or the purchasers of the
exchange notes. Any broker-dealer that resells exchange notes that were received
by it for its own account pursuant to the exchange offer and any broker or
dealer that participates in a distribution of the exchange notes may be deemed
to be "underwriters" within the meaning of the Securities Act and any profit on
any resale of exchange notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incident to our performance of, or
compliance with, the registration rights agreement and will indemnify the
holders of the notes (including any broker-dealers) against liabilities under
the Securities Act.
By its acceptance of the exchange offer, any broker-dealer that receives
exchange notes pursuant to the exchange offer agrees to notify us before using
the prospectus in connection with the sale or transfer of exchange notes. The
broker-dealer further acknowledges and agrees that, upon receipt of notice from
us of the happening of any event which makes any statement in the prospectus
untrue in any material respect or which requires the making of any changes in
the prospectus to make the statements in the prospectus not misleading or which
may impose upon us disclosure obligations that my have a material adverse effect
on us, which notice we agree to deliver promptly to the broker-dealer, the
broker-dealer will suspend use of the prospectus until we have notified the
broker-dealer that delivery of the prospectus may resume and have furnished
copies of any amendment or supplement to the prospectus to the broker-dealer.
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LEGAL MATTERS
Certain legal matters with regard to the validity of the notes will be
passed upon for us and the guarantors by Latham & Watkins, San Francisco,
California. Certain partners and former partners of Latham & Watkins, members of
their families and related persons indirectly own less than 1% of the
outstanding shares of common stock of OI Inc.
EXPERTS
The consolidated financial statements of Owens-Illinois Group, Inc.,
Owens-Brockway Packaging Inc., Owens-Brockway Glass Container Inc., and OI
Plastic Products FTS Inc., at December 31, 2001 and 2000 and for each of the
three years in the period ended December 31, 2001 and the financial statement
schedule of Owens-Illinois Group, Inc., all appearing in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given on the authority of such firm
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-4 that we have
filed with the SEC under the Securities Act. This prospectus does not contain
all of the information set forth in the registration statement. For further
information about us and the notes, you should refer to the registration
statement. This prospectus summarizes material provisions of contracts and other
documents to which we refer you. Since this prospectus may not contain all of
the information that you may find important, you should review the full text of
these documents. We have filed these documents as exhibits to our registration
statement.
In connection with the exchange offer, OI Group will become subject to the
informational reporting requirements of the Securities Exchange Act of 1934, as
amended, and will file reports and other information with the SEC. You may read
and copy any reports and information statements and other information OI Group
files at the public reference facilities of the SEC, Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of those
materials from the SEC by mail at prescribed rates. You should direct requests
to the SEC at the SEC's Public Reference Section, Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, or by calling (800) SEC-0330. In
addition, the SEC maintains a website (www.sec.gov) that contains the reports
and other information filed by OI Group. In addition, for so long as any of the
notes remains outstanding, we have agreed to make available to any prospective
purchaser of the notes or beneficial owner of the notes in connection with any
sale thereof the information required by Rule 144A(d)(4) under the Securities
Act.
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INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
--------
CONSOLIDATED FINANCIAL STATEMENTS OF OWENS-ILLINOIS
GROUP, INC.
Report of Independent Auditors.............................. F-2
Consolidated Results of Operations for the years ended
December 31, 2001, 2000 and 1999.......................... F-3
Consolidated Balance Sheets at December 31, 2001 and 2000... F-4
Consolidated Share Owner's Equity for the years ended
December 31, 2001, 2000 and 1999.......................... F-6
Consolidated Cash Flows for the years ended December 31,
2001, 2000 and 1999....................................... F-7
Statement of Significant Accounting Policies................ F-8
Financial Review............................................ F-11
Financial Statement Schedule II--Valuation and Qualifying
Accounts.................................................. F-34
SUBSIDIARY FINANCIAL STATEMENTS
Owens-Brockway Packaging, Inc............................... F-36
Owens-Brockway Glass Container Inc.......................... F-59
OI Plastic Products FTS Inc................................. F-82
FIRST QUARTER 2002 CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
Owens-Illinois Group, Inc................................... F-96
Owens-Brockway Packaging, Inc............................... F-116
Owens-Brockway Glass Container Inc.......................... F-124
OI Plastic Products FTS Inc................................. F-132
</Table>
F-1
<Page>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Share Owner
Owens-Illinois Group, Inc.
We have audited the accompanying consolidated balance sheets of
Owens-Illinois Group, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of results of operations, share owner's equity, and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the Index to
Financial Statements. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Owens-Illinois
Group, Inc. at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Toledo, Ohio
January 24, 2002
F-2
<Page>
OWENS-ILLINOIS GROUP, INC.
CONSOLIDATED RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Net sales................................................. $5,402.5 $5,552.1 $5,522.9
Royalties and net technical assistance.................... 24.6 25.3 30.3
Equity earnings........................................... 19.4 19.8 22.3
Interest.................................................. 26.9 32.5 28.5
Other..................................................... 539.9 185.1 182.7
-------- -------- --------
6,013.3 5,814.8 5,786.7
Costs and expenses:
Manufacturing, shipping and delivery...................... 4,218.4 4,359.1 4,296.4
Research and development.................................. 41.2 46.7 37.5
Engineering............................................... 31.4 31.3 42.2
Selling and administrative................................ 341.3 285.1 295.6
Interest.................................................. 434.0 486.7 425.9
Other..................................................... 279.8 447.5 191.3
-------- -------- --------
5,346.1 5,656.4 5,288.9
-------- -------- --------
Earnings before items below................................. 667.2 158.4 497.8
Provision for income taxes.................................. 286.4 64.1 185.5
Minority share owners' interests in earnings of
subsidiaries.............................................. 20.1 22.0 13.2
-------- -------- --------
Earnings before extraordinary items......................... 360.7 72.3 299.1
Extraordinary charges from early extinguishment of debt, net
of applicable income taxes................................ (4.1) (0.8)
-------- -------- --------
Net earnings................................................ $ 356.6 $ 72.3 $ 298.3
======== ======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-3
<Page>
OWENS-ILLINOIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
DECEMBER 31,
--------------------
2001 2000
-------- ---------
ASSETS
CURRENT ASSETS:
Cash, including time deposits of $33.7 ($61.2 in 2000).... $ 155.6 $ 229.7
Short-term investments.................................... 16.4 19.7
Receivables, less allowances of $71.1 ($69.9 in 2000)..... 754.5 770.9
Inventories............................................... 836.7 862.4
Prepaid expenses.......................................... 147.0 136.0
-------- ---------
Total current assets...................................... 1,910.2 2,018.7
OTHER ASSETS:
Equity investments........................................ 166.1 181.4
Repair parts inventories.................................. 199.2 232.0
Prepaid pension........................................... 879.5 770.9
Deposits, receivables and other assets.................... 582.4 490.6
Excess of purchase cost over net assets acquired, net of
accumulated amortization of $690.0 ($597.7 in 2000)..... 2,995.3 3,101.0
-------- ---------
Total other assets........................................ 4,822.5 4,775.9
PROPERTY, PLANT, AND EQUIPMENT:
Land, at cost............................................. 168.8 165.1
Buildings and equipment, at cost:
Buildings and building equipment........................ 792.5 817.1
Factory machinery and equipment......................... 4,368.9 4,301.0
Transportation, office and miscellaneous equipment...... 135.7 134.5
Construction in progress................................ 330.3 244.7
-------- ---------
5,796.2 5,662.4
Less accumulated depreciation............................. 2,536.3 2,377.5
Net property, plant, and equipment........................ 3,259.9 3,284.9
-------- ---------
Total assets................................................ $9,992.6 $10,079.5
======== =========
</Table>
F-4
<Page>
OWENS-ILLINOIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(MILLIONS OF DOLLARS)
<Table>
<Caption>
DECEMBER 31,
--------------------
2001 2000
-------- ---------
LIABILITIES AND SHARE OWNER'S EQUITY
CURRENT LIABILITIES:
Short-term loans.......................................... $ 40.4 $ 89.2
Accounts payable.......................................... 457.4 522.7
Salaries and wages........................................ 116.1 83.8
U.S. and foreign income taxes............................. 12.4 21.4
Other accrued liabilities................................. 354.4 390.1
Long-term debt due within one year........................ 30.8 30.8
-------- ---------
Total current liabilities............................... 1,011.5 1,138.0
LONG-TERM DEBT (INCLUDING NOTE PAYABLE TO PARENT OF
$1,700.0)................................................. 5,329.7 5,729.8
DEFERRED TAXES.............................................. 479.8 275.6
NONPENSION POSTRETIREMENT BENEFITS.......................... 303.4 296.1
OTHER LIABILITIES........................................... 386.9 360.5
COMMITMENTS AND CONTINGENCIES
MINORITY SHARE OWNERS' INTERESTS............................ 159.3 172.9
SHARE OWNER'S EQUITY:
Common Stock, par value $.01 per share, 1,000 shares
authorized, 100 shares issued and outstanding........... -- --
Other contributed capital................................. 1,735.1 1,806.4
Retained earnings......................................... 1,163.2 806.6
Accumulated other comprehensive income (loss)............. (576.3) (506.4)
-------- ---------
Total share owner's equity.............................. 2,322.0 2,106.6
-------- ---------
Total liabilities and share owner's equity.................. $9,992.6 $10,079.5
======== =========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-5
<Page>
OWENS-ILLINOIS GROUP, INC.
CONSOLIDATED SHARE OWNER'S EQUITY
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
OTHER CONTRIBUTED CAPITAL
Balance at beginning of year.............................. $1,806.4 $1,937.6 $2,253.1
Net investment by (distribution to) OI Inc................ (71.3) (131.2) (315.5)
-------- -------- --------
Balance at end of year.................................. 1,735.1 1,806.4 1,937.6
======== ======== ========
RETAINED EARNINGS
Balance at beginning of year.............................. 806.6 757.6 459.3
Net earnings.............................................. 356.6 72.3 298.3
Net loss for the month ended December 31, 2000 for the
change in the fiscal year end of certain international
affiliates.............................................. (23.3)
-------- -------- --------
Balance at end of year.................................. 1,163.2 806.6 757.6
======== ======== ========
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year.............................. (506.4) (368.6) (190.7)
Foreign currency translation adjustments.................. (67.4) (137.8) (177.9)
Change in fair value of certain derivative instruments.... (2.5)
-------- -------- --------
Balance at end of year.................................. (576.3) (506.4) (368.6)
======== ======== ========
Total share owner's equity.................................. $2,322.0 $2,106.6 $2,326.6
======== ======== ========
TOTAL COMPREHENSIVE INCOME (LOSS)
Net earnings.............................................. $ 356.6 $ 72.3 $ 298.3
Foreign currency translation adjustments.................. (67.4) (137.8) (177.9)
Change in fair value of certain derivative instruments.... (2.5)
-------- -------- --------
Total................................................... $ 286.7 $ (65.5) $ 120.4
======== ======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-6
<Page>
OWENS-ILLINOIS GROUP, INC.
CONSOLIDATED CASH FLOWS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
OPERATING ACTIVITIES:
Earnings before extraordinary items....................... $ 360.7 $ 72.3 $299.1
Non-cash charges (credits):
Depreciation............................................ 403.2 412.6 403.7
Amortization of deferred costs.......................... 140.5 136.9 141.6
Deferred tax provision (credit)......................... 227.3 (35.8) 110.8
Restructuring costs, writeoffs of certain assets and
settlement of environmental litigation................ 129.4 248.3 20.8
Gains on asset sales.................................... (439.4) (40.8)
Other................................................... (112.3) (104.9) (69.8)
Change in non-current operating assets.................... 8.0 (43.0) (47.1)
Change in non-current liabilities......................... (30.0) (28.4) (18.6)
Change in components of working capital................... (67.1) (116.3) (122.4)
-------- ------ ------
Cash provided by operating activities................... 620.3 541.7 677.3
INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (531.9) (481.4) (650.4)
Acquisitions, net of cash acquired........................ (184.6) (77.1) (34.0)
Net cash proceeds from divestitures and other............. 605.3 94.4 337.1
-------- ------ ------
Cash utilized in investing activities................... (111.2) (464.1) (347.3)
FINANCING ACTIVITIES:
Additions to long-term debt............................... 3,899.8 182.9 117.5
Repayments of long-term debt.............................. (1,382.6) (377.5) (377.3)
Increase (decrease) in short-term loans................... (44.4) (43.8) (19.6)
Net change in payable to parent........................... (2,857.0) 297.6 309.7
Investment by (distribution to) parent.................... (106.5) (213.0) (356.8)
Collateral deposits for certain derivatives............... (26.1)
Payment of finance fees and debt retirement costs......... (62.1) (1.0)
-------- ------ ------
Cash utilized in financing activities................... (578.9) (153.8) (327.5)
Effect of exchange rate fluctuations on cash............ (4.3) 15.6 (16.8)
Effect of change in fiscal year end for certain
international affiliates.............................. 33.2
-------- ------ ------
Decrease in cash............................................ (74.1) (27.4) (14.3)
Cash at beginning of period................................. 229.7 257.1 271.4
-------- ------ ------
Cash at end of period....................................... $ 155.6 $229.7 $257.1
-------- ------ ------
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-7
<Page>
STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATED STATEMENTS. The consolidated financial statements of
Owens-Illinois Group, Inc. ("Company") include the accounts of its subsidiaries.
Newly acquired subsidiaries have been included in the consolidated financial
statements from dates of acquisition. Prior to December 2000, substantially all
of the Company's consolidated foreign subsidiaries reported their results of
operations on a one-month lag, which allowed additional time to compile their
results. The portion of the Company's consolidated net earnings for 2000 that
was attributable to the earnings of these subsidiaries for the 12 months ended
November 30, 2000 was $64.7 million ($107.5 million before unusual items).
Beginning in December 2000, the one-month lag was eliminated. As a result, the
December 2000 results of operations for these subsidiaries, which amounted to a
net loss of $23.3 million, was recorded directly to retained earnings in
December 2000. Earnings of most of these subsidiaries for the month of December
are typically lower than most other months due to customer and factory holidays,
fewer shipping days, and extended maintenance activity. The loss in
December 2000 was greater than recent December periods as a result of lower than
normal shipments for the month, lower selling prices due to product mix and
currency exchange rates, high energy costs, and increased furnace repair work at
several facilities.
The Company uses the equity method of accounting for investments in which it
has a significant ownership interest, generally 20% to 50%. Other investments
are accounted for at cost.
RELATIONSHIP WITH OWENS-ILLINOIS INC. The Company is a wholly-owned
subsidiary of Owens-Illinois, Inc. ("OI Inc."). Although OI Inc. does not
conduct any operations, it has substantial obligations related to outstanding
indebtedness, dividends for preferred stock and asbestos-related payments.
OI Inc. relies primarily on distributions from the Company to meet these
obligations.
For federal and certain state income tax purposes, the taxable income of the
Company is included in the consolidated tax returns of OI Inc. and income taxes
are allocated to the Company on a basis consistent with separate returns.
Current income taxes are recorded by the Company on a basis consistent with
separate returns.
NATURE OF OPERATIONS. The Company is a leading manufacturer of glass
containers and plastics packaging products operating in two product segments.
The Company's principal product lines in the Glass Containers product segment
are glass containers for the food and beverage industries. Sales of the Glass
Containers product segment were 66% of the Company's 2001 consolidated sales.
The Company has glass container operations located in 19 countries, while the
plastics packaging products operations are located in 10 countries. The
principal markets and operations for the Company's glass products are in North
America, Europe, South America and Australia. The Company's principal product
lines in the Plastics Packaging product segment include plastic containers,
closures and plastic prescription containers. Major markets for the Company's
plastics packaging products include the United States household products,
personal care products, health care products, and food and beverage industries.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management of the Company to make estimates and assumptions that affect certain
amounts reported in the financial statements and accompanying notes. Actual
results may differ from those estimates, at which time the Company would revise
its estimates accordingly.
CASH. The Company defines "cash" as cash and time deposits with maturities
of three months or less when purchased.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The carrying amounts reported for
cash, short-term investments and short-term loans approximate fair value. In
addition, carrying amounts approximate
F-8
<Page>
fair value for certain long-term debt obligations subject to frequently
redetermined interest rates. The Company has guaranteed, on a subordinated
basis, OI Inc.'s public debt securities. Fair values of such securities are
generally based on public market quotations. Derivative financial instruments
are included on the balance sheet at fair value.
INVENTORY VALUATION. The Company values most U.S. inventories at the lower
of last-in, first-out (LIFO) cost or market. Other inventories are valued at the
lower of standard costs (which approximate average costs) or market.
EXCESS OF PURCHASE COST OVER NET ASSETS ACQUIRED. Through December 31,
2001, the excess of purchase cost over net assets acquired was being amortized
over 40 years. The Company evaluated the recoverability of long-lived assets
based on undiscounted projected cash flows, excluding interest and taxes, when
factors indicated that an impairment may have existed. (See "New Accounting
Standards").
PROPERTY, PLANT, AND EQUIPMENT. In general, depreciation is computed using
the straight-line method. Renewals and improvements are capitalized. Maintenance
and repairs are expensed as incurred.
REVENUE RECOGNITION. The Company recognizes sales, net of estimated
discounts and allowances, when title to products is transferred to customers.
Shipping and handling costs are included with manufacturing, shipping, and
delivery costs.
INCOME TAXES ON UNDISTRIBUTED EARNINGS. In general, the Company plans to
continue to reinvest the undistributed earnings of foreign subsidiaries and
foreign corporate joint ventures accounted for by the equity method.
Accordingly, taxes are provided only on that amount of undistributed earnings in
excess of planned reinvestments.
FOREIGN CURRENCY TRANSLATION. The assets and liabilities of most affiliates
and associates are translated at current exchange rates and any related
translation adjustments are recorded directly in share owner's equity. For the
years ended December 31, 2001, 2000 and 1999, the Company's affiliates located
in Venezuela operated in a "highly inflationary" economy. As such, certain
assets of these affiliates were translated at historical exchange rates and all
translation adjustments are reflected in the statements of Consolidated Results
of Operations. During 2002, the affiliates in Venezuela will no longer be
considered operating in a "highly inflationary" economy. Assets and liabilities
will be translated at current exchange rates with any related translation
adjustments being recorded directly to share owners' equity.
NEW ACCOUNTING STANDARDS. In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 141, "Business
Combinations" which is effective for business combinations completed after
June 30, 2001. Also in July 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS No. 142"), which is effective for goodwill acquired
after June 30, 2001. For goodwill acquired prior to June 30, 2001, FAS No. 142
will be effective for fiscal years beginning after December 15, 2001. Under FAS
No. 142, goodwill and intangible assets with indefinite lives will no longer be
amortized but will be reviewed annually (or more frequently if impairment
indicators arise) for impairment.
The Company estimates that adopting FAS No. 142 will increase 2002 earnings
before the effects of the accounting change by approximately $90 million
compared to 2001 results. The Company has not completed its assessment of the
effects that adopting FAS No. 142 will have on the reported value of goodwill,
however, the Company expects that it will record an impairment charge in 2002 in
connection with adopting FAS No. 142.
F-9
<Page>
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS No. 144"). FAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("FAS No. 121"). FAS No. 144 provides additional guidance on
estimating cash flows when performing a recoverability test, requires that a
long-lived asset (group) to be disposed of other than by sale (e.g. abandoned)
be classified as "held and used" until it is disposed of, and establishes more
restrictive criteria to classify an asset (group) as "held for sale," however,
it retains the fundamental provisions of FAS No. 121 related to the recognition
and measurement of the impairment of long-lived assets to be "held and used."
FAS No. 144 is effective for fiscal years beginning after December 15, 2001 and
transition is prospective for committed disposal activities that are initiated
after the effective date of FAS No. 144's initial application. The impact of
adopting FAS No. 144 on the Company's reporting and disclosure is not expected
to be material to the Company's financial position or results of operations.
F-10
<Page>
FINANCIAL REVIEW
TABULAR DATA IN MILLIONS OF DOLLARS.
CHANGES IN COMPONENTS OF WORKING CAPITAL RELATED TO OPERATIONS. Changes in
the components of working capital related to operations (net of the effects
related to acquisitions and divestitures) were as follows (certain amounts from
prior year have been reclassified to conform to current presentation):
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Decrease (increase) in current assets:
Short-term investments.................................... $ 3.2 $ 10.4 $ (14.9)
Receivables............................................... (0.2) (43.9) (50.2)
Inventories............................................... 43.2 (50.9) (46.9)
Prepaid expenses.......................................... 3.4 0.8 4.4
Increase (decrease) in current liabilities:
Accounts payable.......................................... (36.1) .7 (7.0)
Accrued liabilities....................................... (54.7) (47.8) (22.2)
Salaries and wages........................................ 12.6 (5.0) 3.2
U.S. and foreign income taxes............................. (38.5) 19.4 11.2
------ ------- -------
$(67.1) $(116.3) $(122.4)
====== ======= =======
</Table>
INVENTORIES. Major classes of inventory are as follows:
<Table>
<Caption>
2001 2000
-------- --------
Finished goods.............................................. $641.8 $651.9
Work in process............................................. 6.2 11.7
Raw materials............................................... 125.3 130.6
Operating supplies.......................................... 63.4 68.2
------ ------
$836.7 $862.4
====== ======
</Table>
If the inventories which are valued on the LIFO method had been valued at
standard costs, which approximate current costs, consolidated inventories would
be higher than reported by $19.9 million and $23.0 million at December 31, 2001
and 2000, respectively.
Inventories which are valued at the lower of standard costs (which
approximate average costs) or market at December 31, 2001 and 2000 were
approximately $501.7 million and $455.4 million, respectively.
F-11
<Page>
EQUITY INVESTMENTS. Summarized information pertaining to the Company's
equity associates follows:
<Table>
<Caption>
2001 2000
-------- --------
At end of year:
Equity in undistributed earnings:
Foreign................................................. $ 90.0 $ 89.3
Domestic................................................ 21.6 19.0
------ ------
Total................................................. $111.6 $108.3
====== ======
Equity in cumulative translation adjustment............... $(54.2) $(46.7)
====== ======
</Table>
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
For the year:
Equity in earnings:
Foreign................................................. $ 7.8 $ 5.8 $ 9.5
Domestic................................................ 11.6 14.0 12.8
----- ----- -----
Total................................................. $19.4 $19.8 $22.3
===== ===== =====
Dividends received........................................ $18.2 $14.5 $10.1
===== ===== =====
</Table>
LONG-TERM DEBT. The following table summarizes the long-term debt of the
Company at December 31, 2001 and 2000:
<Table>
<Caption>
2001 2000
-------- --------
Secured Credit Agreement:
Revolving Credit Facility................................. $2,410.4
Term Loan................................................. 1,045.0
Second Amended and Restated Credit Agreement:
Revolving Credit Facility:
Offshore Loans:
Australian Dollars
1.39 billion........................................ $ 775.3
British Pounds
125.0 million....................................... 186.8
Italian Lira
18.0 billion........................................ 8.7
Payable to OI Inc........................................... 1,700.0 4,557.0
Other....................................................... 205.1 232.8
-------- --------
5,360.5 5,760.6
-------- --------
Less amounts due within one year.......................... 30.8 30.8
-------- --------
Long-term debt.......................................... $5,329.7 $5,729.8
======== ========
</Table>
In April 2001, certain of the Company's subsidiaries (the "Borrowers")
entered into the Secured Credit Agreement (the "Agreement") with a group of
banks, which expires on March 31, 2004. The Agreement provides for a
$3.0 billion revolving credit facility (the "Revolving Credit Facility") and a
$1.5 billion term loan (the "Term Loan"). The Agreement includes an Overdraft
Account Facility providing for aggregate borrowings up to $50 million which
reduce the amount available for borrowing under the Revolving Credit Facility.
The Agreement also provides for the issuance of letters of credit
F-12
<Page>
totaling up to $500 million, which also reduce the amount available for
borrowings under the Revolving Credit Facility. At December 31, 2001, the
Company had unused credit of $491.4 million available under the Secured Credit
Agreement.
Prior to April 2001, the Company's significant bank financing was provided
under OI Inc.'s April 1998 Second Amended and Restated Credit Agreement. The
Second Amended and Restated Credit Agreement provided for a $4.5 billion
Revolving Credit Facility, which included a $1.75 billion fronted offshore loan
revolving facility denominated in certain foreign currencies, subject to certain
sublimits, available to certain of the Company's foreign subsidiaries.
Borrowings under the Secured Credit Agreement were used to repay all amounts
outstanding under, and terminate, the Second Amended and Restated Credit
Agreement through the payment of amounts owed to OI Inc.
The interest rate on borrowings under the Revolving Credit Facility is, at
the Borrower's option, the Base Rate or a reserve adjusted Eurodollar rate. The
interest rate on borrowings under the Revolving Credit Facility also includes a
margin linked to OI Inc.'s Consolidated Leverage Ratio, as defined in the
Agreement. The margin is limited to ranges of 1.75% to 2.00% for Eurodollar
loans and .75% to 1.00% for Base Rate loans. The interest rate on Overdraft
Account loans is the Base Rate minus .50%. The weighted average interest rate on
borrowings outstanding under the Revolving Credit Facility at December 31, 2001
was 4.14%. Including the effects of cross-currency swap agreements related to
Revolving Credit Facility borrowings by the Company's Australian and U.K.
subsidiaries, the weighted average interest rate was 4.95%. While no
compensating balances are required by the Agreement, the Borrowers must pay a
facility fee on the Revolving Credit Facility commitments of .50%.
The interest rate on borrowings under the Term Loan is, at the Borrowers'
option, the Base Rate or a reserve adjusted Eurodollar rate. The interest rate
on borrowings under the Term Loan also includes a margin of 2.50% for Eurodollar
loans and 1.50% for Base Rate loans. The weighted average interest rate on
borrowings outstanding under the Term Loan at December 31, 2001 was 4.50%.
Borrowings under the Agreement are secured by substantially all of the
assets of the Company's domestic subsidiaries and certain foreign subsidiaries
which have a book value of approximately $3.5 billion. Borrowings under the
Agreement are also secured by a pledge of intercompany debt and equity in most
of the Company's domestic subsidiaries and certain stock of certain foreign
subsidiaries.
The Agreement contains covenants and provisions that, among other things,
restrict the ability of the Company and its subsidiaries to dispose of assets,
incur additional indebtedness, prepay other indebtedness or amend certain debt
instruments, pay dividends. create liens on assets, enter into contingent
obligations, enter into sale and leaseback transactions, make investments, loans
or advances, make acquisitions, engage in mergers or consolidations, change the
business conducted by the Company, engage in certain transactions with
affiliates and otherwise restrict certain corporate activities. In addition, the
Agreement contains financial covenants that require the Company and its
subsidiaries to maintain, based upon the financial statements of OI Inc. and its
subsidiaries on a consolidated basis, specified financial ratios and tests,
including minimum fixed charge coverage ratios, maximum leverage ratios, minimum
net worth and specified capital expenditures tests.
During January 2002, a subsidiary of the Company completed a $1.0 billion
private placement of senior secured notes. The notes bear interest at 8 7/8% and
are due February 15, 2009. The notes are guaranteed by the Company and
substantially all of its domestic subsidiaries. The assets of substantially all
of the Company's domestic subsidiaries are pledged as security for the notes.
The issuing subsidiary used the net cash proceeds from the notes to reduce the
outstanding term loan under the Agreement by $980.0 million. As such, the
Company wrote off unamortized deferred financing fees in January 2002 related to
the term loan and recorded an extraordinary charge totaling $10.9 million less
applicable income taxes of $4.2 million. The indenture for the notes restricts
among other things, the ability of the Company's subsidiaries to borrow money,
pay dividends on, or redeem or repurchase stock, make
F-13
<Page>
investments, create liens, enter into certain transactions with affiliates and
sell certain assets or merge with or into other companies.
Amounts payable to OI Inc. above equal OI Inc.'s total indebtedness.
Interest costs on amounts payable to OI Inc. are charged to the Company in the
same amount as incurred by OI Inc. On June 26, 2001, OI Inc. sought and received
consent from the holders of a majority of the principal amount of each of its
six series of senior notes and debentures to amend the indenture governing those
securities. The amendments implement a previously announced offer by the Company
and a principal subsidiary of the Company to guarantee the senior notes and
debentures on a subordinated basis. The fair value of the OI Inc. debt being
guaranteed by the Company at December 31, 2001 was $1,545.1 million.
Annual maturities for all of the Company's long-term debt through 2006 are
as follows: 2002, $30.8 million; 2003, $43.4 million; 2004, $2,807.4 million;
2005, $421.1 million; and 2006, $5.2 million. These maturities reflect the
issuance of the senior secured notes in January 2002 as noted above.
Including interest paid by OI Inc., interest paid in cash aggregated
$424.7 million, $467.6 million, and $388.1 million for the years ended
December 31, 2001, 2000, and 1999, respectively.
OPERATING LEASES. Rent expense attributable to all operating leases was
$95.0 million in 2001, $77.8 million in 2000, and $73.7 million in 1999. Minimum
future rentals under operating leases are as follows: 2002, $62.0 million; 2003,
$50.6 million; 2004, $37.9 million; 2005, $31.6 million; 2006, $25.5 million;
and 2007 and thereafter, $35.5 million.
FOREIGN CURRENCY TRANSLATION. Aggregate foreign currency exchange gains
(losses) included in other costs and expenses were $2.6 million in 2001, $(1.0)
million in 2000 and $4.9 million in 1999.
DERIVATIVE INSTRUMENTS. The terms of OI Inc.'s former bank credit agreement
provided for foreign currency borrowings by certain of its international
affiliates. Such borrowings provided a natural hedge against a portion of the
Company's investment. Under the April 2001 Secured Credit Agreement,
international affiliates are only permitted to borrow in U.S. dollars. The
Company's affiliates in Australia and the United Kingdom have entered into
currency swaps covering their initial borrowings under the Agreement. These
swaps are being used to manage the affiliates exposure to fluctuating foreign
exchange rates by swapping the principal and interest payments due under the
Secured Credit Agreement.
As of December 31, 2001, the Company's affiliate in Australia has swapped
$650.0 million of borrowings into $1,275.0 million of Australian dollars. This
swap matures on March 31, 2003, with interest resets every 90 days. The interest
reset terms of the swap approximate the terms of the U.S. dollar borrowings.
This derivative instrument swaps both the interest and principal from U.S.
dollars to Australian dollars and also swaps the interest rate from a U.S. based
rate to an Australian based rate. The Company's affiliate in the United Kingdom
has swapped $200.0 million of borrowings into 139.0 million British pounds. This
swap also matures on March 31, 2003, with interest resets every 90 days. This
derivative instrument swaps both the interest and principal from U.S. dollars to
British pounds and also swaps the interest rate from a U.S. based rate to a
British based rate.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. for a purchase price of
approximately $150 million and the assumption of certain liabilities. The
Company financed this purchase through borrowings under the secured credit
agreement, which were transferred to Canada through intercompany loans in U.S.
dollars. The Company's affiliate in Canada has entered into swap transactions to
manage the affiliate's exposure to fluctuating foreign exchange rates by
swapping the principal and interest portion of the intercompany loan. At
December 31, 2001, the Canadian affiliate has swapped $90.0 million of U.S.
dollar borrowings into $142.0 million Canadian dollars. This swap matures on
October 1, 2003. This
F-14
<Page>
derivative instrument swaps both the interest and principal from U.S. dollars to
Canadian dollars and also swaps the interest rate from a U.S. based rate to a
Canadian based rate. The affiliate has also entered into a forward hedge related
to the fourth quarter interest receivable and payable related to the previous
swap. The affiliate has also entered in forward hedges which effectively swap
$10 million of U.S. dollar borrowings into $16 million Canadian dollars. These
hedges swap both the interest and principal from U.S. dollars to Canadian
dollars and mature monthly.
The Company recognizes the above derivatives on the balance sheet at fair
value. The Company accounts for the above swaps as fair value hedges. As such,
the changes in the value of the swaps are included in other expense and are
expected to substantially offset any exchange rate gains or losses on the
related U.S. dollar borrowings. For the year ended December 31, 2001, the amount
not offset was immaterial.
The Company also uses commodity futures contracts related to forecasted
future natural gas requirements. The objective of these futures contracts is to
limit the fluctuations in prices paid and the potential volatility in earnings
or cash flows from future price movements. During 2001, the Company entered into
commodity futures contracts for approximately 75% of its domestic natural gas
usage (approximately 1.2 billion BTUs) through March, 2002.
The Company accounts for the above futures contracts on the balance sheet at
fair value. The effective portion of changes in the fair value of a derivative
that is designated as and meets the required criteria for a cash flow hedge are
recorded in accumulated other comprehensive income ("OCI") and reclassified into
earnings in the same period or periods during which the underlying hedged item
affects earnings. The ineffective portion of the change in the fair value of a
derivative designated as a cash flow hedge is recognized in current earnings.
The above futures contracts are accounted for as cash flow hedges at
December 31, 2001. Hedge accounting is only applied when the derivative is
deemed to be highly effective at offsetting anticipated cash flows of the hedged
transactions. For hedged forecasted transactions, hedge accounting will be
discontinued if the forecasted transaction is no longer probable to occur, and
any previously deferred gains or losses will be recorded to earnings
immediately.
During 2001, an unrealized net loss of $2.5 million (net of tax) related to
these commodity futures contracts was included in OCI. There was no
ineffectiveness recognized during 2001.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS). Foreign currency translation
adjustments and changes in certain derivative balances comprise accumulated
other comprehensive income (loss). Changes in accumulated other comprehensive
income (loss) were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Balance at beginning of year................................ $(506.4) $(368.6) $(190.7)
Net effect of exchange rate fluctuations.................... (70.0) (140.6) (175.8)
Deferred income taxes....................................... 2.6 2.8 (2.1)
Change in certain derivative balances....................... (2.5)
------- ------- -------
Balance at end of year...................................... $(576.3) $(506.4) $(368.6)
======= ======= =======
</Table>
The net effect of exchange rate fluctuations generally reflects changes in
the relative strength of the U.S. dollar against major foreign currencies
between the beginning and end of the year.
F-15
<Page>
INCOME TAXES. Deferred income taxes reflect: (1) the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(2) carryovers and credits for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 2001 and 2000
are as follows (certain amounts from prior year have been reclassified to
conform to current year presentation):
<Table>
<Caption>
2001 2000
-------- --------
Deferred tax assets:
Accrued postretirement benefits........................... $ 106.2 $ 103.6
U.S. federal tax loss carryovers.......................... 63.5 149.7
Alternative minimum tax credits........................... 31.5 23.6
Other..................................................... 253.9 296.3
------- -------
Total deferred tax assets............................... 455.1 573.2
Deferred tax liabilities:
Property, plant and equipment............................. 317.1 262.8
Prepaid pension costs..................................... 301.9 254.1
Inventory................................................. 37.4 42.3
Other..................................................... 156.8 183.5
------- -------
Total deferred tax liabilities.......................... 813.2 742.7
------- -------
Net deferred tax liabilities............................ $(358.1) $(169.5)
======= =======
</Table>
Deferred taxes are included in the Consolidated Balance Sheets at
December 31, 2001 and 2000 as follows:
<Table>
<Caption>
2001 2000
-------- --------
Prepaid expenses............................................ $ 121.7 $ 106.1
Deferred tax liabilities.................................... (479.8) (275.6)
------- -------
Net deferred tax liabilities................................ $(358.1) $(169.5)
======= =======
</Table>
The provision (benefit) for income taxes consists of the following:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Current:
U.S. Federal.............................................. $ 8.0 $ 0.8 $ 3.8
State..................................................... 19.4 2.1 2.9
Foreign................................................... 31.7 97.0 68.0
----- ----- ------
59.1 99.9 74.7
----- ----- ------
Deferred:
U.S. Federal.............................................. 192.2 16.9 111.1
State..................................................... 1.2 (9.2) 11.4
Foreign................................................... 33.9 (43.5) (11.7)
----- ----- ------
227.3 (35.8) 110.8
----- ----- ------
Total:
U.S. Federal.............................................. 200.2 17.7 114.9
State..................................................... 20.6 (7.1) 14.3
Foreign................................................... 65.6 53.5 56.3
----- ----- ------
286.4 $64.1 $185.5
===== ===== ======
</Table>
F-16
<Page>
The provision for income taxes was calculated based on the following
components of earnings (loss) before income taxes:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Domestic.................................................... $516.8 $(16.0) $320.9
Foreign..................................................... $150.4 174.4 176.9
------ ------ ------
$667.2 $158.4 $497.8
====== ====== ======
</Table>
Income taxes paid (received) in cash were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Domestic.................................................... $ 8.1 $(0.7) $11.0
Foreign..................................................... 52.1 46.4 51.5
----- ----- -----
$60.2 $45.7 $62.5
===== ===== =====
</Table>
A reconciliation of the provision for income taxes based on the statutory
U.S. Federal tax rate of 35% to the provision for income taxes is as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Pretax earnings at statutory U.S. Federal tax rate.......... $233.5 $55.4 $174.2
Increase (decrease) in provision for income taxes due to:
Amortization of goodwill.................................. 31.5 32.1 33.1
State taxes, net of federal benefit....................... 12.7 (4.1) 9.3
Foreign earnings at different rates....................... (2.7) (6.9) (7.3)
Adjustment for non-U.S. tax law changes................... 6.0 (9.3)
Other items............................................... 5.4 (3.1) (23.8)
------ ----- ------
Provision for income taxes.................................. $286.4 $64.1 $185.5
====== ===== ======
Effective tax rate.......................................... 42.9% 40.4% 37.3%
====== ===== ======
</Table>
At December 31, 2001, the Company had unused net operating losses and
research tax credits expiring from 2007 to 2021.
The Company also has unused alternative minimum tax credits which do not
expire and will be available to offset future U.S. Federal income tax.
At December 31, 2001, the Company's equity in the undistributed earnings of
foreign subsidiaries for which income taxes had not been provided approximated
$562.6 million. It is not practicable to estimate the U.S. and foreign tax which
would be payable should these earnings be distributed.
PARTICIPATION IN OI INC. STOCK OPTION PLANS. The Company participates in
the stock option plans of OI Inc. under which employees of the Company may be
granted options to purchase common shares of OI Inc. No options may be exercised
in whole or in part during the first year after the date granted. In general,
subject to certain accelerated exercisability provisions, 50% of the options
become exercisable on the fifth anniversary of the date of the option grant,
with the remaining 50% becoming exercisable on the sixth anniversary date of the
option grant. In general, options expire following termination of employment or
the day after the tenth anniversary date of the option grant.
All options have been granted at prices equal to the market price of the
OI Inc.'s common stock on the date granted. Accordingly, the Company recognizes
no compensation expense related to the stock option plans. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." If the
Company
F-17
<Page>
had elected to recognize compensation cost based on the fair value of the
options granted at grant date as allowed by SFAS No. 123, pro forma net income
would have been as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Net income:
As reported............................................... $356.6 $72.3 $298.3
Pro forma................................................. 347.7 64.3 291.4
</Table>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Expected life of options.................................... 5 years 5 years 5 years
Expected stock price volatility............................. 69.8% 62.9% 36.5%
Risk-free interest rate..................................... 4.85% 6.60% 5.10%
Expected dividend yield..................................... 0.00% 0.00% 0.00%
</Table>
PENSION BENEFIT PLANS. Net credits to results of operations for all of the
Company's pension plans and certain deferred compensation arrangements amounted
to $83.4 million in 2001, $88.6 million in 2000 and $58.6 million in 1999.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. As part of the transaction,
the Company assumed certain of the pension liabilities of Consumers Packaging.
The information below includes the activity of these pension plans from
October 1, 2001 through December 31, 2001.
The Company has pension plans covering substantially all employees located
in the U.S., the United Kingdom, Australia and Canada. Benefits generally are
based on compensation for salaried employees and on length of service for hourly
employees. The Company's policy is to fund pension plans such that sufficient
assets will be available to meet future benefit requirements. The following
tables relate to the Company's principal U.S., United Kingdom, Australian and
Canadian pension plans.
The changes in the pension benefit obligations for the year were as follows:
<Table>
<Caption>
2001 2000
-------- --------
Obligations at beginning of year............................ $2,388.8 $2,286.5
Change in benefit obligations:
Service cost.............................................. 36.6 36.6
Interest cost............................................. 169.3 168.8
Actuarial loss (gain)..................................... (52.0) 182.7
Special separation program benefits....................... 92.2
Acquisitions.............................................. 179.2
Benefit payments.......................................... (218.9) (348.1)
Other..................................................... 17.6 (29.9)
-------- --------
Net increase in benefit obligations..................... 131.8 102.3
-------- --------
Obligations at end of year.................................. $2,520.6 $2,388.8
======== ========
</Table>
F-18
<Page>
The changes in the fair value of the pension plans' assets for the year were
as follows:
<Table>
<Caption>
2001 2000
-------- --------
Fair value at beginning of year............................. $2,948.7 $3,712.4
Change in fair value:
Actual return (loss) on plan assets....................... (120.6) (362.9)
Benefit payments.......................................... (218.9) (348.1)
Transfer of assets to a special trust to fund qualified
current retiree health liabilities...................... (38.5)
Acquisitions.............................................. 119.9
Other..................................................... 14.9 (14.2)
-------- --------
Net decrease in fair value of assets.................... (204.7) (763.7)
-------- --------
Fair value at end of year................................... $2,744.0 $2,948.7
======== ========
</Table>
The funded status of the pension plans at year end was as follows:
<Table>
<Caption>
2001 2000
-------- --------
Plan assets at fair value................................... $2,744.0 $2,948.7
Projected benefit obligations............................... 2,520.6 2,388.8
-------- --------
Plan assets in excess of projected benefit obligations.... 223.4 559.9
Net unrecognized items:
Actuarial loss............................................ 552.2 170.0
Prior service cost........................................ 49.4 41.0
-------- --------
601.6 211.0
-------- --------
Net prepaid pension......................................... $ 825.0 $ 770.9
======== ========
</Table>
The net prepaid pension is included in the Consolidated Balance Sheets at
December 31, 2001 and 2000 as follows:
<Table>
<Caption>
2001 2000
-------- --------
Prepaid pension............................................. $879.5 $770.9
Other liabilities........................................... (54.5)
------ ------
$825.0 $770.9
====== ======
</Table>
The components of the net pension credit for the year were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Service cost................................................ $ 36.6 $ 36.6 $ 41.8
Interest cost............................................... 169.3 168.8 155.2
Expected asset return....................................... (311.0) (318.5) (280.6)
Amortization:
Prior service cost........................................ 7.6 7.9 8.1
(Gain) loss............................................... 0.5 (0.2) 1.1
------ ------- ------
Net amortization........................................ 8.1 7.7 9.2
------ ------- ------
Net credit.................................................. $(97.0) $(105.4) $(74.4)
====== ======= ======
</Table>
F-19
<Page>
The following selected information is for plans with benefit obligations in
excess of the fair value of plan assets:
<Table>
<Caption>
2001
--------
Benefit obligations at the end of the year.................. $484.7
Fair value of plan assets at the end of the year............ 411.8
======
</Table>
The following information is for plans with accumulated benefit obligations
in excess of the fair value of plan assets:
<Table>
<Caption>
2001
--------
Accumulated benefit obligations at the end of the year...... $145.8
Fair value of plan assets at the end of the year............ 131.5
======
</Table>
The actuarial present value of benefit obligations is based on a weighted
discount rate of approximately 7.00% for 2001 and 2000. Future benefits are
assumed to increase in a manner consistent with past experience of the plans,
which, to the extent benefits are based on compensation, includes assumed salary
increases on a weighted scale of approximately 4.75% for 2001 and 2000. The
expected weighted long-term rate of return on assets was approximately 10.00%
for 2001 and 2000, and 9.50% for 1999. Amortization included in net pension
credits is based on the average remaining service of employees. Plan assets
include marketable equity securities (which at December 31, 2001 and 2000
included 14,423,621 shares of OI Inc.'s common stock), government and corporate
debt securities, real estate and commingled funds.
The Company also sponsors several defined contribution plans for all
salaried and hourly U.S. employees. Participation is voluntary and participants'
contributions are based on their compensation. The Company matches substantially
all plan participants' contributions up to various limits. Company contributions
to these plans amounted to $9.2 million in 2001, $10.2 million in 2000 and
$10.5 million in 1999.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. The Company provides certain
retiree health care and life insurance benefits covering substantially all U.S.
salaried and certain hourly employees. Employees are generally eligible for
benefits upon retirement and completion of a specified number of years of
creditable service.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. The information below
includes the activity of the related Canadian retiree health care plan from
October 1, 2001 through December 31, 2001.
The changes in the postretirement benefit obligations for the year were as
follows:
<Table>
<Caption>
2001 2000
-------- --------
Obligations at beginning of year............................ $279.5 $267.5
Change in benefit obligations:
Service cost.............................................. 1.8 1.6
Interest cost............................................. 20.5 20.4
Actuarial loss............................................ 22.1 15.2
Curtailments.............................................. 5.8
Special separation program termination benefits........... 2.0
Acquisition............................................... 31.3
Benefit payments.......................................... (34.0) (33.0)
------ ------
Net change in benefit obligations....................... 41.7 12.0
------ ------
Obligations at end of year.................................. $321.2 $279.5
====== ======
</Table>
F-20
<Page>
The funded status of the postretirement benefit plans at year end was as
follows:
<Table>
<Caption>
2001 2000
-------- --------
Accumulated postretirement benefit obligations.............. $321.2 $279.5
Net unrecognized items:
Prior service cost........................................ 30.6 43.6
Actuarial loss............................................ (48.4) (27.0)
------ ------
(17.8) 16.6
------ ------
Nonpension postretirement benefit obligations............... $303.4 $296.1
====== ======
</Table>
The components of the net postretirement benefit cost for the year were as
follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Service cost................................................ $ 1.8 $ 1.6 $ 2.3
Interest cost............................................... 20.5 20.5 19.1
Amortization:
Prior service cost (credit)............................... (13.0) (13.6) (13.7)
(Gain) loss............................................... 0.8 (0.1) 1.9
----- ----- -----
Net amortization........................................ (12.2) (13.7) (11.8)
----- ----- -----
Net postretirement benefit cost............................. $10.1 $ 8.4 $ 9.6
===== ===== =====
</Table>
Assumed health care cost inflation was based on a weighted average rate of
6.25% in 2001, declining to ultimate rate of 6.00%. A one percentage point
decrease in the rate would have decreased the accumulated postretirement benefit
obligation at December 31, 2001 by $12.2 million and decreased the net
postretirement benefit cost for 2001 by $0.9 million. A one percentage point
increase in the rate would have increased the accumulated postretirement benefit
obligation at December 31, 2001 by $14.5 million and increased the net
postretirement benefit cost for 2001 by $1.0 million. The assumed weighted
average discount rates used in determining the accumulated postretirement
benefit obligation were 7.25% and 7.50% at December 31, 2001 and 2000,
respectively. Amortization included in net postretirement benefit cost is based
on the average remaining service of employees.
Benefits provided by the Company for certain of the hourly retirees are
determined by collective bargaining. Most other domestic hourly retirees receive
health and life insurance benefits from a multi-employer trust established by
collective bargaining. Payments to the trust as required by the bargaining
agreements are based upon specified amounts per hour worked and were
$6.3 million in 2001, $7.5 million in 2000, and $8.0 million in 1999.
Postretirement health and life benefits for retirees of foreign affiliates are
generally provided through the national health care programs of the countries in
which the affiliates are located.
OTHER REVENUE. Other revenue for 2001 includes a gain of $457.3 million
related to the sale of the Company's Harbor Capital Advisors business and gains
totaling $13.1 million related to the sale of the Company's label business and
the sale of a minerals business in Australia. Other revenue for the year ended
December 31, 1999 includes gains totaling $40.8 million related to the sales of
a U.S. glass container plant and a mold manufacturing business in Colombia.
OTHER COSTS AND EXPENSES. Other costs and expenses for the year ended
December 31, 2001 include pretax charges of $129.5 million related to the
following:
- Impairment charges of $25.2 million at the Company's glass container
affiliate in Puerto Rico. While the Company intends to continue to operate
this facility, an analysis of cash flows indicated that the long-lived
assets, including buildings, furnaces and factory equipment, were
impaired. The Company has written down the majority of the long-lived
assets of this facility.
F-21
<Page>
- Impairment charges of $16.5 million to substantially write off buildings,
furnaces and factory equipment related to the permanent closing of a glass
container facility in Venezuela.
- Impairment charges of $31.0 million at various other international and
domestic facilities in response to decisions about pricing and market
strategy. These charges relate to the permanent closing of one glass
facility in Venezuela and two domestic plastics packaging facilities and
the abandonment of certain equipment at various locations.
- Other costs of $9.4 million related to closing facilities and reducing
workforce. The total planned workforce reductions will involve
approximately 400 employees at an estimated cost of approximately
$7.5 million, of which $1.8 million had been paid by December 31, 2001.
- A charge of $31.0 million related to the loss on the sale of the Company's
facilities in India.
- A charge of $8.5 million for certain contingencies.
- A charge of $7.9 million related to restructuring manufacturing capacity
in the medical devices business.
The Company expects its actions related to the restructuring and impairment
charges to be completed during the next several quarters.
Other costs and expenses for the year ended December 31, 2000 include
$248.3 million principally related to a restructuring and capacity realignment
program. The restructuring and capacity realignment program, initiated in the
third quarter of 2000, includes the consolidation of manufacturing capacity and
a reduction of 350 employees in the U.S. salaried work force, or about 10%,
principally as a result of early retirement incentives. Also included in the
program are a write-down of plant and equipment for the Company's glass
container affiliate in India and certain other asset write-offs. Manufacturing
capacity consolidations involve three U.S. glass container facilities which were
closed and reflect technology-driven improvements in productivity, conversions
from some juice and similar products to plastic containers, Company and customer
decisions regarding pricing and volume and the further concentration of
production in the most strategically-located facilities. The property, plant and
equipment at the three facilities, consisting of land, buildings, furnaces and
factory equipment, was written down by $49.0 million to substantially write off
these assets. The Company expects that it will continue to make cash payments
over the next several quarters for benefits and on-going closing costs related
to the closing of these facilities. Other 2000 pretax charges of $33.5 million
relate principally to a $27.9 million write off of software that had been
abandoned. During the third quarter of 2000, the Company decided, principally as
a cost control measure, to abandon certain portions of a major software project
and wrote off the associated costs.
As a result of a 10% reduction of the U.S. salaried workforce in 2000, the
Company recognized a settlement gain of approximately $40 million related to its
defined benefit pension plan. This gain has been included in the net charge of
$52.4 million for retirement incentives and special termination benefits.
F-22
<Page>
The 2000 pretax charge of $40.0 million was related to the write-down of
property, plant and equipment in India. Based on the Company's expectation of
future net cash flows of its affiliate in India, the related property, plant,
and equipment was written down to realizable values in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Selected information relating to the restructuring accruals follows:
<Table>
<Caption>
EARLY RETIREMENT WRITE-DOWN OF OTHER,
INCENTIVES AND IMPAIRED PROPERTY, PRINCIPALLY
CAPACITY SPECIAL TERMINATION PLANT AND SOFTWARE
REALIGNMENT BENEFITS EQUIPMENT WRITE-OFF TOTAL
----------- ------------------- ------------------ ----------- --------
2000 restructuring charges $ 122.4 $ 52.4 $ 40.0 $ 33.5 $ 248.3
Write-down of assets to net
realizable value............ (49.0) (40.0) (31.5) (120.5)
Reduction of prepaid pension
asset....................... (13.6) (45.8) (59.4)
Increase in nonpension
postretirement benefit
liability................... (0.6) (5.4) (6.0)
Net cash paid................. (1.5) (0.4) (1.9)
-------- ------- ------ ------ --------
Remaining liabilities at
December 31, 2000........... 57.7 0.8 -- 2.0 60.5
Restructuring program and
impairment.................. 45.6 41.7 87.3
Reversal of second quarter
restructuring charge........ (5.2) (5.2)
Medical Devices
restructuring............... 7.9 7.9
Write-down of assets to net
realizable value............ (43.8) (41.7) (85.5)
Net cash paid................. (24.7) (0.8) (25.5)
-------- ------- ------ ------ --------
Remaining liabilities at
December 31, 2001........... $ 37.5 $ -- $ -- $ 2.0 $ 39.5
======== ======= ====== ====== ========
</Table>
Capacity realignment includes charges for plant closings, severance
benefits, and write-downs of assets for disposal or abandonment as a result of
restructuring of manufacturing capacity. Write-downs of assets represent the
majority of charges for 2001.
Other costs and expenses for the year ended December 31, 1999 include
charges totaling $20.8 million related principally to restructuring costs and
write-offs of certain assets in Europe and South America.
EXTRAORDINARY CHARGES FROM EARLY EXTINGUISHMENT OF DEBT. During 2001, the
Company wrote off unamortized deferred financing fees related to indebtedness
repaid prior to its scheduled maturity. As a result, the Company recorded
extraordinary charges totaling $6.6 million less applicable income taxes of
$2.5 million. During 1999, OI Inc. incurred redemption premiums and wrote off
unamortized deferred financing fees related to indebtedness repaid prior to its
scheduled maturity. As a result, the Company was allocated extraordinary charges
totaling $1.2 million less applicable income taxes of $0.4 million.
CONTINGENCIES. The Company's parent, OI Inc., is one of a number of
defendants (typically from 20 to 100 or more) in a substantial number of
lawsuits filed in numerous state and federal courts by persons alleging bodily
injury (including death) as a result of exposure to dust from asbestos fibers.
OI Inc. relies primarily on distributions from the Company to fund its indemnity
payments and legal fees related to these lawsuits.
F-23
<Page>
From 1948 to 1958, one of OI Inc.'s former business units commercially
produced and sold approximately $40 million of a high-temperature,
calcium-silicate based pipe and block insulation material containing asbestos.
OI Inc. exited the pipe and block insulation business in April 1958. The
traditional asbestos personal injury lawsuits and claims relating to such
production and sale of asbestos material typically allege various theories of
liability, including negligence, gross negligence and strict liability and seek
compensatory and punitive damages in various amounts (herein referred to as
"asbestos claims").
The following table shows the approximate number of plaintiffs and claimants
involved in asbestos claims pending at the beginning of, disposed of and filed
during, and pending at the end of, each of the years listed (eliminating
duplicate filings):
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Pending at beginning of year................................ 20,000 17,000 15,000
Disposed.................................................... 24,000 17,000 10,000
Filed....................................................... 31,000 20,000 12,000
------ ------ ------
Pending at end of year...................................... 27,000 20,000 17,000
====== ====== ======
</Table>
Additionally, OI Inc. has claims-handling agreements in place with many
plaintiff's counsel throughout the country. These agreements require evaluation
and negotiation regarding whether particular claimants qualify under the
criteria established by such agreements. The criteria for such claims include
verification of a compensable illness and a reasonable probability of exposure
to a product manufactured by OI Inc.'s former business unit during its
manufacturing period ending in 1958. OI Inc. believes that the bankruptcies of
additional co-defendants, as discussed below, have resulted in an acceleration
of the presentation and disposition of a number of claims under such agreements,
which claims would otherwise have been presented and disposed of over the next
several years. This acceleration is reflected in an increased number of pending
asbestos claims and, to the extent disposed, contributes to an increase in
asbestos-related payments which is expected to continue in the near term.
Since receiving its first asbestos claim, OI Inc., as of December 31, 2001,
has disposed of the asbestos claims of approximately 264,000 plaintiffs and
claimants at an average indemnity payment per claim of approximately $5,300.
Certain of these dispositions have included deferred payment amounts payable
over periods ranging from one to seven years. Deferred payments at December 31,
2001 totaled $37 million and are included in the foregoing average indemnity
payment per claim. OI Inc.'s indemnity payments for these claims have varied on
a per claim basis, and are expected to continue to vary considerably over time.
OI Inc. believes that its ultimate asbestos-related contingent liability
(i.e., its indemnity or other claim disposition costs plus related legal fees)
cannot be estimated with certainty. In 1993, OI Inc. established a liability of
$975 million to cover indemnity payments and legal fees associated with the
resolution of outstanding and expected future asbestos lawsuits and claims. In
1998, an additional liability of $250 million was established. During the third
quarter of 2000, OI Inc. established an additional liability of $550 million to
cover OI Inc.'s estimated indemnity payments and legal fees arising from
outstanding asbestos personal injury lawsuits and claims and asbestos personal
injury lawsuits and claims filed in the ensuing several years. OI Inc.'s ability
to reasonably estimate its liability has been significantly affected by the
volatility of asbestos-related litigation in the United States, the expanding
list of non-traditional defendants that have been sued in this litigation and
found liable for substantial damage awards, the continued use of litigation
screenings to generate new lawsuits, the large number of claims asserted or
filed by parties who claim prior exposure to asbestos materials but have no
present physical impairment as a result of such exposure, and the growing number
of co-defendants that have filed for bankruptcy. Since the beginning of 2000, A.
P. Green Industries, Inc., Armstrong World Industries, Babcock & Wilcox,
Federal-Mogul Corporation, Fibreboard Corporation,
F-24
<Page>
G-I Holdings (GAF), Harbison-Walker Refractories Group, Kaiser Aluminum
Corporation, North American Refractories Co., Owens Corning, Pittsburgh-Corning,
Plibrico Company, Porter Hayden Company, USG Corporation, W. R. Grace & Co. and
several other smaller companies have sought protection under Chapter 11 of the
Bankruptcy Code.
OI Inc. has continued to monitor trends which may affect its ultimate
liability and has continued to analyze the developments and variables affecting
or likely to affect the resolution of pending and future asbestos claims against
OI Inc. OI Inc. expects that the gross amount of total asbestos-related payments
will be moderately lower in 2002 compared to payments of $245.9 million in 2001
and will continue to decline thereafter as the number of potential claimants
continues to decrease. However, the trend toward lower aggregate annual payments
has not occurred as soon as had been anticipated when the additional liability
was established in 2000. In addition, the number of claims and lawsuits filed
against OI Inc. has exceed the number anticipated at that time. As a result,
OI Inc. is continuing to evaluate trends to determine whether further adjustment
of the asbestos-related liabilities is appropriate. While the results of this
review cannot be estimated at this time, OI Inc. expects that an increase of the
liability will be required in order to cover estimated indemnity payments and
legal fees arising from asbestos personal injury lawsuits and claims filed in
the next several years. Subject to the completion of this review, based on all
the factors and matters relating to OI Inc.'s asbestos-related lawsuits and
claims, OI Inc. presently believes that the ultimate resolution of its
asbestos-related costs and liabilities will not have a material effect on
OI Inc.'s financial condition.
Various litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are nonroutine and involve compensatory,
punitive or treble damage claims as a well as other types of relief. The
ultimate legal and financial liability of the Company in respect to such pending
litigation and the ultimate amount of distributions which may be required to be
made by the Company and other subsidiaries of OI, Inc. to fund OI Inc.'s
asbestos-related payments cannot be estimated with certainty. However, the
Company believes, based on its examination and review of such matters and
experience to date and subject to the matters discussed above, that such
ultimate liability will not be material in relation to the Company's
Consolidated Financial Statements.
SEGMENT INFORMATION. The Company operates in the rigid packaging industry.
The Company has two reportable product segments within the rigid packaging
industry: (1) Glass Containers and (2) Plastics Packaging. The Glass Containers
segment includes operations in North America, Europe, the Asia Pacific region,
and South America. The Plastics Packaging segment consists of two business
units--consumer products (plastic containers and closures) and prescription
products. The Other segment consists primarily of the Company's labels and
carriers products business unit, substantially all of which was divested in
early 2001.
The Company evaluates performance and allocates resources based on earnings
before interest income, interest expense, provision for income taxes, minority
share owners' interests in earnings of subsidiaries, and extraordinary charges
(collectively "EBIT") excluding unusual items. EBIT for product segments
includes an allocation of corporate expenses based on both a percentage of sales
and direct billings based on the costs of specific services provided. For the
Company's U.S. pension plans, net periodic pension cost (credit) has been
allocated to product segments while the related prepaid pension asset is
included in the caption "Eliminations and Other Retained." Net sales as shown in
the geographic segment information are based on the location of the Company's
affiliate which recorded the sales.
F-25
<Page>
Financial information regarding the Company's product segments is as follows
(certain prior year amounts have been reclassified in order to conform to
current year presentation):
<Table>
<Caption>
ELIMINATIONS
AND OTHER
GLASS PLASTICS TOTAL PRODUCT RETAINED CONSOLIDATED
CONTAINERS PACKAGING OTHER SEGMENTS ITEMS TOTALS
---------- --------- -------- ------------- ------------ ------------
Net sales:
2001 $ 3,571.2 $1,817.5 $ 13.8 $ 5,402.5 $5,402.5
2000 3,695.6 1,787.6 68.9 5,552.1 5,552.1
1999 3,762.6 1,686.7 73.6 5,522.9 5,522.9
========= ======== ======== ========= ======== ========
EBIT, excluding unusual items:
2001 $ 582.5 $ 247.9 $ (8.2) $ 822.2 $ (57.9) $ 764.3
2000 587.2 249.2 1.1 837.5 23.4 860.9
1999 582.4 277.7 9.2 869.3 5.9 875.2
========= ======== ======== ========= ======== ========
Unusual items:
2001:
Gain on the sale of a minerals
business in Australia........ $ 10.3 $ 10.3 $ 10.3
Gain on the sale of the
Company's label business..... $ 2.8 2.8 2.8
Gain on the sale of the
Company's Harbor Capital
business..................... $ 457.3 457.3
Restructuring and impairment
charges...................... (64.3) (17.8) (82.1) (82.1)
Loss on the sale of the
Company's facilities in
India........................ (31.0) (31.0) (31.0)
Special employee benefit
programs..................... (7.6) (3.5) (11.1) (19.8) (30.9)
Charges related to certain
contingencies................ (8.5) (8.5) (8.5)
Restructuring manufacturing
capacity in the medical
devices business............. (7.9) (7.9) (7.9)
</Table>
F-26
<Page>
<Table>
<Caption>
ELIMINATIONS
AND OTHER
GLASS PLASTICS TOTAL PRODUCT RETAINED CONSOLIDATED
CONTAINERS PACKAGING OTHER SEGMENTS ITEMS TOTALS
---------- --------- -------- ------------- ------------ ------------
Unusual items (continued):
2000:
Charges related to
consolidation of
manufacturing capacity....... $ (120.4) $ (2.0) $ (122.4) $ (122.4)
Charges related to early
retirement incentives and
special termination
benefits..................... (22.0) (9.2) (31.2) $ (21.2) (52.4)
Charges related to impairment
of property, plant and
equipment in India........... (40.0) (40.0) (40.0)
Other charges, principally
related to the write-off of
software..................... (3.6) (3.6) (29.9) (33.5)
1999:
Gains related to the sales of
two manufacturing
facilities................... 40.8 40.8 40.8
Charges related principally to
restructuring costs and
write-offs of certain assets
in Europe and South
America...................... (20.8) (20.8) (20.8)
========= ======== ======== ========= ======== ========
Depreciation and amortization
expense:
2001............................. $ 342.8 $ 181.8 $ 6.0 $ 530.6 $ 13.1 $ 543.7
2000............................. 346.2 177.3 6.4 529.9 19.6 549.5
1999............................. 348.8 173.0 6.5 528.3 17.0 545.3
========= ======== ======== ========= ======== ========
Total assets:
2001............................. $ 5,579.5 $3,355.0 $ 34.9 $ 8,969.4 $1,023.2 $9,992.6
2000............................. 5,633.8 3,398.4 117.0 9,149.2 930.3 10,079.5
1999............................. 6,016.8 3,399.5 109.3 9,525.6 995.6 10,521.2
========= ======== ======== ========= ======== ========
Capital expenditures (1):
2001............................. $ 351.3 $ 177.2 $ 0.5 $ 529.0 $ 2.9 $ 531.9
2000............................. 290.9 184.9 2.4 478.2 3.2 481.4
1999............................. 428.4 212.3 3.4 644.1 6.3 650.4
========= ======== ======== ========= ======== ========
</Table>
- ------------------------
(1) Excludes property, plant and equipment acquired through acquisitions.
Financial information regarding the Company's geographic segments is as
follows:
<Table>
<Caption>
ELIMINATIONS
TOTAL AND OTHER
ASIA SOUTH GEOGRAPHIC RETAINED CONSOLIDATED
NORTH AMERICA EUROPE PACIFIC AMERICA SEGMENTS ITEMS TOTALS
-------------- -------- -------- -------- ---------- ------------ ------------
Net sales:
2001.................... $3,301.1 $ 913.0 $ 660.6 $ 527.4 $5,402.5 $5,402.5
2000.................... 3,390.5 896.9 760.0 504.7 5,552.1 5,552.1
1999.................... 3,319.4 968.8 814.9 419.8 5,522.9 5,522.9
======== ======== ======== ======== ======== ======== ========
</Table>
F-27
<Page>
<Table>
<Caption>
ELIMINATIONS
TOTAL AND OTHER
ASIA SOUTH GEOGRAPHIC RETAINED CONSOLIDATED
NORTH AMERICA EUROPE PACIFIC AMERICA SEGMENTS ITEMS TOTALS
-------------- -------- -------- -------- ---------- ------------ ------------
EBIT, excluding unusual
items:
2001.................... $ 535.8 $ 91.8 $ 102.2 $ 92.4 $ 822.2 $ (57.9) $ 764.3
2000.................... 555.3 81.8 123.9 76.5 837.5 23.4 860.9
1999.................... 601.7 101.2 135.1 31.3 869.3 5.9 875.2
======== ======== ======== ======== ======== ======== ========
Unusual items:
2001:
Gain on the sale of a
minerals business in
Australia............. $ 10.3 $ 10.3 $ 10.3
Gain on the sale of the
Company's label
business.............. $ 2.8 2.8 2.8
Gain on the sale of the
Company's Harbor
Capital Business...... 457.3 457.3
Restructuring and
impairment charges.... (51.0) $ (7.1) (0.8) $ (23.2) (82.1) (82.1)
Loss on the sale of the
Company's facilities
in India.............. (31.0) (31.0) (31.0)
Special employee benefit
programs.............. (7.9) (0.7) (2.3) (0.2) (11.1) (19.8) (30.9)
Charges related to
certain
contingencies......... (8.5) (8.5) (8.5)
Restructuring
manufacturing capacity
in the medial devices
business.............. (7.9) (7.9) (7.9)
2000:
Charges related to
consolidation of
manufacturing
capacity.............. (126.0) 3.6 (122.4) (122.4)
Charges related to early
retirement incentives
and special
termination
benefits.............. (31.2) (31.2) (21.2) (52.4)
Charges related to
impairment of
property, plant, and
equipment in India.... (40.0) (40.0) (40.0)
Other................... (3.6) (3.6) (29.9) (33.5)
1999:
Gains related to the
sales of two
manufacturing
facilities............ 30.8 10.0 40.8 40.8
Charges related
principally to
restructuring costs
and write-offs of
certain assets in
Europe and South
America............... (10.8) (10.0) (20.8) (20.8)
======== ======== ======== ======== ======== ======== ========
</Table>
F-28
<Page>
The Company's net fixed assets by geographic segment are as follows:
<Table>
<Caption>
UNITED STATES FOREIGN TOTAL
------------- -------- --------
2001........................................................ $1,688.2 $1,571.7 $3,259.9
2000........................................................ 1,721.8 1,563.1 3,284.9
1999........................................................ 1,755.0 1,689.1 3,444.1
</Table>
Reconciliations to consolidated totals are as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Revenues:
Net sales for reportable segments......................... $5,402.5 $5,552.1 $5,522.9
Royalties and net technical assistance.................... 24.6 25.3 30.3
Equity earnings........................................... 19.4 19.8 22.3
Interest income........................................... 26.9 32.5 28.5
Other revenue............................................. 539.9 185.1 182.7
-------- -------- --------
Total................................................... $6,013.3 $5,814.8 $5,786.7
======== ======== ========
Reconciliation of EBIT to earnings before income taxes and
minority share owners' interests in earnings:
EBIT, excluding unusual items for reportable segments..... $ 822.2 $ 837.5 $ 869.3
Unusual items excluded from reportable segment
information............................................. (127.5) (197.2) 20.0
Eliminations and other retained, excluding unusual
items................................................... (57.9) 23.4 5.9
Unusual items excluded from eliminations and other
retained:
2001:
Gain on the sale of the Company's Harbor Capital
Advisors business................................... 457.3
Special employee benefit programs..................... (19.8)
2000:
Charges related to early retirement incentives and
special termination benefits........................ (21.2)
Other, principally software write-off................. (29.9)
Net interest expense........................................ (407.1) (454.2) (397.4)
-------- -------- --------
Total....................................................... $ 667.2 $ 158.4 $ 497.8
======== ======== ========
</Table>
FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS. The
following presents condensed consolidating financial information for the
Company, segregating: (1) Owens-Illinois Group, Inc. (the "Parent");
(2) Owens-Brockway Glass Container Inc. (the "Issuer"); (3) those domestic
subsidiaries which will guarantee the notes (the "Guarantor Subsidiaries"); and
(4) all other subsidiaries (the "Non-Guarantor Subsidiaries"). The Guarantor
Subsidiaries are wholly-owned direct and indirect subsidiaries of the Parent and
their guarantees are full, unconditional and joint and several. The Parent is
also a guarantor, and its guarantee is full, unconditional, and joint and
several.
Subsidiaries of the Parent and of the Issuer are presented on the equity
basis of accounting. Certain reclassifications have been made to conform all of
the financial information to the financial presentation on a consolidated basis.
The principal eliminating entries eliminate investments in subsidiaries and
intercompany balances and transactions.
F-29
<Page>
The following information presents consolidating results of operations,
balance sheets and cash flows for the periods and at the dates indicated.
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
RESULTS OF OPERATIONS
Net sales.......................... $ $ 1,636.6 $1,518.1 $2,330.9 $ (83.1) $ 5,402.5
Interest........................... 0.4 2.9 23.6 26.9
Equity earnings from
subsidiaries..................... 360.7 31.2 33.6 (425.5) --
Other equity earnings.............. 10.9 4.9 3.7 (0.1) 19.4
Other revenue...................... 36.7 513.2 39.0 (24.4) 564.5
-------- --------- -------- -------- --------- ---------
Total revenue.................... 360.7 1,715.8 2,072.7 2,397.2 (533.1) 6,013.3
Manufacturing, shipping, and
delivery......................... 1,297.5 1,168.8 1,858.0 (105.9) 4,218.4
Research, engineering, selling,
administrative, and other........ 112.0 311.8 268.9 1.0 693.7
Net intercompany interest.......... (199.7) 135.4 57.4 6.9 --
Other interest expense............. 199.7 70.1 44.2 120.0 434.0
-------- --------- -------- -------- --------- ---------
Total costs and expense.......... -- 1,615.0 1,582.2 2,253.8 (104.9) 5,346.1
Earnings before items below........ 360.7 100.8 490.5 143.4 (428.2) 667.2
Provision for income taxes......... 31.4 200.3 55.7 (1.0) 286.4
Minority share owners' interests in
earnings of subsidiaries......... 22.9 (2.8) 20.1
-------- --------- -------- -------- --------- ---------
Earnings before extraordinary
charge........................... 360.7 69.4 290.2 64.8 (424.4) 360.7
Extraordinary charge............... (4.1) (4.1) 4.1 (4.1)
-------- --------- -------- -------- --------- ---------
Net income (loss).................. $ 356.6 $ 69.4 $ 286.1 $ 64.8 $ (420.3) $ 356.6
======== ========= ======== ======== ========= =========
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
RESULTS OF OPERATIONS
Net sales.......................... $ $ 1,762.6 $1,524.9 $2,336.3 $ (71.7) $ 5,552.1
Interest........................... 0.5 4.1 27.9 32.5
Equity earnings from
subsidiaries..................... 72.3 64.1 20.6 (157.0) --
Other equity earnings.............. 9.8 4.3 5.7 19.8
Other revenue...................... 41.5 152.1 40.0 (23.2) 210.4
-------- --------- -------- -------- --------- ---------
Total revenue.................... 72.3 1,878.5 1,706.0 2,409.9 (251.9) 5,814.8
Manufacturing, shipping, and
delivery......................... 1,408.4 1,164.0 1,880.9 (94.2) 4,359.1
Research, engineering, selling,
administrative and other......... 249.8 333.9 226.5 0.4 810.6
Net intercompany interest.......... (352.8) 219.3 126.7 6.8 --
Other interest expense............. 352.8 0.3 5.7 127.9 486.7
-------- --------- -------- -------- --------- ---------
Total costs and expenses......... -- 1,877.8 1,630.3 2,242.1 (93.8) 5,656.4
-------- --------- -------- -------- --------- ---------
Earnings before items below........ 72.3 0.7 75.7 167.8 (158.1) 158.4
Provision for income taxes......... (19.3) 22.7 61.0 (0.3) 64.1
Minority share owners' interests in
earnings of subsidiaries......... 0.1 22.1 (0.2) 22.0
-------- --------- -------- -------- --------- ---------
Net income......................... $ 72.3 $ 20.0 $ 52.9 $ 84.7 $ (157.6) $ 72.3
======== ========= ======== ======== ========= =========
</Table>
F-30
<Page>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
RESULTS OF OPERATIONS
Net sales............................... $ $ 1,814.6 $1,440.1 $2,383.7 $ (115.5) $ 5,522.9
Interest................................ 0.2 5.5 22.8 28.5
Equity earnings from subsidiaries....... 299.1 80.8 24.5 (404.4) --
Other equity earnings................... 9.0 3.9 9.4 22.3
Other revenue........................... 74.3 126.9 34.0 (22.2) 213.0
-------- --------- -------- -------- --------- ---------
Total revenue......................... 299.1 1,978.9 1,600.9 2,449.9 (542.1) 5,786.7
Manufacturing, shipping, and delivery... 1,437.9 1,039.1 1,954.4 (135.0) 4,296.4
Research, engineering, selling,
administrative and other.............. 111.6 271.5 183.5 566.6
Net intercompany interest............... (285.7) 178.5 98.2 9.0 --
Other interest expense.................. 285.7 0.2 6.4 133.6 425.9
-------- --------- -------- -------- --------- ---------
Total costs and expenses.............. -- 1,728.2 1,415.2 2,280.5 (135.0) 5,288.9
-------- --------- -------- -------- --------- ---------
Earnings before items below............. 299.1 250.7 185.7 169.4 (407.1) 497.8
Provision for income taxes.............. 71.0 61.7 53.8 (1.0) 185.5
Minority share owners' interests in
earnings of subsidiaries.............. 0.1 10.3 2.8 13.2
-------- --------- -------- -------- --------- ---------
Earnings before extraordinary charge.... 299.1 179.7 123.9 105.3 (408.9) 299.1
Extraordinary charge.................... (0.8) (0.8) 0.8 (0.8)
-------- --------- -------- -------- --------- ---------
Net income.............................. $ 298.3 $ 179.7 $ 123.1 $ 105.3 $ (408.1) $ 298.3
======== ========= ======== ======== ========= =========
</Table>
<Table>
<Caption>
DECEMBER 31, 2001
--------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
BALANCE SHEET
Current assets:
Accounts receivable................... $ $ 123.7 $ 185.8 $ 517.0 $ (72.0) $ 754.5
Inventories........................... 162.9 212.1 462.5 (0.8) $ 836.7
Other current assets.................. 1.1 155.2 162.5 0.2 $ 319.0
-------- --------- -------- -------- --------- ---------
Total current assets.................... 287.7 553.1 1,142.0 (72.6) 1,910.2
Investments in and advances to
subsidiaries.......................... 4,021.9 1,967.5 57.1 (6,046.5)
Goodwill................................ 554.6 1,447.7 993.0 2,995.3
Other non-current assets................ 255.0 1,050.0 528.1 (5.9) 1,827.2
-------- --------- -------- -------- --------- ---------
Total other assets...................... 4,021.9 2,777.1 2,554.8 1,521.1 (6,052.4) 4,822.5
Property, plant and equipment, net...... 600.9 1,105.9 1,553.1 3,259.9
-------- --------- -------- -------- --------- ---------
Total assets............................ $4,021.9 $ 3,665.7 $4,213.8 $4,216.2 $(6,125.0) $ 9,992.6
======== ========= ======== ======== ========= =========
Current liabilities:
Accounts payable and accrued
liabilities......................... $ 183.9 $ 317.0 $ 496.6 $ (57.2) $ 940.3
Short-term loans and long-term debt
due within one year................. 4.8 66.4 71.2
-------- --------- -------- -------- --------- ---------
Total current liabilities............... 183.9 321.8 563.0 (57.2) 1,011.5
Long-term debt.......................... 1,700.0 1,661.3 851.3 1,117.1 5,329.7
Other non-current liabilities and
minority interests.................... 92.3 746.9 482.4 7.8 1,329.4
Investment by and advances from
parent................................ 1,728.2 2,293.7 2,053.7 (6,075.6)
Share owner's equity.................... 2,322.0 2,322.0
-------- --------- -------- -------- --------- ---------
Total liabilities and share owner's
equity................................ $4,022.0 $ 3,665.7 $4,213.7 $4,216.2 $(6,125.0) $ 9,992.6
======== ========= ======== ======== ========= =========
</Table>
F-31
<Page>
<Table>
<Caption>
DECEMBER 31, 2000
--------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
BALANCE SHEET
Current assets:
Accounts receivable................... $ $ 148.1 $ 197.1 $ 472.5 $ (46.8) $ 770.9
Inventories........................... 208.3 237.7 417.4 (1.0) 862.4
Other current assets.................. 25.9 114.7 244.4 0.4 385.4
-------- --------- -------- -------- --------- ---------
Total current assets.................... -- 382.3 549.5 1,134.3 (47.4) 2,018.7
Investments in and advances to
subsidiaries.......................... 6,663.6 1,925.5 37.7 (8,626.8) --
Goodwill................................ 574.9 1,510.2 1,015.9 3,101.0
Other non-current assets................ 264.5 963.5 450.0 (3.1) 1,674.9
-------- --------- -------- -------- --------- ---------
Total other assets...................... 6,663.6 2,764.9 2,511.4 1,465.9 (8,629.9) 4,775.9
Property, plant and equipment, net...... 608.3 1,113.2 1,563.4 3,284.9
-------- --------- -------- -------- --------- ---------
Total assets............................ $6,663.6 $ 3,755.5 $4,174.1 $4,163.6 $(8,677.3) $10,079.5
-------- --------- -------- -------- --------- ---------
Current liabilities:
Accounts payable and accrued
liabilities......................... $ $ 197.9 $ 340.3 $ 520.8 $ (41.0) $ 1,018.0
Short-term loans and long-term debt
due within one year................. 5.0 115.0 120.0
-------- --------- -------- -------- --------- ---------
Total current liabilities............... -- 197.9 345.3 635.8 (41.0) 1,138.0
Long-term debt.......................... 4,557.0 7.3 1,165.5 5,729.8
Other non-current liabilities and
minority interests.................... 136.7 578.8 367.6 22.0 1,105.1
Investment by and advances from
parent................................ 3,420.9 3,242.7 1,994.7 (8,658.3) --
Share owner's equity.................... 2,106.6 2,106.6
-------- --------- -------- -------- --------- ---------
Total liabilities and share owner's
equity................................ $6,663.6 $ 3,755.5 $4,174.1 $4,163.6 $(8,677.3) $10,079.5
======== ========= ======== ======== ========= =========
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
CASH FLOWS
Cash provided by (used in) operating
activities............................ $ $ 189.8 $ 80.4 $ 350.1 $ $ $620.3
Investing Activities:
Additions to property, plant, and
equipment........................... (68.6) (156.5) (306.8) (531.9)
Acquisitions, net of cash acquired.... (7.6) (177.0) (184.6)
Proceeds from sales................... 7.0 525.4 72.9 605.3
-------- --------- -------- -------- --------- ---------
Cash provided by (used in) investing
activities........................ -- (61.6) 361.3 (410.9) -- (111.2)
Financing Activities:
Net change in payable to OI, Inc...... (2,857.0) (2,857.0)
Net investment by (distribution to)
OI, Inc............................. (106.5) (106.5)
Change in intercompany transactions... 2,963.5 (1,767.1) (1,271.9) 75.5 --
Change in short term debt............. (0.3) (44.1) (44.4)
Payments of long term debt............ (71.5) (461.3) (849.8) (1,382.6)
Borrowings of long term debt.......... 1,732.9 1,305.5 861.4 3,899.8
Collateral deposits for certain
derivatives......................... (26.1) (26.1)
Payment of finance fees............... (22.5) (20.1) (19.5) (62.1)
-------- --------- -------- -------- --------- ---------
Cash provided by (used in) financing
activities........................ -- (128.2) (448.1) (2.6) -- (578.9)
Effect of exchange rate changes on
cash.................................. (4.3) (4.3)
-------- --------- -------- -------- --------- ---------
Net change in cash...................... -- -- (6.4) (67.7) -- (74.1)
Cash at beginning of period............. -- 28.7 201.0 -- 229.7
-------- --------- -------- -------- --------- ---------
Cash at end of period................... $ -- $ -- $ 22.3 $ 133.3 $ -- $ 155.6
======== ========= ======== ======== ========= =========
</Table>
F-32
<Page>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
CASH FLOWS
Cash provided by (used in) operating
activities............................ $ $ (24.7) $ 199.2 $ 355.2 $ 12.0 $ 541.7
Investing Activities:
Additions to property, plant, and
equipment........................... (72.3) (175.8) (233.3) (481.4)
Acquisitions, net of cash acquired.... (77.1) (77.1)
Proceeds from sales................... 1.8 80.3 12.3 94.4
-------- --------- -------- -------- --------- ---------
Cash provided by (used in) investing
activities.......................... -- (70.5) (95.5) (298.1) -- (464.1)
Financing Activities:
Net change in payable to OI Inc....... 297.6 297.6
Net investment by (distribution to) OI
Inc................................. (213.0) (213.0)
Change in intercompany balances....... (84.6) 95.1 (147.4) 148.9 (12.0) --
Change in short term debt............. (43.8) (43.8)
Payments of long term debt............ (5.6) (371.9) (377.5)
Borrowings of long term debt.......... 1.5 181.4 182.9
-------- --------- -------- -------- --------- ---------
Cash provided by (used in) financing
activities........................ -- 95.1 (151.5) (85.4) (12.0) (153.8)
Effect of exchange rate changes on
cash.................................. 15.6 15.6
Effect of change in fiscal year end for
certain international affiliates...... 33.2 33.2
-------- --------- -------- -------- --------- ---------
Net change in cash...................... -- (0.1) (47.8) 20.5 -- (27.4)
Cash at beginning of period............. 0.1 76.5 180.5 257.1
-------- --------- -------- -------- --------- ---------
Cash at end of period................... $ -- $ -- $ 28.7 $ 201.0 $ -- $ 229.7
======== ========= ======== ======== ========= =========
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
CASH FLOWS
Cash provided by (used in) operating
activities............................ $ $ 132.9 $ 257.9 $ 313.8 $ (27.3) $ 677.3
Investing Activities:
Additions to property, plant, and
equipment........................... (118.9) (201.5) (330.0) (650.4)
Acquisitions, net of cash acquired.... (34.0) (34.0)
Proceeds from sales................... 61.2 14.2 261.7 337.1
-------- --------- -------- -------- --------- ---------
Cash provided by (used in) investing
activities........................ -- (57.7) (187.3) (102.3) -- (347.3)
Financing Activities:
Net change in payable to OI Inc....... 309.7 309.7
Net investment by (distribution to) OI
Inc................................. (356.8) (356.8)
Change in intercompany balances....... 47.1 (75.3) (59.0) 59.9 27.3 --
Change in short term debt............. (19.6) (19.6)
Payments of long term debt............ (4.6) (372.7) (377.3)
Borrowings of long term debt.......... 1.6 115.9 117.5
Payment of finance fees............... (1.0) (1.0)
-------- --------- -------- -------- --------- ---------
Cash provided by (used in) financing
activities........................ -- (75.3) (63.0) (216.5) 27.3 (327.5)
Effect of exchange rate changes on
cash.................................. (16.8) (16.8)
-------- --------- -------- -------- --------- ---------
Net change in cash...................... -- (0.1) 7.6 (21.8) -- (14.3)
Cash at beginning of period............. 0.2 68.9 202.3 271.4
-------- --------- -------- -------- --------- ---------
Cash at end of period................... $ -- $ 0.1 $ 76.5 $ 180.5 $ -- $ 257.1
======== ========= ======== ======== ========= =========
</Table>
F-33
<Page>
OWENS-ILLINOIS GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (CONSOLIDATED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(MILLIONS OF DOLLARS)
Reserves deducted from assets in the balance sheets:
ALLOWANCES FOR LOSSES AND DISCOUNTS ON RECEIVABLES
<Table>
<Caption>
ADDITIONS
BALANCE AT ---------------------------
BEGINNING CHARGED TO COSTS OTHER DEDUCTIONS BALANCE AT
OF PERIOD AND EXPENSES (NOTE 2) (NOTE 1) END OF PERIOD
---------- ---------------- -------- ---------- -------------
2001.................................. $69.9 $79.3 $6.3 $84.4 $71.1
===== ===== ==== ===== =====
2000.................................. $56.9 $68.0 $7.1 $62.1 $69.9
===== ===== ==== ===== =====
1999.................................. $56.9 $53.3 $ -- $53.3 $56.9
===== ===== ==== ===== =====
</Table>
- ------------------------
(1) Deductions from allowances for losses and discounts on receivables represent
uncollectible notes and accounts written off.
(2) Other for 2001 and 2000 relate to acquisitions during the year.
F-34
<Page>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Share Owner
Owens-Brockway Packaging, Inc.
We have audited the accompanying consolidated balance sheets of
Owens-Brockway Packaging, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of results of operations, net Parent investment, and
cash flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Owens-Brockway
Packaging, Inc. at December 31, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
Toledo, Ohio
January 24, 2002
F-35
<Page>
OWENS-BROCKWAY PACKAGING, INC.
CONSOLIDATED RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Net sales................................................. $3,749.4 $3,894.1 $3,970.7
Other revenue............................................. 92.2 110.3 130.0
-------- -------- --------
3,841.6 4,004.4 4,100.7
Costs and expenses:
Manufacturing, shipping, and delivery..................... 2,946.4 3,091.7 3,168.6
Research and development.................................. 10.5 15.0 13.0
Engineering............................................... 30.0 31.2 35.2
Selling and administrative................................ 173.7 170.1 178.5
Net intercompany interest................................. 156.3 244.1 207.9
Other interest expense.................................... 189.4 126.6 131.2
Other..................................................... 159.0 254.5 64.2
-------- -------- --------
3,665.3 3,933.2 3,798.6
-------- -------- --------
Earnings before items below................................. 176.3 71.2 302.1
Provision for income taxes.................................. 87.3 19.8 109.6
Minority share owners' interests in earnings of
subsidiaries.............................................. 19.6 20.6 11.2
-------- -------- --------
Net earnings................................................ $ 69.4 $ 30.8 $ 181.3
======== ======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-36
<Page>
OWENS-BROCKWAY PACKAGING, INC.
CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
ASSETS
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
CURRENT ASSETS:
Cash, including time deposits of $28.2 ($45.3 in 2000).... $ 124.7 $ 169.6
Short-term investments.................................... 3.7
Receivables including amount from related parties of $1.6
($1.1 in 2000), less allowances of $32.2 ($40.6 in 2000)
for losses and discounts................................ 575.3 568.0
Inventories............................................... 611.0 611.4
Prepaid expenses.......................................... 23.9 57.0
-------- --------
Total current assets.................................... 1,334.9 1,409.7
OTHER ASSETS:
Equity investments........................................ 153.9 164.8
Repair parts inventories.................................. 173.5 201.6
Prepaid pension........................................... 49.8 41.2
Deposits, receivables, and other assets................... 421.4 337.4
Excess of purchase cost over net assets acquired, net of
accumulated amortization of $531.0 ($417.2 in 2000)..... 1,556.2 1,602.3
-------- --------
Total other assets...................................... 2,354.8 2,347.3
PROPERTY, PLANT, AND EQUIPMENT:
Land, at cost............................................. 135.1 130.9
Buildings and equipment, at cost:
Buildings and building equipment........................ 526.7 540.7
Factory machinery and equipment......................... 2,828.9 2,809.3
Transportation, office, and miscellaneous equipment..... 79.3 77.5
Construction in progress................................ 196.8 111.3
-------- --------
3,766.8 3,669.7
Less accumulated depreciation............................. 1,663.5 1,546.8
-------- --------
Net property, plant, and equipment...................... 2,103.3 2,122.9
-------- --------
Total assets................................................ $5,793.0 $5,879.9
======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-37
<Page>
OWENS-BROCKWAY PACKAGING, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(MILLIONS OF DOLLARS)
LIABILITIES AND NET PARENT INVESTMENT
<Table>
<Caption>
DECEMBER 31,
---------------------
2001 2000
---------- --------
CURRENT LIABILITIES:
Short-term loans.......................................... $ 40.4 $ 80.9
Accounts payable including amount to related parties of
$30.1 ($9.9 in 2000).................................... 337.0 313.9
Salaries and wages........................................ 89.4 67.0
U.S. and foreign income taxes............................. 0.2 6.3
Other accrued liabilities................................. 196.0 268.4
Long-term debt due within one year........................ 26.0 26.1
-------- --------
Total current liabilities............................... 689.0 762.6
EXTERNAL LONG-TERM DEBT..................................... 2,778.5 1,165.5
DEFERRED TAXES.............................................. 161.9 149.1
OTHER LIABILITIES........................................... 275.7 218.4
MINORITY SHARE OWNERS' INTERESTS............................ 159.7 165.1
NET PARENT INVESTMENT:
Investment by and advances from parent.................... 2,276.1 3,898.6
Accumulated other comprehensive loss...................... (547.9) (479.4)
-------- --------
Total net Parent investment............................. 1,728.2 3,419.2
-------- --------
Total liabilities and net Parent investment................. $5,793.0 $5,879.9
======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-38
<Page>
OWENS-BROCKWAY PACKAGING, INC.
CONSOLIDATED NET PARENT INVESTMENT
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
--------- -------- --------
INVESTMENT BY AND ADVANCES TO PARENT
Balance at beginning of year.............................. $ 3,898.6 $3,739.8 $3,712.2
Net intercompany transactions............................. (1,691.9) 153.0 (153.7)
Net earnings.............................................. 69.4 30.8 181.3
Net loss for the month ended December 31, 2000 for the
change in the fiscal year end of certain international
affiliates.............................................. (25.0)
--------- -------- --------
Balance at end of year.................................. 2,276.1 3,898.6 3,739.8
========= ======== ========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year.............................. (479.4) (343.5) (179.9)
Foreign currency translation adjustments.................. (66.0) (135.9) (163.6)
Change in certain derivative instruments.................. (2.5)
--------- -------- --------
Balance at end of year.................................. (547.9) (479.4) (343.5)
========= ======== ========
Total net Parent investment................................. $ 1,728.2 $3,419.2 $3,396.3
========= ======== ========
TOTAL COMPREHENSIVE INCOME (LOSS)
Net earnings.............................................. $ 69.4 $ 30.8 $ 181.3
Foreign currency translation adjustments.................. (66.0) (135.9) (163.6)
Change in certain derivative instruments.................. (2.5)
========= ======== ========
Total................................................... $ 0.9 $ (105.1) $ 17.7
========= ======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-39
<Page>
OWENS-BROCKWAY PACKAGING, INC.
CONSOLIDATED CASH FLOWS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
--------- -------- --------
OPERATING ACTIVITIES:
Net earnings.............................................. $ 69.4 $ 30.8 $ 181.3
Non-cash charges (credits):
Depreciation............................................ 286.4 298.3 299.0
Amortization of deferred costs.......................... 72.3 62.2 66.1
Deferred tax provision (credit)......................... 72.5 (64.2) 45.2
Restructuring costs and write-offs of certain assets.... 65.2 186.0 20.8
(Gains) losses on asset sales........................... 20.7 (40.8)
Other................................................... (64.0) (80.0) (95.7)
Change in non-current operating assets.................... 18.9 (16.8) (7.8)
Reduction of non-current liabilities...................... (22.1) (0.1) 1.4
Change in components of working capital................... (28.7) (80.0) (69.9)
--------- ------- -------
Cash provided by operating activities................. 490.6 336.2 399.6
INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (364.8) (301.6) (441.9)
Acquisitions, net of cash acquired........................ (169.0) (77.2) (34.2)
Net cash proceeds from divestitures and other............. 80.0 31.7 327.6
--------- ------- -------
Cash utilized in investing activities................. (453.8) (347.1) (148.5)
FINANCING ACTIVITIES:
Additions to long-term debt............................... 2,593.0 172.3 222.6
Repayments of long-term debt.............................. (918.5) (357.0) (475.8)
Decrease in short-term loans.............................. (35.7) (40.4) (14.9)
Net change in intercompany debt........................... (1,643.0) 189.9 6.5
Collateral deposits for certain derivative instruments.... (26.1)
Payment of finance fees................................... (45.3)
--------- ------- -------
Cash utilized in financing activities................. (75.6) (35.2) (261.6)
Effect of exchange rate fluctuations on cash.............. (6.1) 16.1 (17.9)
Effect of change in fiscal year end for certain
international affiliates................................ 31.9
--------- ------- -------
Increase (decrease) in cash................................. (44.9) 1.9 (28.4)
Cash at beginning of year................................... 169.6 167.7 196.1
--------- ------- -------
Cash at end of year......................................... $ 124.7 $ 169.6 $ 167.7
========= ======= =======
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-40
<Page>
STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATED STATEMENTS. The consolidated financial statements of
Owens-Brockway Packaging, Inc. ("Company") include the accounts of its
subsidiaries. Newly acquired subsidiaries have been included in the consolidated
financial statements from dates of acquisition. Prior to December 2000,
substantially all of the Company's consolidated foreign subsidiaries reported
their results of operations on a one-month lag, which allowed additional time to
compile the results. The portion of the Company's consolidated net earnings for
2000 that was attributable to the earnings of these subsidiaries for the
12 months ended November 30, 2000 was $64.7 million ($107.5 million before
unusual items). Beginning in December 2000, the one-month lag was eliminated. As
a result, the December 2000 results of operations for these subsidiaries, which
amounted to a net loss of $25.0 million, was recorded directly to retained
earnings in December 2000. Earnings of most of these subsidiaries for the month
of December are typically lower than most other months due to customer and
factory holidays, fewer shipping days, and extended maintenance activity. The
loss in December 2000 was greater than recent December periods as a result of
lower than normal shipments for the month, lower selling prices due to product
mix and currency exchange rates, high energy costs, and increased furnace repair
work at several facilities.
The Company uses the equity method of accounting for investments in which it
has a significant ownership interest, generally 20% to 50%. Other investments
are accounted for at cost.
RELATIONSHIP WITH OWENS-ILLINOIS GROUP, INC. AND OWENS-ILLINOIS, INC. The
Company is a wholly-owned subsidiary of Owens-Illinois Group, Inc. ("OI Group")
and an indirect subsidiary of Owens-Illinois, Inc. ("OI Inc."). Although
OI Inc. does not conduct any operations, it has substantial obligations related
to outstanding indebtedness, dividends for preferred stock and asbestos-related
payments. OI Inc. relies primarily on distributions from its direct and indirect
subsidiaries to meet these obligations.
For federal and certain state income tax purposes, the taxable income of the
Company is included in the consolidated tax returns of OI Inc. and income taxes
are allocated to the Company on a basis consistent with separate returns.
NATURE OF OPERATIONS. The Company is a leading manufacturer of glass
container products. The Company's principal product lines in the Glass
Containers product segment are glass containers for the food and beverage
industries. The Company has glass container operations located in 19 countries.
The principal markets and operations for the Company's glass products are in
North America, Europe, South America, and Australia. One customer accounted for
11.5%, 10.9%, and 10.3% of the Company's sales in 2001, 2000, and 1999,
respectively.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management of the Company to make estimates and assumptions that affect certain
amounts reported in the financial statements and accompanying notes. Actual
results may differ from those estimates, at which time the Company would revise
its estimates accordingly.
CASH. The Company defines "cash" as cash and time deposits with maturities
of three months or less when purchased.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The carrying amounts reported for
cash, short-term investments and short-term loans approximate fair value. In
addition, carrying amounts approximate fair value for certain long-term debt
obligations subject to frequently redetermined interest rates. Derivative
financial instruments are included on the balance sheet at fair value.
F-41
<Page>
INVENTORY VALUATION. The Company values most U.S. inventories at the lower
of last-in, first-out (LIFO) cost or market. Other inventories are valued at the
lower of standard costs (which approximate average costs) or market.
EXCESS OF PURCHASE COST OVER NET ASSETS ACQUIRED. Through December 31,
2001, the excess of purchase cost over net assets acquired was being amortized
over 40 years. The Company evaluated the recoverability of long-lived assets
based on undiscounted projected cash flows, excluding interest and taxes, when
factors indicate that an impairment may exist. (See "New Accounting Standards).
PROPERTY, PLANT, AND EQUIPMENT. In general, depreciation is computed using
the straight-line method. Renewals and improvements are capitalized. Maintenance
and repairs are expensed as incurred.
REVENUE RECOGNITION. The Company recognizes sales, net of estimated
discounts and allowances, when title to products is transferred to customers.
Shipping and handling costs are included with manufacturing, shipping, and
delivery costs.
INCOME TAXES ON UNDISTRIBUTED EARNINGS. In general, the Company plans to
continue to reinvest the undistributed earnings of foreign subsidiaries and
foreign corporate joint ventures accounted for by the equity method.
Accordingly, taxes are provided only on that amount of undistributed earnings in
excess of planned reinvestments.
FOREIGN CURRENCY TRANSLATION. The assets and liabilities of certain
affiliates and associates are translated at current exchange rates and any
related translation adjustments are recorded directly in share owners' equity.
For the years ended December 31, 2001, 2000, and 1999, the Company's affiliates
located in Venezuela operated in a "highly inflationary" economy. As such,
certain assets of these affiliates were translated at historical exchange rates
and all translation adjustments are reflected in the statements of Consolidated
Results of Operations. Effective January 1, 2002, the affiliates in Venezuela
will no longer be considered operating in a "highly inflationary" economy.
Assets and liabilities will be translated at current exchange rates with any
related translation adjustments being recorded directly to net Parent
investment.
NEW ACCOUNTING STANDARDS. In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 141, "Business
Combinations," which is effective for business combinations completed after
June 30, 2001. Also in July 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS No. 142"), which is effective for goodwill acquired
after June 30, 2001. For goodwill acquired prior to July 1, 2001, FAS No. 142
will be effective for fiscal years beginning after December 15, 2001. Under FAS
No. 142, goodwill and intangible assets with indefinite lives will no longer be
amortized but will be reviewed annually (or more frequently if impairment
indicators arise) for impairment.
The Company estimates that adopting FAS No. 142 will increase 2002 earnings
before the effects of the accounting change by approximately $45 million. The
Company has not completed its assessment of the effects that adopting FAS
No. 142 will have on the reported value of goodwill.
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS No. 144"). FAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("FAS No. 121"). FAS No. 144 provides additional guidance on
estimating cash flows when performing a recoverability test, requires that a
long-lived asset (group) to be disposed of other than by sale (e.g. abandoned)
be classified as "held and used" until it is disposed of, and establishes more
restrictive criteria to classify an asset (group) as "held for sale", however it
retains the fundamental provisions of FAS No. 121 related to the recognition and
measurement of the
F-42
<Page>
impairment of long-lived assets to be "held and used." FAS No. 144 is effective
for fiscal years beginning after December 15, 2001 and transition is prospective
for committed disposal activities that are initiated after the effective date of
FAS No. 144's initial application. The impact of adopting FAS No. 144 on the
Company's reporting and disclosure is not expected to be material to the
Company's financial position or results of operations.
FINANCIAL REVIEW
TABULAR DATA IN MILLIONS OF DOLLARS
CHANGES IN COMPONENTS OF WORKING CAPITAL RELATED TO OPERATIONS. Changes in
the components of working capital related to operations (net of the effects
related to acquisitions and divestitures) were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Decrease (increase) in current assets:
Short-term investments............................. $ 3.6 $ 12.0 $(15.2)
Receivables........................................ 2.3 (35.1) 19.9
Net intercompany receivable........................ 17.2 (43.9) 11.0
Inventories........................................ 24.3 (19.5) (10.1)
Prepaid expenses................................... 0.8 3.8 (25.3)
Increase (decrease) in current liabilities:
Accounts payable and accrued liabilities........... (46.3) (20.1) (47.2)
Salaries and wages................................. 1.4 (2.6) 8.6
U.S. and foreign income taxes...................... (32.0) 25.4 (11.6)
------ ------ ------
$(28.7) $(80.0) $(69.9)
====== ====== ======
</Table>
INVENTORIES. Major classes of inventory are as follows:
<Table>
<Caption>
2001 2000
-------- --------
Finished goods.............................................. $507.2 $494.9
Work in process............................................. 5.9 7.9
Raw materials............................................... 53.5 58.0
Operating supplies.......................................... 44.4 50.6
------ ------
$611.0 $611.4
====== ======
</Table>
If the inventories which are valued on the LIFO method had been valued at
standard costs, which approximate current costs, consolidated inventories would
be higher than reported by $14.7 million and $10.8 million, at December 31, 2001
and 2000, respectively.
Inventories which are valued at the lower of standard costs (which
approximate average costs), or market at December 31, 2001 and 2000 were
approximately $465.9 million and $420.0 million, respectively.
EQUITY INVESTMENTS. Summarized information pertaining to the Company's
equity associates follows:
<Table>
<Caption>
2001 2000
-------- --------
At end of year:
Equity in undistributed earnings:
Foreign................................................. $ 86.2 $ 85.6
Domestic................................................ 21.6 19.0
------ ------
Total................................................. $107.8 $104.6
====== ======
Equity in cumulative translation adjustment............... $(54.2) $(46.7)
====== ======
</Table>
F-43
<Page>
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
For the year:
Equity in earnings:
Foreign............................................ $ 7.3 $ 4.7 $ 8.2
Domestic........................................... 11.6 14.0 12.8
----- ----- -----
Total............................................ $18.9 $18.7 $21.0
===== ===== =====
Dividends received................................... $18.2 $13.9 $ 9.7
===== ===== =====
</Table>
EXTERNAL LONG-TERM DEBT. The following table summarizes the external
long-term debt of the Company at December 31, 2001 and 2000:
<Table>
<Caption>
2001 2000
-------- --------
Secured Credit Agreement:
Revolving Credit Facility.............................. $1,560.4
Term Loan.............................................. 1,045.0
Second Amended and Restated Credit Agreement:
Revolving Credit Facility:
Offshore Loans:
Australian Dollars
1.39 billion..................................... $ 775.3
British Pounds
125.0 million.................................... 186.8
Italian Lira
18.0 billion..................................... 8.7
Other.................................................... 199.1 220.8
-------- --------
2,804.5 1,191.6
-------- --------
Less amounts due within one year......................... 26.0 26.1
-------- --------
External long-term debt.................................. $2,778.5 $1,165.5
======== ========
</Table>
In April 2001, OI Group and certain of its domestic and foreign
subsidiaries, including subsidiaries of the Company (the "Borrowers") entered
into the Secured Credit Agreement (the "Agreement") with a group of banks, which
expires on March 31, 2004. The Agreement provides for a $3.0 billion revolving
credit facility (the "Revolving Credit Facility") and a $1.5 billion term loan
(the "Term Loan"). The Agreement includes an Overdraft Account Facility
providing for aggregate borrowings up to $50 million which reduce the amount
available for borrowing under the Revolving Credit Facility. The Agreement also
provides for the issuance of letters of credit totaling up to $500 million,
which also reduce the amount available for borrowings under the Revolving Credit
Facility.
Under the Secured Credit Agreement, the Company's subsidiaries have a total
commitment of $2.0 billion provided by the Revolving Credit Facility and a total
commitment of $1.045 billion provided by the Term Loan. At December 31, 2001,
the Company's subsidiaries had unused credit of $341.2 million available under
the Secured Credit Agreement.
Prior to April 2001, the Company's significant domestic financing was
provided by OI Inc. under the April 1998 Second Amended and Restated Credit
Agreement through intercompany loans. Borrowings under the Secured Credit
Agreement by the Company's subsidiaries and certain other domestic subsidiaries
of OI Group were used to repay all amounts outstanding under, and terminate the
Second Amended and Restated Credit Agreement.
The interest rate on borrowings under the Revolving Credit Facility is, at
the Borrower's option, the Base Rate or a reserve adjusted Eurodollar rate. The
interest rate on borrowings under the
F-44
<Page>
Revolving Credit Facility also includes a margin linked to the Company's
Consolidated Leverage Ratio, as defined in the Agreement. The margin is limited
to ranges of 1.75% to 2.00% for Eurodollar loans and .75% to 1.00% for Base Rate
loans. The interest rate on Overdraft Account loans is the Base Rate minus .50%.
The weighted average interest rate on borrowings outstanding under the Revolving
Credit Facility at December 31, 2001 was 4.12%. While no compensating balances
are required by the Agreement, the Borrowers must pay a facility fee on the
Revolving Credit Facility commitments of .50%.
The interest rate on borrowings under the Term Loan is, at the Borrowers'
option, the Base Rate or a reserve adjusted Eurodollar rate. The interest rate
on borrowings under the Term Loan also includes a margin of 2.50% for Eurodollar
loans and 1.50% for Base Rate loans. The weighted average interest rate on
borrowings outstanding under the Term Loan at December 31, 2001 was 4.50%.
The Agreement requires, among other things, the maintenance of certain
financial ratios, and restricts the creation of liens and certain types of
business activities and investments.
Borrowings under the Agreement are secured by substantially all the assets
of the Company's domestic subsidiaries and certain foreign subsidiaries, which
have a book value of approximately $1.9 billion. Borrowings are also secured by
a pledge of intercompany debt and equity in most of the Company's domestic
subsidiaries and certain stock of certain foreign subsidiaries.
During January 2002, a subsidiary of the Company completed a $1.0 billion
private placement of senior secured notes. The notes bear interest at 8 7/8% and
are due February 15, 2009. The notes are guaranteed by OI Group and
substantially all of its domestic subsidiaries. The assets of substantially all
of OI Group's domestic subsidiaries are pledged as security for the notes. The
Company's subsidiary used substantially all the net cash proceeds from the notes
to reduce its outstanding term loan under the Agreement by $980 million. As
such, the Company wrote off unamortized deferred financing fees in January 2002
related to the term loan and recorded an extraordinary charge totaling
$10.9 million less applicable income taxes of $4.2 million. The indenture for
the notes restricts among other things, the ability of the Company and its
restricted subsidiaries to borrow money, pay dividends on, or redeem or
repurchase stock, make investments, create liens, enter into certain
transactions with affiliates, and sell certain assets or merge with or into
other companies.
Annual maturities for all of the Company's long-term debt through 2006 are
as follows: 2002, $26.0 million; 2003, $43.0 million; 2004, $1,657.2 million;
2005, $70.9 million; and 2006, $5.0 million. These maturities reflect the
issuance of the senior secured notes in January 2002 as noted above.
Interest paid in cash aggregated $180.5 million for 2001, $117.7 million for
2000, and $116.6 million for 1999.
GUARANTEES OF DEBT. The Company has guaranteed the borrowings of certain of
OI Group's domestic subsidiaries totaling $850 million and has also guaranteed
the borrowings of certain foreign subsidiaries under the Agreement.
During the second quarter of 2001, OI Inc. sought and received consent from
the holders of a majority of the principal amount of each of its six series of
senior notes and debentures to amend the indenture governing those securities.
The amendments implement a previously announced offer by OI Group and the
Company to secure OI Inc.'s obligations under the indentures and the securities
with a second lien on the intercompany debt and capital stock of their direct
subsidiaries, including the Company. OI Group and the Company have also
guaranteed OI Inc.'s obligations under the indentures.
F-45
<Page>
OPERATING LEASES. Rent expense attributable to all operating leases was
$59.6 million in 2001, $44.1 million in 2000, and $43.2 million in 1999. Minimum
future rentals under operating leases are as follows: 2002, $33.2 million; 2003,
$26.2 million; 2004, $17.4 million; 2005, $12.2 million; 2006, $10.7 million;
and 2007 and thereafter, $25.5 million.
FOREIGN CURRENCY TRANSLATION. Aggregate foreign currency exchange gains
(losses) included in other costs and expenses were $3.9 million in 2001, $(0.4)
million in 2000, and $4.4 million in 1999.
DERIVATIVE INSTRUMENTS. The terms of OI Inc.'s former bank credit agreement
provided for foreign currency borrowings by certain of the Company's
international affiliates. Such borrowings provided a natural hedge against a
portion of the Company's investment. Under the April 2001 Secured Credit
Agreement, international affiliates are only permitted to borrow in U.S.
dollars. The Company's affiliates in Australia and the United Kingdom have
entered into currency swaps covering their initial borrowings under the
Agreement. These swaps are being used to manage the affiliates' exposure to
fluctuating foreign exchange rates by swapping the principal and interest
payments due under the Secured Credit Agreement.
As of December 31, 2001, the Company's affiliate in Australia has swapped
$650.0 million of borrowings into $1,275.0 million Australian dollars. This swap
matures on March 31, 2003, with interest resets every 90 days. The interest
reset terms of the swap approximate the terms of the U.S. dollar borrowings.
This derivative instrument swaps both the interest and principal from U.S.
dollars to Australian dollars and also swaps the interest rate from a U.S. based
rate to an Australian based rate. The Company's affiliate in the United Kingdom
has swapped $200.0 million of borrowings into 139.0 million British pounds. This
swap also matures on March 31, 2003, with interest resets every 90 days. This
derivative instrument swaps both the interest and principal from U.S. dollars to
British pounds and also swaps the interest rate from a U.S. based rate to a
British rate.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. for a purchase price of
approximately $150 million. The Company financed this purchase through
borrowings under the Secured Credit Agreement, which were transferred to Canada
through intercompany loans in U.S. dollars. The Company's affiliate in Canada
has entered into swap transactions to manage the affiliate's exposure to
fluctuating foreign exchange rates by swapping the principal and interest
portion of the intercompany loan. At December 31, 2001, the Canadian affiliate
has swapped $90.0 million of borrowings into $142.0 million Canadian dollars.
This swap matures on October 1, 2003. This derivative instrument swaps both the
interest and principal from U.S. dollars to Canadian dollars and also swaps the
interest rate from a U.S. based rate to a Canadian based rate. The affiliate has
also entered into a forward hedge related to the fourth quarter interest
receivable and payable related to the previous swap. The affiliate has also
entered in forward hedges which effectively swap $10.0 million of borrowings
into $16.0 million Canadian dollars. These hedges swap both the interest and
principal from U.S. dollars to Canadian dollars and mature monthly.
The Company recognizes the above derivatives on the balance sheet at fair
value. The Company accounts for the above swaps as fair value hedges. As such,
the changes in the value of the swaps are included in other expense and are
expected to substantially offset any exchange rate gains or losses on the
related U.S. dollar borrowings. For the year ended December 31, 2001, the amount
not offset was immaterial.
The Company also uses commodity futures contracts related to forecasted
natural gas requirements. The objective of these futures contracts is to limit
the fluctuations in prices paid and the potential volatility in earnings or cash
flows from future market price movements. During 2001, the Company entered into
commodity futures contracts for approximately 75% of its domestic natural gas
usage (approximately 1.2 billion BTUs) through March 2002. The Company has also
entered into additional contracts in 2002 with respect to its forecasted natural
gas usage through the end of 2002.
F-46
<Page>
The Company accounts for the above futures contracts on the balance sheet at
fair value. The effective portion of changes in the fair value of a derivative
that is designated as and meets the required criteria for a cash flow hedge is
recorded in accumulated other comprehensive income ("OCI") and reclassified into
earnings in the same period or periods during which the underlying hedged item
affects earnings. The ineffective portion of the change in the fair value of a
derivative designated as a cash flow hedge is recognized in current earnings.
The above futures contracts are accounted for as cash flow hedges at
December 31, 2001. Hedge accounting is only applied when the derivative is
deemed to be highly effective at offsetting anticipated cash flows of the hedged
transactions. For hedged forecasted transactions, hedge accounting will be
discontinued if the forecasted transaction is no longer probable to occur, and
any previously deferred gains or losses will be recorded to earnings
immediately.
During 2001, an unrealized net loss of $2.5 million (net of tax) related to
these commodity futures contracts was included in OCI. There was no
ineffectiveness recognized during the 2001.
ACCUMULATED OTHER COMPREHENSIVE LOSS. Foreign currency translation
adjustments and changes in certain derivative balances comprise accumulated
other comprehensive loss. Changes in accumulated other comprehensive loss was as
follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Balance at beginning of year.............................. $(479.4) $(343.5) $(179.9)
Net effect of exchange rate fluctuations.................. (68.6) (138.7) (161.5)
Deferred income taxes..................................... 2.6 2.8 (2.1)
Change in certain derivative balances..................... (2.5)
------- ------- -------
Balance at end of year.................................... $(547.9) $(479.4) $(343.5)
======= ======= =======
</Table>
The net effect of exchange rate fluctuations generally reflects changes in
the relative strength of the U.S. dollar against major foreign currencies
between the beginning and end of the year.
INCOME TAXES. Deferred income taxes reflect: (1) the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(2) carryovers and credits for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 2001 and 2000
are as follows (certain amounts from prior year have been reclassified to
conform to current year presentation):
<Table>
<Caption>
2001 2000
-------- --------
Deferred tax assets:
Tax loss carryovers....................................... $ 19.4 $ 15.3
Other..................................................... 139.8 130.3
------- -------
Total deferred tax assets............................... 159.2 145.6
Deferred tax liabilities:
Property, plant and equipment............................. 161.8 142.9
Inventory................................................. 35.8 39.2
Other..................................................... 117.6 75.7
------- -------
Total deferred tax liabilities.......................... 315.2 257.8
------- -------
Net deferred tax liabilities............................ $(156.0) $(112.2)
======= =======
</Table>
F-47
<Page>
Deferred taxes are included in the Consolidated Balance Sheets at
December 31, 2001 and 2000 as follows:
<Table>
<Caption>
2001 2000
-------- --------
Prepaid expenses............................................ $ 5.9 $ 36.9
Deferred tax liabilities.................................... (161.9) (149.1)
------- -------
Net deferred tax liabilities................................ $(156.0) $(112.2)
======= =======
</Table>
The provision (benefit) for income taxes consists of the following:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Current:
State..................................................... $(0.3) $ 0.3 $ 1.7
Foreign................................................... 15.1 87.9 61.8
----- ----- ------
14.8 88.2 63.5
----- ----- ------
Deferred:
U.S. Federal.............................................. 30.1 (17.4) 56.3
State..................................................... 3.6 (5.6) 6.7
Foreign................................................... 38.8 (45.4) (16.9)
----- ----- ------
72.5 (68.4) 46.1
----- ----- ------
Total:
U.S. Federal.............................................. 30.1 (17.4) 56.3
State..................................................... 3.3 (5.3) 8.4
Foreign................................................... 53.9 42.5 44.9
----- ----- ------
$87.3 $19.8 $109.6
===== ===== ======
</Table>
The provision for income taxes was calculated based on the following
components of earnings (loss) before income taxes:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Domestic.................................................... $ 58.3 $(74.8) $153.8
Foreign..................................................... 118.0 146.0 148.3
------ ------ ------
$176.3 $ 71.2 $302.1
====== ====== ======
</Table>
Income taxes paid in cash were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Domestic.................................................... $ 0.2 $ 0.5 $ 0.3
Foreign..................................................... 45.7 44.3 47.1
----- ----- -----
$45.9 $44.8 $47.4
===== ===== =====
</Table>
F-48
<Page>
A reconciliation of the provision for income taxes based on the statutory
U.S. Federal tax rate of 35% to the provision for income taxes is as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Pretax earnings at statutory U.S. Federal tax rate.......... $61.7 $24.9 $105.8
Increase (decrease) in provision for income taxes due to:
Amortization of goodwill.................................. 15.1 15.6 16.6
State taxes, net of federal benefit....................... 2.1 (3.4) 5.5
Foreign earnings at different rates....................... (3.4) (9.3) (17.0)
Adjustment for non-U.S. tax law changes................... 6.0 (9.3)
Other items............................................... 5.8 1.3 (1.3)
----- ----- ------
Provision for income taxes.................................. $87.3 $19.8 $109.6
----- ----- ------
Effective tax rate.......................................... 49.5% 27.9% 36.3%
===== ===== ======
</Table>
The Company is included with OI Inc.'s consolidated tax returns. OI Inc. has
net operating losses, alternative minimum tax credits, and research and
development credits available to offset future U.S. Federal income tax.
At December 31, 2001, the Company's equity in the undistributed earnings of
foreign subsidiaries for which income taxes had not been provided approximated
$529.9 million. It is not practicable to estimate the U.S. and foreign tax which
would be payable should these earnings be distributed.
RELATED PARTY TRANSACTIONS. Charges for administrative services are
allocated to the Company by OI Inc. based on an annual utilization level. Such
services include compensation and benefits administration, payroll processing,
use of certain general accounting systems, auditing, income tax planning and
compliance, and treasury services. Management believes that such transactions
are on terms no less favorable to the Company than those that could be obtained
from unaffiliated third parties. The following information summarizes the
Company's significant related party transactions:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Sales to affiliated companies............................. $ 1.0 $ 3.1 $ 4.3
===== ===== =====
Expenses:
Administrative services................................... 18.5 21.5 19.2
Corporate management fee.................................. 16.3 17.9 18.1
----- ----- -----
Total expenses.............................................. $34.8 $39.4 $37.3
===== ===== =====
</Table>
The above expenses are recorded in the statement of operations as follows:
<Table>
<Caption>
2000 2001 1999
-------- -------- --------
Cost of sales............................................... $16.4 $19.2 $17.0
Selling, general, and administrative expenses............... 18.4 20.2 20.3
----- ----- -----
Total expenses.............................................. $34.8 $39.4 $37.3
===== ===== =====
</Table>
Intercompany interest is charged to the Company from OI Inc. based on
intercompany debt balances. Intercompany interest expense is calculated using a
weighted average interest rate of external borrowings by OI Inc.
F-49
<Page>
PARTICIPATION IN OI INC. STOCK OPTION PLANS. The Company participates in
the stock option plans of OI Inc. under which employees of the Company may be
granted options to purchase common shares of OI Inc. No options may be exercised
in whole or in part during the first year after the date granted. In general,
subject to certain accelerated exercisability provisions, 50% of the options
become exercisable on the fifth anniversary of the date of the option grant,
with the remaining 50% becoming exercisable on the sixth anniversary date of the
option grant. In general, options expire following termination of employment or
the day after the tenth anniversary date of the option grant.
All options have been granted at prices equal to the market price of the
OI Inc.'s common stock on the date granted. Accordingly, the Company recognizes
no compensation expense related to the stock option plans. OI Inc. has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation."
A substantial number of the options have been granted to key employees of
another subsidiary of OI Inc., some of whose compensation costs are included in
an allocation of costs to all operating subsidiaries of OI Inc., including the
Company. It is not practical to determine an amount of additional compensation
allocable to the Company if OI Inc. had elected to recognize compensation cost
based on the fair value of the options granted at grant date as allowed by SFAS
No. 123.
PENSION BENEFIT PLANS. The Company participates in OI Inc.'s pension plans
for substantially all employees located in the United States. Benefits generally
are based on compensation for salaried employees and on length of service for
hourly employees. OI Inc.'s policy is to fund pension plans such that sufficient
assets will be available to meet future benefit requirements. Independent
actuaries determine pension costs for each subsidiary of OI Inc. included in the
plans; however, accumulated benefit obligation information and plan assets
pertaining to each subsidiary have not been separately determined. As such, the
accumulated benefit obligation and the plan assets related to the pension plans
for domestic employees have been retained by another subsidiary of OI Inc. Net
credits to results of operations for the Company's allocated portion of the
domestic pension costs amounted to $77.1 million in 2001, $82.9 million in 2000,
and $67.2 million in 1999.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. As part of the transaction,
the Company assumed certain of the pension liabilities of Consumers Packaging.
The information below includes the activity of these pension plans from
October 1, 2001 through December 31, 2001.
The Company's subsidiaries in the United Kingdom, Australia and Canada also
have pension plans covering substantially all employees. The following tables
relate to the Company's principal United Kingdom, Australian and Canadian
pension plans (the International Pension Plans).
The changes in the International Pension Plans benefit obligations for the
year were as follows:
<Table>
<Caption>
2001 2000
-------- --------
Obligations at beginning of year............................ $392.7 $400.5
Change in benefit obligations:
Service cost.............................................. 9.3 9.1
Interest cost............................................. 22.9 22.3
Actuarial (gain) loss..................................... (13.1) 6.9
Acquisitions.............................................. 170.0
Benefit payments.......................................... (25.5) (24.6)
Other..................................................... (11.9) (21.5)
------ ------
Net increase (decrease) in benefit obligations.......... 151.7 (7.8)
------ ------
Obligations at end of year.................................. $544.4 $392.7
====== ======
</Table>
F-50
<Page>
The changes in the fair value of the International Pension Plans' assets for
the year were as follows:
<Table>
<Caption>
2001 2000
-------- --------
Fair value at beginning of year............................. $416.1 $459.5
Change in fair value:
Actual return (loss) on plan assets....................... (26.6) 9.2
Benefit payments.......................................... (25.5) (24.6)
Acquisitions.............................................. 119.9
Other..................................................... (3.3) (28.0)
------ ------
Net increase (decrease) in fair value of assets......... 64.5 (43.4)
------ ------
Fair value at end of year................................... $480.6 $416.1
====== ======
</Table>
The funded status of the International Pension Plans at year end was as
follows:
<Table>
<Caption>
2001 2000
-------- --------
Plan assets at fair value................................... $480.6 $416.1
Projected benefit obligations............................... 544.4 392.7
------ ------
Funded status of the plans................................ (63.8) 23.4
Net unrecognized items:
Actuarial loss............................................ 46.7 1.7
Prior service cost........................................ 12.4 16.1
------ ------
59.1 17.8
------ ------
Net prepaid (accrued) pension............................... $ (4.7) $ 41.2
====== ======
</Table>
The net prepaid (accrued) pension is included in the Consolidated Balance
Sheets at December 31, 2001 and 2000 as follows:
<Table>
<Caption>
2001 2000
-------- --------
Prepaid pension............................................. $ 49.8 $41.2
Other liabilities........................................... (54.5)
------ -----
$ (4.7) $41.2
====== =====
</Table>
The components of the International Pension Plans' net pension expense
(credit) for the year were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Service cost................................................ $ 9.3 $ 9.1 $ 8.7
Interest cost............................................... 22.9 22.3 20.3
Expected asset return....................................... (36.8) (35.9) (26.2)
Amortization:
Prior service cost........................................ 1.2 0.8 1.0
Gain...................................................... (0.1)
------ ------ ------
Net amortization........................................ 1.2 0.7 1.0
------ ------ ------
Net expense (credit)........................................ $ (3.4) $ (3.8) $ 3.8
====== ====== ======
</Table>
F-51
<Page>
The following selected information is for plans with benefit obligations in
excess of the fair value of plan assets:
<Table>
<Caption>
2001
--------
Benefit obligations at the end of the year.................. $484.7
Fair value of plan assets at the end of the year............ 411.8
======
</Table>
The following information is for plans with accumulated benefit obligations
in excess of the fair value of plan assets:
<Table>
<Caption>
2001
--------
Accumulated benefit obligations at the end of the year...... $145.8
Fair value of plan assets at the end of the year............ 131.5
======
</Table>
For the International Pension Plans, the actuarial present value of benefit
obligations is based on a weighted discount rate of approximately 6.00% for 2001
and 5.25% for 2000. Future benefits are assumed to increase in a manner
consistent with past experience of the plans, which, to the extent benefits are
based on compensation, includes assumed salary increases on a weighted scale of
approximately 4.00% for 2001 and 2000. The expected weighted long-term rate of
return on assets was approximately 8.50% for 2001, 7.75% for 2000, and 6.75% for
1999. Amortization included in net pension credits is based on the average
remaining service of employees. Plan assets include marketable equity
securities, government and corporate debt securities, real estate and commingled
funds.
OI Inc. also sponsors several defined contribution plans for all salaried
and hourly U.S. employees of the Company. Participation is voluntary and
participants' contributions are based on their compensation. OI Inc. matches
substantially all plan participants' contributions up to various limits.
OI Inc. charges the Company for its share of the match. The Company's share of
the contributions to these plans amounted to $4.8 million in 2001, $5.6 million
in 2000, and $5.8 million in 1999.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. OI Inc. provides certain
retiree health care and life insurance benefits covering substantially all U.S.
salaried and certain hourly employees. Employees are generally eligible for
benefits upon retirement and completion of a specified number of years of
creditable service. Independent actuaries determine postretirement benefit costs
for each subsidiary of OI Inc.; however, accumulated postretirement benefit
obligation information pertaining to each subsidiary has not been separately
determined. As such, the accumulated postretirement benefit obligation has been
retained by another subsidiary of OI Inc.
The Company's net periodic postretirement benefit cost, as allocated by
OI Inc., for domestic employees was $4.8 million, $4.2 million, and
$4.8 million at December 31, 2001, 2000, and 1999, respectively.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. The information below is the
activity of the Canadian related retiree health care plan from October 1, 2001
through December 31, 2001.
F-52
<Page>
The changes in the Canadian postretirement benefit obligations were as
follows:
<Table>
<Caption>
2001
--------
Obligations at beginning of year............................ $ --
Change in benefit obligations:
Service cost.............................................. 0.1
Interest cost............................................. 0.5
Actuarial loss............................................ 0.1
Acquisition............................................... 31.2
Benefit payments.......................................... (0.2)
-----
Net change in benefit obligations....................... 31.7
-----
Obligations at end of year.................................. $31.7
=====
</Table>
The funded status of the Canadian postretirement benefit plans at year end
was as follows:
<Table>
<Caption>
2001
--------
Accumulated postretirement benefit obligations.............. $31.7
Net unrecognized items:
Prior service credits..................................... --
Actuarial loss............................................ (0.1)
-----
(0.1)
-----
Nonpension postretirement benefit obligations............... $31.6
=====
</Table>
The Company's nonpension postretirement benefit obligations are included
with other long term liabilities on the balance sheet.
The components of the Canadian net postretirement benefit cost were as
follows:
<Table>
<Caption>
2001
--------
Service cost................................................ $0.1
Interest cost............................................... 0.5
----
Net postretirement benefit cost............................. $0.6
====
</Table>
Assumed health care cost inflation was based on a rate of 9.00% in 2001,
declining to an ultimate rate of 5.50%. A one percentage point decrease in the
rate would have decreased the accumulated postretirement benefit obligation at
December 31, 2001 by $4.1 million and decreased the net postretirement benefit
cost for 2001 by $0.1 million. A one percentage point increase in the rate would
have increased the accumulated postretirement benefit obligation at
December 31, 2001 by $5.1 million and increased the net postretirement benefit
cost for 2001 by $0.1 million. The assumed weighted average discount rate used
in determining the accumulated postretirement benefit obligation was 6.50% at
December 31, 2001.
Benefits provided by OI Inc. for certain of the hourly retirees of the
Company are determined by collective bargaining. Most other domestic hourly
retirees receive health and life insurance benefits from a multi-employer trust
established by collective bargaining. Payments to the trust as required by the
bargaining agreements are based upon specified amounts per hour worked and were
$6.3 million in 2001, $7.5 million in 2000, and $8.0 million in 1999.
Postretirement health and life benefits for retirees of foreign affiliates are
generally provided through the national health care programs of the countries in
which the affiliates are located.
F-53
<Page>
OTHER REVENUE. Other revenue for the year ended December 31, 2001 includes
$10.3 million from the sale of a minerals business in Australia. Other revenue
for the year ended December 31, 1999 includes gains totaling $40.8 million
related to the sales of a U.S. glass container plant and a mold manufacturing
business in Colombia.
OTHER COSTS AND EXPENSES. Other costs and expenses for the year ended
December 31, 2001 include pretax charges of $96.2 million related to the
following: (1) charges of $65.2 million principally related to a restructuring
program and impairment at certain of the Company's international and domestic
operations. The charge includes the impairment of assets at the Company's
affiliate in Puerto Rico and the consolidation of manufacturing capacity and the
closing of a facility in Venezuela. The charge related to the Puerto Rico
facility of $25.2 million related to the impairment of assets. While the Company
intends to continue to operate this facility, an analysis of cash flows
indicated that the long-lived assets, including buildings, furnaces, and factory
equipment were impaired. The Company has written down the majority of the
long-lived assets of this facility. As a result of the consolidation of
manufacturing capacity and the closing of two facilities in Venezuela, the
Company recorded an impairment charge of approximately $22 million to
substantially write off buildings, furnaces, and factory equipment. The program
also includes consolidation of capacity at certain other international and
domestic facilities in response to decisions about pricing and market strategy.
The total planned reduction in workforce resulting from these actions will
involve approximately 220 employees. The restructuring program included
termination benefits of approximately $4.5 million, of which $1.5 million had
been paid by December 31, 2001; and (2) a charge of $31.0 million related to the
loss on the sale of the Company's facilities in India; The Company expects its
actions related to the restructuring and impairment charges to be completed
during the next several quarters.
Other costs and expenses for the year ended December 31, 2000 include
charges of $186.0 million principally related to a restructuring and capacity
realignment program. The program, initiated in the third quarter of 2000,
includes the consolidation of manufacturing capacity and a reduction of 175
employees in the U.S. salaried work force, or about 15%, principally as a result
of early retirement incentives. Also included in the program are a write-down of
plant and equipment for the Company's glass container affiliate in India and
certain other asset write-offs. Charges for manufacturing capacity
consolidations of $120.4 million principally involve U.S. glass container
facilities and reflect technology-driven improvements in productivity,
conversions from some juice and similar products to plastic containers, Company
and customer decisions regarding pricing and volume, and the further
concentration of production in the most strategically-located facilities. The
property, plant and equipment at the three facilities, consisting of land,
buildings, furnaces and factory equipment, was written down by $48.0 million to
substantially write off these assets. The Company expects that it will continue
to make cash payments over the next several quarters for benefits and on-going
closing costs related to the closing of these facilities.
As a result of reducing the U.S. salaried workforce in 2000, the Company
recognized a settlement gain of approximately $24 million related to its defined
benefit pension plan. This gain has been included in the net charge of
$22.0 million for early retirement incentives and special termination benefits.
The 2000 pretax charge of $40.0 million was related to the write-down of
property, plant, and equipment in India. Based on the Company's expectation of
future net cash flows of its affiliate in India, the related property, plant,
and equipment was written down to realizable values in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
F-54
<Page>
Selected information relating to the restructuring accruals follows:
<Table>
<Caption>
WRITE-DOWN
OF
EARLY RETIREMENT IMPAIRED
INCENTIVES AND PROPERTY,
SPECIAL TERMINATION PLANT AND
CAPACITY REALIGNMENT(A) BENEFITS EQUIPMENT OTHER TOTAL
----------------------- ------------------- ---------- -------- --------
2000 restructuring charges... $120.4 $ 22.0 $40.0 $ 3.6 $186.0
Write-down of assets to net
realizable value........... (48.4) (40.0) (3.6) (92.0)
Reduction of OI Inc. prepaid
pension asset.............. (13.0) (18.2) (31.2)
Increase in OI Inc.
nonpension postretirement
benefit liability.......... (0.6) (3.2) (3.8)
Net cash paid................ (1.2) (0.2) (1.4)
------ ------ ----- ----- ------
Remaining liabilities at
December 31, 2000.......... 57.2 0.4 -- -- 57.6
2001 restructuring charges... 23.5 41.7 65.2
Write-down of assets to net
realizable value........... (33.7) (41.7) (75.4)
Net cash paid................ (24.2) (0.4) (24.6)
------ ------ ----- ----- ------
Remaining liabilities at
December 31, 2001.......... $ 22.8 $ -- $ -- $ -- $ 22.8
====== ====== ===== ===== ======
</Table>
- ------------------------
(a) Capacity realignment includes charges for plant closing costs, severance
benefits, and write-downs of assets for disposal or abandonment as a result
of restructuring of manufacturing capacity. Write-downs of assets represent
the majority of the charges for 2001.
Other costs and expenses for the year ended December 31, 1999 include
charges totaling $20.8 million related principally to restructuring costs and
write-offs of certain assets in Europe and South America.
GEOGRAPHIC INFORMATION. The Company operates in the rigid packaging
industry. The Company has one primary reportable product segment within the
rigid packaging industry: Glass Containers. The Glass Containers segment
includes operations in North America, Europe, the Asia Pacific region, and South
America.
The Company evaluates performance and allocates resources based on earnings
before interest income, interest expense, provision for income taxes, minority
share owners' interests in earnings of subsidiaries, and extraordinary charges
(collectively "EBIT") excluding unusual items. Net sales as shown in the
geographic segment information are based on the location of the Company's
affiliate which recorded the sales.
F-55
<Page>
Financial information regarding the Company's geographic segments is as
follows:
<Table>
<Caption>
TOTAL
NORTH ASIA SOUTH GEOGRAPHIC
AMERICA(A) EUROPE PACIFIC AMERICA SEGMENTS
---------- -------- -------- -------- ----------
Net sales:
2001...................................... $1,662.2 $ 909.7 $660.6 $516.9 $3,749.4
2000...................................... 1,744.9 894.0 760.7 494.5 3,894.1
1999...................................... 1,777.5 965.6 815.0 412.6 3,970.7
======== ======== ====== ====== ========
EBIT, excluding unusual items:
2001...................................... $ 306.2 $ 93.2 $102.2 $ 91.6 $ 593.2
2000...................................... 317.4 81.9 123.9 77.2 600.4
1999...................................... 336.0 97.9 135.0 29.9 598.8
======== ======== ====== ====== ========
Unusual items:
2001:
Gain on the sale of a minerals business
in Australia.......................... $ 10.3 $ 10.3
Restructuring and impairment charges.... $ (35.1) $ (6.1) (0.8) $(23.2) (65.2)
Special employee benefit programs....... (4.4) (0.7) (2.3) (0.2) (7.6)
Loss on the sale of the Company's
facilities in India................... (31.0) (31.0)
2000:
Charges related to consolidation of
manufacturing capacity................ (124.0) 3.6 (120.4)
Charges related to early retirement
incentives and special termination
benefits.............................. (22.0) (22.0)
Charges related to impairment of
property, plant, and equipment in
India................................. (40.0) (40.0)
Other................................... (3.6) (3.6)
1999:
Gains related to the sales of two
manufacturing facilities.............. 30.8 10.0 40.8
Charges related principally to
restructuring costs and write-offs of
certain assets in Europe and South
America............................... (10.8) (10.0) (20.8)
</Table>
- ------------------------
(a) One customer accounted for 11.5%, 10.9%, and 10.3% of the Company's sales in
2001, 2000, and 1999 respectively.
The Company's net fixed assets by location are as follows:
<Table>
<Caption>
UNITED
STATES FOREIGN TOTAL
-------- -------- --------
2001..................................................... $605.0 $1,498.3 $2,103.3
2000..................................................... 612.6 1,510.3 2,122.9
1999..................................................... 676.7 1,631.1 2,307.8
====== ======== ========
</Table>
F-56
<Page>
Reconciliations to consolidated totals are as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Revenues:
Net sales............................................ $3,749.4 $3,894.1 $3,970.7
Royalties and net technical assistance............... 17.2 17.9 21.3
Equity earnings...................................... 18.9 18.7 21.0
Interest............................................. 22.3 27.5 22.4
Other................................................ 33.8 46.2 65.3
-------- -------- --------
Total................................................ $3,841.6 $4,004.4 $4,100.7
======== ======== ========
Reconciliation of EBIT to earnings before income taxes
and minority share owners' interests in earnings of
subsidiaries:
EBIT, excluding unusual items........................ $ 593.2 $ 600.4 $ 598.8
Unusual items........................................ (93.5) (186.0) 20.0
Net interest expense................................. (323.4) (343.2) (316.7)
-------- -------- --------
Total................................................ $ 176.3 $ 71.2 $ 302.1
======== ======== ========
</Table>
F-57
<Page>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Share Owner
Owens-Brockway Glass Container Inc.
We have audited the accompanying consolidated balance sheets of
Owens-Brockway Glass Container Inc. as of December 31, 2001 and 2000, and the
related consolidated statements of results of operations, net Parent investment,
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Owens-Brockway
Glass Container Inc. at December 31, 2001 and 2000, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
Toledo, Ohio
January 24, 2002
F-58
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
CONSOLIDATED RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Net sales................................................. $3,749.4 $3,891.6 $3,965.2
Other revenue............................................. 92.2 105.5 130.0
-------- -------- --------
3,841.6 3,997.1 4,095.2
Costs and expenses:
Manufacturing, shipping, and delivery..................... 2,946.4 3,090.1 3,165.2
Research and development.................................. 10.5 15.0 13.0
Engineering............................................... 30.0 31.2 35.2
Selling and administrative................................ 173.7 170.1 178.5
Net intercompany interest................................. 156.3 245.1 208.2
Other interest expense.................................... 189.4 126.6 131.2
Other..................................................... 159.0 254.4 64.3
-------- -------- --------
3,665.3 3,932.5 3,795.6
-------- -------- --------
Earnings before items below................................. 176.3 64.6 299.6
Provision for income taxes.................................. 87.3 24.0 108.7
-------- -------- --------
Minority share owners' interests in earnings of
subsidiaries.............................................. 19.6 20.6 11.2
-------- -------- --------
Net earnings................................................ $ 69.4 $ 20.0 $ 179.7
======== ======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-59
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
ASSETS
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
CURRENT ASSETS:
Cash, including time deposits of $28.2 ($45.3 in 2000).... $ 124.7 $ 169.6
Short-term investments.................................... 3.7
Receivables including amount from related parties of $1.6
($1.1 in 2000), less allowances of $32.2 ($40.6 in 2000)
for losses and discounts................................ 575.3 568.0
Inventories............................................... 611.0 611.4
Prepaid expenses.......................................... 23.9 57.0
-------- --------
Total current assets.................................... 1,334.9 1,409.7
OTHER ASSETS:
Equity investments........................................ 153.9 164.4
Repair parts inventories.................................. 173.5 201.6
Prepaid pension........................................... 49.8 41.2
Deposits, receivables, and other assets................... 421.4 337.4
Excess of purchase cost over net assets acquired, net of
accumulated amortization of $531.0 ($417.2 in 2000)..... 1,556.2 1,602.3
-------- --------
Total other assets...................................... 2,354.8 2,346.9
PROPERTY, PLANT, AND EQUIPMENT:
Land, at cost............................................. 135.1 130.9
Buildings and equipment, at cost:
Buildings and building equipment........................ 526.7 540.7
Factory machinery and equipment......................... 2,828.9 2,809.3
Transportation, office, and miscellaneous equipment..... 79.3 77.5
Construction in progress................................ 196.8 111.3
-------- --------
3,766.8 3,669.7
Less accumulated depreciation............................. 1,663.5 1,546.8
-------- --------
Net property, plant, and equipment...................... 2,103.3 2,122.9
-------- --------
Total assets................................................ $5,793.0 $5,879.5
======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-60
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(MILLIONS OF DOLLARS)
LIABILITIES AND NET PARENT INVESTMENT
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
CURRENT LIABILITIES:
Short-term loans.......................................... $ 40.4 $ 80.9
Accounts payable including amount to related parties of
$30.1 ($9.9 in 2000).................................... 337.0 313.9
Salaries and wages........................................ 89.4 67.0
U.S. and foreign income taxes............................. 0.2 6.3
Other accrued liabilities................................. 196.0 266.3
Long-term debt due within one year........................ 26.0 26.1
-------- --------
Total current liabilities............................... 689.0 760.5
EXTERNAL LONG-TERM DEBT..................................... 2,778.5 1,165.5
DEFERRED TAXES.............................................. 161.9 149.1
OTHER LIABILITIES........................................... 275.7 218.4
MINORITY SHARE OWNERS' INTERESTS............................ 159.7 165.1
NET PARENT INVESTMENT:
Investment by and advances from parent.................... 2,276.1 3,900.3
Accumulated other comprehensive loss...................... (547.9) (479.4)
-------- --------
Total net Parent investment............................. 1,728.2 3,420.9
-------- --------
Total liabilities and net Parent investment................. $5,793.0 $5,879.5
======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-61
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
CONSOLIDATED NET PARENT INVESTMENT
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
--------- -------- --------
INVESTMENT BY AND ADVANCES TO PARENT
Balance at beginning of year.............................. $ 3,900.3 $3,730.4 $3,701.8
Net intercompany transactions............................. (1,693.6) 174.9 (151.1)
Net earnings.............................................. 69.4 20.0 179.7
Net loss for the month ended December 31, 2000 for the
change in the fiscal year end of certain international
affiliates.............................................. (25.0)
--------- -------- --------
Balance at end of year.................................. 2,276.1 3,900.3 3,730.4
========= ======== ========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year.............................. (479.4) (343.5) (179.9)
Foreign currency translation adjustments.................. (66.0) (135.9) (163.6)
Change in certain derivative instruments.................. (2.5)
--------- -------- --------
Balance at end of year.................................. (547.9) (479.4) (343.5)
========= ======== ========
Total net Parent investment................................. $ 1,728.2 $3,420.9 $3,386.9
========= ======== ========
TOTAL COMPREHENSIVE INCOME (LOSS)
Net earnings.............................................. $ 69.4 $ 20.0 $ 179.7
Foreign currency translation adjustments.................. (66.0) (135.9) (163.6)
Change in certain derivative instruments.................. (2.5)
--------- -------- --------
Total................................................... $ 0.9 $ (115.9) $ 16.1
========= ======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-62
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
CONSOLIDATED CASH FLOWS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
--------- -------- --------
OPERATING ACTIVITIES:
Net earnings.............................................. $ 69.4 $ 20.0 $ 179.7
Non-cash charges (credits):
Depreciation............................................ 286.4 298.3 299.0
Amortization of deferred costs.......................... 72.3 62.2 66.1
Deferred tax provision (credit)......................... 72.5 (64.2) 45.2
Restructuring costs and write-offs of certain assets.... 65.2 186.0 20.8
(Gains) losses on asset sales........................... 20.7 (40.8)
Other................................................... (64.0) (80.0) (95.7)
Change in non-current operating assets.................... 18.9 (16.8) (7.8)
Change in non-current liabilities......................... (22.1) (0.1) 1.4
Change in components of working capital................... (28.7) (80.0) (69.9)
--------- ------- -------
Cash provided by operating activities................... 490.6 325.4 398.0
INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (364.8) (301.6) (441.9)
Acquisitions, net of cash acquired........................ (169.0) (77.2) (34.2)
Net cash proceeds from divestitures and other............. 80.0 31.7 327.6
--------- ------- -------
Cash utilized in investing activities................... (453.8) (347.1) (148.5)
FINANCING ACTIVITIES:
Additions to long-term debt............................... 2,593.0 172.3 222.6
Repayments of long-term debt.............................. (918.5) (357.0) (475.8)
Decrease in short-term loans.............................. (35.7) (40.4) (14.9)
Net change in intercompany debt........................... (1,643.0) 200.7 8.1
Collateral deposits for certain derivative instruments.... (26.1)
Payment of finance fees................................... (45.3)
--------- ------- -------
Cash utilized in financing activities................... (75.6) (24.4) (260.0)
Effect of exchange rate fluctuations on cash.............. (6.1) 16.1 (17.9)
Effect of change in fiscal year end for certain
international affiliates................................ 31.9
--------- ------- -------
Increase (decrease) in cash................................. (44.9) 1.9 (28.4)
Cash at beginning of year................................... 169.6 167.7 196.1
--------- ------- -------
Cash at end of year......................................... $ 124.7 $ 169.6 $ 167.7
========= ======= =======
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-63
<Page>
STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATED STATEMENTS. The consolidated financial statements of
Owens-Brockway Glass Container, Inc. ("Company") include the accounts of its
subsidiaries. Newly acquired subsidiaries have been included in the consolidated
financial statements from dates of acquisition. Prior to December 2000,
substantially all of the Company's consolidated foreign subsidiaries reported
their results of operations on a one-month lag, which allowed additional time to
compile the results. The portion of the Company's consolidated net earnings for
2000 that was attributable to the earnings of these subsidiaries for the
12 months ended November 30, 2000 was $64.7 million ($107.5 million before
unusual items). Beginning in December 2000, the one-month lag was eliminated. As
a result, the December 2000 results of operations for these subsidiaries, which
amounted to a net loss of $25.0 million, was recorded directly to retained
earnings in December 2000. Earnings of most of these subsidiaries for the month
of December are typically lower than most other months due to customer and
factory holidays, fewer shipping days, and extended maintenance activity. The
loss in December 2000 was greater than recent December periods as a result of
lower than normal shipments for the month, lower selling prices due to product
mix and currency exchange rates, high energy costs, and increased furnace repair
work at several facilities.
The Company uses the equity method of accounting for investments in which it
has a significant ownership interest, generally 20% to 50%. Other investments
are accounted for at cost.
RELATIONSHIP WITH OWENS-BROCKWAY PACKAGING, INC., OWENS-ILLINOIS
GROUP, INC. AND OWENS-ILLINOIS, INC. The Company is a wholly-owned subsidiary of
Owens-Brockway Packaging, Inc. ("OB Packaging"), and an indirect subsidiary of
Owens-Illinois Group, Inc. ("OI Group") and Owens-Illinois, Inc. ("OI Inc.").
Although OI Inc. does not conduct any operations, it has substantial obligations
related to outstanding indebtedness, dividends for preferred stock and
asbestos-related payments. OI Inc. relies primarily on distributions from its
direct and indirect subsidiaries to meet these obligations.
For federal and certain state income tax purposes, the taxable income of the
Company is included in the consolidated tax returns of OI Inc. and income taxes
are allocated to the Company on a basis consistent with separate returns.
NATURE OF OPERATIONS. The Company is a leading manufacturer of glass
container products. The Company's principal product lines in the Glass
Containers product segment are glass containers for the food and beverage
industries. The Company has glass container operations located in 19 countries.
The principal markets and operations for the Company's glass products are in
North America, Europe, South America, and Australia. One customer accounted for
11.5%, 10.9%, and 10.3% of the Company's sales in 2001, 2000, and 1999,
respectively.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management of the Company to make estimates and assumptions that affect certain
amounts reported in the financial statements and accompanying notes. Actual
results may differ from those estimates, at which time the Company would revise
its estimates accordingly.
CASH. The Company defines "cash" as cash and time deposits with maturities
of three months or less when purchased.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The carrying amounts reported for
cash, short-term investments and short-term loans approximate fair value. In
addition, carrying amounts approximate fair value for certain long-term debt
obligations subject to frequently redetermined interest rates. Derivative
financial instruments are included on the balance sheet at fair value.
F-64
<Page>
INVENTORY VALUATION. The Company values most U.S. inventories at the lower
of last-in, first-out (LIFO) cost or market. Other inventories are valued at the
lower of standard costs (which approximate average costs) or market.
EXCESS OF PURCHASE COST OVER NET ASSETS ACQUIRED. Through December 31,
2001, the excess of purchase cost over net assets acquired was being amortized
over 40 years. The Company evaluated the recoverability of long-lived assets
based on undiscounted projected cash flows, excluding interest and taxes, when
factors indicate that an impairment may exist. (See "New Accounting Standards").
PROPERTY, PLANT, AND EQUIPMENT. In general, depreciation is computed using
the straight-line method. Renewals and improvements are capitalized. Maintenance
and repairs are expensed as incurred.
REVENUE RECOGNITION. The Company recognizes sales, net of estimated
discounts and allowances, when title to products is transferred to customers.
Shipping and handling costs are included with manufacturing, shipping, and
delivery costs.
INCOME TAXES ON UNDISTRIBUTED EARNINGS. In general, the Company plans to
continue to reinvest the undistributed earnings of foreign subsidiaries and
foreign corporate joint ventures accounted for by the equity method.
Accordingly, taxes are provided only on that amount of undistributed earnings in
excess of planned reinvestments.
FOREIGN CURRENCY TRANSLATION. The assets and liabilities of certain
affiliates and associates are translated at current exchange rates and any
related translation adjustments are recorded directly in share owners' equity.
For the years ended December 31, 2001, 2000, and 1999, the Company's affiliates
located in Venezuela operated in a "highly inflationary" economy. As such,
certain assets of these affiliates were translated at historical exchange rates
and all translation adjustments are reflected in the statements of Consolidated
Results of Operations. Effective January 1, 2002, the affiliates in Venezuela
will no longer be considered operating in a "highly inflationary" economy.
Assets and liabilities will be translated at current exchange rates with any
related translation adjustments being recorded directly to net Parent
investment.
NEW ACCOUNTING STANDARDS. In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 141, "Business
Combinations," which is effective for business combinations completed after
June 30, 2001. Also in July 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS No. 142"), which is effective for goodwill acquired
after June 30, 2001. For goodwill acquired prior to July 1, 2001, FAS No. 142
will be effective for fiscal years beginning after December 15, 2001. Under FAS
No. 142, Goodwill and intangible assets with indefinite lives will no longer be
amortized but will be reviewed annually (or more frequently if impairment
indicators arise) for impairment.
The Company estimates that adopting FAS No. 142 will increase 2002 earnings
before the effects of the accounting change by approximately $45 million. The
Company has not completed its assessment of the effects that adopting FAS
No. 142 will have on the reported value of goodwill.
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS No. 144"). FAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("FAS No. 121"). FAS No. 144 provides additional guidance on
estimating cash flows when performing a recoverability test, requires that a
long-lived asset (group) to be disposed of other than by sale (e.g. abandoned)
be classified as "held and used" until it is disposed of, and establishes more
restrictive criteria to classify an asset (group) as "held for sale", however it
retains the fundamental provisions of FAS No. 121 related to the recognition and
measurement of the
F-65
<Page>
impairment of long-lived assets to be "held and used." FAS No. 144 is effective
for fiscal years beginning after December 15, 2001 and transition is prospective
for committed disposal activities that are initiated after the effective date of
FAS No. 144's initial application. The impact of adopting FAS No. 144 on the
Company's reporting and disclosure is not expected to be material to the
Company's financial position or results of operations.
FINANCIAL REVIEW
TABULAR DATA IN MILLIONS OF DOLLARS
CHANGES IN COMPONENTS OF WORKING CAPITAL RELATED TO OPERATIONS. Changes in
the components of working capital related to operations (net of the effects
related to acquisitions and divestitures) were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Decrease (increase) in current assets:
Short-term investments.................................... $ 3.6 $ 12.0 $(15.2)
Receivables............................................... 2.3 (35.1) 19.9
Net intercompany receivable............................... 17.2 (43.9) 11.0
Inventories............................................... 24.3 (19.5) (10.1)
Prepaid expenses.......................................... 0.8 3.8 (25.3)
Increase (decrease) in current liabilities:
Accounts payable and accrued liabilities.................. (46.3) (20.1) (47.2)
Salaries and wages........................................ 1.4 (2.6) 8.6
U.S. and foreign income taxes............................. (32.0) 25.4 (11.6)
------ ------ ------
$(28.7) $(80.0) $(69.9)
------ ------ ------
</Table>
INVENTORIES. Major classes of inventory are as follows:
<Table>
<Caption>
2001 2000
-------- --------
Finished goods.............................................. $507.2 $494.9
Work in process............................................. 5.9 7.9
Raw materials............................................... 53.5 58.0
Operating supplies.......................................... 44.4 50.6
------ ------
$611.0 $611.4
====== ======
</Table>
If the inventories which are valued on the LIFO method had been valued at
standard costs, which approximate current costs, consolidated inventories would
be higher than reported by $14.7 million and $10.8 million, at December 31, 2001
and 2000, respectively.
Inventories which are valued at the lower of standard costs (which
approximate average costs), or market at December 31, 2001 and 2000 were
approximately $465.9 million and $420.0 million, respectively.
F-66
<Page>
EQUITY INVESTMENTS. Summarized information pertaining to the Company's
equity associates follows:
<Table>
<Caption>
2001 2000
-------- --------
At end of year:
Equity in undistributed earnings:
Foreign................................................. $ 86.2 $ 85.6
Domestic................................................ 21.6 19.0
------ ------
Total................................................. $107.8 $104.6
====== ======
Equity in cumulative translation adjustment................. $(54.2) $(46.7)
====== ======
</Table>
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
For the year:
Equity in earnings:
Foreign................................................. $ 7.3 $ 4.7 $ 8.2
Domestic................................................ 11.6 14.0 12.8
----- ----- -----
Total................................................. $18.9 $18.7 $21.0
===== ===== =====
Dividends received.......................................... $18.2 $13.9 $ 9.7
===== ===== =====
</Table>
EXTERNAL LONG-TERM DEBT. The following table summarizes the external
long-term debt of the Company at December 31, 2001 and 2000:
<Table>
<Caption>
2001 2000
-------- --------
Secured Credit Agreement:
Revolving Credit Facility................................. $1,560.4
Term Loan................................................. 1,045.0
Second Amended and Restated Credit Agreement:
Revolving Credit Facility:
Offshore Loans:
Australian Dollars 1.39 billion....................... $ 775.3
British Pounds 125.0 million.......................... 186.8
Italian Lira 18.0 billion............................. 8.7
Other....................................................... 199.1 220.8
-------- --------
2,804.5 1,191.6
Less amounts due within one year.......................... 26.0 26.1
-------- --------
External long-term debt................................. $2,778.5 $1,165.5
======== ========
</Table>
In April 2001, OI Group and certain of its subsidiaries, including the
Company and certain of its foreign subsidiaries (the "Borrowers") entered into
the Secured Credit Agreement (the "Agreement") with a group of banks, which
expires on March 31, 2004. The Agreement provides for a $3.0 billion revolving
credit facility (the "Revolving Credit Facility") and a $1.5 billion term loan
(the "Term Loan"). The Agreement includes an Overdraft Account Facility
providing for aggregate borrowings up to $50 million which reduce the amount
available for borrowing under the Revolving Credit Facility. The Agreement also
provides for the issuance of letters of credit totaling up to $500 million,
which also reduce the amount available for borrowings under the Revolving Credit
Facility.
Under the Secured Credit Agreement, the Company and its subsidiaries have a
total commitment of $2.0 billion provided by the Revolving Credit Facility and a
total commitment of $1.045 billion
F-67
<Page>
provided by the Term Loan. At December 31, 2001, the Company and its
subsidiaries had unused credit of $341.2 million available under the Secured
Credit Agreement.
Prior to April 2001, the Company's significant domestic financing was
provided by OI Inc. under the April 1998 Second Amended and Restated Credit
Agreement through intercompany loans. Borrowings under the Secured Credit
Agreement by the Company, its subsidiaries and certain other domestic
subsidiaries of OI Group were used to repay all amounts outstanding under, and
terminate the Second Amended and Restated Credit Agreement.
The interest rate on borrowings under the Revolving Credit Facility is, at
the Borrower's option, the Base Rate or a reserve adjusted Eurodollar rate. The
interest rate on borrowings under the Revolving Credit Facility also includes a
margin linked to the Company's Consolidated Leverage Ratio, as defined in the
Agreement. The margin is limited to ranges of 1.75% to 2.00% for Eurodollar
loans and .75% to 1.00% for Base Rate loans. The interest rate on Overdraft
Account loans is the Base Rate minus .50%. The weighted average interest rate on
borrowings outstanding under the Revolving Credit Facility at December 31, 2001
was 4.12%. While no compensating balances are required by the Agreement, the
Borrowers must pay a facility fee on the Revolving Credit Facility commitments
of .50%.
The interest rate on borrowings under the Term Loan is, at the Borrowers'
option, the Base Rate or a reserve adjusted Eurodollar rate. The interest rate
on borrowings under the Term Loan also includes a margin of 2.50% for Eurodollar
loans and 1.50% for Base Rate loans. The weighted average interest rate on
borrowings outstanding under the Term Loan at December 31, 2001 was 4.50%.
The Agreement requires, among other things, the maintenance of certain
financial ratios, and restricts the creation of liens and certain types of
business activities and investments.
Borrowings under the Agreement are secured by substantially all the assets
of the Company, its domestic subsidiaries and certain foreign subsidiaries,
which have a book value of approximately $1.9 billion. Borrowings are also
secured by a pledge of intercompany debt and equity in most of the Company's
domestic subsidiaries and certain stock of certain foreign subsidiaries.
During January 2002, the Company completed a $1.0 billion private placement
of senior secured notes. The notes bear interest at 8 7/8% and are due
February 15, 2009. The notes are guaranteed by OI Group and substantially all of
its domestic subsidiaries. The assets of substantially all of OI Group's
domestic subsidiaries are pledged as security for the notes. The Company used
substantially all the net cash proceeds from the notes to reduce its outstanding
term loan under the Agreement by $980 million. As such, the Company wrote off
unamortized deferred financing fees in January 2002 related to the term loan and
recorded an extraordinary charge totaling $10.9 million less applicable income
taxes of $4.2 million. The indenture for the notes restricts among other things,
the ability of the Company and its restricted subsidiaries to borrow money, pay
dividends on, or redeem or repurchase stock, make investments, create liens,
enter into certain transactions with affiliates, and sell certain assets or
merge with or into other companies.
Annual maturities for all of the Company's long-term debt through 2006 are
as follows: 2002, $26.0 million; 2003, $43.0 million; 2004, $1,657.2 million;
2005, $70.9 million; and 2006, $5.0 million. These maturities reflect the
issuance of the senior secured notes in January 2002 as noted above.
Interest paid in cash aggregated $180.5 million for 2001, $117.7 million for
2000, and $116.6 million for 1999.
GUARANTEES OF DEBT. The Company has guaranteed the borrowings of certain of
OI Inc.'s domestic subsidiaries totaling $850 million and has also guaranteed
the borrowings of certain foreign subsidiaries under the Agreement.
F-68
<Page>
OPERATING LEASES. Rent expense attributable to all operating leases was
$59.6 million in 2001, $44.1 million in 2000, and $43.2 million in 1999. Minimum
future rentals under operating leases are as follows: 2002, $33.2 million; 2003,
$26.2 million; 2004, $17.4 million; 2005, $12.2 million; 2006, $10.7 million;
and 2007 and thereafter, $25.5 million.
FOREIGN CURRENCY TRANSLATION. Aggregate foreign currency exchange gains
(losses) included in other costs and expenses were $3.9 million in 2001, $(0.4)
million in 2000, and $4.4 million in 1999.
DERIVATIVE INSTRUMENTS. The terms of OI Inc.'s former bank credit agreement
provided for foreign currency borrowings by certain of the Company's
international affiliates. Such borrowings provided a natural hedge against a
portion of the Company's investment. Under the April 2001 Secured Credit
Agreement, international affiliates are only permitted to borrow in U.S.
dollars. The Company's affiliates in Australia and the United Kingdom have
entered into currency swaps covering their initial borrowings under the
Agreement. These swaps are being used to manage the affiliates' exposure to
fluctuating foreign exchange rates by swapping the principal and interest
payments due under the Secured Credit Agreement.
As of December 31, 2001, the Company's affiliate in Australia has swapped
$650.0 million of borrowings into $1,275.0 million Australian dollars. This swap
matures on March 31, 2003, with interest resets every 90 days. The interest
reset terms of the swap approximate the terms of the U.S. dollar borrowings.
This derivative instrument swaps both the interest and principal from U.S.
dollars to Australian dollars and also swaps the interest rate from a U.S. based
rate to an Australian based rate. The Company's affiliate in the United Kingdom
has swapped $200.0 million of borrowings into 139.0 million British pounds. This
swap also matures on March 31, 2003, with interest resets every 90 days. This
derivative instrument swaps both the interest and principal from U.S. dollars to
British pounds and also swaps the interest rate from a U.S. based rate to a
British rate.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. for a purchase price of
approximately $150 million. The Company financed this purchase through
borrowings under the Secured Credit Agreement, which were transferred to Canada
through intercompany loans in U.S. dollars. The Company's affiliate in Canada
has entered into swap transactions to manage the affiliate's exposure to
fluctuating foreign exchange rates by swapping the principal and interest
portion of the intercompany loan. At December 31, 2001, the Canadian affiliate
has swapped $90.0 million of borrowings into $142.0 million Canadian dollars.
This swap matures on October 1, 2003. This derivative instrument swaps both the
interest and principal from U.S. dollars to Canadian dollars and also swaps the
interest rate from a U.S. based rate to a Canadian based rate. The affiliate has
also entered into a forward hedge related to the fourth quarter interest
receivable and payable related to the previous swap. The affiliate has also
entered in forward hedges which effectively swap $10.0 million of borrowings
into $16.0 million Canadian dollars. These hedges swap both the interest and
principal from U.S. dollars to Canadian dollars and mature monthly.
The Company recognizes the above derivatives on the balance sheet at fair
value. The Company accounts for the above swaps as fair value hedges. As such,
the changes in the value of the swaps are included in other expense and are
expected to substantially offset any exchange rate gains or losses on the
related U.S. dollar borrowings. For the year ended December 31, 2001, the amount
not offset was immaterial.
The Company also uses commodity futures contracts related to forecasted
natural gas requirements. The objective of these futures contracts is to limit
the fluctuations in prices paid and the potential volatility in earnings or cash
flows from future market price movements. During 2001, the Company entered into
commodity futures contracts for approximately 75% of its domestic natural gas
usage (approximately 1.2 billion BTUs) through March 2002. The Company has also
entered into additional contracts in 2002 with respect to its forecasted natural
gas usage through the end of 2002.
F-69
<Page>
The Company accounts for the above futures contracts on the balance sheet at
fair value. The effective portion of changes in the fair value of a derivative
that is designated as and meets the required criteria for a cash flow hedge is
recorded in accumulated other comprehensive income ("OCI") and reclassified into
earnings in the same period or periods during which the underlying hedged item
affects earnings. The ineffective portion of the change in the fair value of a
derivative designated as a cash flow hedge is recognized in current earnings.
The above futures contracts are accounted for as cash flow hedges at
December 31, 2001. Hedge accounting is only applied when the derivative is
deemed to be highly effective at offsetting anticipated cash flows of the hedged
transactions. For hedged forecasted transactions, hedge accounting will be
discontinued if the forecasted transaction is no longer probable to occur, and
any previously deferred gains or losses will be recorded to earnings
immediately.
During 2001, an unrealized net loss of $2.5 million (net of tax) related to
these commodity futures contracts was included in OCI. There was no
ineffectiveness recognized during the 2001.
ACCUMULATED OTHER COMPREHENSIVE LOSS. Foreign currency translation
adjustments and changes in certain derivative balances comprise accumulated
other comprehensive loss. Changes in accumulated other comprehensive loss was as
follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Balance at beginning of year.............................. $(479.4) $(343.5) $(179.9)
Net effect of exchange rate fluctuations.................. (68.6) (138.7) (161.5)
Deferred income taxes..................................... 2.6 2.8 (2.1)
Change in certain derivative balances..................... (2.5)
------- ------- -------
Balance at end of year.................................... $(547.9) $(479.4) $(343.5)
======= ======= =======
</Table>
The net effect of exchange rate fluctuations generally reflects changes in
the relative strength of the U.S. dollar against major foreign currencies
between the beginning and end of the year.
INCOME TAXES. Deferred income taxes reflect: (1) the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(2) carryovers and credits for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 2001 and 2000
are as follows (certain amounts from prior year have been reclassified to
conform to current year presentation):
<Table>
<Caption>
2001 2000
-------- --------
Deferred tax assets:
Tax loss carryovers....................................... $ 19.4 $ 15.3
Other..................................................... 139.8 130.3
------- -------
Total deferred tax assets............................... 159.2 145.6
Deferred tax liabilities:
Property, plant and equipment............................. 161.8 142.9
Inventory................................................. 35.8 39.2
Other..................................................... 117.6 75.7
------- -------
Total deferred tax liabilities.......................... 315.2 257.8
------- -------
Net deferred tax liabilities............................ $(156.0) $(112.2)
======= =======
</Table>
F-70
<Page>
Deferred taxes are included in the Consolidated Balance Sheets at
December 31, 2001 and 2000 as follows:
<Table>
<Caption>
2001 2000
-------- --------
Prepaid expenses............................................ $ 5.9 $ 36.9
Deferred tax liabilities.................................... (161.9) (149.1)
------- -------
Net deferred tax liabilities................................ $(156.0) $(112.2)
======= =======
</Table>
The provision (benefit) for income taxes consists of the following:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Current:
State..................................................... $(0.3) $ 0.3 $ 1.7
Foreign................................................... 15.1 87.9 61.8
----- ------ ------
14.8 88.2 63.5
----- ------ ------
Deferred:
U.S. Federal.............................................. 30.1 (14.1) 55.5
State..................................................... 3.6 (4.7) 6.6
Foreign................................................... 38.8 (45.4) (16.9)
----- ------ ------
72.5 (64.2) 45.2
===== ====== ======
Total:
U.S. Federal.............................................. 30.1 (14.1) 55.5
State..................................................... 3.3 (4.4) 8.3
Foreign................................................... 53.9 42.5 44.9
----- ------ ------
$87.3 $ 24.0 $108.7
===== ====== ======
</Table>
The provision for income taxes was calculated based on the following
components of earnings (loss) before income taxes:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Domestic.................................................... $ 58.3 $(81.4) $151.3
Foreign..................................................... 118.0 146.0 148.3
------ ------ ------
$176.3 $ 64.6 $299.6
------ ------ ------
</Table>
Income taxes paid in cash were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Domestic.................................................... $ 0.2 $ 0.5 $ 0.3
Foreign..................................................... 45.7 44.3 47.1
----- ----- -----
$45.9 $44.8 $47.4
===== ===== =====
</Table>
F-71
<Page>
A reconciliation of the provision for income taxes based on the statutory
U.S. Federal tax rate of 35% to the provision for income taxes is as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Pretax earnings at statutory U.S. Federal tax rate.......... $61.7 $22.6 $104.9
Increase (decrease) in provision for income taxes due to:
Amortization of goodwill.................................. 15.1 15.6 16.6
State taxes, net of federal benefit....................... 2.1 (2.9) 5.5
Foreign earnings at different rates....................... (3.4) (9.3) (17.0)
Adjustment for non-U.S. tax law changes................... 6.0 (9.3)
Other items............................................... 5.8 7.3 (1.3)
----- ----- ------
Provision for income taxes.................................. $87.3 $24.0 $108.6
===== ===== ======
Effective tax rate.......................................... 49.5% 37.2% 36.3%
===== ===== ======
</Table>
The Company is included with OI Inc.'s consolidated tax returns. OI Inc. has
net operating losses, alternative minimum tax credits, and research and
development credits available to offset future U.S. Federal income tax.
At December 31, 2001, the Company's equity in the undistributed earnings of
foreign subsidiaries for which income taxes had not been provided approximated
$529.9 million. It is not practicable to estimate the U.S. and foreign tax which
would be payable should these earnings be distributed.
RELATED PARTY TRANSACTIONS. Charges for administrative services are
allocated to the Company by OI Inc. based on an annual utilization level. Such
services include compensation and benefits administration, payroll processing,
use of certain general accounting systems, auditing, income tax planning and
compliance, and treasury services. Management believes that such transactions
are on terms no less favorable to the Company than those that could be obtained
from unaffiliated third parties. The following information summarizes the
Company's significant related party transactions:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Sales to affiliated companies............................. $ 1.0 $ 3.1 $ 4.3
===== ===== =====
Expenses:
Administrative services................................... 18.5 21.5 19.2
Corporate management fee.................................. 16.3 17.9 18.1
----- ----- -----
Total expenses.............................................. $34.8 $39.4 $37.3
===== ===== =====
</Table>
The above expenses are recorded in the statement of operations as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Cost of sales............................................... $16.4 $19.2 $17.0
Selling, general, and administrative expenses............... 18.4 20.2 20.3
----- ----- -----
Total expenses.............................................. $34.8 $39.4 $37.3
===== ===== =====
</Table>
Intercompany interest is charged to the Company from OI Inc. based on
intercompany debt balances. Intercompany interest expense is calculated using a
weighted average interest rate of external borrowings by OI Inc.
F-72
<Page>
PARTICIPATION IN OI INC. STOCK OPTION PLANS. The Company participates in
the stock option plans of OI Inc. under which employees of the Company may be
granted options to purchase common shares of OI Inc. No options may be exercised
in whole or in part during the first year after the date granted. In general,
subject to certain accelerated exercisability provisions, 50% of the options
become exercisable on the fifth anniversary of the date of the option grant,
with the remaining 50% becoming exercisable on the sixth anniversary date of the
option grant. In general, options expire following termination of employment or
the day after the tenth anniversary date of the option grant.
All options have been granted at prices equal to the market price of the
OI Inc.'s common stock on the date granted. Accordingly, the Company recognizes
no compensation expense related to the stock option plans. OI Inc. has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation."
A substantial number of the options have been granted to key employees of
another subsidiary of OI Inc., some of whose compensation costs are included in
an allocation of costs to all operating subsidiaries of OI Inc., including the
Company. It is not practical to determine an amount of additional compensation
allocable to the Company if OI Inc. had elected to recognize compensation cost
based on the fair value of the options granted at grant date as allowed by SFAS
No. 123.
PENSION BENEFIT PLANS. The Company participates in OI Inc.'s pension plans
for substantially all employees located in the United States. Benefits generally
are based on compensation for salaried employees and on length of service for
hourly employees. OI Inc.'s policy is to fund pension plans such that sufficient
assets will be available to meet future benefit requirements. Independent
actuaries determine pension costs for each subsidiary of OI Inc. included in the
plans; however, accumulated benefit obligation information and plan assets
pertaining to each subsidiary have not been separately determined. As such, the
accumulated benefit obligation and the plan assets related to the pension plans
for domestic employees have been retained by another subsidiary of OI Inc. Net
credits to results of operations for the Company's allocated portion of the
domestic pension costs amounted to $77.1 million in 2001, $82.9 million in 2000,
and $67.2 million in 1999.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. As part of the transaction,
the Company assumed certain of the pension liabilities of Consumers Packaging.
The information below includes the activity of these pension plans from
October 1, 2001 through December 31, 2001.
The Company's subsidiaries in the United Kingdom, Australia and Canada also
have pension plans covering substantially all employees. The following tables
relate to the Company's principal United Kingdom, Australian and Canadian
pension plans (the International Pension Plans).
The changes in the International Pension Plans benefit obligations for the
year were as follows:
<Table>
<Caption>
2001 2000
-------- --------
Obligations at beginning of year............................ $392.7 $400.5
Change in benefit obligations:
Service cost.............................................. 9.3 9.1
Interest cost............................................. 22.9 22.3
Actuarial (gain) loss..................................... (13.1) 6.9
Acquisitions.............................................. 170.0
Benefit payments.......................................... (25.5) (24.6)
Other..................................................... (11.9) (21.5)
------ ------
Net increase (decrease) in benefit obligations.......... 151.7 (7.8)
------ ------
Obligations at end of year.................................. $544.4 $392.7
====== ======
</Table>
F-73
<Page>
The changes in the fair value of the International Pension Plans' assets for
the year were as follows:
<Table>
<Caption>
2001 2000
-------- --------
Fair value at beginning of year............................. $416.1 $459.5
Change in fair value:
Actual return (loss) on plan assets....................... (26.6) 9.2
Benefit payments.......................................... (25.5) (24.6)
Acquisitions.............................................. 119.9
Other..................................................... (3.3) (28.0)
------ ------
Net increase (decrease) in fair value of assets......... 64.5 (43.4)
------ ------
Fair value at end of year................................... $480.6 $416.1
====== ======
</Table>
The funded status of the International Pension Plans at year end was as
follows:
<Table>
<Caption>
2001 2000
-------- --------
Plan assets at fair value................................... $480.6 $416.1
Projected benefit obligations............................... 544.4 392.7
------ ------
Funded status of the plans................................ (63.8) 23.4
Net unrecognized items:
Actuarial loss............................................ 46.7 1.7
Prior service cost........................................ 12.4 16.1
------ ------
59.1 17.8
------ ------
Net prepaid (accrued) pension............................... $ (4.7) $ 41.2
====== ======
</Table>
The net prepaid (accrued) pension is included in the Consolidated Balance
Sheets at December 31, 2001 and 2000 as follows:
<Table>
<Caption>
2001 2000
-------- --------
Prepaid pension............................................. $ 49.8 $41.2
Other liabilities........................................... (54.5)
------ -----
$ (4.7) $41.2
====== =====
</Table>
The components of the International Pension Plans' net pension expense
(credit) for the year were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Service cost................................................ $ 9.3 $ 9.1 $ 8.7
Interest cost............................................... 22.9 22.3 20.3
Expected asset return....................................... (36.8) (35.9) (26.2)
Amortization:
Prior service cost........................................ 1.2 0.8 1.0
Gain...................................................... (0.1)
------ ------ ------
Net amortization........................................ 1.2 0.7 1.0
------ ------ ------
Net expense (credit)........................................ $ (3.4) $ (3.8) $ 3.8
====== ====== ======
</Table>
F-74
<Page>
The following selected information is for plans with benefit obligations in
excess of the fair value of plan assets:
<Table>
<Caption>
2001
--------
Benefit obligations at the end of the year.................. $484.7
Fair value of plan assets at the end of the year............ 411.8
======
</Table>
The following information is for plans with accumulated benefit obligations
in excess of the fair value of plan assets:
<Table>
<Caption>
2001
--------
Accumulated benefit obligations at the end of the year...... $145.8
Fair value of plan assets at the end of the year............ 131.5
======
</Table>
For the International Pension Plans, the actuarial present value of benefit
obligations is based on a weighted discount rate of approximately 6.00% for 2001
and 5.25% for 2000. Future benefits are assumed to increase in a manner
consistent with past experience of the plans, which, to the extent benefits are
based on compensation, includes assumed salary increases on a weighted scale of
approximately 4.00% for 2001 and 2000. The expected weighted long-term rate of
return on assets was approximately 8.50% for 2001, 7.75% for 2000, and 6.75% for
1999. Amortization included in net pension credits is based on the average
remaining service of employees. Plan assets include marketable equity
securities, government and corporate debt securities, real estate and commingled
funds.
OI Inc. also sponsors several defined contribution plans for all salaried
and hourly U.S. employees of the Company. Participation is voluntary and
participants' contributions are based on their compensation. OI Inc. matches
substantially all plan participants' contributions up to various limits.
OI Inc. charges the Company for its share of the match. The Company's share of
the contributions to these plans amounted to $4.8 million in 2001, $5.6 million
in 2000, and $5.8 million in 1999.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. OI Inc. provides certain
retiree health care and life insurance benefits covering substantially all U.S.
salaried and certain hourly employees. Employees are generally eligible for
benefits upon retirement and completion of a specified number of years of
creditable service. Independent actuaries determine postretirement benefit costs
for each subsidiary of OI Inc.; however, accumulated postretirement benefit
obligation information pertaining to each subsidiary has not been separately
determined. As such, the accumulated postretirement benefit obligation has been
retained by another subsidiary of OI Inc.
The Company's net periodic postretirement benefit cost, as allocated by
OI Inc., for domestic employees was $4.8 million, $4.2 million, and
$4.8 million at December 31, 2001, 2000, and 1999, respectively.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. The information below is the
activity of the Canadian related
F-75
<Page>
retiree health care plan from October 1, 2001 through December 31, 2001. The
changes in the Canadian postretirement benefit obligations were as follows:
<Table>
<Caption>
2001
--------
Obligations at beginning of year............................ $ --
Change in benefit obligations:
Service cost.............................................. 0.1
Interest cost............................................. 0.5
Actuarial loss............................................ 0.1
Acquisition............................................... 31.2
Benefit payments.......................................... (0.2)
-----
Net change in benefit obligations....................... 31.7
-----
Obligations at end of year.................................. $31.7
=====
</Table>
The funded status of the Canadian postretirement benefit plans at year end
was as follows:
<Table>
<Caption>
2001
--------
Accumulated postretirement benefit obligations.............. $31.7
Net unrecognized items:
Prior service credits..................................... --
Actuarial loss............................................ (0.1)
-----
(0.1)
-----
Nonpension postretirement benefit obligations............... $31.6
=====
</Table>
The Company's nonpension postretirement benefit obligations are included
with other long term liabilities on the balance sheet.
The components of the Canadian net postretirement benefit cost were as
follows:
<Table>
<Caption>
2001
--------
Service cost................................................ $0.1
Interest cost............................................... 0.5
----
Net postretirement benefit cost............................. $0.6
====
</Table>
Assumed health care cost inflation was based on a rate of 9.00% in 2001,
declining to an ultimate rate of 5.50%. A one percentage point decrease in the
rate would have decreased the accumulated postretirement benefit obligation at
December 31, 2001 by $4.1 million and decreased the net postretirement benefit
cost for 2001 by $0.1 million. A one percentage point increase in the rate would
have increased the accumulated postretirement benefit obligation at
December 31, 2001 by $5.1 million and increased the net postretirement benefit
cost for 2001 by $0.1 million. The assumed weighted average discount rate used
in determining the accumulated postretirement benefit obligation was 6.50% at
December 31, 2001.
Benefits provided by OI Inc. for certain of the hourly retirees of the
Company are determined by collective bargaining. Most other domestic hourly
retirees receive health and life insurance benefits from a multi-employer trust
established by collective bargaining. Payments to the trust as required by the
bargaining agreements are based upon specified amounts per hour worked and were
$6.3 million in 2001, $7.5 million in 2000, and $8.0 million in 1999.
Postretirement health and life benefits for retirees of foreign affiliates are
generally provided through the national health care programs of the countries in
which the affiliates are located.
F-76
<Page>
OTHER REVENUE. Other revenue for the year ended December 31, 2001 includes
$10.3 million from the sale of a minerals business in Australia. Other revenue
for the year ended December 31, 1999 includes gains totaling $40.8 million
related to the sales of a U.S. glass container plant and a mold manufacturing
business in Colombia.
OTHER COSTS AND EXPENSES. Other costs and expenses for the year ended
December 31, 2001 include pretax charges of $96.2 million related to the
following: (1) charges of $65.2 million principally related to a restructuring
program and impairment at certain of the Company's international and domestic
operations. The charge includes the impairment of assets at the Company's
affiliate in Puerto Rico and the consolidation of manufacturing capacity and the
closing of a facility in Venezuela. The charge related to the Puerto Rico
facility of $25.2 million related to the impairment of assets. While the Company
intends to continue to operate this facility, an analysis of cash flows
indicated that the long-lived assets, including buildings, furnaces, and factory
equipment were impaired. The Company has written down the majority of the
long-lived assets of this facility. As a result of the consolidation of
manufacturing capacity and the closing of two facilities in Venezuela, the
Company recorded an impairment charge of approximately $22 million to
substantially write off buildings, furnaces, and factory equipment. The program
also includes consolidation of capacity at certain other international and
domestic facilities in response to decisions about pricing and market strategy.
The total planned reduction in workforce resulting from these actions will
involve approximately 220 employees. The restructuring program included
termination benefits of approximately $4.5 million, of which $1.5 million had
been paid by December 31, 2001; and (2) a charge of $31.0 million related to the
loss on the sale of the Company's facilities in India; The Company expects its
actions related to the restructuring and impairment charges to be completed
during the next several quarters.
Other costs and expenses for the year ended December 31, 2000 include
charges of $186.0 million principally related to a restructuring and capacity
realignment program. The program, initiated in the third quarter of 2000,
includes the consolidation of manufacturing capacity and a reduction of 175
employees in the U.S. salaried work force, or about 15%, principally as a result
of early retirement incentives. Also included in the program are a write-down of
plant and equipment for the Company's glass container affiliate in India and
certain other asset write-offs. Charges for manufacturing capacity
consolidations of $120.4 million principally involve U.S. glass container
facilities and reflect technology-driven improvements in productivity,
conversions from some juice and similar products to plastic containers, Company
and customer decisions regarding pricing and volume, and the further
concentration of production in the most strategically-located facilities. The
property, plant and equipment at the three facilities, consisting of land,
buildings, furnaces and factory equipment, was written down by $48.0 million to
substantially write off these assets. The Company expects that it will continue
to make cash payments over the next several quarters for benefits and on-going
closing costs related to the closing of these facilities.
As a result of reducing the U.S. salaried workforce in 2000, the Company
recognized a settlement gain of approximately $24 million related to its defined
benefit pension plan. This gain has been included in the net charge of
$22.0 million for early retirement incentives and special termination benefits.
The 2000 pretax charge of $40.0 million was related to the write-down of
property, plant, and equipment in India. Based on the Company's expectation of
future net cash flows of its affiliate in India, the related property, plant,
and equipment was written down to realizable values in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
F-77
<Page>
Selected information relating to the restructuring accruals follows:
<Table>
<Caption>
EARLY WRITE-DOWN
RETIREMENT OF
INCENTIVES IMPAIRED
AND SPECIAL PROPERTY,
CAPACITY TERMINATION PLANT AND
REALIGNMENT(A) BENEFITS EQUIPMENT OTHER TOTAL
-------------- ----------- ---------- -------- --------
2000 restructuring charges.............. $ 120.4 $ 22.0 $ 40.0 $ 3.6 $ 186.0
Write-down of assets to net realizable
value................................. (48.4) (40.0) (3.6) (92.0)
Reduction of OI Inc. prepaid pension
asset................................. (13.0) (18.2) (31.2)
Increase in OI Inc. nonpension
postretirement benefit liability...... (0.6) (3.2) (3.8)
Net cash paid........................... (1.2) (0.2) (1.4)
------- ------ ------ ----- -------
Remaining liabilities at December 31,
2000.................................. 57.2 0.4 -- -- 57.6
2001 restructuring charges.............. 23.5 41.7 65.2
Write-down of assets to net realizable
value................................. (33.7) (41.7) (75.4)
Net cash paid........................... (24.2) (0.4) (24.6)
------- ------ ------ ----- -------
Remaining liabilities at December 31,
2001.................................. $ 22.8 $ -- $ -- $ -- $ 22.8
======= ====== ====== ===== =======
</Table>
- ------------------------
(a) Capacity realignment includes charges for plant closing costs, severance
benefits, and write-downs of assets for disposal or abandonment as a result
of restructuring of manufacturing capacity. Write-downs of assets represent
the majority of the charges for 2001.
Other costs and expenses for the year ended December 31, 1999 include
charges totaling $20.8 million related principally to restructuring costs and
write-offs of certain assets in Europe and South America.
GEOGRAPHIC INFORMATION. The Company operates in the rigid packaging
industry. The Company has one primary reportable product segment within the
rigid packaging industry: Glass Containers. The Glass Containers segment
includes operations in North America, Europe, the Asia Pacific region, and South
America.
The Company evaluates performance and allocates resources based on earnings
before interest income, interest expense, provision for income taxes, minority
share owners' interests in earnings of subsidiaries, and extraordinary charges
(collectively "EBIT") excluding unusual items. Net sales as shown in the
geographic segment information are based on the location of the Company's
affiliate which recorded the sales.
F-78
<Page>
Financial information regarding the Company's geographic segments is as
follows:
<Table>
<Caption>
TOTAL
NORTH ASIA SOUTH GEOGRAPHIC
AMERICA(A) EUROPE PACIFIC AMERICA SEGMENTS
---------- -------- -------- -------- ----------
Net sales:
2001....................................... $1,662.2 $909.7 $660.6 $516.9 $3,749.4
2000....................................... 1,742.4 894.0 760.7 494.5 3,891.6
1999....................................... 1,772.0 965.6 815.0 412.6 3,965.2
======== ====== ====== ====== ========
EBIT, excluding unusual items:
2001....................................... $ 306.2 $ 93.2 $102.2 $ 91.6 $ 593.2
2000....................................... 311.8 81.9 123.9 77.2 594.8
1999....................................... 333.8 97.9 135.0 29.9 596.6
======== ====== ====== ====== ========
Unusual items:
2001:
Gain on the sale of a minerals business
in Australia........................... $ 10.3 $ 10.3
Restructuring and impairment charges..... $ (35.1) $ (6.1) (0.8) $(23.2) (65.2)
Special employee benefit programs........ (4.4) (0.7) (2.3) (0.2) (7.6)
Loss on the sale of the Company's
facilities in India.................... (31.0) (31.0)
2000:
Charges related to consolidation of
manufacturing capacity................. (124.0) 3.6 (120.4)
Charges related to early retirement
incentives and special termination
benefits............................... (22.0) (22.0)
Charges related to impairment of
property, plant, and equipment in
India.................................. (40.0) (40.0)
Other.................................... (3.6) (3.6)
1999:
Gains related to the sales of two
manufacturing facilities............... 30.8 10.0 40.8
Charges related principally to
restructuring costs and write-offs of
certain assets in Europe and South
America................................ (10.8) (10.0) (20.8)
</Table>
- ------------------------
(a) One customer accounted for 11.5%, 10.9%, and 10.3% of the Company's sales in
2001, 2000, and 1999 respectively.
The Company's net fixed assets by location are as follows:
<Table>
<Caption>
UNITED
STATES FOREIGN TOTAL
-------- -------- --------
2001..................................................... $605.0 $1,498.3 $2,103.3
2000..................................................... 612.6 1,510.3 2,122.9
1999..................................................... 676.7 1,631.1 2,307.8
====== ======== ========
</Table>
F-79
<Page>
Reconciliations to consolidated totals are as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Revenues:
Net sales............................................ $3,749.4 $3,891.6 $3,965.2
Royalties and net technical assistance............... 17.2 17.9 21.3
Equity earnings...................................... 18.9 18.7 21.0
Interest............................................. 22.3 27.5 22.4
Other................................................ 33.8 41.4 65.3
-------- -------- --------
Total................................................ $3,841.6 $3,997.1 $4,095.2
======== ======== ========
Reconciliation of EBIT to earnings before income taxes
and minority share owners' interests in earnings of
subsidiaries:
EBIT, excluding unusual items........................ $ 593.2 $ 594.8 $ 596.6
Unusual items........................................ (93.5) (186.0) 20.0
Net interest expense................................. (323.4) (344.2) (317.0)
-------- -------- --------
Total................................................ $ 176.3 $ 64.6 $ 299.6
======== ======== ========
</Table>
F-80
<Page>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Share Owner
OI Plastic Products FTS Inc.
We have audited the accompanying consolidated balance sheets of OI Plastic
Products FTS Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of results of operations, net Parent investment, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of OI Plastic
Products FTS Inc. at December 31, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
Toledo, Ohio
January 24, 2002
F-81
<Page>
OI PLASTIC PRODUCTS FTS INC.
CONSOLIDATED RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Net sales................................................. $1,661.1 $1,668.4 $1,558.7
Other revenue............................................. 14.9 11.3 12.4
-------- -------- --------
1,676.0 1,679.7 1,571.1
Costs and expenses:
Manufacturing, shipping, and delivery..................... 1,288.9 1,287.6 1,144.0
Research and development.................................. 30.7 31.6 24.7
Engineering............................................... 1.4 0.3 6.8
Selling and administrative................................ 70.2 68.5 69.2
Net intercompany interest................................. 55.5 103.2 87.0
Other interest expense.................................... 38.6 2.7 3.8
Other..................................................... 88.8 67.2 55.1
-------- -------- --------
1,574.1 1,561.1 1,390.6
-------- -------- --------
Earnings before items below................................. 101.9 118.6 180.5
Provision for income taxes.................................. 53.3 60.5 83.8
Minority share owners' interests in earnings of
subsidiaries.............................................. 0.5 1.4 2.0
-------- -------- --------
Net earnings................................................ $ 48.1 $ 56.7 $ 94.7
======== ======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-82
<Page>
OI PLASTIC PRODUCTS FTS INC.
CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
ASSETS
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
CURRENT ASSETS:
Cash...................................................... $ 10.3 $ 34.2
Receivables including amount from related parties of $9.2
($8.7 in 2000), less allowances of $38.2 ($29.2 in 2000)
for losses and discounts................................ 184.3 192.0
Inventories............................................... 222.9 249.2
Prepaid expenses.......................................... 41.1 24.7
-------- --------
Total current assets.................................... 458.6 500.1
OTHER ASSETS:
Equity investments........................................ 9.2 14.2
Repair parts inventories.................................. 25.6 30.4
Deposits, receivables, and other assets................... 95.9 95.3
Excess of purchase cost over net assets acquired, net of
accumulated amortization of $440.2 ($394.7 in 2000)..... 1,468.2 1,523.6
-------- --------
Total other assets...................................... 1,598.9 1,663.5
PROPERTY, PLANT, AND EQUIPMENT:
Land, at cost............................................. 28.7 29.3
Buildings and equipment, at cost:
Buildings and building equipment........................ 212.8 223.6
Factory machinery and equipment......................... 1,522.6 1,474.8
Transportation, office, and miscellaneous equipment..... 22.5 19.4
Construction in progress................................ 131.1 128.5
-------- --------
1,917.7 1,875.6
Less accumulated depreciation............................. 799.3 759.8
-------- --------
Net property, plant, and equipment...................... 1,118.4 1,115.8
-------- --------
Total assets................................................ $3,175.9 $3,279.4
======== ========
</Table>
F-83
<Page>
OI PLASTIC PRODUCTS FTS INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(MILLIONS OF DOLLARS)
LIABILITIES AND NET PARENT INVESTMENT
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
CURRENT LIABILITIES:
Short-term loans.......................................... $ 8.3
Accounts payable including amount to related parties of
$12.3 ($8.0 in 2000).................................... $ 105.9 114.5
Salaries and wages........................................ 18.2 17.5
U.S. and foreign income taxes............................. 10.8 13.2
Other accrued liabilities................................. 47.6 13.6
Long-term debt due within one year........................ 4.9 4.6
-------- --------
Total current liabilities............................... 187.4 171.7
EXTERNAL LONG-TERM DEBT..................................... 851.3 7.2
DEFERRED TAXES.............................................. 172.6 173.4
OTHER LIABILITIES........................................... 12.9 1.9
MINORITY SHARE OWNERS' INTERESTS............................ 8.3
NET PARENT INVESTMENT
Investment by and advances from parent.................... 1,980.0 2,944.1
Accumulated other comprehensive loss...................... (28.3) (27.2)
-------- --------
Total net Parent investment............................. 1,951.7 2,916.9
-------- --------
Total liabilities and net Parent investment................. $3,175.9 $3,279.4
======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-84
<Page>
OI PLASTIC PRODUCTS FTS INC.
CONSOLIDATED NET PARENT INVESTMENT
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
INVESTMENT BY AND ADVANCES TO PARENT
Balance at beginning of year.............................. $2,944.1 $2,884.7 $2,742.0
Net intercompany transactions............................. (1,012.2) 4.5 48.0
Net earnings.............................................. 48.1 56.7 94.7
Net loss for the month ended December 31, 2000 for the
change in the fiscal year end of certain international
affiliates.............................................. (1.8)
-------- -------- --------
Balance at end of year.................................. 1,980.0 2,944.1 2,884.7
======== ======== ========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year.............................. (27.2) (25.0) (9.7)
Foreign currency translation adjustments.................. (1.1) (2.2) (15.3)
-------- -------- --------
Balance at end of year.................................. (28.3) (27.2) (25.0)
======== ======== ========
Total net Parent investment................................. $1,951.7 $2,916.9 $2,859.7
======== ======== ========
TOTAL COMPREHENSIVE INCOME (LOSS)
Net earnings.............................................. $ 48.1 $ 56.7 $ 94.7
Foreign currency translation adjustments.................. (1.1) (2.2) (15.3)
-------- -------- --------
Total................................................... $ 47.0 $ 54.5 $ 79.4
======== ======== ========
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-85
<Page>
OI PLASTIC PRODUCTS FTS INC.
CONSOLIDATED CASH FLOWS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
OPERATING ACTIVITIES:
Net earnings.............................................. $ 48.1 $ 56.7 $ 94.7
Non-cash charges (credits):
Depreciation............................................ 111.2 107.6 97.6
Amortization of deferred costs.......................... 60.9 60.3 63.7
Deferred tax provision.................................. 42.9 51.9 75.5
Restructuring costs and write-offs of certain assets.... 33.3 26.6
(Gains) losses on asset sales........................... (2.8) 4.0
Other................................................... (10.9) (17.9) (10.5)
Change in non-current operating assets.................... (1.7) (7.4) (8.9)
Reduction of non-current liabilities...................... (0.2) (1.4)
Change in components of working capital................... 35.7 (83.2) (10.0)
-------- ------ ------
Cash provided by operating activities................... 316.7 194.4 304.7
INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (164.0) (176.4) (192.3)
Acquisitions, net of cash acquired........................ (15.6)
Net cash proceeds from divestitures and other............. 66.7 4.8 9.2
-------- ------ ------
Cash utilized in investing activities................... (112.9) (171.6) (183.1)
FINANCING ACTIVITIES:
Net change in intercompany debt........................... (1,049.5) 3.5 (103.3)
Additions to long-term debt............................... 850.4 1.5 1.6
Payment of finance fees................................... (14.9)
Decrease in short-term loans.............................. (8.7) (3.4) (4.8)
Repayments of long-term debt.............................. (6.8) (10.5) (6.9)
-------- ------ ------
Cash utilized in financing activities................... (229.5) (8.9) (113.4)
Effect of exchange rate fluctuations on cash.............. 1.8 (0.4) (1.0)
Effect of change in fiscal year end for certain
international affiliates................................ 1.2
-------- ------ ------
Increase (decrease) in cash................................. (23.9) 14.7 7.2
Cash at beginning of year................................... 34.2 19.5 12.3
-------- ------ ------
Cash at end of year......................................... $ 10.3 $ 34.2 $ 19.5
======== ====== ======
</Table>
See accompanying Statement of Significant Accounting Policies and Financial
Review.
F-86
<Page>
STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATED STATEMENTS. The consolidated financial statements of
OI Plastic Products FTS Inc. ("Company") include the accounts of its
subsidiaries. During January 2002, OI Closure FTS, Inc, another subsidiary of
Owens-Illinois Inc., was merged into the Company. Since both entities were under
common control of Owens-Illinois Inc., the consolidated statement of operations,
net parent investment, and cash flows for each of the three years ended
December 31, 2001 and the consolidated balance sheets at December 31, 2001 and
2000 include OI Closure FTS, Inc. for all periods at historical cost. Newly
acquired subsidiaries have been included in the consolidated financial
statements from dates of acquisition. Prior to December 2000, substantially all
of the Company's consolidated foreign subsidiaries reported their results of
operations on a one-month lag, which allowed additional time to compile the
results. Beginning in December 2000, the one-month lag was eliminated. As a
result, the December 2000 results of operations for these subsidiaries, which
amounted to a net loss of $1.8 million, was recorded directly to retained
earnings in December 2000.
The Company uses the equity method of accounting for investments in which it
has a significant ownership interest, generally 20% to 50%. Other investments
are accounted for at cost.
RELATIONSHIP WITH OWENS-ILLINOIS, INC. AND OWENS-ILLINOIS, GROUP INC. The
Company is a wholly-owned subsidiary of Owens-Illinois Group, Inc. ("OI Group")
and an indirect subsidiary of Owens-Illinois, Inc. ("OI Inc."). Although
OI Inc. does not conduct any operations, it has substantial obligations related
to outstanding indebtedness, dividends for preferred stock and asbestos-related
payments. OI Inc. relies primarily on distributions from its direct and indirect
subsidiaries to meet these obligations.
For federal and certain state income tax purposes, the taxable income of the
Company is included in the consolidated tax returns of OI Inc. and income taxes
are allocated to the Company on a basis consistent with separate returns.
Current income taxes are recorded by the Company on a basis consistent with
separate returns.
NATURE OF OPERATIONS. The Company is a leading manufacturer of plastics
packaging products. The Company's principal product lines are plastic
containers, closures and plastic prescription containers. The Company's
principal operations are in North America, however, the Company does have minor
operations in Europe and South America. Major markets include the United States
household products, personal care products, health care products, and food and
beverage industries. One customer accounted for 18.0%, 13.0%, and 12.1% of the
Company's sales in 2001, 2000, and 1999 respectively.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management of the Company to make estimates and assumptions that affect certain
amounts reported in the financial statements and accompanying notes. Actual
results may differ from those estimates, at which time the Company would revise
its estimates accordingly.
CASH. The Company defines "cash" as cash and time deposits with maturities
of three months or less when purchased.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The carrying amounts reported for
cash, short-term investments and short-term loans approximate fair value. In
addition, carrying amounts approximate fair value for certain long-term debt
obligations subject to frequently redetermined interest rates. The Company is
not a party to any material derivative financial instruments.
INVENTORY VALUATION. The Company values most U.S. inventories at the lower
of last-in, first-out (LIFO) cost or market. Other inventories are valued at the
lower of standard costs (which approximate average costs) or market.
F-87
<Page>
EXCESS OF PURCHASE COST OVER NET ASSETS ACQUIRED. Through December 31,
2001, the excess of purchase cost over net assets acquired was being amortized
over 40 years. The Company evaluated the recoverability of long-lived assets
based on undiscounted projected cash flows, excluding interest and taxes, when
factors indicated that an impairment may have existed. (See "New Accounting
Standards").
PROPERTY, PLANT, AND EQUIPMENT. In general, depreciation is computed using
the straight-line method. Renewals and improvements are capitalized. Maintenance
and repairs are expensed as incurred.
REVENUE RECOGNITION. The Company recognizes sales, net of estimated
discounts and allowances, when title to products is transferred to customers.
Shipping and handling costs are included with manufacturing, shipping, and
delivery costs.
INCOME TAXES ON UNDISTRIBUTED EARNINGS. In general, the Company plans to
continue to reinvest the undistributed earnings of foreign subsidiaries and
foreign corporate joint ventures accounted for by the equity method.
Accordingly, taxes are provided only on that amount of undistributed earnings in
excess of planned reinvestments.
FOREIGN CURRENCY TRANSLATION. The assets and liabilities of most affiliates
and associates are translated at current exchange rates and any related
translation adjustments are recorded directly in share owners' equity. The
Company's affiliate located in Venezuela operates in a highly inflationary
economy. In such cases, certain assets of this affiliate are translated at
historical exchange rates and all translation adjustments are reflected in the
statements of consolidated results of operations.
NEW ACCOUNTING STANDARDS. In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 141, "Business
Combinations" which is effective for business combinations completed after
June 30, 2001. Also in July 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS No. 142"), which is effective for goodwill acquired
after June 30, 2001. For goodwill acquired prior to July 1, 2001, FAS No. 142
will be effective for fiscal years beginning after December 15, 2001. Under FAS
No. 142, goodwill and intangible assets with indefinite lives will no longer be
amortized but will be reviewed annually (or more frequently if impairment
indicators arise) for impairment.
The Company estimates that adopting FAS No. 142 will increase 2002 earnings
before the effects of the accounting change by approximately $45 million. The
Company has not completed its assessment of the effects that adopting FAS
No. 142 will have on the reported value of goodwill, however, the Company
expects that it will record an impairment charge in 2002 in connection with
adopting FAS No. 142.
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS No. 144"). FAS No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("FAS No. 121"). FAS No. 144 provides additional guidance on
estimating cash flows when performing a recoverability test, requires that a
long-lived asset (group) to be disposed of other than by sale (e.g. abandoned)
be classified as "held and used" until it is disposed of, and establishes more
restrictive criteria to classify an asset (group) as "held for sale"; however,
it retains the fundamental provisions of FAS No. 121 related to the recognition
and measurement of the impairment of long-lived assets to be "held and used."
FAS No. 144 is effective for fiscal years beginning after December 15, 2001 and
transition is prospective for committed disposal activities that are initiated
after the effective date of FAS No. 144's initial application. The impact of
adopting FAS No. 144 on the Company's reporting and disclosure is not expected
to be material to the Company's financial position or results of operations.
F-88
<Page>
FINANCIAL REVIEW
TABULAR DATA IN MILLIONS OF DOLLARS.
CHANGES IN COMPONENTS OF WORKING CAPITAL RELATED TO OPERATIONS. Changes in
the components of working capital related to operations (net of the effects
related to acquisitions and divestitures) were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Decrease (increase) in current assets:
Receivables............................................... $ (2.6) $ 1.5 $(39.2)
Inventories............................................... 20.0 (31.6) (34.8)
Prepaid expenses.......................................... 3.4 2.7 (2.3)
Increase (decrease) in current liabilities:
Accounts payable and accrued liabilities.................. 19.2 (6.9) 12.5
Salaries and wages........................................ 2.0 (0.1) 0.6
U.S. and foreign income taxes............................. (6.3) (48.8) 53.2
------ ------ ------
$ 35.7 $(83.2) $(10.0)
====== ====== ======
</Table>
INVENTORIES. Major classes of inventory are as follows:
<Table>
<Caption>
2001 2000
-------- --------
Finished goods.............................................. $133.7 $157.4
Work in process............................................. 0.3 3.8
Raw materials............................................... 71.7 72.6
Operating supplies.......................................... 17.2 15.4
------ ------
$222.9 $249.2
====== ======
</Table>
If the inventories which are valued on the LIFO method had been valued at
standard costs, which approximate current costs, consolidated inventories would
be higher than reported by $5.2 million and $10.5 million at December 31, 2001
and 2000, respectively.
Inventories which are valued at the lower of standard costs (which
approximate average costs), or market at December 31, 2001 and 2000 were
approximately $34.0 million and $33.4 million, respectively.
EXTERNAL LONG-TERM DEBT. The following table summarizes the external
long-term debt of the Company at December 31, 2001 and 2000:
<Table>
<Caption>
DECEMBER 31
-------------------
2001 2000
-------- --------
Secured Credit Agreement:
Revolving Credit Facility................................. $850.0
Other....................................................... 6.2 $11.8
------ -----
856.2 11.8
Less amounts due within one year............................ 4.9 4.6
------ -----
External long-term debt................................... $851.3 $ 7.2
====== =====
</Table>
In April 2001, OI Group and certain of its domestic and foreign
subsidiaries, including the Company (the "Borrowers") entered into the Secured
Credit Agreement (the "Agreement") with a group of banks, which expires on
March 31, 2004. The Agreement provides for a $3.0 billion revolving
F-89
<Page>
credit facility (the "Revolving Credit Facility") and a $1.5 billion term loan
(the "Term Loan"). The Agreement includes an Overdraft Account Facility
providing for aggregate borrowings up to $50 million which reduce the amount
available for borrowing under the Revolving Credit Facility. The Agreement also
provides for the issuance of letters of credit totaling up to $500 million,
which also reduce the amount available for borrowings under the Revolving Credit
Facility.
Under the Secured Credit Agreement, the Company has a total commitment of
$1.0 billion provided by the Revolving Credit Facility. The Company has no
commitment available under the Term Loan. At December 31, 2001, the Company had
unused credit of $150.0 million available under the Secured Credit Agreement.
Prior to April 2001, the Company's significant financing was provided by
OI Inc. under the April 1998 Second Amended and Restated Credit Agreement
through intercompany loans. Borrowings under the Secured Credit Agreement by the
Company and certain other domestic and foreign subsidiaries of OI Group were
used to repay all amounts outstanding under, and terminate, the Second Amended
and Restated Credit Agreement.
The interest rate on borrowings under the Revolving Credit Facility is, at
the Borrower's option, the Base Rate or a reserve adjusted Eurodollar rate. The
interest rate on borrowings under the Revolving Credit Facility also includes a
margin linked to OI Inc.'s Consolidated Leverage Ratio, as defined in the
Agreement. The margin is limited to ranges of 1.75% to 2.00% for Eurodollar
loans and .75% to 1.00% for Base Rate loans. The interest rate on Overdraft
Account loans is the Base Rate minus .50%. The weighted average interest rate on
borrowings outstanding under the Revolving Credit Facility at December 31, 2001
was 4.17%. While no compensating balances are required by the Agreement, the
Borrowers must pay a facility fee on the Revolving Credit Facility commitments
of .50%.
Borrowings under the Agreement are secured by substantially all the assets
of the Company and its domestic subsidiaries. Borrowings are also secured by a
pledge of intercompany debt and equity in most of the Company's domestic
subsidiaries.
The Agreement requires, among other things, the maintenance of certain
financial ratios, and restricts the creation of liens and certain types of
business activities and investments.
Annual maturities for all of the Company's external long-term debt through
2006 are as follows: 2002, $4.9 million; 2003, $0.5 million; 2004,
$850.3 million; 2005, $0.2 million; and 2006, $0.2 million.
Interest paid in cash aggregated $31.7 million for 2001, $0.9 million for
2000, and $1.1 million for 1999.
GUARANTEES OF DEBT. The Company has guaranteed the borrowings of certain of
OI Inc.'s domestic subsidiaries totaling $2,605.4 and has also guaranteed the
borrowings of certain foreign affiliates under the Agreement.
During January 2002, an affiliate of the Company completed a $1.0 billion
private placement of senior secured notes. The assets of the Company and most of
its domestic subsidiaries are pledged as security for the notes. The Company has
guaranteed these notes.
OPERATING LEASES. Rent expense attributable to all operating leases was
$21.9 million in 2001, $19.1 million in 2000, and $17.4 million in 1999. Minimum
future rentals under operating leases are as follows: 2002, $9.0 million; 2003,
$5.0 million; 2004, $1.5 million; 2005, $0.6 million; 2006, $0.5 million; and
2007 and thereafter, $2.2 million.
FOREIGN CURRENCY TRANSLATION. Aggregate foreign currency exchange gains
(losses) included in other costs and expenses were $(1.3) million in 2001,
$(0.7) million in 2000, and $0.5 million in 1999.
F-90
<Page>
INCOME TAXES. Deferred income taxes reflect: (1) the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(2) carryovers and credits for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 2001 and 2000
are as follows (certain amounts from prior year have been reclassified to
conform to current year presentation):
<Table>
<Caption>
2001 2000
-------- --------
Deferred tax assets:
Tax loss carryovers....................................... $ 10.9 $ 5.3
Accrued liabilities....................................... 20.9 6.6
Other..................................................... 24.2 16.8
------- -------
Total deferred tax assets............................... 56.0 28.7
Deferred tax liabilities:
Property, plant and equipment............................. 151.8 142.6
Inventory................................................. 1.6 1.6
Other..................................................... 37.0 39.3
------- -------
Total deferred tax liabilities.......................... 190.4 183.5
------- -------
Net deferred tax liabilities............................ $(134.4) $(154.8)
======= =======
</Table>
Deferred taxes are included in the Consolidated Balance Sheets at
December 31, 2001 and 2000 as follows:
<Table>
<Caption>
2001 2000
-------- --------
Prepaid expenses............................................ $ 38.2 $ 18.6
Deferred tax liabilities.................................... (172.6) (173.4)
------- -------
Net deferred tax liabilities................................ $(134.4) $(154.8)
======= =======
</Table>
The provision for income taxes consists of the following:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Current:
State..................................................... $ 1.2 $(0.4) $ 2.1
Foreign................................................... 9.2 9.0 6.2
----- ----- -----
10.4 8.6 8.3
----- ----- -----
Deferred:
U.S. Federal.............................................. 39.9 45.3 66.9
State..................................................... 3.2 6.3 8.2
Foreign................................................... (0.2) 0.3 0.4
----- ----- -----
42.9 51.9 75.5
----- ----- -----
Total:
U.S. Federal.............................................. 39.9 45.3 66.9
State..................................................... 4.4 5.9 10.3
Foreign................................................... 9.0 9.3 6.6
----- ----- -----
$53.3 $60.5 $83.8
===== ===== =====
</Table>
F-91
<Page>
The provision for income taxes was calculated based on the following
components of earnings before income taxes:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Domestic.................................................... $ 70.5 $ 91.4 $159.4
Foreign..................................................... 31.4 27.2 21.1
------ ------ ------
$101.9 $118.6 $180.5
====== ====== ======
</Table>
Income taxes paid in cash were as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Domestic.................................................... $1.5 $0.9 $2.5
Foreign..................................................... 6.4 2.1 4.4
---- ---- ----
$7.9 $3.0 $6.9
==== ==== ====
</Table>
A reconciliation of the provision for income taxes based on the statutory
U.S. Federal tax rate of 35% to the provision for income taxes is as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
Pretax earnings at statutory U.S. Federal tax rate.......... $35.7 $41.5 $63.2
Increase (decrease) in provision for income taxes due to:
Amortization of goodwill.................................. 16.5 16.5 16.4
State taxes, net of federal benefit....................... 3.5 3.9 6.7
Foreign earnings at different rates....................... (1.7) 0.3 (1.9)
Other items............................................... (0.7) (1.7) (0.6)
----- ----- -----
Provision for income taxes.................................. $53.3 $60.5 $83.8
----- ----- -----
Effective tax rate.......................................... 52.3% 51.0% 46.4%
===== ===== =====
</Table>
The Company is included with OI Inc.'s consolidated tax returns. OI Inc. has
net operating losses, alternative minimum tax credits, and research and
development credits available to offset future U.S. Federal income tax.
At December 31, 2001, the Company's equity in the undistributed earnings of
foreign subsidiaries for which income taxes had not been provided approximated
$32.7 million. It is not practicable to estimate the U.S. and foreign tax which
would be payable should these earnings be distributed.
RELATED PARTY TRANSACTIONS. Charges for administrative services are
allocated to the Company by OI Inc. based on an annual utilization level. Such
services include compensation and benefits administration, payroll processing,
use of certain general accounting systems, auditing, income tax planning and
compliance, and treasury services. Management believes that such transactions
are on
F-92
<Page>
terms no less favorable to the Company than those that could be obtained from
unaffiliated third parties. The following information summarizes the Company's
significant related party transactions:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Sales to affiliated companies............................. $ 8.2 $ 7.7 $ 2.6
===== ===== =====
Expenses:
Administrative services................................... $13.2 $15.6 $14.6
Corporate management fee.................................. 8.5 8.6 7.8
----- ----- -----
Total expenses.............................................. $21.7 $24.2 $22.4
===== ===== =====
</Table>
The above expenses are recorded in the statement of operations as follows:
<Table>
Cost of sales............................................... $11.6 $13.8 $12.9
Selling, general, and administrative expenses............... 10.1 10.4 9.5
----- ----- -----
Total expenses.............................................. $21.7 $24.2 $22.4
===== ===== =====
</Table>
Intercompany interest is charged to the Company from OI Inc. based on its
ending intercompany debt balances. Intercompany interest expense is calculated
using a weighted average interest rate of external borrowings by OI Inc.
PARTICIPATION IN OI INC. STOCK OPTION PLANS. The Company participates in
the stock option plans of OI Inc. under which employees of the Company may be
granted options to purchase common shares of OI Inc. No options may be exercised
in whole or in part during the first year after the date granted. In general,
subject to certain accelerated exercisability provisions, 50% of the options
become exercisable on the fifth anniversary of the date of the option grant,
with the remaining 50% becoming exercisable on the sixth anniversary date of the
option grant. In general, options expire following termination of employment or
the day after the tenth anniversary date of the option grant.
All options have been granted at prices equal to the market price of the
OI Inc.'s common stock on the date granted. Accordingly, the Company recognizes
no compensation expense related to the stock option plans. OI Inc. has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation."
A substantial number of the options have been granted to key employees of
another subsidiary of OI Inc., some of whose compensation costs are included in
an allocation of costs to all operating subsidiaries of OI Inc., including the
Company. It is not practical to determine an amount of additional compensation
allocable to the Company if OI Inc. had elected to recognize compensation cost
based on the fair value of the options granted at grant date as allowed by SFAS
No. 123.
PENSION BENEFIT PLANS. The Company participates in OI Inc.'s pension plans
for substantially all employees located in the United States. Benefits generally
are based on compensation for salaried employees and on length of service for
hourly employees. OI Inc.'s policy is to fund pension plans such that sufficient
assets will be available to meet future benefit requirements. Independent
actuaries determine pension costs for each subsidiary of OI Inc. included in the
plans; however, accumulated benefit obligation information and plan assets
pertaining to each subsidiary have not been separately determined. As such, the
accumulated benefit obligation and the plan assets related to the pension plans
for domestic employees have been retained by another subsidiary of OI Inc. Net
credits to results of operations for the Company's allocated portion of the
domestic pension costs amounted to $13.6 million in 2001, $15.1 million in 2000,
and $9.0 million in 1999.
F-93
<Page>
OI Inc. also sponsors several defined contribution plans for all salaried
and hourly U.S. employees of the Company. Participation is voluntary and
participants' contributions are based on their compensation. OI Inc. matches
substantially all plan participants' contributions up to various limits.
OI Inc. charges the Company for its share of the match. The Company's share
of the contributions to these plans amounted to $3.5 million in 2001,
$3.9 million in 2000, and $4.0 million in 1999.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. OI Inc. provides certain
retiree health care and life insurance benefits covering substantially all U.S.
salaried and certain hourly employees. Employees are generally eligible for
benefits upon retirement and completion of a specified number of years of
creditable service. Independent actuaries determine postretirement benefit costs
for each subsidiary of OI Inc.; however, accumulated postretirement benefit
obligation information pertaining to each subsidiary has not been separately
determined. As such, the accumulated postretirement benefit obligation has been
retained by another subsidiary of OI Inc.
The Company's net periodic postretirement benefit cost, as allocated by
OI Inc., was $2.3 million, $1.9 million, and $2.3 million at December 31, 2001,
2000, and 1999, respectively.
OTHER REVENUE. Other revenue for the year ended December 31, 2001 includes
$2.8 million from the sale of the Company's label business.
OTHER COSTS AND EXPENSES. Other costs and expenses for the year ended
December 31, 2001 include: (1) net charges of $16.9 million consisting of
$22.1 million for impairment and restructuring charges at certain of the
Company's operations offset by a $5.2 million reversal of a prior charge;
(2) $7.9 million related to restructuring manufacturing capacity in the medical
devices business; and (3) $8.5 million for certain contingencies. The total
planned reduction in workforce will involve approximately 180 employees. The
restructuring program included termination benefits of approximately
$3.5 million, of which $0.2 million had been paid by December 31, 2001. The
Company expects its actions related to the restructuring and impairment charges
to be completed during the next several quarters.
Other costs and expenses for the year ended December 31, 2000 include
charges of $11.2 million principally related to a restructuring and capacity
realignment program. The restructuring and capacity realignment program,
initiated in the third quarter of 2000, includes the consolidation of
manufacturing capacity and a reduction of 100 employees in the U.S. salaried
work force, or about 5%, principally as a result of early retirement incentives.
As a result of the approximate 5% reduction of the U.S. salaried workforce
in 2000, the Company recognized a settlement gain of approximately $8 million
related to its defined benefit pension plan. This gain has been included in the
net charge of $9.2 million for early retirement incentives and special
termination benefits.
F-94
<Page>
Selected information relating to restructuring accruals follows:
<Table>
<Caption>
EARLY RETIREMENT
CAPACITY INCENTIVES AND SPECIAL
REALIGNMENT RETIREMENT BENEFITS TOTAL
----------- ---------------------- --------
2000 restructuring charges.......................... $ 2.0 $ 9.2 $11.2
Write-down of assets to net realizable value........ (0.6) (0.6)
Reduction of OI Inc prepaid pension asset........... (0.6) (7.4) (8.0)
Increase in OI Inc nonpension post-retirement
benefit liability................................. (1.4) (1.4)
Net cash paid....................................... (0.3) (0.3)
----- ----- -----
Remaining liabilities at December 31, 2000.......... 0.5 0.4 0.9
Restructuring program and impairment................ 22.1 22.1
Reversal of second quarter restructuring charge..... (5.2) (5.2)
Medical Devices restructuring....................... 7.9 7.9
Write-down of assets to net realizable value........ (10.1) (10.1)
Net cash paid....................................... (0.5) (0.4) (0.9)
----- ----- -----
Remaining liabilities at December 31, 2001.......... $14.7 $ -- $14.7
===== ===== =====
</Table>
Capacity realignment includes charges for plant closing costs, severance
benefits, and write-downs of assets for disposal or abandonment as a result of
restructuring of manufacturing capacity. Write-downs of assets represent the
majority of the charges for 2001.
F-95
<Page>
OWENS-ILLINOIS GROUP, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
2002 2001
-------- --------
(UNAUDITED)
Revenues:
Net sales................................................. $1,310.9 $1,306.1
Royalties and net technical assistance.................... 6.8 5.4
Equity earnings........................................... 6.0 3.6
Interest.................................................. 5.3 6.5
Other..................................................... 9.3 42.9
-------- --------
1,338.3 1,364.5
Costs and expenses:
Manufacturing, shipping, and delivery..................... 1,019.8 1,027.7
Research and development.................................. 10.8 10.2
Engineering............................................... 7.8 6.8
Selling and administrative................................ 80.8 78.4
Interest.................................................. 100.9 113.5
Other..................................................... 9.0 46.9
-------- --------
1,229.1 1,283.5
-------- --------
Earnings before items below................................. 109.2 81.0
Provision for income taxes.................................. 34.5 27.2
Minority share owners' interests in earnings of
subsidiaries.............................................. 4.5 4.9
-------- --------
Earnings before extraordinary item and cumulative effect of
accounting change......................................... 70.2 48.9
Extraordinary charge from early extinguishment of debt, net
of applicable income taxes................................ (6.7)
Cumulative effect of accounting change...................... (460.0)
-------- --------
Net earnings (loss)......................................... $ (396.5) $ 48.9
======== ========
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-96
<Page>
OWENS-ILLINOIS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
----------- --------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash, including time deposits............................. $ 115.2 $ 155.6 $ 173.8
Short-term investments, at cost which approximates
market.................................................. 17.3 16.4 14.8
Receivables, less allowances for losses and discounts
($59.6 at March 31, 2002, $71.1 at December 31, 2001,
and $53.4 at March 31, 2001)............................ 774.2 754.5 820.5
Inventories............................................... 897.6 836.7 858.1
Prepaid expenses.......................................... 156.7 147.0 97.2
-------- -------- --------
Total current assets.................................... 1,961.0 1,910.2 1,964.4
Investments and other assets:
Equity investments........................................ 163.2 166.1 179.3
Repair parts inventories.................................. 187.8 199.2 221.4
Prepaid pension........................................... 900.2 879.5 796.1
Deposits, receivables, and other assets................... 569.0 582.4 492.3
Goodwill.................................................. 2,564.2 2,995.3 2,960.0
-------- -------- --------
Total other assets...................................... 4,384.4 4,822.5 4,649.1
Property, plant, and equipment, at cost..................... 5,834.2 5,796.2 5,467.8
Less accumulated depreciation............................... 2,595.6 2,536.3 2,349.1
-------- -------- --------
Net property, plant, and equipment........................ 3,238.6 3,259.9 3,118.7
-------- -------- --------
Total assets................................................ $9,584.0 $9,992.6 $9,732.2
======== ======== ========
LIABILITIES AND SHARE OWNER'S EQUITY
Current liabilities:
Short-term loans and long-term debt due within one year... $ 86.4 $ 71.2 $ 106.7
Accounts payable and other liabilities.................... 940.1 940.3 931.3
-------- -------- --------
Total current liabilities............................... 1,026.5 1,011.5 1,038.0
Long-term debt (including note payable to parent of
$1,700.0)................................................. 5,344.7 5,329.7 5,537.1
Deferred taxes.............................................. 485.5 479.8 299.1
Nonpension postretirement benefits.......................... 297.1 303.4 289.7
Other liabilities........................................... 427.1 386.9 337.5
Commitments and contingencies
Minority share owners' interests............................ 148.3 159.3 166.0
Share owner's equity:
Common stock, par value $.01 per share 1,000 shares
authorized, 100 shares issued and outstanding........... -- -- --
Other contributed capital................................. 1,693.4 1,735.1 1,823.3
Retained earnings......................................... 766.7 1,163.2 855.5
Accumulated other comprehensive income.................... (605.3) (576.3) (614.0)
-------- -------- --------
Total share owner's equity.............................. 1,854.8 2,322.0 2,064.8
-------- -------- --------
Total liabilities and share owner's equity.................. $9,584.0 $9,992.6 $9,732.2
======== ======== ========
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-97
<Page>
OWENS-ILLINOIS GROUP, INC.
CONDENSED CONSOLIDATED CASH FLOWS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2002 2001
-------- --------
(UNAUDITED)
Cash flows from operating activities:
Net earnings before extraordinary item and cumulative
effect of accounting change............................. $ 70.2 $ 48.9
Non-cash charges (credits):
Depreciation............................................ 107.4 100.7
Amortization of deferred costs.......................... 12.2 32.8
Deferred tax provision (credit)......................... 4.7 (2.9)
Gains on asset sales.................................... (12.0)
Other................................................... (40.3) (22.0)
Change in non-current operating assets.................... 9.4 (9.0)
Reduction of non-current liabilities...................... (14.0) (1.5)
Change in components of working capital................... (51.9) (141.2)
-------- ------
Cash provided by (utilized in) operating activities..... 97.7 (6.2)
Cash flows from investing activities:
Additions to property, plant, and equipment............... (112.3) (93.1)
Net cash proceeds from divestitures....................... 17.0 113.6
Acquisitions, net of cash acquired........................ (2.4) (4.8)
-------- ------
Cash provided by (utilized in) investing activities..... (97.7) 15.7
Cash flows from financing activities:
Additions to long-term debt............................... 1,073.7 39.3
Repayments of long-term debt.............................. (1,058.5) (99.6)
Payment of finance fees................................... (18.0)
Increase (decrease) in short-term loans................... 16.2 (9.6)
Collateral deposits for certain derivative instruments.... 8.6
Net change in payable to parent........................... (20.0)
(Distribution to) investment by parent.................... (64.0) 32.8
-------- ------
Cash utilized in financing activities................... (42.0) (57.1)
Effect of exchange rate fluctuations on cash................ 1.6 (8.3)
-------- ------
Decrease in cash............................................ (40.4) (55.9)
Cash at beginning of period................................. 155.6 229.7
-------- ------
Cash at end of period....................................... $ 115.2 $173.8
======== ======
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-98
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABULAR DATA IN MILLIONS OF DOLLARS
1. BASIS OF PRESENTATION.
The Condensed Consolidated Financial Statements presented herein are
unaudited but, in the opinion of management, reflect all adjustments necessary
to present fairly such information for the periods and at the dates indicated.
Since the accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with Article 10 of Regulation S-X, they do not
contain all information and footnotes normally contained in annual consolidated
financial statements; accordingly, they should be read in conjunction with the
Consolidated Financial Statements of Owens-Illinois Group, Inc. and notes
thereto appearing elsewhere in this prospectus.
The Company is a wholly-owned subsidiary of Owens-Illinois, Inc. ("OI Inc."
or "Parent"). Although OI Inc. does not conduct any operations, it has
substantial obligations related to outstanding indebtedness, dividends for
preferred stock and asbestos-related payments. OI Inc. relies primarily on
distributions from its direct and indirect subsidiaries to meet these
obligations.
2. INVENTORIES.
Major classes of inventory are as follows:
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
--------- -------- ---------
Finished goods................................... $701.0 $641.8 $660.3
Work in process.................................. 9.9 6.2 8.9
Raw materials.................................... 119.7 125.3 120.8
Operating supplies............................... 67.0 63.4 68.1
------ ------ ------
$897.6 $836.7 $858.1
====== ====== ======
</Table>
F-99
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABULAR DATA IN MILLIONS OF DOLLARS (CONTINUED)
3. LONG-TERM DEBT.
The following table summarizes the long-term debt of the Company:
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
--------- -------- ---------
Secured Credit Agreement:
Revolving Credit Facility:
Revolving Loans......................................... $2,424.1 $2,410.4
Term Loan................................................. 65.0 1,045.0
Second Amended and Restated Credit Agreement
Revolving Credit Facility:
Revolving Loans......................................... $ 15.6
Offshore Loans:
Australian dollars--1.26 billion...................... 612.8
British pounds--133.0 million......................... 188.7
Senior Secured Notes:
8.88%, due 2009........................................... 1,000.0
Payable to OI Inc........................................... 1,700.0 1,700.0 4,537.0
Other....................................................... 184.5 205.1 213.8
-------- -------- --------
5,373.6 5,360.5 5,567.9
Less amounts due within one year.......................... 28.9 30.8 30.8
-------- -------- --------
Long-term debt.......................................... $5,344.7 $5,329.7 $5,537.1
======== ======== ========
</Table>
At March 31, 2002, the borrowers had unused credit of $479.5 million
available under the Secured Credit Agreement.
The weighted average interest rate on borrowings outstanding under the
Revolving Credit Facility at March 31, 2002 was 3.91%. Including the effects of
cross-currency swap agreements related to Revolving Credit Facility borrowings
by the Company's Australian, U.K., and Canadian subsidiaries, the weighted
average interest rate was 4.90%.
The weighted average interest rate on borrowings outstanding under the Term
Loan at March 31, 2002 was 4.42%.
During January 2002, a subsidiary of the Company completed a $1.0 billion
private placement of senior secured notes. The notes bear interest at 8 7/8% and
are due February 15, 2009. The notes are guaranteed by substantially all of the
Company's domestic subsidiaries. The assets of substantially all of the
Company's domestic subsidiaries are pledged as security for the notes. The
issuing subsidiary used the net cash proceeds from the notes to reduce the
outstanding term loan under the Agreement by $980.0 million. As a result, the
Company wrote off unamortized deferred financing fees in January 2002 related to
the term loan and recorded an extraordinary charge totaling $10.9 million less
applicable income taxes of $4.2 million. The indenture for the notes restricts
among other things, the ability of the Company's subsidiaries to borrow money,
pay dividends on, or redeem or repurchase stock, make investments, create liens,
enter into certain transactions with affiliates, and sell certain assets or
merge with or into other companies.
F-100
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABULAR DATA IN MILLIONS OF DOLLARS (CONTINUED)
4. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS.
The following presents condensed consolidating financial information for the
Company, segregating: (1) Owens-Illinois Group, Inc. (the "Parent");
(2) Owens-Brockway Glass Container Inc. (the "Issuer"); (3) those domestic
subsidiaries which guarantee the notes (the "Guarantor Subsidiaries"); and
(4) all other subsidiaries (the "Non-Guarantor Subsidiaries"). The Guarantor
Subsidiaries are wholly-owned direct and indirect subsidiaries of the Parent and
their guarantees are full, unconditional and joint and several. The Parent is
also a guarantor, and its guarantee is full, unconditional and joint and
several.
Subsidiaries of the Parent and of the Issuer are presented on the equity
basis of accounting. Certain reclassifications have been made to conform all of
the financial information to the financial presentation on a consolidated basis.
The principal eliminating entries eliminate investments in subsidiaries and
intercompany balances and transactions.
F-101
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABULAR DATA IN MILLIONS OF DOLLARS (CONTINUED)
The following information presents consolidating results of operations,
statements of cash flows, and balance sheets for the periods and as of the dates
indicated.
<Table>
<Caption>
MARCH 31, 2002
-------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
BALANCE SHEET
Current assets:
Accounts receivable............ $ -- $ 153.8 $ 190.8 $ 494.0 $ (64.4) $ 774.2
Inventories.................... 161.9 207.4 528.9 (0.6) 897.6
Other current assets........... (4.1) 145.3 148.2 (0.2) 289.2
-------- -------- -------- -------- --------- --------
Total current assets............. -- 311.6 543.5 1,171.1 (65.2) 1,961.0
Investments in and advances to
subsidiaries................... 3,554.8 1,890.7 13.5 (5,459.0) --
Goodwill......................... 554.6 1,054.9 954.7 2,564.2
Other non-current assets......... 251.8 1,062.5 512.6 (6.7) 1,820.2
-------- -------- -------- -------- --------- --------
Total other assets............... 3,554.8 2,697.1 2,130.9 1,467.3 (5,465.7) 4,384.4
Property, plant and equipment,
net............................ 605.0 1,090.7 1,542.9 3,238.6
-------- -------- -------- -------- --------- --------
Total assets..................... $3,554.8 $3,613.7 $3,765.1 $4,181.3 $(5,530.8) $9,584.0
======== ======== ======== ======== ========= ========
Current liabilities:
Accounts payable and accrued
liabilities.................. $ -- $ 178.0 $ 323.4 $ 487.3 $ (48.6) $ 940.1
Short-term loans and long-term
debt due within one year..... 4.9 81.5 86.4
-------- -------- -------- -------- --------- --------
Total current liabilities........ -- 178.0 328.3 568.8 (48.6) 1,026.5
Long-term debt................... 1,700.0 1,705.0 846.7 1,093.0 5,344.7
Other non-current liabilities and
minority interests............. 90.6 733.1 526.9 7.4 1,358.0
Investments by and advances from
parent......................... 1,640.1 1,857.0 1,992.6 (5,489.7) --
Share owner's equity............. 1,854.8 1,854.8
-------- -------- -------- -------- --------- --------
Total liabilities and share
owner's equity................. $3,554.8 $3,613.7 $3,765.1 $4,181.3 $(5,530.9) $9,584.0
======== ======== ======== ======== ========= ========
</Table>
F-102
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABULAR DATA IN MILLIONS OF DOLLARS (CONTINUED)
<Table>
<Caption>
DECEMBER 31, 2001
-------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
BALANCE SHEET
Current assets:
Accounts receivable.............. $ -- $ 123.7 $ 185.8 $ 517.0 $ (72.0) $ 754.5
Inventories...................... 162.9 212.1 462.5 (0.8) 836.7
Other current assets............. 1.1 155.2 162.5 0.2 319.0
-------- -------- -------- -------- --------- --------
Total current assets............... -- 287.7 553.1 1,142.0 (72.6) 1,910.2
Investments in and advances to
subsidiaries..................... 4,022.0 1,967.5 57.1 (6,046.6) --
Goodwill........................... 554.6 1,447.7 993.0 2,995.3
Other non-current assets........... 255.0 1,050.0 528.1 (5.9) 1,827.2
-------- -------- -------- -------- --------- --------
Total other assets................. 4,022.0 2,777.1 2,554.8 1,521.1 (6,052.5) 4,822.5
Property, plant and equipment,
net.............................. 600.9 1,105.9 1,553.1 3,259.9
-------- -------- -------- -------- --------- --------
Total assets....................... $4,022.0 $3,665.7 $4,213.8 $4,216.2 $(6,125.1) $9,992.6
======== ======== ======== ======== ========= ========
Current liabilities:
Accounts payable and accrued
liabilities.................... $ -- $ 183.9 $ 317.0 $ 496.6 $ (57.2) $ 940.3
Short-term loans and long-term
debt due within one year....... 4.8 66.4 71.2
-------- -------- -------- -------- --------- --------
Total current liabilities.......... -- 183.9 321.8 563.0 (57.2) 1,011.5
Long-term debt..................... 1,700.0 1,661.3 851.3 1,117.1 5,329.7
Other non-current liabilities and
minority interests............... 92.3 746.9 482.4 7.8 1,329.4
Investments by and advances from
parent........................... 1,728.2 2,293.8 2,053.7 (6,075.7) --
Share owner's equity............... 2,322.0 2,322.0
-------- -------- -------- -------- --------- --------
Total liabilities and share owner's
equity........................... $4,022.0 $3,665.7 $4,213.8 $4,216.2 $(6,125.1) $9,992.6
======== ======== ======== ======== ========= ========
</Table>
F-103
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABULAR DATA IN MILLIONS OF DOLLARS (CONTINUED)
<Table>
<Caption>
MARCH 31, 2001
-------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
BALANCE SHEET
Current assets:
Accounts receivable.............. $ -- $ 185.5 $ 244.8 $ 453.3 $ (63.1) $ 820.5
Inventories...................... 214.9 227.0 416.2 858.1
Other current assets............. 22.1 79.1 184.6 285.8
-------- -------- -------- -------- --------- --------
Total current assets............... -- 422.5 550.9 1,054.1 (63.1) 1,964.4
Investments in and advances to
subsidiaries..................... 6,601.8 1,808.2 70.6 (8,480.6) --
Goodwill........................... 569.9 1,500.9 889.2 2,960.0
Other non-current assets........... 259.8 979.9 453.0 (3.6) 1,689.1
-------- -------- -------- -------- --------- --------
Total other assets................. 6,601.8 2,637.9 2,551.4 1,342.2 (8,484.2) 4,649.1
Property, plant and equipment,
net.............................. 602.9 1,065.4 1,450.4 3,118.7
Total assets....................... $6,601.8 $3,663.3 $4,167.7 $3,846.7 $(8,547.3) $9,732.2
======== ======== ======== ======== ========= ========
Current liabilities:
Accounts payable and accrued
liabilities.................... $ -- $ 177.5 $ 324.8 $ 480.2 $ (51.2) $ 931.3
Short-term loans and long-term
debt due within one year....... 4.6 102.1 106.7
-------- -------- -------- -------- --------- --------
Total current liabilities.......... -- 177.5 329.4 582.3 (51.2) 1,038.0
Long-term debt..................... 4,537.0 18.7 981.4 5,537.1
Other non-current liabilities and
minority interests............... 120.7 583.0 366.9 21.7 1,092.3
Investments by and advances from
parent........................... 3,365.1 3,236.6 1,916.1 (8,517.8) --
Share owner's equity............... 2,064.8 2,064.8
-------- -------- -------- -------- --------- --------
Total liabilities and share owner's
equity........................... $6,601.8 $3,663.3 $4,167.7 $3,846.7 $(8,547.3) $9,732.2
======== ======== ======== ======== ========= ========
</Table>
F-104
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31, 2002
-------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
RESULTS OF OPERATIONS
Net sales............................. $ -- $390.2 $ 372.6 $565.8 $ (17.7) $1,310.9
Interest.............................. 0.6 4.7 5.3
Equity earnings from subsidiaries..... 70.2 32.9 4.8 (107.9) --
Other equity earnings................. 3.5 0.9 1.6 6.0
Other revenue......................... 12.0 3.7 5.9 (5.5) 16.1
------- ------ ------- ------ ------- --------
Total revenue....................... 70.2 438.6 382.6 578.0 (131.1) 1,338.3
Manufacturing, shipping, and
delivery............................ 308.0 281.9 452.6 (22.7) 1,019.8
Research, engineering, selling,
administrative, and other........... 20.3 48.5 39.4 0.2 108.4
Net intercompany interest............. (33.1) 19.7 11.6 1.8 --
Other interest expense................ 33.1 28.6 12.0 27.2 100.9
------- ------ ------- ------ ------- --------
Total costs and expense............. -- 376.6 354.0 521.0 (22.5) 1,229.1
Earnings (loss) before items below.... 70.2 62.0 28.6 57.0 (108.6) 109.2
Provision (credit) for income taxes... 11.5 8.5 14.8 (0.3) 34.5
Minority share owners' interests in
earnings of subsidiaries............ 4.5 4.5
------- ------ ------- ------ ------- --------
Earnings (loss) before extraordinary
charge and cumulative effect of
accounting change................... 70.2 50.5 20.1 37.7 (108.3) 70.2
Extraordinary charge.................. (6.7) (6.7) 6.7 (6.7)
Cumulative effect of accounting
change.............................. (460.0) (47.0) (413.0) (57.1) 517.1 (460.0)
------- ------ ------- ------ ------- --------
Net income (loss)..................... $(396.5) $ (3.2) $(392.9) $(19.4) $ 415.5 $ (396.5)
======= ====== ======= ====== ======= ========
</Table>
F-105
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31, 2001
-------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
RESULTS OF OPERATIONS
Net sales.............................. $ -- $410.5 $382.3 $535.1 $ (21.8) $1,306.1
Interest............................... 0.5 6.0 6.5
Equity earnings from subsidiaries...... 48.9 29.1 5.9 (83.9) --
Other equity earnings.................. 2.7 1.1 (0.2) 3.6
Other revenue.......................... 4.5 30.7 17.9 (4.8) 48.3
------ ------ ------ ------ ------- --------
Total revenue........................ 48.9 446.8 420.5 558.8 (110.5) 1,364.5
Manufacturing, shipping, and
delivery............................. 331.3 291.3 431.8 (26.7) 1,027.7
Research, engineering, selling,
administrative, and other............ 24.3 70.0 47.8 0.2 142.3
Net intercompany interest.............. (84.8) 52.0 31.1 1.7 --
Other interest expense................. 84.8 0.9 27.8 113.5
------ ------ ------ ------ ------- --------
Total costs and expense.............. -- 407.6 393.3 509.1 (26.5) 1,283.5
Earnings (loss) before items below..... 48.9 39.2 27.2 49.7 (84.0) 81.0
Provision (credit) for income taxes.... 4.3 13.5 9.5 (0.1) 27.2
Minority share owners' interests in
earnings of subsidiaries............. 5.2 (0.3) 4.9
------ ------ ------ ------ ------- --------
Net income (loss)...................... $ 48.9 $ 34.9 $ 13.7 $ 35.0 $ (83.6) $ 48.9
====== ====== ====== ====== ======= ========
</Table>
F-106
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31, 2002
--------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
CASH FLOWS
Cash provided by operating
activities........................ $ -- $ 0.1 $ 62.4 $ 35.2 $ -- $ 97.7
Investing Activities:
Additions to property, plant, and
equipment....................... (25.6) (22.2) (64.5) (112.3)
Acquisitions, net of cash
acquired........................ (2.4) (2.4)
Proceeds from sales............... 3.1 12.2 1.7 17.0
------ --------- ------ ------ ----- ---------
Cash used in investing
activities.................... -- (22.5) (10.0) (65.2) -- (97.7)
Financing Activities:
Net distribution to OI Inc........ (64.0) (64.0)
Change in intercompany
transactions.................... 64.0 (3.2) (61.5) 0.7 --
Change in short term debt......... 16.2 16.2
Payments of long term debt........ (1,001.4) (4.6) (52.5) (1,058.5)
Borrowings of long term debt...... 1,045.0 28.7 1,073.7
Collateral deposits for certain
derivatives..................... 8.6 8.6
Payment of finance fees........... (18.0) (18.0)
------ --------- ------ ------ ----- ---------
Cash provided by (used in)
financing activities.......... -- 22.4 (66.1) 1.7 -- (42.0)
Effect of exchange rate change on
cash.............................. 1.6 1.6
------ --------- ------ ------ ----- ---------
Net change in cash.................. -- -- (13.7) (26.7) -- (40.4)
Cash at beginning of period......... -- 22.3 133.3 155.6
------ --------- ------ ------ ----- ---------
Cash at end of period............... $ -- $ -- $ 8.6 $106.6 $ -- $ 115.2
====== ========= ====== ====== ===== =========
</Table>
F-107
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31, 2001
-------------------------------------------------------------------------------
NON-
GUARANTOR GUARANTOR
PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
CASH FLOWS
Cash provided by (used in) operating
activities........................... $ -- $(56.9) $ 1.4 $ 49.3 $ -- $ (6.2)
Investing Activities:
Additions to property, plant, and
equipment.......................... (13.0) (24.0) (56.1) (93.1)
Acquisitions, net of cash acquired... (4.8) (4.8)
Proceeds from sales.................. 62.3 51.3 113.6
------ ------ ------ ------ ----- ------
Cash provided by (used in)
investing activities............. -- (13.0) 33.5 (4.8) -- 15.7
Financing Activities:
Net change in payable to OI Inc...... (20.0) (20.0)
Net investment by OI Inc............. 32.8 32.8
Change in intercompany
transactions....................... (12.8) 69.9 (48.3) (8.8) --
Change in short term debt............ (0.3) (9.3) (9.6)
Payments of long term debt........... (12.1) (87.5) (99.6)
Borrowings of long term debt......... 23.5 15.8 39.3
------ ------ ------ ------ ----- ------
Cash provided by (used in)
financing activities............. -- 69.9 (37.2) (89.8) -- (57.1)
Effect of exchange rate change on
cash................................. (8.3) (8.3)
------ ------ ------ ------ ----- ------
Net change in cash..................... -- -- (2.3) (53.6) -- (55.9)
Cash at beginning of period............ -- 28.7 201.0 229.7
------ ------ ------ ------ ----- ------
Cash at end of period.................. $ -- $ -- $ 26.4 $147.4 $ -- $173.8
====== ====== ====== ====== ===== ======
</Table>
5. CASH FLOW INFORMATION.
Including interest paid by OI Inc., interest paid in cash aggregated
$54.7 million for the first quarter of 2002 and $77.6 million for the first
quarter of 2001. Income taxes paid in cash totaled $5.4 million for the first
quarter of 2002 and $8.2 million for the first quarter of 2001.
6. COMPREHENSIVE INCOME.
The Company's components of comprehensive income (loss) are net earnings
(loss), change in fair value of certain derivative adjustments, and foreign
currency translation adjustments. Total comprehensive income (loss) for the
three month periods ended March 31, 2002 and 2001 amounted to $(425.5) million
and $(58.7) million, respectively.
F-108
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
7. CONTINGENCIES.
OI Inc. is one of a number of defendants (typically from 20 to 100 or more)
in a substantial number of lawsuits filed in numerous state and federal courts
by persons alleging bodily injury (including death) as a result of exposure to
dust from asbestos fibers. OI Inc. relies primarily on distributions from its
subsidiaries, including the Company, to fund its indemnity payments and legal
fees related to these lawsuits.
From 1948 to 1958, one of OI Inc.'s former business units commercially
produced and sold approximately $40 million of a high-temperature,
calcium-silicate based pipe and block insulation material containing asbestos.
OI Inc. exited the pipe and block insulation business in April 1958. The
traditional asbestos personal injury lawsuits and claims relating to such
production and sale of asbestos material typically allege various theories of
liability, including negligence, gross negligence and strict liability and seek
compensatory and, in some cases, punitive damages in various amounts (herein
referred to as "asbestos claims").
As of March 31, 2002, OI Inc. estimates that it is a named defendant in
asbestos lawsuits and claims involving approximately 24,000 plaintiffs and
claimants. The total amount of relief sought by plaintiffs and claimants cannot
be determined because the amount is often not required to be stated in an
initial claim or lawsuit and because settlements are often reached before claims
and lawsuits advance to the point where such amounts would be required.
Additionally, OI Inc. has claims-handling agreements in place with many
plaintiffs' counsel throughout the country. These agreements require evaluation
and negotiation regarding whether particular claimants qualify under the
criteria established by such agreements. The criteria for such claims include
verification of a compensable illness and a reasonable probability of exposure
to a product manufactured by OI Inc.'s former business unit during its
manufacturing period ending in 1958.
OI Inc. believes that the bankruptcies of additional co-defendants, as
discussed below, have resulted in an acceleration of the presentation and
disposition of a number of claims under such agreements, which claims would
otherwise have been presented and disposed of over the next several years. This
acceleration is reflected in an increased number of pending asbestos claims and,
to the extent disposed, contributes to an increase in asbestos-related payments
which is expected to continue in the near term.
OI Inc. is also a defendant in other asbestos-related lawsuits or claims
involving maritime workers, medical monitoring claimants, co-defendants and
property damage claimants. Based upon its past experience, OI Inc. believes that
these categories of lawsuits and claims will not involve any material liability
and they are not included in the above description of pending matters.
Since receiving its first asbestos claim, OI Inc., as of March 31, 2002, has
disposed of the asbestos claims of approximately 272,000 plaintiffs and
claimants at an average indemnity payment per claim of approximately $5,300.
OI Inc.'s indemnity payments for these claims have varied on a per claim basis,
and are expected to continue to vary considerably over time. As discussed above,
a part of OI Inc.'s objective is to achieve, where possible, resolution of
asbestos claims pursuant to claims-handling agreements. Under such agreements,
qualification by meeting certain illness and exposure criteria has tended to
reduce the number of claims presented to OI Inc. that would ultimately be
dismissed or rejected due to the absence of impairment or product exposure
evidence. OI Inc. expects that as a result, although aggregate spending may be
lower, there may be an increase in the per claim average indemnity payment
involved in such resolution. In this regard, although the average of such
payments
F-109
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
has been somewhat higher following the implementation of the claims-handling
agreements in the mid-1990s, the annual average amount has not varied materially
from year to year.
OI Inc. believes that its ultimate asbestos-related contingent liability
(i.e., its indemnity or other claim disposition costs plus related legal fees)
cannot be estimated with certainty. In 1993, OI Inc. established a liability of
$975 million to cover indemnity payments and legal fees associated with the
resolution of outstanding and expected future asbestos lawsuits and claims. In
1998, an additional liability of $250 million was established. During the third
quarter of 2000, OI Inc. established an additional liability of $550 million to
cover OI Inc.'s estimated indemnity payments and legal fees arising from
outstanding asbestos personal injury lawsuits and claims and asbestos personal
injury lawsuits and claims expected to be filed in the ensuing several years.
OI Inc.'s ability to reasonably estimate its liability has been significantly
affected by the volatility of asbestos-related litigation in the United States,
the expanding list of non-traditional defendants that have been sued in this
litigation and found liable for substantial damage awards, the continued use of
litigation screenings to generate new lawsuits, the large number of claims
asserted or filed by parties who claim prior exposure to asbestos materials but
have no present physical impairment as a result of such exposure, and the
growing number of co-defendants that have filed for bankruptcy. Since the
beginning of 2000, A. P. Green Industries, Inc., Armstrong World Industries,
Babcock & Wilcox, Federal-Mogul Corporation, Fibreboard Corporation, G-I
Holdings (GAF), Harbison-Walker Refractories Group, Kaiser Aluminum Corporation,
North American Refractories Co., Owens Corning, Pittsburgh-Corning, Plibrico
Company, Porter Hayden Company, USG Corporation, W. R. Grace & Co. and several
other smaller companies have sought protection under Chapter 11 of the
Bankruptcy Code.
OI Inc. has continued to monitor trends which may affect its ultimate
liability and has continued to analyze the developments and variables affecting
or likely to affect the resolution of pending and future asbestos claims against
OI Inc. OI Inc. expects that the gross amount of total asbestos-related payments
will be moderately lower in 2002 compared to 2001 and will continue to decline
thereafter as the number of potential claimants continues to decrease. However,
the trend toward lower aggregate annual payments has not occurred as soon as had
been anticipated when the additional liability was established in 2000. In
addition, the number of claims and lawsuits filed against OI Inc. has exceeded
the number anticipated at that time. In early March 2002, OI Inc. initiated a
comprehensive review to determine whether further adjustment of asbestos-related
liabilities was appropriate. At the conclusion of this review in April, OI Inc.
determined that an additional charge of $475 million would be appropriate to
adjust the reserve for estimated future asbestos-related costs. The material
components of OI Inc.'s accrual, including this additional accrued amount, are
the following: (i) OI Inc.'s estimate at that date of the reasonably probable
contingent liability for asbestos claims already asserted against OI Inc.,
(ii) OI Inc.'s estimate at that date of the contingent liability for preexisting
but unasserted asbestos claims for prior periods arising under its
administrative claims-handling agreements with various plaintiffs' counsel,
(iii) OI Inc.'s estimate at that time of the contingent liability for asbestos
claims not yet asserted against OI Inc., but which OI Inc. believes it is
reasonably probable will be asserted in the future, to the degree that such an
estimation as to future claims is possible, and (iv) OI Inc.'s estimate of legal
defense costs likely to be incurred in connection with the foregoing types of
claims.
The significant assumptions underlying the material components of OI Inc.'s
accrual are:
a) the extent to which settlements are limited to claimants who were
exposed to OI Inc.'s asbestos-containing insulation prior to its exit from
that business in 1958;
F-110
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OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
b) the extent to which claims are resolved under OI Inc.'s
administrative claims agreements or on terms comparable to those set forth
in those agreements;
c) the extent of reduction in the inventory of pending serious disease
cases;
d) the extent to which OI Inc. is able to successfully defend itself at
trial;
e) the extent of actions by courts to eliminate or reduce the diversion
of financial resources for unimpaired claimants and so-called forum
shopping;
f) the extent to which additional defendants with substantial resources
and assets are required to participate significantly in the resolution of
future asbestos cases and claims;
g) the number and timing of co-defendant bankruptcies; and
h) the extent to which the resolution of co-defendant bankruptcies
divert resources to unimpaired claimants.
OI Inc. believes that any possible loss or range of loss in addition to the
foregoing charge cannot be reasonably estimated. While OI Inc. cannot reasonably
estimate the precise timing of payment, OI Inc. believes that its liabilities
for the next several years will not exceed the amount accrued based on its
expectation of moderate declines in annual spending for asbestos-related costs.
OI Inc. has previously pursued recovery of its losses from third parties,
particularly its insurance carriers, and has largely resolved all of its
significant coverage claims. OI Inc. expects some further recovery from deferred
payment provisions of existing settlement agreements and from pursuing certain
additional reimbursement claims. However, OI Inc. does not expect to recover
additional material amounts in excess of the recorded receivable of
$37.0 million at March 31, 2002.
Other litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are nonroutine and involve compensatory,
punitive or treble damage claims as well as other types of relief.
The ultimate amount of distributions which may be required to be made by the
Company and other subsidiaries of OI Inc. to fund OI Inc.'s asbestos-related
payments cannot be estimated with certainty. OI Inc.'s reported results of
operation for 2002 have been materially affected by the $475 million first
quarter charge and asbestos-related payments continue to be substantial. Any
possible future additional accrual would likewise materially affect OI Inc.'s
results of operations in the period in which it might be recorded. Also, the
continued use of significant amounts of cash for asbestos-related costs has
affected and will continue to affect the Company's cost of borrowing and its
ability to pursue global or domestic acquisitions. However, the Company believes
that its operating cash flows and other sources of liquidity will be sufficient
to make distributions to OI Inc. for asbestos-related costs and to fund its
working capital and capital expenditure requirements on a short-term and
long-term basis.
F-111
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
8. SEGMENT INFORMATION.
The Company operates in the rigid packaging industry. The Company has two
reportable product segments within the rigid packaging industry: (1) Glass
Containers and (2) Plastics Packaging. The Plastics Packaging segment consists
of two business units--consumer products (plastic containers and closures) and
prescription products. The Other segment consists primarily of the Company's
labels and carriers products business unit, substantially all of which was
divested in early 2001.
The Company evaluates performance and allocates resources based on earnings
before interest income, interest expense, provision for income taxes, minority
share owners' interests in earnings of subsidiaries, and extraordinary charges,
(collectively "EBIT") excluding unusual items. EBIT for product segments
includes an allocation of corporate expenses based on both a percentage of sales
and direct billings based on the costs of specific services provided.
Financial information for the three-month periods ended March 31, 2002 and
2001 regarding the Company's product segments is as follows:
<Table>
<Caption>
ELIMINATIONS
TOTAL AND
GLASS PLASTICS PRODUCT OTHER CONSOLIDATED
CONTAINERS PACKAGING OTHER SEGMENTS RETAINED TOTALS
---------- --------- -------- -------- ------------ ------------
Net sales:
March 31, 2002......................... $870.1 $440.8 $ -- $1,310.9 $1,310.9
March 31, 2001......................... 841.8 459.8 4.5 1,306.1 1,306.1
====== ====== ==== ======== ========
EBIT, excluding unusual items and
goodwill amortization:
March 31, 2002......................... $151.1 $ 74.8 $ -- $ 225.9 $ (21.1) $ 204.8
March 31, 2001......................... 132.1 78.9 0.2 211.2 (13.2) 198.0
====== ====== ==== ======== ======= ========
Unusual items:
March 31, 2001
Gain on the sale of a minerals
business in Australia.............. $ 10.3 $ 10.3 $ 10.3
Gain on the sale of the Company's
label business..................... $2.8 2.8 2.8
==== ======== ========
</Table>
The reconciliation of EBIT to earnings before income taxes and minority
share owners' interests in earnings of subsidiaries for the three-month periods
ended March 31, 2002 and 2001 is as follows:
<Table>
<Caption>
MARCH 31, 2002 MARCH 31, 2001
-------------- --------------
EBIT, excluding unusual items and goodwill amortization, for
reportable segments....................................... $225.9 $ 211.2
Unusual items excluded from reportable segment
information............................................... 13.1
Amortization of goodwill.................................... (23.1)
Eliminations and other retained............................. (21.1) (13.2)
Net interest expense........................................ (95.6) (107.0)
------ -------
Total....................................................... $109.2 $ 81.0
====== =======
</Table>
F-112
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
9. ADOPTION OF NEW ACCOUNTING STANDARD--GOODWILL.
On January 1, 2002, the Company adopted Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS No. 142"). As required by
FAS No. 142, the Company is no longer amortizing goodwill, but will be reviewing
annually (or more frequently if impairment indicators arise) for impairment.
During the first quarter of 2002, the Company completed an impairment test
under FAS No. 142 using the business enterprise value ("BEV") of each reporting
unit which was calculated as of the measurement date, January 1, 2002, by
determining the present value of debt-free, after tax future cash flows,
discounted at the weighted average cost of capital of a hypothetical third party
buyer. This BEV was then compared to the book value of each reporting unit as of
the measurement date to assess whether an impairment existed under FAS 142.
Based on this comparison, the Company determined that an impairment existed in
its consumer products reporting unit of the Plastics Packaging segment. The
consumer products reporting unit operates in a highly competitive and fragmented
industry. This industry has excess capacity which has created downward pricing
pressure. The Company lowered its earnings and cash flow projections for this
unit for the next several years which resulted in a lower BEV. Following a
review of the valuation of the assets of the consumer products reporting unit,
the Company has recorded an impairment charge of $460 million to reduce the
reported value of its goodwill. As required by FAS No. 142, the transitional
impairment loss has been recognized as the cumulative effect of a change in
method of accounting.
The following pro forma earnings for 2001 have been presented on a pro forma
basis to eliminate goodwill amortization of $23.1 million as required by FAS
No. 142.
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------- -------------
(ACTUAL) (PRO FORMA)
Earnings before extraordinary item and cumulative effect of
accounting change......................................... $ 70.2 $72.0
Net earnings (loss)......................................... $(396.5) $72.0
</Table>
10. RESTRUCTURING ACCRUALS.
During the second quarter of 2001, the Company recorded net charges of
$82.1 million for a restructuring program and impairment at certain of the
Company's international and domestic operations. The charge includes the
impairment of assets at the Company's affiliate in Puerto Rico and the
consolidation of manufacturing capacity and the closing of a facility in
Venezuela. The program also includes consolidation of capacity at certain other
international and domestic facilities in response to decisions about pricing and
market strategy. The total planned reduction in workforce will involve
approximately 400 employees. The Company expects its actions related to these
restructuring and impairment charges to be completed during the next several
quarters.
The Company also has remaining restructuring accruals related to a capacity
realignment program initiated in 2000. The program principally involved the
closing of three U.S. glass container plants. During 2002, the Company has
partially reopened one of these facilities, and as such, has reversed a portion
of the original charge. The Company expects that it will continue to make cash
payments over the next several quarters for on-going costs related to the
closing of these facilities.
F-113
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
Selected information relating to the above restructuring accruals follows:
<Table>
Remaining accruals as of December 31, 2001.................. $37.5
Write-down of assets to net realizable value................ (8.8)
Net cash paid............................................... (2.4)
Reversal of previous restructuring charge................... (3.2)
-----
Remaining accrual as of March 31, 2002...................... $23.1
=====
</Table>
11. DERIVATIVE INSTRUMENTS.
Under the terms of the April 2001 Secured Credit Agreement, international
affiliates are only permitted to borrow in U.S. dollars. In order to manage the
international affiliates' exposure to fluctuating foreign exchange rates, the
Company's affiliates in Australia and the United Kingdom have entered into
currency swaps for the principal portion of their initial borrowings under the
Agreement and for their interest payments due under the Agreement.
As of March 31, 2002, the Company's affiliate in Australia has swapped
$650.0 million of borrowings into $1,275.0 million Australian dollars. This swap
matures on March 31, 2003, with interest resets every 90 days. The interest
reset terms of the swap approximate the terms of the U.S. dollar borrowings.
This derivative instrument swaps both the interest and principal from U.S.
dollars to Australian dollars and also swaps the interest rate from a U.S. based
rate to an Australian based rate. The Company's affiliate in the United Kingdom
has swapped $200.0 million of borrowings into 139.0 million British pounds. This
swap also matures on March 31, 2003, with interest resets every 90 days. This
derivative instrument swaps both the interest and principal from U.S. dollars to
British pounds and also swaps the interest rate from a U.S. based rate to a
British based rate.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. for a purchase price of
approximately $150 million. The Company financed this purchase through
borrowings under the Secured Credit Agreement, of which $100 million was
transferred to Canada through intercompany loans in U.S. dollars with the
remaining $50 million being transferred as equity. The Company's affiliate in
Canada has entered into swap transactions to manage the affiliate's exposure to
fluctuating foreign exchange rates by swapping the principal and interest
portion of the intercompany loan. At March 31, 2002, the Canadian affiliate has
swapped $90.0 million of borrowings into $142.0 million Canadian dollars. This
swap matures on October 1, 2003. This derivative instrument swaps both the
interest and principal from U.S. dollars to Canadian dollars and also swaps the
interest rate from a U.S. based rate to a Canadian based rate. The affiliate has
also entered in forward hedges which effectively swap $10.0 million of
borrowings into $16.0 million Canadian dollars. These hedges swap both the
interest and principal from U.S. dollars to Canadian dollars and mature monthly.
The Company recognizes the above derivatives on the balance sheet at fair
value. The Company accounts for the above swaps as fair value hedges. As such,
the changes in the value of the swaps are included in other expense and are
expected to substantially offset any exchange rate gains or losses on the
related U.S. dollar borrowings. For the three months ended March 31, 2002, the
amount not offset was immaterial.
The Company also uses commodity futures contracts related to forecasted
natural gas requirements. The objective of these futures contracts is to limit
the fluctuations in prices paid and the
F-114
<Page>
OWENS-ILLINOIS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
potential volatility in earnings or cash flows from future market price
movements. During January 2002, the Company entered into commodity futures
contracts for approximately 50% of its domestic natural gas usage (approximately
800 million BTUs) through the end of 2002.
The Company accounts for the above futures contracts on the balance sheet at
fair value. The effective portion of changes in the fair value of a derivative
that is designated as and meets the required criteria for a cash flow hedge is
recorded in accumulated other comprehensive income ("OCI") and reclassified into
earnings in the same period or periods during which the underlying hedged item
affects earnings. The ineffective portion of the change in the fair value of a
derivative designated as a cash flow hedge is recognized in current earnings.
The above futures contracts are accounted for as cash flow hedges at
March 31, 2002. Hedge accounting is only applied when the derivative is deemed
to be highly effective at offsetting anticipated cash flows of the hedged
transactions. For hedged forecasted transactions, hedge accounting will be
discontinued if the forecasted transaction is no longer probable to occur, and
any previously deferred gains or losses will be recorded to earnings
immediately.
During the three months ended March 31, 2002, an unrealized net gain of
$3.0 million (after tax of $1.6 million) related to these commodity futures
contracts was included in OCI. There was no ineffectiveness recognized during
the three months ended March 31, 2002.
F-115
<Page>
OWENS-BROCKWAY PACKAGING, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------- -------------
(UNAUDITED)
Revenues:
Net sales................................................. $911.2 $892.3
Other revenue............................................. 23.2 26.4
------ ------
934.4 918.7
Costs and expenses:
Manufacturing, shipping, and delivery..................... 716.1 713.0
Research and development.................................. 2.8 3.0
Engineering............................................... 7.5 6.9
Selling and administrative................................ 43.5 39.1
Net intercompany interest................................. 25.5 57.4
Other interest expense.................................... 55.7 27.4
Other..................................................... 5.0 17.0
------ ------
856.1 863.8
------ ------
Earnings before items below................................. 78.3 54.9
Provision for income taxes.................................. 22.9 14.8
Minority share owners' interests in earnings of
subsidiaries.............................................. 4.9 5.2
------ ------
Earnings before extraordinary item and cumulative effect of
accounting change......................................... 50.5 34.9
Extraordinary charge from early extinguishment of debt, net
of applicable income taxes................................ (6.7)
Cumulative effect of accounting change...................... (47.0)
------ ------
Net earnings (loss)......................................... $ (3.2) $ 34.9
====== ======
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-116
<Page>
OWENS-BROCKWAY PACKAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
----------- --------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash, including time deposits............................ $ 102.3 $ 124.7 $ 124.0
Short-term investments................................... 0.9 0.4
Receivables including amount from related parties of
$14.6 ($1.6 at Dec.31, 2001, $1.0 at March 31, 2001),
less allowances of $29.1 ($32.2 at Dec. 31, 2001, $28.6
at March 31, 2001) for losses and discounts............ 582.0 575.3 576.5
Inventories.............................................. 676.5 611.0 611.8
Prepaid expenses......................................... 32.5 23.9 36.9
-------- -------- --------
Total current assets................................... 1,394.2 1,334.9 1,349.6
Other assets:
Equity investments....................................... 153.7 153.9 161.1
Repair parts inventories................................. 161.2 173.5 193.6
Prepaid pension.......................................... 50.3 49.8 40.3
Deposits, receivables, and other assets.................. 408.4 421.4 343.4
Goodwill................................................. 1,525.0 1,556.2 1,470.6
-------- -------- --------
Total other assets..................................... 2,298.6 2,354.8 2,209.0
Property, plant, and equipment, at cost.................... 3,796.9 3,766.8 3,553.0
Less accumulated depreciation............................ 1,706.5 1,663.5 1,547.0
-------- -------- --------
Net property, plant, and equipment..................... 2,090.4 2,103.3 2,006.0
-------- -------- --------
Total assets............................................... $5,783.2 $5,793.0 $5,564.6
======== ======== ========
LIABILITIES AND NET PARENT INVESTMENT
Current liabilities:
Short-term loans and long-term debt due within one
year................................................... $ 81.5 $ 66.4 $ 95.0
Accounts payable and other liabilities................... 620.0 622.6 599.7
-------- -------- --------
Total current liabilities.............................. 701.5 689.0 694.7
External long-term debt.................................... 2,798.1 2,778.5 981.4
Deferred taxes............................................. 179.0 161.9 163.9
Other liabilities.......................................... 315.4 275.7 199.3
Minority share owners' interests........................... 149.1 159.7 160.2
Net Parent investment:
Investment by and advances from parent................... 2,217.1 2,276.1 3,949.9
Accumulated other comprehensive income................... (577.0) (547.9) (584.8)
-------- -------- --------
Total net Parent investment............................ 1,640.1 1,728.2 3,365.1
-------- -------- --------
Total liabilities and net Parent investment................ $5,783.2 $5,793.0 $5,564.6
======== ======== ========
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-117
<Page>
OWENS-BROCKWAY PACKAGING, INC.
CONDENSED CONSOLIDATED CASH FLOWS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
--------- --------
(UNAUDITED)
OPERATING ACTIVITIES:
Net earnings before extraordinary item and cumulative
effect of accounting change............................. $ 50.5 $ 34.9
Non-cash charges (credits):
Depreciation............................................ 75.4 71.3
Amortization of deferred costs.......................... 7.2 15.4
Deferred tax provision (credit)......................... (3.7) 30.3
Gains on asset sales.................................... (10.3)
Other................................................... (31.7) (15.5)
Change in non-current operating assets.................... 9.0 0.7
Change in non-current liabilities......................... (10.5)
Change in components of working capital................... (48.1) (105.7)
--------- -------
Cash provided by operating activities................... 48.1 21.1
INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (82.0) (68.0)
Net cash proceeds from divestitures and other............. 5.3 53.0
--------- -------
Cash utilized in investing activities................... (76.7) (15.0)
FINANCING ACTIVITIES:
Additions to long-term debt............................... 1,073.7 15.9
Repayments of long-term debt.............................. (1,053.8) (87.6)
Increase (decrease) in short-term loans................... 16.2 (9.1)
Net change in intercompany debt........................... (22.1) 37.2
Collateral deposits for certain derivative instruments.... 8.6
Payment of finance fees................................... (18.0)
--------- -------
Cash provided by (utilized in) financing activities..... 4.6 (43.6)
Effect of exchange rate fluctuations on cash.............. 1.6 (8.1)
--------- -------
Decrease in cash............................................ (22.4) (45.6)
Cash at beginning of period................................. 124.7 169.6
--------- -------
Cash at end of period....................................... $ 102.3 $ 124.0
========= =======
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-118
<Page>
OWENS-BROCKWAY PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABULAR DATA IN MILLIONS OF DOLLARS
1. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements presented herein are
unaudited but, in the opinion of management, reflect all adjustments necessary
to present fairly such information for the periods and at the dates indicated.
Since the accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with Article 10 of Regulation S-X, they do not
contain all information and footnotes normally contained in annual consolidated
financial statements; accordingly, they should be read in conjunction with the
Consolidated Financial Statements of Owens-Brockway Packaging, Inc. and notes
thereto appearing elsewhere in this prospectus.
The Company is a wholly-owned subsidiary of Owens-Illinois Group, Inc. ("OI
Group" or "Parent") and an indirect subsidiary of Owens-Illinois, Inc.
("OI Inc."). Although OI Inc. does not conduct any operations, it has
substantial obligations related to outstanding indebtedness, dividends for
preferred stock and asbestos-related payments. OI Inc. relies primarily on
distributions from its direct and indirect subsidiaries to meet these
obligations.
2. INVENTORIES
Major classes of inventory are as follows:
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
--------- -------- ---------
Finished goods........................................... $566.1 $507.2 $503.6
Work in process.......................................... 9.0 5.9 6.4
Raw materials............................................ 54.6 53.5 53.3
Operating supplies....................................... 46.8 44.4 48.5
------ ------ ------
$676.5 $611.0 $611.8
====== ====== ======
</Table>
3. EXTERNAL LONG-TERM DEBT
The following table summarizes the external long-term debt of the Company:
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
--------- -------- ---------
Secured Credit Agreement:
Revolving Credit Facility............................ $1,574.2 $1,560.4
Term Loan............................................ 65.0 1,045.0
Second Amended and Restated Credit Agreement:
Revolving Credit Facility:
Offshore Loans:
Australian Dollars
1.39 billion $ 612.8
British Pounds
125.0 million 188.7
Senior Secured Notes, 8.88%, due 2009.................. 1,000.0
Other.................................................. 183.0 199.1 206.1
-------- -------- --------
2,822.2 2,804.5 1,007.6
Less amounts due within one year..................... 24.1 26.0 26.2
-------- -------- --------
External long-term debt............................ $2,798.1 $2,778.5 $ 981.4
======== ======== ========
</Table>
F-119
<Page>
OWENS-BROCKWAY PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
3. EXTERNAL LONG-TERM DEBT (CONTINUED)
At March 31, 2002, the Company and its subsidiaries had unused credit of
$329.5 million available under the Secured Credit Agreement.
The weighted average interest rate on borrowings outstanding under the
Revolving Credit Facility at March 31, 2002 was 3.90%. Including the effects of
cross-currency swap agreements related to Revolving Credit Facility borrowings
by the Company's Australian, U.K., and Canadian subsidiaries, the weighted
average interest rate was 5.44%.
The weighted average interest rate on borrowings outstanding under the Term
Loan at March 31, 2002 was 4.42%.
During January 2002, the Company completed a $1.0 billion private placement
of senior secured notes. The notes bear interest at 8 7/8% and are due
February 15, 2009. The notes are guaranteed by OI Group and substantially all of
its domestic subsidiaries. The assets of substantially all of OI Group's
domestic subsidiaries are pledged as security for the notes. The Company used
the net cash proceeds from the notes to reduce its outstanding term loan under
the Agreement by $980 million. As a result, the Company wrote off unamortized
deferred financing fees in January 2002 related to the term loan and recorded an
extraordinary charge totaling $10.9 million less applicable income taxes of
$4.2 million. The indenture for the notes restricts, among other things, the
ability of the Company and its restricted subsidiaries to borrow money, pay
dividends on, or redeem or repurchase stock, make investments, create liens,
enter into certain transactions with affiliates, and sell certain assets or
merge with or into other companies.
4. GUARANTEES OF DEBT
The Company has guaranteed the borrowings of certain of OI Inc.'s domestic
subsidiaries totaling $850 million and has also guaranteed the borrowings of
certain foreign subsidiaries under the Agreement.
5. CASH FLOW INFORMATION
Interest paid in cash aggregated $43.1 million for the first quarter of 2002
and $22.3 million for the first quarter of 2001. Income taxes paid in cash
totaled $4.6 million for the first quarter of 2002 and $6.7 million for the
first quarter of 2001.
6. COMPREHENSIVE INCOME
The Company's components of comprehensive loss are net loss, change in fair
value of certain derivative adjustments, and foreign currency translation
adjustments. Total comprehensive loss for the three month periods ended
March 31, 2002 and 2001 amounted to $(32.3) million and $(70.5) million,
respectively.
7. ADOPTION OF NEW ACCOUNTING STANDARD--GOODWILL
On January 1, 2002, the Company adopted Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS No. 142"). As required by
FAS No. 142, the Company is no longer
F-120
<Page>
OWENS-BROCKWAY PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
7. ADOPTION OF NEW ACCOUNTING STANDARD--GOODWILL (CONTINUED)
amortizing goodwill, but will be reviewing annually (or more frequently if
impairment indicators arise) for impairment.
During the first quarter of 2002, the Company completed an impairment test
under FAS No. 142 using the business enterprise value ("BEV") of each reporting
unit which was calculated as of the measurement date, January 1, 2002, by
determining the present value of debt-free, after tax future cash flows,
discounted at the weighted average cost of capital of a hypothetical third party
buyer. This BEV was then compared to the book value of each reporting unit as of
the measurement date to assess whether an impairment existed under FAS 142.
Based on this comparison, the Company determined that an impairment existed in
its consumer products reporting unit. The consumer plastic products reporting
unit operates in a highly competitive and fragmented industry. This industry has
excess capacity which has created downward pricing pressure. The Company lowered
its earnings and cash flow projections for this unit for the next several years
which resulted in a lower BEV. Following a review of the valuation of the assets
of the consumer products reporting unit, the Company recorded an impairment
charge of $47.0 million to reduce the reported value of its goodwill. As
required by FAS No. 142, the transitional impairment loss has been recognized as
the cumulative effect of a change in method of accounting.
The following pro forma earnings for 2001 have been presented on a pro forma
basis to eliminate goodwill amortization of $11.5 million, as required by FAS
No. 142.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2001
-------- -----------
(ACTUAL) (PRO FORMA)
Earnings before extraordinary item and cumulative effect
of accounting change................................... $50.5 $46.4
Net earnings (loss)...................................... $(3.2) $46.4
</Table>
8. RESTRUCTURING ACCRUALS
During the second quarter of 2001, the Company recorded net charges of
$65.2 million for a restructuring program and impairment at certain of the
Company's international and domestic operations. The charge includes the
impairment of assets at the Company's affiliate in Puerto Rico and the
consolidation of manufacturing capacity and the closing of a facility in
Venezuela. The program also includes consolidation of capacity at certain other
international and domestic facilities in response to decisions about pricing and
market strategy. The Company expects its actions related to these restructuring
and impairment charges to be completed during the next several quarters.
The Company also has remaining restructuring accruals related to a capacity
realignment program initiated in 2000. The program principally involved the
closing of three U.S. plants. During 2002, the Company has partially reopened
one of these facilities, and as such, has reversed a portion of the original
charge. The Company expects that it will continue to make cash payments over the
next several quarters for on-going costs related to the closing of these
facilities.
F-121
<Page>
OWENS-BROCKWAY PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
8. RESTRUCTURING ACCRUALS (CONTINUED)
Selected information relating to the above restructuring accruals follows:
<Table>
Remaining accruals as of December 31, 2001.................. $22.8
Write-down of assets to net realizable value................ (1.1)
Net cash paid............................................... (2.8)
Reversal of previous restructuring charge................... (3.2)
-----
Remaining accrual as of March 31, 2002...................... $15.7
=====
</Table>
9. DERIVATIVE INSTRUMENTS
Under the terms of the April 2001 Secured Credit Agreement, international
affiliates are only permitted to borrow in U.S. dollars. In order to manage the
international affiliates' exposure to fluctuating foreign exchange rates, the
Company's affiliates in Australia and the United Kingdom have entered into
currency swaps for the principal portion of their initial borrowings under the
Agreement and for their interest payments due under the Agreement.
As of March 31, 2002, the Company's affiliate in Australia has swapped
$650.0 million of borrowings into $1,275.0 million Australian dollars. This swap
matures on March 31, 2003, with interest resets every 90 days. The interest
reset terms of the swap approximate the terms of the U.S. dollar borrowings.
This derivative instrument swaps both the interest and principal from U.S.
dollars to Australian dollars and also swaps the interest rate from a U.S. based
rate to an Australian based rate. The Company's affiliate in the United Kingdom
has swapped $200.0 million of borrowings into 139.0 million British pounds. This
swap also matures on March 31, 2003, with interest resets every 90 days. This
derivative instrument swaps both the interest and principal from U.S. dollars to
British pounds and also swaps the interest rate from a U.S. based rate to a
British based rate.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. for a purchase price of
approximately $150 million. The Company financed this purchase through
borrowings under the Secured Credit Agreement, of which $100 million was
transferred to Canada through intercompany loans in U.S. dollars with the
remaining $50 million being transferred as equity. The Company's affiliate in
Canada has entered into swap transactions to manage the affiliate's exposure to
fluctuating foreign exchange rates by swapping the principal and interest
portion of the intercompany loan. At March 31, 2002, the Canadian affiliate has
swapped $90.0 million of borrowings into $142.0 million Canadian dollars. This
swap matures on October 1, 2003. This derivative instrument swaps both the
interest and principal from U.S. dollars to Canadian dollars and also swaps the
interest rate from a U.S. based rate to a Canadian based rate. The affiliate has
also entered in forward hedges which effectively swap $10.0 million of
borrowings into $16.0 million Canadian dollars. These hedges swap both the
interest and principal from U.S. dollars to Canadian dollars and mature monthly.
The Company recognizes the above derivatives on the balance sheet at fair
value. The Company accounts for the above swaps as fair value hedges. As such,
the changes in the value of the swaps are included in other expense and are
expected to substantially offset any exchange rate gains or losses on the
related U.S. dollar borrowings. For the three months ended March 31, 2002, the
amount not offset was immaterial.
F-122
<Page>
OWENS-BROCKWAY PACKAGING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
9. DERIVATIVE INSTRUMENTS (CONTINUED)
The Company also uses commodity futures contracts related to forecasted
natural gas requirements. The objective of these futures contracts is to limit
the fluctuations in prices paid and the potential volatility in earnings or cash
flows from future market price movements. During January 2002, the Company
entered into commodity futures contracts for approximately 50% of its domestic
natural gas usage (approximately 800 million BTUs) through the end of 2002.
The Company accounts for the above futures contracts on the balance sheet at
fair value. The effective portion of changes in the fair value of a derivative
that is designated as and meets the required criteria for a cash flow hedge is
recorded in accumulated other comprehensive income ("OCI") and reclassified into
earnings in the same period or periods during which the underlying hedged item
affects earnings. The ineffective portion of the change in the fair value of a
derivative designated as a cash flow hedge is recognized in current earnings.
The above futures contracts are accounted for as cash flow hedges at
March 31, 2002. Hedge accounting is only applied when the derivative is deemed
to be highly effective at offsetting anticipated cash flows of the hedged
transactions. For hedged forecasted transactions, hedge accounting will be
discontinued if the forecasted transaction is no longer probable to occur, and
any previously deferred gains or losses will be recorded to earnings
immediately.
During the three months ended March 31, 2002, an unrealized gain of
$3.0 million (after tax of $1.6 million) related to these commodity futures
contracts was included in OCI. There was no ineffectiveness recognized during
the three months ended March 31, 2002.
F-123
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2002 2001
-------- --------
(UNAUDITED)
Revenues:
Net sales................................................. $911.2 $892.3
Other revenue............................................. 23.2 26.4
------ ------
934.4 918.7
Costs and expenses:
Manufacturing, shipping, and delivery..................... 716.1 713.0
Research and development.................................. 2.8 3.0
Engineering............................................... 7.5 6.9
Selling and administrative................................ 43.5 39.1
Net intercompany interest................................. 25.5 57.4
Other interest expense.................................... 55.7 27.4
Other..................................................... 5.0 17.0
------ ------
856.1 863.8
------ ------
Earnings before items below................................. 78.3 54.9
Provision for income taxes.................................. 22.9 14.8
Minority share owners' interests in earnings of
subsidiaries.............................................. 4.9 5.2
------ ------
Earnings before extraordinary item and cumulative effect of
accounting change......................................... 50.5 34.9
Extraordinary charge from early extinguishment of debt, net
of applicable income taxes................................ (6.7)
Cumulative effect of accounting change...................... (47.0)
------ ------
Net earnings (loss)......................................... $ (3.2) $ 34.9
====== ======
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-124
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
----------- -------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash, including time deposits............................. $ 102.3 $ 124.7 $ 124.0
Short-term investments.................................... 0.9 0.4
Receivables including amount from related parties of $14.6
($1.6 at Dec.31, 2001, $1.0 at March 31, 2001), less
allowances of $29.1 ($32.2 at Dec. 31, 2001, $28.6 at
March 31, 2001) for losses and discounts................ 582.0 575.3 576.5
Inventories............................................... 676.5 611.0 611.8
Prepaid expenses.......................................... 32.5 23.9 36.9
-------- -------- --------
Total current assets.................................... 1,394.2 1,334.9 1,349.6
Other assets:
Equity investments........................................ 153.7 153.9 161.1
Repair parts inventories.................................. 161.2 173.5 193.6
Prepaid pension........................................... 50.3 49.8 40.3
Deposits, receivables, and other assets................... 408.4 421.4 343.4
Goodwill.................................................. 1,525.0 1,556.2 1,470.6
-------- -------- --------
Total other assets...................................... 2,298.6 2,354.8 2,209.0
Property, plant, and equipment, at cost..................... 3,796.9 3,766.8 3,553.0
Less accumulated depreciation............................. 1,706.5 1,663.5 1,547.0
-------- -------- --------
Net property, plant, and equipment...................... 2,090.4 2,103.3 2,006.0
-------- -------- --------
Total assets................................................ $5,783.2 $5,793.0 $5,564.6
======== ======== ========
LIABILITIES AND NET PARENT INVESTMENT
Current liabilities:
Short-term loans and long-term debt due within one year... $ 81.5 $ 66.4 $ 95.0
Accounts payable and other liabilities.................... 620.0 622.6 599.7
-------- -------- --------
Total current liabilities............................... 701.5 689.0 694.7
External long-term debt..................................... 2,798.1 2,778.5 981.4
Deferred taxes.............................................. 179.0 161.9 163.9
Other liabilities........................................... 315.4 275.7 199.3
Minority share owners' interests............................ 149.1 159.7 160.2
Net Parent investment:
Investment by and advances from parent.................... 2,217.1 2,276.1 3,949.9
Accumulated other comprehensive income.................... (577.0) (547.9) (584.8)
-------- -------- --------
Total net Parent investment............................. 1,640.1 1,728.2 3,365.1
-------- -------- --------
Total liabilities and net Parent investment................. $5,783.2 $5,793.0 $5,564.6
======== ======== ========
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-125
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
CONDENSED CONSOLIDATED CASH FLOWS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
--------- --------
(UNAUDITED)
OPERATING ACTIVITIES:
Net earnings before extraordinary item and cumulative
effect of accounting change............................. $ 50.5 $ 34.9
Non-cash charges (credits):
Depreciation............................................ 75.4 71.3
Amortization of deferred costs.......................... 7.2 15.4
Deferred tax provision (credit)......................... (3.7) 30.3
Gains on asset sales.................................... (10.3)
Other................................................... (31.7) (15.5)
Change in non-current operating assets.................... 9.0 0.7
Change in non-current liabilities......................... (10.5)
Change in components of working capital................... (48.1) (105.7)
--------- -------
Cash provided by operating activities................... 48.1 21.1
INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (82.0) (68.0)
Net cash proceeds from divestitures and other............. 5.3 53.0
--------- -------
Cash utilized in investing activities................... (76.7) (15.0)
FINANCING ACTIVITIES:
Additions to long-term debt............................... 1,073.7 15.9
Repayments of long-term debt.............................. (1,053.8) (87.6)
Increase (decrease) in short-term loans................... 16.2 (9.1)
Net change in intercompany debt........................... (22.1) 37.2
Collateral deposits for certain derivative instruments.... 8.6
Payment of finance fees................................... (18.0)
--------- -------
Cash provided by (utilized in) financing activities..... 4.6 (43.6)
Effect of exchange rate fluctuations on cash.............. 1.6 (8.1)
--------- -------
Decrease in cash............................................ (22.4) (45.6)
Cash at beginning of period................................. 124.7 169.6
--------- -------
Cash at end of period....................................... $ 102.3 $ 124.0
========= =======
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-126
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABULAR DATA IN MILLIONS OF DOLLARS
1. BASIS OF PRESENTATION.
The Condensed Consolidated Financial Statements presented herein are
unaudited but, in the opinion of management, reflect all adjustments necessary
to present fairly such information for the periods and at the dates indicated.
Since the accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with Articlep 10 of Regulation S-X, they do not
contain all information and footnotes normally contained in annual consolidated
financial statements; accordingly, they should be read in conjunction with the
Consolidated Financial Statements of Owens-Brockway Glass Container Inc. and
notes thereto appearing elsewhere in this prospectus.
The Company is a wholly-owned subsidiary of Owens-Brockway Packaging, Inc.
("OB Packaging" or "Parent"), and an indirect subsidiary of Owens-Illinois
Group, Inc. ("OI Group") and Owens-Illinois, Inc. ("OI Inc."). Although OI Inc.
does not conduct any operations, it has substantial obligations related to
outstanding indebtedness, dividends for preferred stock and asbestos-related
payments. OI Inc. relies primarily on distributions from its direct and indirect
subsidiaries to meet these obligations.
2. INVENTORIES.
Major classes of inventory are as follows:
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
--------- -------- ---------
Finished goods................................... $566.1 $507.2 $503.6
Work in process.................................. 9.0 5.9 6.4
Raw materials.................................... 54.6 53.5 53.3
Operating supplies............................... 46.8 44.4 48.5
------ ------ ------
$676.5 $611.0 $611.8
====== ====== ======
</Table>
F-127
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
3. EXTERNAL LONG-TERM DEBT.
The following table summarizes the external long-term debt of the Company:
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
--------- -------- ---------
Secured Credit Agreement:
Revolving Credit Facility................................. $1,574.2 $1,560.4
Term Loan................................................. 65.0 1,045.0
Second Amended and Restated Credit Agreement:
Revolving Credit Facility:
Offshore Loans:
Australian Dollars
1.39 billion........................................ $ 612.8
British Pounds
125.0 million....................................... 188.7
Senior Secured Notes, 8.88%, due 2009....................... 1,000.0
Other....................................................... 183.0 199.1 206.1
-------- -------- -------
2,822.2 2,804.5 1,007.6
Less amounts due within one year.......................... 24.1 26.0 26.2
-------- -------- -------
External long-term debt................................. $2,798.1 $2,778.5 $ 981.4
======== ======== =======
</Table>
At March 31, 2002, the Company and its subsidiaries had unused credit of
$329.5 million available under the Secured Credit Agreement.
The weighted average interest rate on borrowings outstanding under the
Revolving Credit Facility at March 31, 2002 was 3.90%. Including the effects of
cross-currency swap agreements related to Revolving Credit Facility borrowings
by the Company's Australian, U.K., and Canadian subsidiaries, the weighted
average interest rate was 5.44%.
The weighted average interest rate on borrowings outstanding under the Term
Loan at March 31, 2002 was 4.42%.
During January 2002, the Company completed a $1.0 billion private placement
of senior secured notes. The notes bear interest at 8 7/8% and are due
February 15, 2009. The notes are guaranteed by OI Group and substantially all of
its domestic subsidiaries. The assets of substantially all of OI Group's
domestic subsidiaries are pledged as security for the notes. The Company used
the net cash proceeds from the notes to reduce its outstanding term loan under
the Agreement by $980 million. As a result, the Company wrote off unamortized
deferred financing fees in January 2002 related to the term loan and recorded an
extraordinary charge totaling $10.9 million less applicable income taxes of
$4.2 million. The indenture for the notes restricts, among other things, the
ability of the Company and its restricted subsidiaries to borrow money, pay
dividends on, or redeem or repurchase stock, make investments, create liens,
enter into certain transactions with affiliates, and sell certain assets or
merge with or into other companies.
F-128
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
4. GUARANTEES OF DEBT.
The Company has guaranteed the borrowings of certain of OI Inc.'s domestic
subsidiaries totaling $850 million and has also guaranteed the borrowings of
certain foreign subsidiaries under the Agreement.
5. CASH FLOW INFORMATION.
Interest paid in cash aggregated $43.1 million for the first quarter of 2002
and $22.3 million for the first quarter of 2001. Income taxes paid in cash
totaled $4.6 million for the first quarter of 2002 and $6.7 million for the
first quarter of 2001.
6. COMPREHENSIVE INCOME.
The Company's components of comprehensive loss are net loss, change in fair
value of certain derivative adjustments, and foreign currency translation
adjustments. Total comprehensive loss for the three month periods ended
March 31, 2002 and 2001 amounted to $(32.3) million and $(70.5) million,
respectively.
7. ADOPTION OF NEW ACCOUNTING STANDARD--GOODWILL.
On January 1, 2002, the Company adopted Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS No. 142"). As required by
FAS No. 142, the Company is no longer amortizing goodwill, but will be reviewing
annually (or more frequently if impairment indicators arise) for impairment.
During the first quarter of 2002, the Company completed an impairment test
under FAS No. 142 using the business enterprise value ("BEV") of each reporting
unit which was calculated as of the measurement date, January 1, 2002, by
determining the present value of debt-free, after tax future cash flows,
discounted at the weighted average cost of capital of a hypothetical third party
buyer. This BEV was then compared to the book value of each reporting unit as of
the measurement date to assess whether an impairment existed under FAS 142.
Based on this comparison, the Company determined that an impairment existed in
its consumer products reporting unit. The consumer plastic products reporting
unit operates in a highly competitive and fragmented industry. This industry has
excess capacity which has created downward pricing pressure. The Company lowered
its earnings and cash flow projections for this unit for the next several years
which resulted in a lower BEV. Following a review of the valuation of the assets
of the consumer products reporting unit, the Company recorded an impairment
charge of $47.0 million to reduce the reported value of its goodwill. As
required by FAS No. 142, the transitional impairment loss has been recognized as
the cumulative effect of a change in method of accounting.
F-129
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
The following pro forma earnings for 2001 have been presented on a pro forma
basis to eliminate goodwill amortization of $11.5 million, as required by FAS
No. 142.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2001
-------- -----------
(ACTUAL) (PRO FORMA)
Earnings before extraordinary item and cumulative effect
of accounting change................................... $50.5 $46.4
Net earnings (loss)...................................... $(3.2) $46.4
</Table>
8. RESTRUCTURING ACCRUALS.
During the second quarter of 2001, the Company recorded net charges of
$65.2 million for a restructuring program and impairment at certain of the
Company's international and domestic operations. The charge includes the
impairment of assets at the Company's affiliate in Puerto Rico and the
consolidation of manufacturing capacity and the closing of a facility in
Venezuela. The program also includes consolidation of capacity at certain other
international and domestic facilities in response to decisions about pricing and
market strategy. The Company expects its actions related to these restructuring
and impairment charges to be completed during the next several quarters.
The Company also has remaining restructuring accruals related to a capacity
realignment program initiated in 2000. The program principally involved the
closing of three U.S. plants. During 2002, the Company has partially reopened
one of these facilities, and as such, has reversed a portion of the original
charge. The Company expects that it will continue to make cash payments over the
next several quarters for on-going costs related to the closing of these
facilities.
Selected information relating to the above restructuring accruals follows:
<Table>
Remaining accruals as of December 31, 2001.................. $22.8
Write-down of assets to net realizable value................ (1.1)
Net cash paid............................................... (2.8)
Reversal of previous restructuring charge................... (3.2)
-----
Remaining accrual as of March 31, 2002...................... $15.7
=====
</Table>
9. DERIVATIVE INSTRUMENTS.
Under the terms of the April 2001 Secured Credit Agreement, international
affiliates are only permitted to borrow in U.S. dollars. In order to manage the
international affiliates' exposure to fluctuating foreign exchange rates, the
Company's affiliates in Australia and the United Kingdom have entered into
currency swaps for the principal portion of their initial borrowings under the
Agreement and for their interest payments due under the Agreement.
As of March 31, 2002, the Company's affiliate in Australia has swapped
$650.0 million of borrowings into $1,275.0 million Australian dollars. This swap
matures on March 31, 2003, with interest resets every 90 days. The interest
reset terms of the swap approximate the terms of the U.S. dollar borrowings.
This derivative instrument swaps both the interest and principal from U.S.
dollars to Australian dollars and also swaps the interest rate from a U.S. based
rate to an Australian based rate.
F-130
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
The Company's affiliate in the United Kingdom has swapped $200.0 million of
borrowings into 139.0 million British pounds. This swap also matures on
March 31, 2003, with interest resets every 90 days. This derivative instrument
swaps both the interest and principal from U.S. dollars to British pounds and
also swaps the interest rate from a U.S. based rate to a British based rate.
On October 1, 2001, the Company completed the acquisition of the Canadian
glass container assets of Consumers Packaging Inc. for a purchase price of
approximately $150 million. The Company financed this purchase through
borrowings under the Secured Credit Agreement, of which $100 million was
transferred to Canada through intercompany loans in U.S. dollars with the
remaining $50 million being transferred as equity. The Company's affiliate in
Canada has entered into swap transactions to manage the affiliate's exposure to
fluctuating foreign exchange rates by swapping the principal and interest
portion of the intercompany loan. At March 31, 2002, the Canadian affiliate has
swapped $90.0 million of borrowings into $142.0 million Canadian dollars. This
swap matures on October 1, 2003. This derivative instrument swaps both the
interest and principal from U.S. dollars to Canadian dollars and also swaps the
interest rate from a U.S. based rate to a Canadian based rate. The affiliate has
also entered in forward hedges which effectively swap $10.0 million of
borrowings into $16.0 million Canadian dollars. These hedges swap both the
interest and principal from U.S. dollars to Canadian dollars and mature monthly.
The Company recognizes the above derivatives on the balance sheet at fair
value. The Company accounts for the above swaps as fair value hedges. As such,
the changes in the value of the swaps are included in other expense and are
expected to substantially offset any exchange rate gains or losses on the
related U.S. dollar borrowings. For the three months ended March 31, 2002, the
amount not offset was immaterial.
The Company also uses commodity futures contracts related to forecasted
natural gas requirements. The objective of these futures contracts is to limit
the fluctuations in prices paid and the potential volatility in earnings or cash
flows from future market price movements. During January 2002, the Company
entered into commodity futures contracts for approximately 50% of its domestic
natural gas usage (approximately 800 million BTUs) through the end of 2002.
The Company accounts for the above futures contracts on the balance sheet at
fair value. The effective portion of changes in the fair value of a derivative
that is designated as and meets the required criteria for a cash flow hedge is
recorded in accumulated other comprehensive income ("OCI") and reclassified into
earnings in the same period or periods during which the underlying hedged item
affects earnings. The ineffective portion of the change in the fair value of a
derivative designated as a cash flow hedge is recognized in current earnings.
The above futures contracts are accounted for as cash flow hedges at
March 31, 2002. Hedge accounting is only applied when the derivative is deemed
to be highly effective at offsetting anticipated cash flows of the hedged
transactions. For hedged forecasted transactions, hedge accounting will be
discontinued if the forecasted transaction is no longer probable to occur, and
any previously deferred gains or losses will be recorded to earnings
immediately.
During the three months ended March 31, 2002, an unrealized net gain of
$3.0 million (after tax of $1.6 million) related to these commodity futures
contracts was included in OCI. There was no ineffectiveness recognized during
the three months ended March 31, 2002.
F-131
<Page>
OI PLASTIC PRODUCTS FTS INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------- -------------
(UNAUDITED)
Revenues:
Net sales................................................. $ 400.6 $417.9
Other revenue............................................. 4.8 5.3
------- ------
405.4 423.2
Costs and expenses:
Manufacturing, shipping, and delivery..................... 305.3 320.4
Research and development.................................. 8.0 7.0
Engineering............................................... 0.3 0.1
Selling and administrative................................ 16.5 15.4
Net intercompany interest................................. 6.9 24.7
Other interest expense.................................... 11.1 0.5
Other..................................................... 3.8 13.5
------- ------
351.9 381.6
------- ------
Earnings before items below................................. 53.5 41.6
Provision for income taxes.................................. 20.3 20.0
Minority share owners' interests in earnings of
subsidiaries.............................................. 0.3
------- ------
Earnings before cumulative effect of accounting change...... 33.2 21.3
Cumulative effect of accounting change...................... (413.0)
------- ------
Net earnings (loss)......................................... $(379.8) $ 21.3
======= ======
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-132
<Page>
OI PLASTIC PRODUCTS FTS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
----------- --------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash, including time deposits............................. $ 6.6 $ 10.3 $ 28.4
Receivables including amount from related parties of $42.4
($9.2 at Dec.31, 2001, $14.6 at March 31, 2001), less
allowances of $28.7 ($38.2 at Dec. 31, 2001, $25.2 at
March 31, 2001) for losses and discounts................ 244.0 184.3 232.2
Inventories............................................... 218.8 222.9 243.5
Prepaid expenses.......................................... 43.3 41.1 24.4
-------- -------- --------
Total current assets.................................... 512.7 458.6 528.5
Other assets:
Equity investments........................................ 6.2 9.2 14.8
Repair parts inventories.................................. 26.5 25.6 27.8
Deposits, receivables, and other assets................... 90.0 95.9 92.4
Goodwill.................................................. 1,039.2 1,468.2 1,514.3
-------- -------- --------
Total other assets...................................... 1,161.9 1,598.9 1,649.3
Property, plant, and equipment, at cost..................... 1,925.8 1,917.7 1,804.1
Less accumulated depreciation............................. 814.1 799.3 731.1
-------- -------- --------
Net property, plant, and equipment...................... 1,111.7 1,118.4 1,073.0
-------- -------- --------
Total assets................................................ $2,786.3 $3,175.9 $3,250.8
======== ======== ========
LIABILITIES AND NET PARENT INVESTMENT
Current liabilities:
Short-term loans and long-term debt due within one year... $ 4.9 $ 4.9 $ 11.7
Accounts payable and other liabilities.................... 171.2 182.5 151.2
-------- -------- --------
Total current liabilities............................... 176.1 187.4 162.9
External long-term debt..................................... 846.7 851.3 3.1
Deferred taxes.............................................. 178.6 172.6 167.0
Other liabilities........................................... 11.6 12.9 1.8
Minority share owners' interests............................ 6.9
Net Parent investment
Investment by and advances from parent.................... 1,601.6 1,980.0 2,938.3
Accumulated other comprehensive income.................... (28.3) (28.3) (29.2)
-------- -------- --------
Total net Parent investment............................. 1,573.3 1,951.7 2,909.1
-------- -------- --------
Total liabilities and net Parent investment................. $2,786.3 $3,175.9 $3,250.8
======== ======== ========
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-133
<Page>
OI PLASTIC PRODUCTS FTS INC.
CONDENSED CONSOLIDATED CASH FLOWS
(MILLIONS OF DOLLARS)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
------------- -------------
(UNAUDITED)
OPERATING ACTIVITIES:
Net earnings before cumulative effect of accounting
change.................................................. $ 33.2 $ 21.3
Non-cash charges (credits):
Depreciation............................................ 30.6 28.0
Amortization of deferred costs.......................... 3.9 14.3
Deferred tax provision (credit)......................... 2.5 (18.3)
Gains on asset sales.................................... (2.8)
Other................................................... (2.2) (5.0)
Change in non-current operating assets.................... (0.5) (0.4)
Change in components of working capital................... (68.2) (44.2)
------ ------
Cash utilized in operating activities................... (0.7) (7.1)
INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (30.5) (25.8)
Acquisitions, net of cash acquired........................ (2.3) (4.8)
Net cash proceeds from divestitures and other............. 11.6 60.6
------ ------
Cash provided by (utilized in) investing activities..... (21.2) 30.0
FINANCING ACTIVITIES:
Net change in intercompany debt........................... 22.7 (23.9)
Decrease in short-term loans.............................. (0.5)
Repayments of long-term debt.............................. (4.6) (4.2)
------ ------
Cash provided by (utilized) in financing activities....... 18.1 (28.6)
Effect of exchange rate fluctuations on cash.............. 0.1 (0.1)
------ ------
Decrease in cash............................................ (3.7) (5.8)
Cash at beginning of period................................. 10.3 34.2
------ ------
Cash at end of period....................................... $ 6.6 $ 28.4
====== ======
</Table>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-134
<Page>
OI PLASTIC PRODUCTS FTS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABULAR DATA IN MILLIONS OF DOLLARS
1. BASIS OF PRESENTATION.
The Condensed Consolidated Financial Statements presented herein are
unaudited but, in the opinion of management, reflect all adjustments necessary
to present fairly such information for the periods and at the dates indicated.
Since the accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with Article 10 of Regulation S-X, they do not
contain all information and footnotes normally contained in annual consolidated
financial statements; accordingly, they should be read in conjunction with the
Consolidated Financial Statements of OI Plastic Products FTS Inc. and notes
thereto appearing elsewhere in this prospectus.
The Company is a wholly-owned subsidiary of Owens-Illinois Group, Inc. ("OI
Group" or "Parent") and an indirect subsidiary of Owens-Illinois, Inc.
("OI Inc."). Although OI Inc. does not conduct any operations, it has
substantial obligations related to outstanding indebtedness, dividends for
preferred stock and asbestos-related payments. OI Inc. relies primarily on
distributions from its direct and indirect subsidiaries to meet these
obligations.
2. INVENTORIES.
Major classes of inventory are as follows:
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
--------- -------- ---------
Finished goods................................... $134.1 $133.7 $156.0
Work in process.................................. 0.8 0.3 2.5
Raw materials.................................... 65.0 71.7 67.4
Operating supplies............................... 18.9 17.2 17.6
------ ------ ------
$218.8 $222.9 $243.5
====== ====== ======
</Table>
3. EXTERNAL LONG-TERM DEBT.
The following table summarizes the external long-term debt of the Company.
<Table>
<Caption>
MARCH 31, DEC. 31, MARCH 31,
2002 2001 2001
--------- -------- ---------
Secured Credit Agreement:
Revolving Credit Facility...................... $850.0 $850.0
Other............................................ 1.6 6.2 $7.7
------ ------ ----
851.6 856.2 7.7
Less amounts due within one year............... 4.9 4.9 4.6
------ ------ ----
External long-term debt.......................... $846.7 $851.3 $3.1
====== ====== ====
</Table>
At March 31, 2002, the Company had unused credit of $150.0 million available
under the Secured Credit Agreement.
The weighted average interest rate on borrowings outstanding under the
Revolving Credit Facility at March 31, 2002 was 3.92%.
F-135
<Page>
OI PLASTIC PRODUCTS FTS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
4. GUARANTEES OF DEBT.
The Company has guaranteed the borrowings of certain of OI Inc.'s domestic
subsidiaries totaling $2,639.2 and has also guaranteed the borrowings of certain
foreign affiliates under the Agreement.
During January 2002, an affiliate of the Company completed a $1.0 billion
private placement of senior secured notes. The assets of the Company and most of
its domestic subsidiaries are pledged as security for the notes. The Company has
guaranteed these notes.
5. CASH FLOW INFORMATION.
Interest paid in cash aggregated $13.0 million for the first quarter of 2002
and $0.9 million for the first quarter of 2001. Income taxes paid in cash
totaled $0.8 million for the first quarter of 2002 and $1.4 million for the
first quarter of 2001.
6. COMPREHENSIVE INCOME.
The Company's components of comprehensive income (loss) are net earnings
(loss), change in fair value of certain derivative adjustments, and foreign
currency translation adjustments. Total comprehensive income (loss) for the
three month periods ended March 31, 2002 and 2001 amounted to $(379.8) million
and $19.3 million, respectively.
7. ADOPTION OF NEW ACCOUNTING STANDARD--GOODWILL.
On January 1, 2002, the Company adopted Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS No. 142"). As required by
FAS No. 142, the Company is no longer amortizing goodwill, but will be reviewing
annually (or more frequently if impairment indicators arise) for impairment.
During the first quarter of 2002, the Company completed an impairment test
under FAS No. 142 using the business enterprise value ("BEV") of each reporting
unit which was calculated as of the measurement date, January 1, 2002, by
determining the present value of debt-free, after tax future cash flows,
discounted at the weighted average cost of capital of a hypothetical third party
buyer. This BEV was then compared to the book value of each reporting unit as of
the measurement date to assess whether an impairment existed under FAS 142.
Based on this comparison, the Company determined that an impairment existed in
its consumer products reporting unit. The consumer plastic products reporting
unit operates in a highly competitive and fragmented industry. This industry has
excess capacity which has created downward pricing pressure. The Company lowered
its earnings and cash flow projections for this unit for the next several years
which resulted in a lower BEV. Following a review of the valuation of the assets
of the consumer products reporting unit, the Company recorded an impairment
charge of $413.0 million to reduce the reported value of its goodwill. As
required by FAS No. 142, the transitional impairment loss has been recognized as
the cumulative effect of a change in method of accounting.
F-136
<Page>
OI PLASTIC PRODUCTS FTS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TABULAR DATA IN MILLIONS OF DOLLARS
The following pro forma earnings for 2001 have been presented on a pro forma
basis to eliminate goodwill amortization of $11.6 million, as required by FAS
No. 142.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2001
-------- -----------
(ACTUAL) (PRO FORMA)
Earnings before cumulative effect of accounting
change................................................ $ 33.2 $32.9
Net earnings (loss)..................................... $(379.8) $32.9
</Table>
8. RESTRUCTURING ACCRUALS.
During the second quarter of 2001, the Company recorded net charges of
$16.9 million for a restructuring program and impairment at certain of the
Company's international and domestic operations. The program also includes
consolidation of capacity at certain other international and domestic facilities
in response to decisions about pricing and market strategy. The Company expects
its actions related to these restructuring and impairment charges to be
completed during the next several quarters.
The Company also has remaining restructuring accruals related to a capacity
realignment program initiated in 2000. The Company expects that it will continue
to make cash payments over the next several quarters for on-going costs related
to the restructuring.
Selected information relating to the above restructuring accruals follows:
<Table>
Remaining accruals as of December 31, 2001.................. $14.7
Write-down of assets to net realizable value................ (7.7)
Net cash paid............................................... 0.4
-----
Remaining accrual as of March 31, 2002...................... $ 7.4
=====
</Table>
F-137
<Page>
OWENS-BROCKWAY GLASS CONTAINER INC.
OFFER TO EXCHANGE UP TO $1,000,000,000 OF ITS
8 7/8% SENIOR SECURED NOTES DUE 2009,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR UP TO $1,000,000,000 OF ITS OUTSTANDING
8 7/8% SENIOR SECURED NOTES DUE 2009
---------------------
PROSPECTUS
---------------------
July 2, 2002