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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-15157
PACTIV CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 36-2552989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 WEST FIELD COURT 60045
LAKE FOREST, IL (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 482-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
ON WHICH REGISTERED
TITLE OF EACH CLASS --------------------------------------------------------
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Common Stock ($.01 par value) and associated Preferred New York Stock Exchange
Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
CLASS OF VOTING STOCK AND NUMBER OF SHARES MARKET VALUE OF COMMON STOCK HELD BY
HELD BY NON-AFFILIATES AT JANUARY 31, 2000 NON-AFFILIATES
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COMMON STOCK 167,760,834 SHARES $1,551,787,715*
* Based upon the closing sale price on the Composite Tape for the Common Stock
on January 31, 2000.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock ($.01
par value), 171,524,417 shares outstanding as of January 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF THE FORM 10-K
DOCUMENT into which incorporated
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Pactiv Corporation's Definitive Proxy Statement for Part III
the Annual Meeting of Shareowners to be held May 10,
2000
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CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning, among other
things, the prospects and developments of the company (as defined) and business
strategies for its operations, all of which are subject to risks and
uncertainties. These forward-looking statements are identified as
"forward-looking statements" or by their use of terms (and variations thereof)
and phrases such as "will," "may," "anticipate," "intend," "goal," "continued,"
"estimate," "expect," "project," "potential," "forecast," "plans," "should,"
"designed to," "foreseeable future," "outlook," "believe," and "scheduled" and
similar terms (and variations thereof) and phrases.
When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, the company cautions that, while
it believes such assumptions or bases to be reasonable and makes them in good
faith, assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, the
company or its management expresses an expectation or belief as to future
results, such expectation or belief is expressed in good faith and believed to
have a reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or will be achieved or accomplished.
The company's actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include the following:
Changes in Consumer Demand and Prices. Demand for certain of the company's
products is cyclical. For example, demand for protective packaging is driven by
trends in the building, construction, automotive and durable goods markets.
Demand for certain packaging products is also subject to changes in consumer
preferences. Demand for, and pricing of, the company's products are subject to
economic conditions and other factors present in the various domestic and
international markets where the products are sold. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 1999
compared with 1998" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 1998 compared with 1997."
Changes in Prices of Raw Materials. Significant increases in the cost of
certain raw materials used in the company's products, to the extent they are not
timely reflected in the company's prices or mitigated through long-term supply
contracts, could adversely impact the company's results. For example, the cost
of plastic resin and paper materials in certain of the company's products can be
volatile.
Risks Associated with International Operations. The company operates
facilities and sells products in several countries throughout the world. As a
result, the company is subject to risks associated with selling and operating in
foreign countries, including devaluations and fluctuations in currency exchange
rates, imposition of limitations on conversion of foreign currencies into U.S.
dollars, 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 foreign countries, and
imposition or increase of investment and other restrictions by foreign
governments.
Other Factors. In addition to the factors described above, the company may
be impacted by a number of other matters and uncertainties, including: (i) the
general economic, political and competitive conditions in markets and countries
where the company operates; (ii) governmental actions; (iii) changes in capital
availability or costs; (iv) the cost of compliance with changes in regulations,
including environmental regulations; (v) workforce factors such as strikes or
labor interruptions; (vi) the company's ability to identify and make appropriate
acquisitions and to integrate operations of acquired businesses quickly and in a
cost-effective manner; (vii) changes by the Financial Accounting Standards Board
or other accounting regulatory bodies of authoritative generally accepted
accounting principles or policies; (viii) the timing and occurrence (or
non-occurrence) of transactions and events which may be subject to circumstances
beyond the company's control; (ix) the company's ability to recognize forecasted
savings from its restructuring programs on a timely basis; and (x) the company's
ability to function as a "stand-alone" independent entity following its spin-off
from Tenneco Inc.
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TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
Item 4.1 Executive Officers of the Registrant........................ 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 8
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................... 10
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 19
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure.................................................. 54
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 54
Item 11. Executive Compensation...................................... 54
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 54
Item 13. Certain Relationships and Related Transactions.............. 54
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
Item 14. 8-K......................................................... 54
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Pactiv Corporation (Pactiv), previously known as Tenneco Packaging Inc.
(TPI), was formerly a wholly-owned subsidiary of Tenneco Inc. (Tenneco) that was
spun-off to shareowners of Tenneco on November 4, 1999 (the spin-off). Pactiv
includes the assets, liabilities, and operations of Tenneco's former specialty
packaging business as well as certain of Tenneco's former corporate and
administrative service operations. As used herein, the terms "Pactiv" and "the
company" refer to the packaging businesses and corporate and administrative
service operations of Tenneco for periods prior to the spin-off, and to Pactiv
for periods after the spin-off.
The company was incorporated in the state of Delaware in 1965 under the
name Packaging Corporation of America. In November 1995 the company changed its
name to Tenneco Packaging Inc., and concurrent with the spin-off changed its
name to Pactiv Corporation.
Pactiv is a global supplier of specialty packaging and consumer products
with 1999 revenues of $2.9 billion. As of December 31, 1999, the company
operated 85 manufacturing facilities in 17 countries around the world and
employed approximately 15,000 people. Pactiv's main operating segments are (a)
consumer and foodservice/food packaging and (b) protective and flexible
packaging. The company's consumer products include plastic, aluminum, and
paper-based products, such as disposable tableware, food storage bags, waste
bags and aluminum cookware. The company's foodservice/food packaging products
include foam, clear plastic, aluminum, pressed paperboard, and molded fiber
packaging for customers in the food distribution channel, including wholesalers
and supermarkets, and customers who process and prepare food for consumption,
known as food packers and processors. Protective packaging is used to protect
and cushion various commercial and industrial products from the point of
manufacture to the point of delivery or pick-up, and principally serves the
electronics, automotive, furniture, and e-commerce markets. Flexible packaging
products are mainly used in food, medical, pharmaceutical, chemical, and hygiene
applications, and often involve custom design.
PRODUCTS AND MARKETS
Consumer and Foodservice/Food Packaging
The company manufactures, markets, and sells consumer products, such as
plastic storage bags for food and household items, plastic waste bags, foam and
molded fiber tableware, and aluminum cookware. Many of these products are sold
under such recognized brand names as Hefty(R), Baggies(R), Hefty OneZip(R),
Kordite(R), and E-Z Foil(R). These products, which are typically used by
consumers in their homes, are sold through a variety of retailers, including
supermarkets, mass merchandisers, and other stores where consumers purchase
household goods. In addition to consumer products, the company manufactures
plastic zipper closures for a variety of other packaging applications.
For foodservice customers, the company offers products to merchandize and
serve both on-premises and takeout meals. These items include tableware
products, such as plates, bowls, and cups, and a broad line of takeout service
containers made from clear plastic, microwaveable plastic, molded fiber,
paperboard, foam, and aluminum.
The company's food packaging products are designed to protect food during
distribution, aid retailers in merchandising food products, and help customers
prepare and serve meals in their homes. Food packaging products for supermarkets
include clear rigid display packaging for produce, deli, and bakery
applications, microwaveable containers for prepared, ready-to-eat meals, plastic
foam trays for meat and produce, and plastic bags for produce and bakery
applications.
For food processors, the company's products include dual-ovenable
paperboard containers, molded fiber egg cartons, foam meat trays, aluminum
containers, and modified atmosphere packaging, which extends the shelf life of
meat products.
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Protective and Flexible Packaging
The company manufactures, markets, and sells protective packaging for use
in the automotive, computer, electronic, furniture, durable goods, building, and
construction industries. Pactiv's sheet foams and air encapsulated bubble
products, for example, are used for cushioning and surface protection, and
paperboard honeycomb and engineered foam plank products provide protection
against shock, vibration, and thermal damage. Pactiv also offers padded mailers,
a variety of laminated protective coverings, and customized packaging systems.
The Company's flexible packaging products are used in consumer, medical,
pharmaceutical, chemical, hygiene, and industrial applications. These products
include liners for disposable diapers, wrap-around sleeves for glass and plastic
bottles, polypropylene medical bags for sterile intravenous fluid delivery,
modified atmosphere films, stand-up pouches, food and hygiene packaging, and
surgical kits.
The company also offers polyethylene stretch film and film and foam
products for use in the construction industry.
GROWTH STRATEGY
Pactiv has grown, and expects to continue to grow, by expanding existing
businesses and through strategic acquisitions. In this connection, the company's
revenues have grown from approximately $600 million in 1994 to $2.9 billion in
1999.
The company's growth strategy is to focus on markets that have strong
expansion characteristics and attractive margins. Through the company's custom
design centers and broad product lines, customers are offered "material-neutral"
solutions, tailored to their specific packaging needs. With this approach and
the availability of worldwide geographic coverage, the company has become a
primary supplier to national and international manufacturers and distributors,
and has developed long-term relationships with key players in the consolidating
packaging and foodservice distribution industries. These relationships are
critical in identifying and penetrating new growth markets with attractive
margins.
Market Presence
Many of the company's products have strong market positions. For example,
in foodservice packaging, Pactiv has the number one market share position in the
United States and Canada in four of five main product categories based on unit
volume. In addition, management estimates that products representing 80% of
sales of the protective packaging business hold the number one or number two
market share position in North America based on sales. In the United States, the
company also has the leading market share position in disposable tableware,
aided by the Hefty(R) brand, and Pactiv's E-Z Foil(R) brand of disposable
aluminum cookware leads competition by a wide margin in both sales and market
share. The breadth of the company's product lines, its ability to offer
"one-stop shopping" to customers and its long-term relationships with key
distributors have contributed to the attainment of these leadership positions.
New Products/Design Services
The company further fuels growth by developing proprietary new products and
value-added product line extensions, spending $40 million on research and
development activities in 1999. The consumer products and foodservice/food
packaging business introduced approximately sixty new products and product line
extensions during the year, which included expanding the use of its patented
OneZip(R) closure system into other zipper closure applications, such as Slide
Rite(R) retail packaging for baby wipes and supermarket produce and deli
products; adding jumbo two-gallon and sandwich bags to the Hefty(R) OneZip(R)
storage and freezer bag line; and introducing proprietary modified atmosphere
packaging called ActiveTech(TM), which is used by food processors to extend the
shelf life of case-ready red meat.
In the protective and flexible packaging business, where custom design
services drive revenues, approximately twenty-five custom product applications
were developed in 1999. Examples of recent protective and flexible packaging
introductions include engineered foams; Profiles(R) products, which are
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foam-based materials used in various markets, such as building products and
furniture, to provide custom-designed insulation, cushioning, and surface
protection; high-end stand-up pouches for soups and detergents; and Propyflex(R)
medical bags for fluids.
State-of-the-Art Service Capabilities
Building on the business' broad product lines and strong relationships with
national distributors, Pactiv is implementing a customer linked manufacturing
(CLM) system. CLM is a state-of-the-art production planning and order
fulfillment system which reduces supply chain costs, enhances customer service,
and improves productivity, providing a competitive advantage to both the company
and its customers.
Productivity/Cost Reduction
Pactiv's strong focus on improving productivity and reducing manufacturing
and logistics costs is key to improving the business' profitability. For
example, unit manufacturing costs have continued to decline for many products,
such as rigid display packaging, foam products, and performance films.
Strategic Acquisitions
Strategic acquisitions have been, and will continue to be, an important
element of the company's growth strategy. In 1999 the company made three
acquisitions and additional equity contributions to existing joint ventures
totaling $24 million. Management has a successful track record of acquiring
businesses and rapidly integrating them into the company. Acquisitions are
pursued that strengthen brand presence; expand product offerings and markets;
and offer synergies related to rationalizing product lines, reconfiguring and
upgrading manufacturing capabilities, and reducing operating, selling,
distribution, purchasing, and administrative costs.
MARKETING, DISTRIBUTION, AND CUSTOMERS
Pactiv's two operating segments have a combined sales and marketing staff
of approximately 500 people.
Consumer products are sold through a direct salesforce and a national
network of brokers and manufacturers' representatives.
Foodservice and supermarket customers are primarily served through a
network of independent distributors, while food packaging and processor
customers are principally served through a direct salesforce, with some sales
going through distributors.
The protective and flexible packaging business sells to distributors,
fabricators, and directly to end-users worldwide.
No one customer accounted for more than 10% of the company's 1999 sales. In
general, the company's backlog of orders is not material.
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ANALYSIS OF SALES
The following table sets forth information relating to sales from
continuing operations. Prior to the spin-off, the combined results of the
consumer and foodservice/food packaging and protective and flexible businesses
were reported under the specialty packaging segment by Tenneco. During the
fourth quarter of 1999 the company modified the composition of its operating
segments because of changes in its management-reporting structure triggered by
the spin-off. Segment information for 1998 and 1997 has been restated to conform
with current segment presentation.
SALES
1999 1998 1997
------------- ------------- -------------
($ IN MILLIONS)
Consumer and foodservice/food packaging...... $2,074 71% $1,985 71% $1,966 77%
Protective and flexible packaging............ 847 29% 800 29% 587 23%
Other........................................ -- -- 6 -- 10 --
------ --- ------ --- ------ ---
Total.............................. $2,921 100% $2,791 100% $2,563 100%
------ --- ------ --- ------ ---
See note 19 to the financial statements for additional segment and
geographic information.
COMPETITION
Pactiv conducts business in markets that are highly competitive and faces
substantial competition in all of its product lines from numerous global,
national, and regional companies, ranging from the largest packaging companies
to small, emerging enterprises. Some competitors have greater financial and
other resources than Pactiv, while others are significantly smaller with lower
fixed costs and more operating flexibility. In general, success in acquiring
business is dependent on price, quality, service, response time, and order
fulfillment. In addition, competitors use a variety of packaging materials and
structures, and serve different geographic regions through various distribution
channels.
INTERNATIONAL
Pactiv has facilities and sells products in countries throughout the world.
As a result, it is subject to various risks, such as fluctuations in foreign
currency exchange rates, limitations on conversion of foreign currencies into
U.S. dollars, restrictions on remittance of dividends and other payments by
foreign subsidiaries, withholding and other taxes on remittances by foreign
subsidiaries, hyperinflation in foreign countries, and restrictions on
investments in foreign countries. See note 19 to the financial statements for
additional information regarding the company's international operations.
RAW MATERIALS
Plastic resins, such as polystyrene, polyethylene, polypropylene and
polyvinyl chloride, aluminum, paperboard, and recycled fiber are the principal
raw materials used by the company. Approximately 80% of Pactiv's revenues comes
from products made from different types of plastics. In general, these raw
materials are readily available from a wide variety of suppliers. Raw material
prices can be volatile, and are a function of, among other things, the
availability of production capacity and oil and other material costs. The supply
of raw materials was adequate in 1999, and is expected to remain that way in
2000.
ENVIRONMENTAL REGULATION
Pactiv is subject to existing and potential federal, state, local, and
foreign legislation controlling air emissions. In addition, various consumer and
special interest groups have lobbied from time to time for the implementation of
a variety of environmental and pollution control measures. Although management
believes that laws and regulations promulgated to date have not had a material
adverse effect on the company there can be no assurance that future legislative
or regulatory efforts or initiatives would not have a material adverse effect on
the company.
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OTHER
As of December 31, 1999, Pactiv employed approximately 15,000 people, 14%
of whom were covered by collective bargaining agreements. One of those
agreements, covering a total of 273 employees, is scheduled for renegotiation in
2000. In Europe and the Middle East, approximately 2,350 employees are governed
by works councils. Management believes that employee relations are generally
satisfactory.
The company owns a number of U.S. and foreign patents and trademarks and
other intellectual property relating to its products which are important to
their manufacture, marketing, and distribution.
Pactiv's administrative service operations utilize numerous software
licenses and operate computer equipment. These operations provide the following
services: financial accounting, employee benefits administration, payroll
processing, accounts payable, information systems support, telecommunications,
and disaster recovery support. The company continues to provide some of these
services to certain former affiliates of Tenneco through contractual
arrangements.
In December 1999 Pactiv sold certain assets of its administrative service
operations to Exult Inc. (Exult), and entered into an agreement under which
Exult will provide certain administrative services to the company. Exult also
entered into an agreement to provide certain services to Tenneco Automotive
Inc., a former affiliate, which previously were provided by Pactiv.
In April 1999 the company contributed its containerboard packaging business
to a new joint venture, called Packaging Corporation of America (PCA), in which
the company retained a 45% common equity interest (which was subsequently
reduced to approximately 43% as a result of equity issued to its management). In
June 1999 the company sold its folding carton business, which represented the
balance of its paperboard packaging segment, for $73 million. In February 2000
Pactiv sold most of its interest in PCA for $398 million, which was primarily
used to reduce debt, retaining a 6% equity interest in PCA. See note 2 to the
financial statements for additional information.
In December 1999 the company entered into an agreement to sell its aluminum
foil reroll facility in Clayton, New Jersey, and its aluminum packer processer
facility in Shelbyville, Kentucky. This sale closed in January 2000.
ITEM 2. PROPERTIES.
HEADQUARTERS LOCATION
Pactiv leases its executive offices which are located at 1900 West Field
Court, Lake Forest, Illinois 60045. Its telephone number at that address is
(847) 482-2000.
MANUFACTURING AND ENGINEERING FACILITIES
In North America, Pactiv operates sixty-three facilities in twenty-one
states, Canada, and Mexico. Plastic and aluminum foodservice and consumer
products, stretch films, and building products are manufactured at twenty-five
plants. The protective packaging business converts paperboard into honeycomb
products at twelve plants. Sixteen plants apply extrusion, foaming, and
converting technologies to produce clear, foamed, flexible, or rigid plastic
protective packaging from polystyrene, polyethylene and polypropylene, and kraft
papers. Molded fiber packaging is produced at seven locations, and tooling for
molded fiber plants is manufactured at one location. Ovenable paperboard
products are manufactured at two facilities. A research and development center
for food packaging and process development is located in Canandaigua, New York.
Design centers and process development operations for protective and flexible
packaging are located in Buffalo Grove, Illinois, Grand Rapids and Troy,
Michigan, Atlanta, Georgia and Santa Fe Springs, California. In addition, the
company participates in two North American joint ventures, Sentinel Polyolefin
LLC and Pactiv de Mexico, S.A. de CV.
Pactiv owns twenty-two international manufacturing facilities. Eleven
protective packaging plants in Belgium, England, France, Germany, Italy, The
Netherlands, Poland, Spain, and Hungary make plastic air encapsulated bubble and
foam sheet products, including mailers. Five flexible packaging plants in Egypt
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and Germany make flexible films, bags, labels, pouches, printed and converted
paper bags, and disposable medical packaging. Omni-Pac, a European subsidiary,
produces cushioning and molded fiber packaging in Elsfleth, Germany, and Great
Yarmouth, England. Single-use thermoformed plastic food containers and films are
manufactured at four facilities in England, Scotland, and Wales. In addition,
Pactiv operates or participates in several international joint ventures,
including a folding carton operation in Dongguan, China, a recycling venture in
Budapest, Hungary, and a corrugated converting operation in Shaoxing, China.
Management believes that substantially all of its plants and equipment
generally are well maintained and in good operating condition.
The company is of the opinion that it generally has satisfactory title to
properties owned and used in its businesses, subject to certain liens which do
not materially detract from the value or use of the properties.
ITEM 3. LEGAL PROCEEDINGS.
In May 1999 Tenneco, the company, and a number of containerboard
manufacturers were named as defendants in a civil class-action antitrust lawsuit
pending in the United States district court for the Eastern District of
Pennsylvania. Pactiv also was named as a defendant in a related class-action
antitrust lawsuit. The lawsuits allege that the defendants conspired to raise
linerboard prices for corrugated containers and corrugated sheets from October
1, 1993, through November 30, 1995, in violation of Section 1 of the Sherman
Act. The lawsuits seek treble damages in an unspecified amount, plus attorney
fees. The company's management believes that the allegations have no merit, is
vigorously defending the claims, and believes that the outcome will not have a
material adverse effect on the company's financial position or results of
operations. As between Tenneco and Pactiv, Pactiv is responsible for defending
the claims and for any liability resulting therefrom.
See note 3 to the financial statements for information about potential
environmental liabilities.
The company and its subsidiaries are parties to various other legal
proceedings arising from their operations. The company believes that the outcome
of these proceedings, individually and in the aggregate, will not have a
material adverse effect on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
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ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the company at April 1, 2000,
the positions held by such officers, and the date appointed to such positions:
NAME (AGE) POSITION DATE APPOINTED
---------- ---------------------------------------- --------------
Richard L. Wambold (48)................... Chairman March 2000
President June 1999
Chief Executive Officer November 1999
Andrew A. Campbell (54)................... Vice President, Finance and Chief October 1999
Financial Officer
James V. Faulkner, Jr. (56)............... Vice President and January 1995
General Counsel
Peter J. Lazaredes (49)................... Vice President and General February 2000
Manager, Foodservice, Supermarket and
Institutional Packaging
James D. Morris (46)...................... Vice President and General February 2000
Manager, Protective and
Flexible Packaging
During the past five years each of the executive officers has been
continuously engaged in the business of the company in the positions indicated,
except as follows:
(1) Mr. Wambold was Executive Vice President and General Manager of the
company's specialty packaging and consumer products business units from June
1997 to May 1999, and prior to that was Vice President and General Manager of
such units.
(2) Prior to joining the company, Mr. Campbell served as Acting Chief
Financial Officer and Financial Consultant of Foamex International Inc. from May
to September 1999. From December 1998 until May 1999, Mr. Campbell pursued
personal interests. Prior to that, he was Executive Vice President, Finance and
Administration and Chief Financial Officer of Dominick's Supermarkets Inc. from
July to November 1998 and Senior Vice President, Finance and Chief Financial
Officer of Safety Kleen Corporation from April 1997 to June 1998. From June 1996
to March 1997, he managed his own investments. Prior to that, Mr. Campbell was
President and Director of Duplex Products, Inc. from June 1995 to May 1996, and
Vice President, Finance and Chief Financial Officer of that company from
November 1994 to May 1995.
(3) From 1996, when he joined the company, until being appointed to his
current position, Mr. Lazaredes held various senior management positions in the
company's specialty packaging unit, with responsibility for marketing and sales
of rigid and flexible containers for the foodservice and institutional markets,
and, from 1992 to 1996, served as General Manager of Amoco Foam Products
Company's tableware business.
(4) From 1995 until assuming his current responsibilities, Mr. Morris held
various senior management positions in the company's specialty packaging unit,
with responsibility for manufacturing, engineering, and product development, as
well as sales, marketing, and business planning for the food packaging/processor
operations.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS.
The outstanding shares of common stock ($0.01 par value) of Pactiv are
listed on the New York Stock Exchange (NYSE).
The stock began "regular way" trading on the NYSE on November 5, 1999 (the
business day immediately following the spin-off). The high and low stock price
and dividends paid per share of stock were as follows:
SALE PRICE
--------------- DIVIDENDS
HIGH LOW PAID
------ ------ ---------
Fourth quarter 1999.......................... $14.50 $ 9.31 $ --
As of January 31, 2000, there were approximately 73,689 holders of record
of the company's common stock, including brokers and other nominees.
Dividend declarations are at the discretion of the company's board of
directors. The company does not intend to declare a dividend in the foreseeable
future.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(AMOUNTS IN MILLIONS, EXCEPT PER-SHARE DATA) 1999 1998 1997 1996 1995
FOR THE YEARS ENDED DECEMBER 31(A) ------------ ------------ ------------ ------------ ------------
STATEMENT OF INCOME (LOSS)
Sales
Consumer and foodservice/food packaging... $ 2,074 $ 1,985 $ 1,966 $ 1,713 $ 676
Protective and flexible packaging......... 847 800 587 274 169
Other..................................... -- 6 10 -- --
------------ ------------ ------------ ------------ ------------
Total................................. $ 2,921 $ 2,791 $ 2,563 $ 1,987 $ 845
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations
before interest expense, income taxes, and
minority interest......................... (13) 283 306 234 33
Interest expense............................ 146 133 124 102 91
Income tax expense (benefit)................ (47) 67 75 67 (3)
Minority interest........................... -- 1 1 -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations.... (112) 82 106 65 (55)
Income (loss) from discontinued operations,
net of income tax......................... (193) 57 21 71 224
Extraordinary loss, net of income tax....... (7) -- -- (2) --
Cumulative effect of changes in accounting
principles, net of income tax............. (32) -- (38) -- --
------------ ------------ ------------ ------------ ------------
Net income (loss)........................... $ (344) $ 139 $ 89 $ 134 $ 169
------------ ------------ ------------ ------------ ------------
Average number of shares outstanding
Basic....................................... 167.405 168.506 170.265 169.609 172.764
Diluted..................................... 167.663 168.835 170.802 170.526 173.512
Earnings (loss) per share
Basic
Continuing operations..................... $ (0.67) $ 0.49 $ 0.63 $ 0.38 $ (0.32)
Discontinued operations................... (1.15) 0.34 0.12 0.42 1.30
Extraordinary loss........................ (0.04) -- -- (0.01) --
Cumulative effect of changes in accounting
principles.............................. (0.19) -- (0.23) -- --
------------ ------------ ------------ ------------ ------------
$ (2.05) $ 0.83 $ 0.52 $ 0.79 $ 0.98
------------ ------------ ------------ ------------ ------------
Diluted
Continuing operations..................... $ (0.67) $ 0.49 $ 0.63 $ 0.38 $ (0.32)
Discontinued operations................... (1.15) 0.34 0.12 0.42 1.29
Extraordinary loss........................ (0.04) -- -- (0.01) --
Cumulative effect of changes in accounting
principles.............................. (0.19) -- (0.23) -- --
------------ ------------ ------------ ------------ ------------
$ (2.05) $ 0.83 $ 0.52 $ 0.79 $ 0.97
------------ ------------ ------------ ------------ ------------
STATEMENT OF FINANCIAL POSITION
Net assets of discontinued operations....... $ 195 $ 366 $ 423 $ 459 $ 393
Total assets................................ 4,588 4,798 4,618 4,028 3,358
Short-term debt............................. 325 595 158 123 205
Long-term debt.............................. 1,741 1,312 1,492 1,073 880
Debt allocated to discontinued operations... -- 548 473 394 369
Minority interest........................... 20 14 15 -- --
Shareowners' equity......................... 1,350 1,776 1,839 1,843 1,531
STATEMENT OF CASH FLOWS
Cash provided (used) by operating
activities................................ $ (31) $ 577 $ 405 $ 263 $ 479
Cash used by investing activities........... (994) (514) (654) (669) (1,791)
Cash provided (used) by financing
activities................................ 1,030 (67) 239 399 1,327
Capital expenditures for continuing
operations................................ (173) (194) (229) (216) (265)
(a) During the periods presented, the company completed numerous acquisitions,
the most significant of which were the acquisitions of Mobil Plastics for
$1.3 billion in November 1995, Amoco Foam Products for $310 million in
August 1996, and the protective and flexible packaging businesses of N.V.
Koninklijke KNP BT for $380 million in April 1997.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION
On November 4, 1999, in connection with a corporate reorganization, Pactiv
Corporation's former parent company, Tenneco Inc., (Tenneco) and its
subsidiaries completed various intercompany transfers and distributions designed
to restructure and separate their then-existing businesses, assets, liabilities,
and operations so that, among other things, the packaging businesses and certain
corporate and administrative service operations of Tenneco would be owned by
Pactiv Corporation (Pactiv). Tenneco subsequently distributed pro rata to
holders of its common stock all of the outstanding common stock of Pactiv (the
spin-off). Prior to the spin-off, Pactiv was named Tenneco Packaging Inc. (TPI).
As used herein, the term "company" or "Pactiv" refers, for periods prior to
the spin-off, to TPI and certain other subsidiaries through which Tenneco
conducted its packaging businesses, and, for periods after the spin-off, to
Pactiv and its consolidated subsidiaries.
Prior to the spin-off, all of the outstanding common stock of the company
was owned directly or indirectly by Tenneco. The financial statements in this
report present the results of operations, financial position, and cash flows of
the company as if it were a separate entity for all periods. The former parent's
historical basis in the assets and liabilities of the company has been carried
over to Pactiv. All per-share information is presented on a diluted basis,
unless otherwise noted.
The company's operating segments include:
Consumer and foodservice/food packaging, which relates to the manufacture
and sale of disposable plastic, molded fiber, pressed paperboard, and aluminum
packaging products for the consumer, foodservice, and food packaging markets.
Protective and flexible packaging, which relates to the manufacture and
sale of plastic, paperboard, and molded fiber protective and flexible packaging
products. Major markets served by protective packaging products include
electronics, automotive, furniture, and e-commerce, whereas flexible packaging
products are used mainly in food, medical, pharmaceutical, chemical, and
hygienic applications.
Other, which primarily relates to corporate and administrative service
operations and pension plan income and expense.
STRATEGIC REALIGNMENT
In July 1998, Tenneco's board of directors authorized management to develop
a broad range of strategic alternatives to separate its automotive, paperboard
packaging, and specialty packaging businesses. Subsequently, Tenneco completed
the following actions:
- In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging operation to a new
joint venture with Madison Dearborn Partners, Inc. called Packaging
Corporation of America (PCA). For the contribution, which was completed
in April 1999, Pactiv received approximately $2 billion in the form of
cash and the assumption of debt, and retained a 45% equity interest in
PCA (subsequently reduced to 43% as a result of equity issued to
management) which was valued at approximately $200 million.
- In April 1999, Tenneco reached an agreement to sell the paperboard
packaging operation's remaining business, its folding carton operation,
to Caraustar Industries for $73 million. This transaction closed in June
1999.
- Also in April 1999, Tenneco's board of directors approved the spin-off.
- In June 1999, Tenneco's board of directors authorized the specialty
packaging business to sell its remaining interest in PCA. Approximately
85% of this interest was sold by Pactiv in February 2000 for net proceeds
of $398 million through a registered public offering.
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- In August 1999, Tenneco received a letter ruling from the Internal
Revenue Service that the spin-off would be considered to be a tax-free
event for U.S. federal income tax purposes.
- On November 4, 1999, Tenneco completed the spin-off by issuing a dividend
of the common stock of Pactiv to Tenneco shareowners.
The paperboard packaging segment is classified as a discontinued operation
in the financial statements included in this report. See note 7 to the financial
statements for further information.
Before the spin-off, Tenneco realigned substantially all of its existing
debt through a combination of tender offers, exchange offers, and other
refinancings. The realignment was financed through borrowings by Tenneco
Automotive (formerly Tenneco, which changed its name to Tenneco Automotive Inc.
in connection with the spin-off) under a new credit facility, the issuance by
Tenneco Automotive of subordinated debt, Pactiv's issuance of public debt, and
borrowings by Pactiv under new credit facilities.
At the spin-off date, Pactiv had total funded debt of $2.1 billion,
comprised of new public-debt securities and drawings under its credit
facilities. Pactiv's debt is rated as investment grade by both Standard & Poor's
and Moody's. The debt is described in more detail in note 8 to the financial
statements.
In connection with the spin-off, Pactiv entered into certain contractual
arrangements with Tenneco Automotive, including separate distribution,
tax-sharing, human-resource, insurance, and transition-service agreements. These
agreements specify, among other things, that the company will provide
administrative services relating to information systems, payroll, accounts
payable, benefits administration, accounting, cash management, and employee
travel to Tenneco Automotive for a specified period of time based on contractual
fee arrangements.
UNUSUAL ITEMS
Restructuring and Other
In the fourth quarter of 1998, a restructuring plan was approved to reduce
administrative and operating costs. As a result, Pactiv recorded a pre-tax
charge against income from continuing operations of $32 million ($20 million
after tax, or $0.12 per share). The restructuring plan involved the elimination
of production lines at two plants, which was expected to result in the reduction
of 104 positions; exiting four joint ventures; and the elimination of 184
administrative positions in business units and at corporate headquarters. All
related actions have been substantially completed and were executed in
accordance with the company's initial plan. As a result of this restructuring, a
total of 252 positions were eliminated as of December 31, 1999.
In the first quarter of 1999, a plan was adopted to realign company
functions in connection with the contribution of the containerboard assets to
the PCA joint venture, and to close Tenneco's headquarters facility in
Greenwich, Connecticut. This plan, for which a $29 million pre-tax charge ($17
million after tax, or $0.10 per share) was recorded, included the elimination of
approximately forty positions. Approximately $30 million was received in the
second quarter of 1999 related to the sale of the Greenwich facility. These
restructuring actions were completed in 1999 and were executed in accordance
with the company's initial plan.
In the fourth quarter of 1999, Pactiv adopted an extensive restructuring
plan to exit non-core businesses and to reduce overhead costs. As a result, the
company recorded a $154 million charge ($91 million after tax, or $0.54 per
share). This charge was related to (1) the sale of the company's forest products
and aluminum foil container businesses in Europe ($68 million), for which cash
proceeds of $20 million were received in the fourth quarter of 1999, and the
sale of certain assets of the company's administrative service operations and
corporate aircraft operations ($10 million); (2) impairment of long-lived assets
held for use in the company's packaging polyethylene business ($68 million); and
(3) severance costs ($8 million) associated with the elimination of 161
positions, primarily in the company's international operations. The impairment
of the packaging polyethylene business assets was
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recorded following completion of an evaluation of strategic alternatives for
this business and represented the difference between the carrying value of the
assets and their forecasted discounted future cash flows.
In total, Pactiv expects to realize annual savings of $75 million upon
completion of the 1998 and 1999 restructuring actions. Of this, an estimated $30
million was realized in 1999, and an additional $45 million is anticipated in
2000 ($40 million) and 2001 ($5 million).
See note 4 to the financial statements for additional information on
restructuring and other actions.
Spin-off Transaction Costs
In the fourth quarter of 1999, the company recorded transaction costs
related to the spin-off which reduced income before interest expense, income
taxes, and minority interest, net income, and earnings per share by $136
million, $96 million, and $0.57, respectively. These costs were related to
special curtailment and termination benefits for former Tenneco employees ($72
million), professional services performed in connection with the spin-off ($49
million), and separation from Tenneco operations ($15 million).
YEAR 1999 COMPARED WITH 1998
RESULTS OF CONTINUING OPERATIONS
Sales
Details of sales were as follows:
1999 1998 CHANGE
------ ------ ------
(DOLLARS IN MILLIONS)
Consumer and foodservice/food packaging................... $2,074 $1,985 4.5%
Protective and flexible packaging......................... 847 800 5.9
Other..................................................... -- 6 --
------ ------
Total........................................... $2,921 $2,791 4.7%
------ ------
Sales in 1999 grew 4.7%, to $2.9 billion, reflecting unit volume growth of
7%. Excluding the negative impact of foreign-currency exchange rates, sales
increased 5.5%. Sales growth was lower than unit volume gains because of a
decline in selling prices in the first half of 1999.
Sales of the consumer and foodservice/food packaging business advanced 4.5%
in 1999, principally driven by unit volume increases of 7%. In 1999, sales of
protective and flexible products increased 5.9%, primarily as a result of unit
volume growth of 10%. Excluding the negative impact of foreign-currency
exchange, sales of the protective and flexible business grew 8.9%.
Operating Income (Income (Loss) before Interest Expense, Income Taxes, and
Minority Interest)
Operating income by segment appears below.
1999 1998 CHANGE
----- ---- ------
(DOLLARS IN MILLIONS)
Consumer and foodservice/food packaging..................... $ 192 $268 (28.4)%
Protective and flexible packaging........................... (2) 60 --
Other....................................................... (203) (45) --
----- ----
Total............................................. $ (13) $283 --%
----- ----
The $13 million operating loss in 1999 included restructuring and other
charges of $183 million and spin-off transaction expenses of $136 million.
Operating income in 1998 was $283 million, which included
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restructuring charges of $32 million. Excluding the effect of these unusual
items, operating income by segment was as follows:
1999 1998 CHANGE
---- ---- ------
(DOLLARS IN MILLIONS)
Consumer and foodservice/food packaging..................... $258 $277 (6.9)%
Protective and flexible packaging........................... 75 69 8.7
Other....................................................... (27) (31) 12.9
---- ----
Total............................................. $306 $315 (2.9)%
---- ----
Excluding the impact of unusual items, operating income was $306 million in
1999, a decline of 2.9% from the prior year. The favorable impact of 7% unit
volume growth and restructuring savings in 1999 was more than offset by the
decline in the spread between selling prices and material costs (principally
polyethylene resin) which lowered gross margin as a percent of sales to 26.6%
from 28.1% in 1998. In addition, operating income in 1999 was negatively
impacted by higher operating costs for the corporate data center.
Consumer and foodservice/food packaging operating income declined 6.9% in
1999, as the favorable impact of 7% unit volume growth was more than offset by a
decline in margins because of the rapid escalation of raw material costs.
Protective and flexible packaging operating income increased 8.7% in 1999,
principally because of a 10% growth in unit volume and the positive effect of
cost-reduction initiatives. Excluding the negative impact of foreign-currency
exchange, operating income improved 13% in 1999.
The operating loss in the other segment was reduced to $27 million in 1999
from $31 million in 1998, as a result of reductions in corporate overhead costs
and higher pension income, partially offset by an increase in expenses
associated with operating the corporate data center.
Interest Expense, Net of Interest Capitalized
Prior to the spin-off, corporate debt of Tenneco and related interest
expense had been allocated to Pactiv, and changes in allocated debt and
after-tax allocated interest costs were recorded as a component of Pactiv's
combined equity.
Interest expense from continuing operations increased from $133 million in
1998 to $146 million in 1999. The $13 million increase in 1999 was driven by
higher allocated corporate debt, as well as interest costs related to the
realignment of debt in connection with the spin-off.
Income Taxes
Pactiv's effective tax rate for 1999 was 29.6% (benefit), compared with
44.7% for 1998. The company's income tax benefit in 1999 ($47 million) was
principally attributable to the previously discussed restructuring and other
charges and spin-off transaction expenses. Excluding these items, the effective
tax rate for 1999 was 43.3%, compared with 43.4% for 1998.
Income (Loss) from Continuing Operations
The company recorded a net loss from continuing operations of $112 million
($0.67 per share) in 1999, compared with net income of $82 million ($0.49 per
share) the previous year. Excluding the restructuring and other charges and
spin-off transaction costs, net income for 1999 was $93 million ($0.55 per
share), while 1998's net income was $102 million ($0.61 per share).
DISCONTINUED OPERATIONS AND EXTRAORDINARY CHARGE
For 1999, the loss from discontinued operations, net of income tax, was
$193 million ($1.15 per share), which was comprised principally of an after-tax
loss on the sales of the paperboard packaging operations of $206 million, which
included the recording of a $53 million loss ($37 million after tax) in
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the fourth quarter of the year, reflecting events which occurred after the sales
related to the final settlement of working capital, revisions to actuarially
determined estimates of pension plan curtailment costs, and changes in estimates
regarding retained liabilities.
Discontinued operations generated after-tax income of $57 million for the
year ended December 31, 1998, primarily driven by favorable containerboard
pricing in the paperboard packaging business.
In 1999, an extraordinary after-tax charge of $7 million ($0.04 per share)
was recorded as a result of the early retirement of debt in connection with the
contribution of the containerboard assets to PCA.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
Details of the company's capital structure appear below.
1999 1998
DECEMBER 31 (IN MILLIONS) ------------ ------------
Short-term debt, including current maturities of long-term
debt..................................................... $ 325 $ 595
Long-term debt............................................. 1,741 1,312
Debt allocated to discontinued operations.................. -- 548
------ ------
Total debt....................................... 2,066 2,455
Minority interest.......................................... 20 14
Shareowners' equity........................................ 1,350 1,776
------ ------
Total capitalization............................. $3,436 $4,245
------ ------
Pactiv's ratio of debt to total capitalization was 60.1% and 57.8% at
December 31, 1999 and December 31, 1998, respectively. Total debt declined in
1999 as a result of the contribution by Pactiv of its containerboard assets to
the PCA joint venture.
Equity declined in 1999 as a result of distributions made to Tenneco and
the net loss recorded for the year, which included the loss on containerboard
assets contributed to PCA, as well as the restructuring and other charges and
the spin-off transaction costs discussed previously. See the statement of
changes in shareowners' equity for additional information.
Cash Flows
A summary of cash flows appears below.
1999 1998
(IN MILLIONS) ------ -----
Cash provided (used) by:
Operating activities...................................... $ (31) $ 577
Investing activities...................................... (994) (514)
Financing activities...................................... 1,030 (67)
Cash used by operating activities was $31 million in 1999, while $577
million was generated from operations in 1998. The $608 million decrease in 1999
was comprised of $341 million from continuing operations and $267 million from
discontinued operations. The decrease in cash from continuing operations was
primarily driven by restructuring and spin-off transaction payments, as well as
increases in working capital. The decline in cash from discontinued operations
was principally attributable to the repurchase of accounts receivable of the
containerboard business previously sold to a third party in connection with the
formation of the PCA joint venture, as well as a decline in containerboard sales
because of lower linerboard and medium prices.
Investing activities used $994 million of cash in 1999, an increase of $480
million from 1998's level. This increase was driven by the purchase of assets
used by the containerboard business in contemplation of
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their contribution to the PCA joint venture, partially offset by lower spending
on acquisitions and capital projects, and by proceeds from the sale of other
businesses.
Pactiv borrowed $1.8 billion in the second quarter of 1999 in connection
with the formation of the PCA joint venture, and used $1.2 billion of the
proceeds to acquire assets used by the containerboard business under operating
leases and timber cutting rights, and to purchase accounts receivable of this
business that had previously been sold to a third party. The remaining proceeds
($600 million) from this borrowing, together with $306 million in cash received
from the sale of the containerboard and folding carton businesses, were used to
retire Tenneco's short-term debt. Excluding these transactions, cash provided by
financing activities was $724 million for 1999.
Responsibility for the $1.8 billion in debt discussed in the previous
paragraph was transferred to PCA in connection with the formation of the
containerboard joint venture. This reduction of debt is shown in the statement
of cash flows as a non-cash financing activity.
Capital Commitments
The company estimates that expenditures aggregating approximately $103
million will be required after December 31, 1999, to complete projects
authorized at that date, and for which substantial commitments have been made.
Liquidity
Before the spin-off, Tenneco realigned substantially all of its debt
through a combination of tender offers, exchange offers, and other refinancings.
The realignment was financed, in part, by the exchange of Pactiv public-debt
securities for Tenneco public-debt securities, and borrowings by Pactiv under
new credit facilities, which are described below. At the date of the spin-off,
Pactiv had total funded debt of $2.1 billion, comprised of new public-debt
securities and drawings under its credit facilities.
Pactiv's management believes that cash flows from operations, combined with
available borrowing capacity under its credit facilities, will generally be
sufficient to meet capital requirements.
Former Tenneco notes and debentures with an aggregate principal amount of
$1.2 billion were exchanged, in a non-cash transaction, for new public-debt
securities of Pactiv, which were recorded based on the fair value of the debt on
the date of exchange. The terms of Pactiv's public-debt securities are similar
to the terms of the series of Tenneco's original securities for which they were
exchanged, except that interest rates are approximately 50 basis points higher.
The terms of the new securities will not restrict Pactiv's ability to declare
dividends, authorize capital expenditures, or incur additional unsecured debt.
Pactiv entered into a five-year, $750 million revolving-credit agreement
and a 364-day, $250 million revolving-credit agreement in connection with the
spin-off. Borrowings under these facilities of $644 million at the time of the
spin-off were used to fund a portion of the debt realignment. These facilities
do not impose any restriction on Pactiv's ability to declare dividends or make
capital investments. They do, however, include limitations related to liens,
subsidiary debt, disposing of all or substantially all of the company's assets,
and discontinuing Pactiv's primary businesses. These agreements require Pactiv
to comply with financial and other customary covenants, the most restrictive of
which are requirements related to the ratio of debt to earnings before interest,
taxes, depreciation, and amortization (EBITDA), and the ratio of EBITDA to
interest expense. None of these items are expected to limit the company's
ability to operate its business in the ordinary course. At Pactiv's option,
borrowings under the facilities bear interest at a floating rate based on LIBOR,
adjusted for reserve requirements, plus a specified margin, or based on a
specified prime or reference rate. Borrowings under these facilities may also
bear interest based on competitive bids.
At the time of the spin-off, Pactiv exercised its right to make a one-time
draw under a $1.5 billion term-loan agreement in the amount of $300 million at a
floating interest rate based on LIBOR, adjusted
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for reserve requirements, plus a specified margin. As a result of the sale of
the majority of Pactiv's interest in PCA on February 2, 2000, all amounts
borrowed under this facility were subsequently repaid.
Pactiv entered into a $175 million syndicated-lease agreement with a
third-party lessor and various lenders, a portion of which was used to
restructure or replace certain existing operating leases and public warehouse
arrangements, with the balance to be used to facilitate additional leasing
arrangements for other operating facilities. The syndicated-lease facility
contains customary terms and conditions, including residual-value guarantees,
default provisions, and financial covenants.
YEAR 1998 COMPARED WITH 1997
RESULTS OF CONTINUING OPERATIONS
Sales
Detail of sales were as follows:
1998 1997 CHANGE
(DOLLARS IN MILLIONS) ------ ------ ------
Consumer and foodservice/food packaging.................... $1,985 $1,966 0.9%
Protective and flexible packaging.......................... 800 587 36.3
Other...................................................... 6 10 (40.0)
------ ------
Total............................................ $2,791 $2,563 8.9%
------ ------
Sales were $2.8 billion in 1998, up 8.9% from 1997. This increase was
primarily attributable to the impact ($199 million) on sales of the protective
and flexible packaging segment of the acquisition of N.V. Koninklijke KNP BT
(KNP BT) in April 1997 and Richter Manufacturing in April 1998.
Operating Income (Income (Loss) before interest expense, income taxes, and
minority interest)
Operating income by segment appears below.
1998 1997 CHANGE
(DOLLARS IN MILLIONS) ---- ---- ------
Consumer and foodservice/food packaging..................... $268 $253 5.9%
Protective and flexible packaging........................... 60 55 9.1
Other....................................................... (45) (2) --
---- ----
Total............................................. $283 $306 (7.5)%
---- ----
Excluding the impact of restructuring charges of $32 million in 1998,
segment operating income was as follows:
1998 1997 CHANGE
(DOLLARS IN MILLIONS) ---- ---- ------
Consumer and foodservice/food packaging..................... $277 $253 9.5%
Protective and flexible packaging........................... 69 55 25.5
Other....................................................... (31) (2) --
---- ----
Total............................................. $315 $306 2.9%
---- ----
Excluding the effect of restructuring charges, 1998 operating income was
$315 million, up 2.9% from the prior year. This rise was principally driven by
the impact of the previously discussed acquisitions on results of the protective
and flexible segment, as well as by higher unit volumes, primarily in Hefty
OneZip(R), foodservice foam, and consumer tableware products, and lower expenses
at Pactiv's administrative service operations. Partially offsetting these items
was the effect of one-time expenses associated with information systems projects
in the business units and increased costs related to data center consolidation
actions.
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20
Interest Expense, Net of Interest Capitalized
Interest expense for 1998 was $133 million, 7.3% higher than in 1997,
primarily because of an increase in corporate debt allocated by Tenneco.
Income Taxes
Pactiv's effective tax rate for 1998 was 44.7%, compared with 41.2% for
1997. The tax rate was higher than the statutory rate in both periods primarily
because of the impact of state and local income taxes.
Income from Continuing Operations
Income from continuing operations for 1998 and 1997 was $82 million ($0.49
per share) and $106 million ($0.63 per share), respectively. Excluding
restructuring charges, income for 1998 was $102 million ($0.61 per share), $4
million (3.8%) lower than 1997.
DISCONTINUED OPERATIONS
Income from discontinued operations (paperboard packaging business) was $57
million ($0.34 per share) in 1998, up from $21 million ($0.12 per share) in
1997, primarily because of improved containerboard pricing.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
Details of the company's capital structure appear below.
1998 1997
DECEMBER 31 (IN MILLIONS) ------ ------
Short-term debt, including current maturities of long-term
debt...................................................... $ 595 $ 158
Long-term debt.............................................. 1,312 1,492
Debt allocated to discontinued operations................... 548 473
------ ------
Total debt........................................ 2,455 2,123
Minority interest........................................... 14 15
Shareowners' equity......................................... 1,776 1,839
------ ------
Total capitalization.............................. $4,245 $3,977
------ ------
Pactiv's debt to capitalization ratio was 57.8% at December 31, 1998,
compared with 53.4% at December 31, 1997. The increase in 1998 was principally
attributable to the increase in allocated corporate debt from Tenneco and the
decline in equity.
Cash Flows
A summary of sources and uses of cash is shown in the following table.
1998 1997
(IN MILLIONS) ----- -----
Cash provided (used) by:
Operating activities...................................... $ 577 $ 405
Investing activities...................................... (514) (654)
Financing activities...................................... (67) 239
Cash provided by operating activities increased to $577 million in 1998
from $405 million in 1997. The $172 million increase in 1998 was comprised of
$74 million from continuing operations and $98 million from discontinued
operations. The increase from continuing operations was primarily attributable
to working capital, which decreased slightly in 1998, but increased
significantly in 1997 to support the growth in sales from 1996 levels. Cash
generated by discontinued operations improved because of higher earnings in
1998, primarily resulting from higher containerboard pricing.
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Investing activities used $514 million of cash in 1998, down $140 million
from 1997's level, primarily because of lower spending on acquisitions,
partially offset by higher capital expenditures related to discontinued
operations, which primarily reflected the acquisition of leased timberlands in
contemplation of the PCA joint venture formation. Acquisitions in 1998 included
Champion International's dual-ovenable paperboard tray manufacturing facility in
Belvidere, Illinois; Richter Manufacturing; and the protective-packaging assets
of Sentinel Products Corporation. The principal acquisition in 1997 was the
protective and flexible packaging businesses of KNP BT.
Financing activities used $67 million of cash in 1998, compared with
providing $239 million in 1997. The $306 million change occurred primarily
because Pactiv distributed $56 million to Tenneco in 1998, while $331 million
was contributed to Pactiv by Tenneco in 1997.
CHANGES IN ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes new
accounting and reporting standards requiring that all derivative instruments,
including such instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at fair value. FAS No.
133 will become effective for fiscal years beginning after June 15, 2000. Pactiv
is currently evaluating the new standard, but has not yet determined the impact,
if any, it will have on its financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, Reporting on the Costs of
Start-Up Activities, which requires that costs of start-up activities be
expensed as incurred. This statement became effective for fiscal years beginning
after December 15, 1998. SOP 98-5 required that previously capitalized costs
related to start-up activities be expensed as a cumulative effect of changes in
accounting principles upon adoption. The company adopted SOP 98-5 on January 1,
1999, and recorded a related after-tax charge of $32 million (net of a $9
million tax benefit), or $0.19 per share, pertaining to previously capitalized
start-up costs of its foreign operations and its administrative service
operations. If the new accounting method had been applied retroactively, net
income for the years ended December 31, 1998 and 1997 would have been lower by
$14 million (net of a $8 million tax benefit), or $0.08 per share, and $7
million (net of a $3 million tax benefit), or $0.04 per share, respectively.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use and required prospective application for fiscal
years beginning after December 15, 1998. The impact of this new standard, which
the company adopted on January 1, 1999, did not have a significant effect on
Pactiv's financial position or results of operations.
In the fourth quarter of 1997, Pactiv adopted the FASB's EITF Issue 97-13,
Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation, and recorded a related after-tax charge of $38 million (net of a
$24 million tax benefit), or $0.23 per share. This charge was reported as a
cumulative effect of changes in accounting principles. EITF Issue 97-13
establishes the accounting treatment and allocation methodology to be used for
consulting and other costs incurred in connection with information technology
transformation activities.
YEAR 2000
Pactiv initiated a Year 2000 compliance program to ensure that its
information systems and other date-sensitive equipment continue uninterrupted
into the Year 2000. All of the company's essential processes and systems were
compliant with Year 2000 requirements by the end of 1999. Pactiv did not
experience any Year 2000 consequences that affected the company's financial
position, liquidity, or results of operations, and did not experience any
disruptions as a result of Year 2000 issues at its major vendors
18
22
and customers. The company will continue to monitor Year 2000 issues during the
year as other critical dates approach. Contingency plans are in place to cover
any problems that might arise at a later date. This multi-year program was
executed in accordance with the company's initial plan, and the total cost was
approximately $22 million.
EURO CONVERSION
The formation of the European Monetary Union resulted in the adoption of a
common currency, the euro, among eleven European nations. The euro is being
adopted over a three-year transition period which commenced on January 1, 1999.
Pactiv believes it is on course to becoming fully "euro ready" on or before the
conclusion of the three-year period. The company believes that the costs
associated with transitioning to the euro will not be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
DERIVATIVE FINANCIAL INSTRUMENTS
The company is exposed to market risks related to changes in foreign
currency-exchange rates, interest rates, and commodity prices. To manage these
risks, the company, from time to time, enters into various hedging contracts in
accordance with the company's policies and procedures. The company does not use
hedging instruments for trading purposes, and is not a party to any transactions
involving leveraged derivatives.
Foreign Currency Exchange
The company uses foreign-currency forward contracts to hedge its exposure
to adverse changes in exchange rates, primarily related to the European euro,
British pound, and Canadian dollar. Hedging is accomplished through the use of
financial instruments, with related gains or losses offsetting gains or losses
on underlying assets or liabilities.
In managing foreign-currency risk, the company aggregates existing
positions and hedges residual exposures through third-party derivative
contracts. The following table summarizes foreign-currency forward contracts in
effect at December 31, 1999, all of which will mature in 2000.
(IN MILLIONS, EXCEPT SETTLEMENT RATES)
-------------------------------------- NOTIONAL AMOUNT WEIGHTED-AVERAGE NOTIONAL AMOUNT
IN FOREIGN CURRENCY SETTLEMENT RATE IN U.S. DOLLARS
------------------- ---------------- ---------------
European euros -- Purchase................... 5 1.006 $ 5
-- Sell....................... (190) 1.006 (191)
Canadian dollars -- Purchase................... 3 0.690 2
-- Sell....................... (15) 0.690 (10)
British pounds -- Purchase................... 37 1.615 59
-- Sell....................... (37) 1.615 (60)
U.S. dollars -- Purchase................... 224 1.000 224
-- Sell....................... (20) 1.000 (20)
Interest Rates
Following the realignment of debt in connection with the spin-off, the
company is exposed to interest-rate risk on certain of its debt instruments.
Pactiv utilizes revolving-credit and term-loan facilities that bear interest at
a floating rate based on LIBOR. The amount outstanding under these facilities
aggregated $861 million at December 31, 1999. In addition, the company has
issued public-debt securities with original maturity dates ranging from six to
twenty-eight years that have fixed interest rates. Should the company decide to
redeem these securities prior to their stated maturity, it would incur costs
based on the fair value of the debt at that time.
19
23
The following table provides information about Pactiv's financial
instruments that are sensitive to interest rate risks.
ESTIMATED MATURITY DATES
------------------------------------------------------
(IN MILLIONS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL
- ------------- ---- ---- ---- ---- ---- ---------- ------
FACILITIES WITH FLOATING INTEREST
RATES BASED ON LIBOR
Term-loan facility.................. $300 -- -- -- -- -- $ 300
Five-year revolving-credit
facility.......................... -- -- -- -- 561 -- 561
DEBT SECURITIES WITH FIXED INTEREST
RATES
Long-term debt securities........... 4 4 4 2 2 1,177 1,193
Inasmuch as the company's debt was issued in November 1999, its book and
fair value were considered to be approximately the same as of December 31, 1999.
Interest-rate risk management is accomplished through the use of swaps to
create synthetic-debt instruments. In conjunction with the debt realignment, the
company entered into an interest-rate swap to hedge its exposure to
interest-rate movements. The company settled this swap in November 1999,
incurring a $43 million loss, which is being recognized as additional interest
expense over the average life of the underlying debt.
Commodities
The company purchases commodities, such as resin, paper, and aluminum, at
market prices and does not currently use financial instruments to hedge
commodity prices.
In December 1999, the company entered into a five-year agreement with one
of its vendors to exclusively purchase certain materials at prices within a
specified range. The agreement does not include minimum purchase commitments.
The statements and other information (including the tables) in this section
constitute forward looking statements.
20
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO THE FINANCIAL STATEMENTS OF PACTIV CORPORATION
AND CONSOLIDATED SUBSIDIARIES
PAGE
----
Report of independent public accountants.................... 22
Statement of income (loss) for each of the three years in
the period ended December 31, 1999........................ 23
Statement of financial position at December 31, 1999 and
1998...................................................... 24
Statement of cash flows for each of the three years in the
period ended December 31, 1999............................ 25
Statement of changes in shareowners' equity for each of the
three years in the period ended December 31, 1999......... 26
Statement of comprehensive income (loss) for each of the
three years in the period ended December 31, 1999......... 27
Notes to financial statements............................... 28
21
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
and Shareowners,
Pactiv Corporation:
We have audited the accompanying statements of financial position of Pactiv
Corporation (a Delaware corporation) and consolidated subsidiaries as of
December 31, 1999 and 1998, and the related statements of income (loss), cash
flows, changes in shareowners' equity and comprehensive income (loss) for each
of the three years ended December 31, 1999. These financial statements and the
schedule referred to below 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 generally accepted auditing
standards. 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 financial position of Pactiv Corporation and
consolidated subsidiaries as of December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years ended December 31,
1999, in conformity with generally accepted accounting principles.
As explained in note 3 to the financial statements, effective January 1,
1999, the company changed its method of accounting for the costs of start-up
activities, and effective December 1, 1997, it changed its method of accounting
for certain costs incurred in connection with information technology
transformation projects.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
index to financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The supplemental schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
February 22, 2000
22
26
STATEMENT OF INCOME (LOSS)
(IN MILLIONS, EXCEPT SHARE AND PER-SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31 1999 1998 1997
- ------------------------------- ------------ ------------ ------------
(COMBINED) (COMBINED) (COMBINED)
REVENUES
Sales
Consumer and foodservice/food packaging....... $ 2,074 $ 1,985 $ 1,966
Protective and flexible packaging............. 847 800 587
Other......................................... -- 6 10
------------ ------------ ------------
2,921 2,791 2,563
Loss on sale of businesses and assets, net....... (12) (9) --
Other income, net................................ 4 6 6
------------ ------------ ------------
2,913 2,788 2,569
------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales (excluding depreciation and
amortization shown below)..................... 1,993 1,866 1,779
Engineering, research, and development........... 37 33 34
Selling, general, and administrative............. 393 399 287
Depreciation and amortization.................... 184 175 163
Restructuring and other.......................... 183 32 --
Spin-off transaction............................. 136 -- --
------------ ------------ ------------
2,926 2,505 2,263
------------ ------------ ------------
INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME
TAXES, AND MINORITY INTEREST..................... (13) 283 306
Interest expense, net of interest
capitalized................................. 146 133 124
Income tax expense (benefit).................. (47) 67 75
Minority interest............................. -- 1 1
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS........... (112) 82 106
Income (loss) from discontinued operations, net of
income tax....................................... (193) 57 21
------------ ------------ ------------
Income (loss) before extraordinary loss............ (305) 139 127
Extraordinary loss, net of income tax.............. (7) -- --
------------ ------------ ------------
Income (loss) before cumulative effect of changes
in accounting principles......................... (312) 139 127
Cumulative effect of changes in accounting
principles, net of income tax.................... (32) -- (38)
------------ ------------ ------------
NET INCOME (LOSS).................................. $ (344) $ 139 $ 89
------------ ------------ ------------
EARNINGS (LOSS) PER SHARE
Average shares of common stock outstanding
Basic............................................ 167,405,315 168,505,573 170,264,731
Diluted.......................................... 167,663,438 168,834,531 170,801,636
Basic earnings (loss) per share of common stock
Continuing operations............................ $ (0.67) $ 0.49 $ 0.63
Discontinued operations.......................... (1.15) 0.34 0.12
Extraordinary loss............................... (0.04) -- --
Cumulative effect of changes in accounting
principles.................................... (0.19) -- (0.23)
------------ ------------ ------------
$ (2.05) $ 0.83 $ 0.52
------------ ------------ ------------
Diluted earnings (loss) per share of common stock
Continuing operations............................ $ (0.67) $ 0.49 $ 0.63
Discontinued operations.......................... (1.15) 0.34 0.12
Extraordinary loss............................... (0.04) -- --
Cumulative effect of changes in accounting
principles.................................... (0.19) -- (0.23)
------------ ------------ ------------
$ (2.05) $ 0.83 $ 0.52
------------ ------------ ------------
The accompanying notes to financial statements are an integral part of this
statement.
23
27
STATEMENT OF FINANCIAL POSITION
AT DECEMBER 31 ($ IN MILLIONS) 1999 1998
- ------------------------------ -------------- ----------
(CONSOLIDATED) (COMBINED)
ASSETS
Current assets
Cash and temporary cash investments....................... $ 12 $ 7
Accounts and notes receivable
Trade, less allowances of $11 million in 1999 and
1998................................................... 279 336
Affiliated companies.................................... -- 44
Income taxes............................................ 30 15
Other................................................... 42 52
Inventories............................................... 429 412
Deferred income taxes..................................... 50 6
Prepayments and other..................................... 24 45
------ ------
Total current assets 866 917
------ ------
Property, plant, and equipment, net......................... 1,396 1,556
------ ------
Other assets
Goodwill and intangibles, net............................. 981 1,052
Deferred income taxes..................................... 40 --
Pension assets............................................ 941 742
Other..................................................... 169 165
------ ------
Total other assets 2,131 1,959
------ ------
Net assets of discontinued operations..................... 195 366
------ ------
TOTAL ASSETS $4,588 $4,798
------ ------
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Short-term debt, including current maturities of long-term
debt.................................................... $ 325 $ 595
Accounts payable
Trade................................................... 265 255
Affiliated companies.................................... -- 6
Taxes accrued............................................. 30 13
Interest accrued.......................................... 17 --
Accrued liabilities....................................... 188 188
Other..................................................... 95 85
------ ------
Total current liabilities 920 1,142
------ ------
Long-term debt.............................................. 1,741 1,312
------ ------
Deferred income taxes....................................... 321 291
------ ------
Post-retirement benefits.................................... 140 163
------ ------
Deferred credits and other liabilities...................... 96 100
------ ------
Minority interest........................................... 20 14
------ ------
Shareowners' equity
Common stock (168,372,798 shares outstanding in 1999)..... 2 --
Investment of former parent (Tenneco Inc.)................ -- 1,776
Premium on common stock and other capital surplus......... 1,468 --
Accumulated other comprehensive loss...................... (24) --
Retained deficit.......................................... (96) --
------ ------
Total shareowners' equity................................. 1,350 1,776
------ ------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $4,588 $4,798
------ ------
The accompanying notes to financial statements are an integral part of this
statement.
24
28
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS) 1999 1998 1997
- --------------------------------------------- ---------- ---------- ----------
(COMBINED) (COMBINED) (COMBINED)
OPERATING ACTIVITIES
Income (loss) from continuing operations.................... $ (112) $ 82 $ 106
Adjustments to reconcile income (loss) from continuing
operations to cash provided (used) by continuing
operations
Depreciation and amortization........................... 184 175 163
Deferred income taxes................................... -- 77 118
Loss on sale of businesses and assets, net.............. 12 9 --
Restructuring and other................................. 183 32 --
Pension income.......................................... (86) (65) (72)
Allocated interest, net of tax.......................... 72 85 78
Changes in components of working capital
(Increase) decrease in receivables................... 17 28 (1)
(Increase) decrease in inventories................... (30) 8 (12)
Increase in prepayments and other current assets..... (3) (1) (30)
Decrease in accounts payable......................... (13) (13) (44)
Decrease in taxes accrued............................ (110) (23) (36)
Increase (decrease) in interest accrued.............. 16 -- (1)
Increase (decrease) in other current liabilities..... (18) 35 (5)
Other................................................... (81) (57) 34
------- ------- -------
Cash provided by continuing operations...................... 31 372 298
Cash provided (used) by discontinued operations............. (62) 205 107
------- ------- -------
Cash provided (used) by operating activities................ (31) 577 405
------- ------- -------
INVESTING ACTIVITIES
Net proceeds related to sale of discontinued operations..... 254 -- 10
Net proceeds from sale of businesses and assets............. 81 22 14
Expenditures for property, plant, and equipment............. (173) (194) (229)
Acquisitions of businesses and assets....................... (24) (101) (285)
Expenditures for property, plant, and equipment and business
acquisitions of discontinued operations................... (1,129) (203) (108)
Investments and other....................................... (3) (38) (56)
------- ------- -------
Cash used by investing activities........................... (994) (514) (654)
------- ------- -------
FINANCING ACTIVITIES
Issuance of long-term debt.................................. 2,261 3 4
Retirement of long-term debt................................ (30) (18) (18)
Net increase (decrease) in short-term debt, excluding
current maturities of long-term debt...................... 293 4 (78)
Cash contributions from (distributions to) former parent
(Tenneco, Inc.)........................................... (1,494) (56) 331
------- ------- -------
Cash provided (used) by financing activities................ 1,030 (67) 239
------- ------- -------
Effect of foreign-exchange rate changes on cash and
temporary cash investments................................ -- -- (1)
------- ------- -------
Increase (decrease) in cash and temporary cash
investments............................................... 5 (4) (11)
Cash and temporary cash investments, January 1.............. 7 11 22
------- ------- -------
Cash and temporary cash investments, December 31............ $ 12 $ 7 $ 11
------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during year for interest.......................... $ 21 $ 6 $ 9
Cash paid during year for income taxes, net................. 53 21 (68)
NON-CASH INVESTING AND FINANCING ACTIVITIES
Equity interest received in connection with sale of
containerboard business................................... 194 -- --
Principal amount of long-term debt assumed by buyers of
containerboard business................................... 1,760 -- --
Principal amount of long-term debt issued at spin-off....... 1,174 -- --
The accompanying notes to financial statements are an integral part of this
statement.
25
29
STATEMENT OF CHANGES IN SHAREOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS) 1999 1998 1997
- --------------------------------------------- -------------- ---------- ----------
(CONSOLIDATED) (COMBINED) (COMBINED)
CONSOLIDATED SHAREOWNERS' EQUITY
COMMON STOCK
Balance, November 5......................................... $ --
Issued pursuant to spin-off (168.373 shares)................ 2
-------
Balance, December 31 (168.373 shares)....................... 2
-------
PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS
Balance, November 5......................................... --
Premium on common stock issued pursuant to spin-off......... 1,468
-------
Balance, December 31........................................ 1,468
-------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, November 5......................................... --
Reclassification of accumulated other comprehensive loss
pursuant to spin-off...................................... (22)
Other comprehensive loss.................................... (2)
-------
Balance, December 31........................................ (24)
-------
RETAINED DEFICIT
Balance, November 5......................................... --
Net loss.................................................... (96)
-------
Balance, December 31........................................ (96)
-------
TOTAL CONSOLIDATED SHAREOWNERS' EQUITY, DECEMBER 31......... $ 1,350
-------
COMBINED SHAREOWNERS' EQUITY
Balance, January 1.......................................... $ 1,776 $1,839 $1,843
Net income (loss)........................................... (248) 139 89
Other comprehensive income (loss)........................... (23) 22 (24)
Allocated interest, net of tax.............................. 86 111 102
Change in allocated debt from former parent (Tenneco
Inc.)..................................................... 15 (333) (549)
Cash contributions from (distributions to) former parent.... (1,494) (56) 331
Non-cash contributions from former parent................... 1,336 54 47
Reclassification of accumulated other comprehensive loss
pursuant to spin-off...................................... 22 -- --
Issuance of common stock in connection with spin-off........ (1,470) -- --
------- ------ ------
Total combined shareowners' equity, December 31............. $ -- $1,776 $1,839
------- ------ ------
The accompanying notes to financial statements are an integral part of this
statement.
26
30
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
1999 1998 1997
FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS) (COMBINED) (COMBINED) (COMBINED)
- --------------------------------------------- ----------------------------- ----------------------------- -------------
ACCUMULATED ACCUMULATED ACCUMULATED
OTHER OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME INCOME
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS)... $(344) $139
----- ----
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
CUMULATIVE TRANSLATION ADJUSTMENT
Balance, January 1... $ 3 $(21) $ 3
Translation of foreign-currency
statements... (26) (26) 24 24 (25)
Hedges of net investment in foreign
subsidiaries... -- -- -- -- 2
Income tax expense... -- -- -- -- (1)
---- ---- ----
Balance, December 31... (23) 3 (21)
---- ---- ----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance, January 1... (2) -- --
Additional minimum pension liability
adjustment... 3 3 (4) (4) --
Income tax benefit (expense)... (2) (2) 2 2 --
---- ---- ----
Balance, December 31... (1) (2) --
---- ---- ----
BALANCE, DECEMBER 31... $(24) $ 1 $(21)
---- ----- ---- ---- ----
OTHER COMPREHENSIVE INCOME (LOSS)... (25) 22
----- ----
COMPREHENSIVE INCOME (LOSS)... $(369) $161
----- ----
1997
FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS) (COMBINED)
- --------------------------------------------- -------------
COMPREHENSIVE
INCOME
-------------
NET INCOME (LOSS)... $ 89
----
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
CUMULATIVE TRANSLATION ADJUSTMENT
Balance, January 1...
Translation of foreign-currency
statements... (25)
Hedges of net investment in foreign
subsidiaries... 2
Income tax expense... (1)
Balance, December 31...
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance, January 1...
Additional minimum pension liability
adjustment... --
Income tax benefit (expense)... --
Balance, December 31...
BALANCE, DECEMBER 31...
----
OTHER COMPREHENSIVE INCOME (LOSS)... (24)
----
COMPREHENSIVE INCOME (LOSS)... $ 65
----
The accompanying notes to financial statements are an integral part of this
statement.
27
31
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On November 4, 1999, in connection with a corporate reorganization, Pactiv
Corporation's former parent company, Tenneco Inc. (Tenneco) and its subsidiaries
completed various intercompany transfers and distributions designed to
restructure and separate their then existing businesses, assets, liabilities,
and operations so that, among other things, the packaging businesses and certain
corporate and administrative service operations of Tenneco would be owned by
Pactiv Corporation (Pactiv). Tenneco subsequently distributed pro rata to
holders of its common stock all of the outstanding common stock of Pactiv (the
spin-off). Prior to the spin-off, Pactiv was named Tenneco Packaging Inc. (TPI).
As used herein, the term "company" or "Pactiv" refers, for periods prior to
the spin-off, to TPI and certain other subsidiaries through which Tenneco
conducted its packaging businesses, and, for periods after the spin-off, to
Pactiv and its consolidated subsidiaries.
Prior to the spin-off, all of the outstanding common stock of the company
was owned directly or indirectly by Tenneco. The financial statements present
the results of operations, financial position, and cash flows of the company as
if it were a separate entity for all periods. The former parent's historical
basis in the assets and liabilities of the company has been carried over to
Pactiv. All per-share information is presented on a diluted basis, unless
otherwise noted.
The accompanying statement of financial position is presented on a
consolidated basis at December 31, 1999. All other financial statements are
presented on a combined basis.
2. STRATEGIC REALIGNMENT
In July 1998, Tenneco's board of directors authorized management to develop
a broad range of strategic alternatives to separate its automotive, paperboard
packaging, and specialty packaging businesses. Subsequently, Tenneco completed
the following actions:
- In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging operation to a new
joint venture with Madison Dearborn Partners, Inc. called Packaging
Corporation of America (PCA). For the contribution, which was completed
in April 1999, Pactiv received approximately $2 billion in the form of
cash and debt assumption, and retained a 45% equity interest in PCA
(subsequently reduced to 43% as a result of equity issued to management)
which was valued at approximately $200 million.
- In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's remaining business, its folding carton operation, to
Caraustar Industries for $73 million. This transaction closed in June
1999.
- Also in April 1999, Tenneco's board of directors approved the spin-off.
- In June 1999, Tenneco's board of directors authorized the specialty
packaging business to sell its interest in PCA. Approximately 85% of this
interest was sold by Pactiv in February 2000 for net proceeds of $398
million through a registered public offering.
- In August 1999, Tenneco received a letter ruling from the Internal
Revenue Service that the spin-off would be considered to be a tax-free
event for U.S. federal income tax purposes.
- On November 4, 1999, Tenneco completed the spin-off by issuing a dividend
of the common stock of Pactiv to Tenneco shareowners.
The paperboard packaging segment is classified as a discontinued operation
in the financial statements. See note 7 for further information.
Before the spin-off, Tenneco realigned substantially all of its existing
debt through a combination of tender offers, exchange offers, and other
refinancings. The realignment was financed through borrowings by
28
32
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Tenneco Automotive (formerly Tenneco, which changed its name to Tenneco
Automotive Inc. in connection with the spin-off) under a new credit facility,
the issuance by Tenneco Automotive of subordinated debt, Pactiv's issuance of
public debt, and borrowings by Pactiv under new credit facilities.
At the spin-off date, Pactiv had total funded debt of $2.1 billion,
comprised of new public-debt securities and drawings under its credit
facilities. Pactiv's debt is rated as investment grade by both Standard & Poor's
and Moody's. The debt is described in more detail in note 8.
In connection with the spin-off, Pactiv has entered into certain
contractual arrangements with Tenneco Automotive, including separate
distribution, tax-sharing, human-resource, insurance, and transition-service
agreements. These agreements specify, among other things, that the company will
provide administrative services related to information systems, payroll,
accounts payable, benefits administration, accounting, cash management, and
employee travel to Tenneco Automotive for a specified period of time based on
contractual fee arrangements.
3. SUMMARY OF ACCOUNTING POLICIES
Consolidation
The financial statements of the company include all majority-owned
subsidiaries. Investments in 20% to 50% owned companies, where Pactiv has the
ability to exert significant influence over operating and financial policies,
are carried at cost plus equity in undistributed earnings since date of
acquisition. All significant intercompany transactions are eliminated.
Cash and Temporary Cash Investments
The company defines cash and temporary cash investments as checking
accounts, money-market accounts, certificates of deposit, and U.S. Treasury
notes having an original maturity of ninety days or less.
Accounts and Notes Receivable
The company sells trade receivables ($122 million and $140 million at
December 31, 1999 and 1998, respectively) to a third party in the ordinary
course of business. Such sales are reflected as a reduction of accounts and
notes receivable in the statement of financial position, and receipt of related
proceeds are included in cash provided (used) by operating activities in the
statement of cash flows.
Inventories
Inventories are stated at the lower of cost or market. A portion of
inventories (52% and 61% at December 31, 1999 and 1998, respectively) is valued
using the last-in, first-out (LIFO) method of accounting. All other inventories
are valued using first-in, first-out (FIFO) or average-cost methods. If FIFO or
average-cost methods had been used for all inventories, the total balance at
December 31, 1999 and 1998, would have been lower by $9 million and $30 million,
respectively.
Property, Plant, and Equipment, Net
Depreciation is recorded on a straight-line basis over the estimated useful
lives of assets. Useful lives range from 10 to 40 years for buildings and
improvements, and from three to twenty-five years for machinery and equipment.
The company currently expenses start-up costs as incurred. Prior to January
1, 1999, certain start-up expenditures were capitalized and amortized over
periods ranging from three to five years. Capitalized start-up costs, net of
amortization, at December 31, 1998 were $41 million.
The company capitalizes certain costs related to the purchase and
development of software used in its business. Such costs are amortized over
their estimated useful lives, ranging from three to twelve years,
29
33
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
based on various factors. Capitalized software development costs, net of
amortization, were $77 million and $140 million at December 31, 1999 and 1998,
respectively. The decrease in 1999 was primarily attributable to the spin-off
and asset sales.
The Company periodically re-evaluates carrying values and estimated useful
lives of long-lived assets to determine whether current facts and circumstances
warrant adjustments. The company uses estimates of undiscounted cash flows from
long-lived assets in determining whether the book value of such assets are
recoverable over their remaining useful lives.
Goodwill and Intangibles, Net
Goodwill is amortized on a straight-line basis over forty years. The
company has capitalized certain intangible assets, primarily trademarks and
patents, based on their estimated fair value at the time of acquisition.
Amortization of these assets is recorded on a straight-line basis over periods
ranging from five to forty years.
Other Long-Term Assets
The company established a grantor trust to fund certain compensation and
supplemental retirement benefits payable to former employees of Tenneco. This
funding was established through the issuance of debt at the time of the
spin-off. Unpaid benefits were $57 million at December 31, 1999. Offsetting
liabilities are included in deferred credits and other liabilities in the
statement of financial position.
Pactiv has a 50% interest in a U.S. joint venture with Sentinel Products
Corporation which manufactures and distributes cross-linked, polyolefin-foam
products. Capital contributions to the joint venture were $8 million and $9
million in 1999 and 1998, respectively. At December 31, 1998, Pactiv also had a
37% joint-venture interest in Zhejiana Tenneco Corrugated Packaging Co. Ltd.,
located in China. During 1999, the company contributed additional capital to the
joint venture in exchange for an increase in ownership to 63%. As a result, the
joint venture was included in the company's financial statements on a
consolidated basis in 1999.
Environmental Liabilities
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations that
do not contribute to current or future revenue generation are expensed as
incurred. Liabilities are recorded when environmental assessments indicate that
remedial efforts are probable and that costs can be reasonably estimated.
Estimates of liabilities are based on currently available facts, existing
technology, and current laws and regulations, taking into consideration the
likely effects of inflation and other factors. All available evidence is
considered, including prior experience in remediation of contaminated sites,
other companies' clean-up experience, and data released by the United States
Environmental Protection Agency or other organizations. Estimated liabilities
are subject to revision in subsequent periods based on actual costs or new
information. Liabilities are included in the statement of financial position at
their undiscounted amounts.
Revenue Recognition
The company recognizes revenue as products are shipped to customers.
General and Administrative Expenses
Included in costs and expenses under selling, general, and
administrative(SG&A) in the statement of income (loss) for 1999, 1998, and 1997
were expenses totaling $43 million, $60 million, and $49 million, respectively,
for the company's share of Tenneco's corporate, general, and administrative
costs related to
30
34
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
legal, financial, communications, and other services. Also included in the SG&A
category for 1999, 1998, and 1997 were costs aggregating $53 million, $53
million, and $22 million, respectively, related to corporate administrative
services which were not allocated by Tenneco to its business units.
Prior to the spin-off, the allocation of Tenneco's corporate general and
administrative expenses was based on estimated levels of effort devoted to
Tenneco's various operations and the relative size of those operations based on
revenues, gross property value, and payroll, which Pactiv's management believes
was reasonable.
Research and Development
Research and development costs, which are expensed as incurred, totaled $40
million, $25 million, and $29 million for 1999, 1998, and 1997, respectively.
Advertising
Advertising costs are generally expensed in the year in which the
advertising first takes place.
Income Taxes
The company utilizes the liability method of accounting for income taxes,
whereby it recognizes deferred-tax assets and liabilities for the future tax
consequences of temporary timing differences between the tax basis of assets and
liabilities and the corresponding amounts reported in the financial statements.
Deferred-tax assets are reduced by a valuation allowance when, based on
management's estimates, it is more likely than not that a portion of
deferred-tax assets will not be realized in a future period. Estimates utilized
in the recognition of deferred-tax assets are subject to revision in subsequent
periods based on new facts or circumstances.
The company does not provide for U.S. federal income taxes on unremitted
earnings of foreign subsidiaries, as it is the present intention of management
to reinvest those earnings in its foreign operations. Unremitted earnings of
foreign subsidiaries totaled $70 million at December 31, 1999. It is not
practicable to determine the amount of U.S. federal income taxes that would be
payable if those earnings were remitted.
Pactiv and Tenneco Automotive have entered into an agreement to file a
consolidated U.S. federal income tax return for all periods prior to the
spin-off. This agreement provides, among other things, that each company in a
taxable income position will be charged an amount equivalent to what its U.S.
federal income tax would be if computed on a separate-return basis, and that
each company in a tax-loss position will be reimbursed currently. The income-tax
amounts reflected in the financial statements of Pactiv under the provisions of
this arrangement are not materially different from what they would have been if
determined on a separate-return basis.
Liability for foreign income taxes is generally allocated to the legal
entity on which such taxes are imposed. In the case of state income taxes,
Pactiv is liable for paying its own taxes in states where returns are filed
separately. In states where returns are filed on a combined basis, liability is
allocated in a manner similar to that for federal income tax.
Changes in Accounting Principles
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes new
accounting and reporting standards requiring that all derivative instruments,
including such instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at fair value. FAS No.
133 will become effective for fiscal years beginning after June 15, 2000. Pactiv
is currently evaluating the new standard, but has not yet determined the impact,
if any, it will have on its financial position or results of operations.
31
35
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, Reporting on the Costs of
Start-Up Activities, which requires that costs of start-up activities be
expensed as incurred. This statement became effective for fiscal years beginning
after December 15, 1998. SOP 98-5 required that previously capitalized costs
related to start-up activities be expensed as a cumulative effect of changes in
accounting principles upon adoption. The company adopted SOP 98-5 on January 1,
1999, and recorded a related after-tax charge of $32 million (net of a $9
million tax benefit), or $0.19 per share, pertaining to previously capitalized
start-up costs of its foreign operations and its administrative service
operations. If the new accounting method had been applied retroactively, net
income for the years ended December 31, 1998 and 1997 would have been lower by
$14 million (net of a $8 million tax benefit), or $0.08 per share, and $7
million (net of a $3 million tax benefit), or $0.04 per share, respectively.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use, and required prospective application for fiscal
years beginning after December 15, 1998. The impact of this new standard, which
the company adopted on January 1, 1999, did not have a significant effect on
Pactiv's financial position or results of operations.
In the fourth quarter of 1997, Pactiv adopted the FASB's EITF Issue 97-13,
Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation, and recorded a related after-tax charge of $38 million (net of a
$24 million tax benefit), or $0.23 per share. This charge was reported as a
cumulative effect of changes in accounting principles. EITF Issue 97-13
establishes the accounting treatment and allocation methodology to be used for
consulting and other costs incurred in connection with information technology
transformation activities.
Earnings Per Share
In accordance with requirements of FAS No. 128, Earnings Per Share, basic
earnings per share are computed by dividing income available to common
shareowners by the weighted-average number of shares outstanding. The
computation of diluted earnings per share is similar, except that the
weighted-average number of shares outstanding is adjusted to reflect the
potential issuances of dilutive shares, and the related change in income
available to common shareowners that would occur is factored into the
calculation.
Foreign Currency Translation
Financial statements of international operations are translated into U.S.
dollars using end-of-period exchange rates for assets and liabilities, and the
periods' weighted-average exchange rates for revenues, expenses, gains, and
losses. Translation adjustments are recorded as cumulative translation
adjustments in shareowners' equity.
Risk Management Activities
From time to time, the company uses derivative financial instruments,
principally foreign-currency purchase and sale contracts with terms of less than
one year, to hedge its exposure to changes in foreign-currency exchange rates.
Net gains or losses on such contracts are recognized in the income statement as
an offset to foreign-currency gains or losses on the underlying transactions.
The company also has, from time to time, entered into contracts to hedge its net
investment in foreign subsidiaries. After-tax gains or losses on such contracts
are recognized on an accrual basis in the statement of financial position under
accumulated other comprehensive income (loss) for 1999 and combined equity for
1998. In the statement of cash flows, cash receipts and payments related to
hedge contracts are classified the same way as cash flows from the transactions
being hedged.
32
36
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interest-rate risk management is accomplished through the use of swaps to
create synthetic-debt instruments. Gains and losses on the settlement of swaps
are recognized as additions to or reductions of interest expense.
The company does not use derivative financial instruments for speculative
purposes.
Stock-Based Compensation
The company follows requirements of Accounting Principles Board
(APB)Opinion No. 25 in accounting for stock options.
Estimates
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts for assets, liabilities, revenues, and
expenses. Actual results may differ from such estimates.
Reclassifications
Certain prior-year amounts have been reclassified to conform with
current-year presentation.
4. UNUSUAL ITEMS
Restructuring and Other
In the fourth quarter of 1998, a restructuring plan was approved to reduce
administrative and operating costs. As a result, Pactiv recorded a pre-tax
charge against income from continuing operations of $32 million ($20 million
after tax, or $0.12 per share). The restructuring plan involved the elimination
of production lines at two plants, which was expected to result in the reduction
of 104 positions; exiting four joint ventures; and the elimination of 184
administrative positions in business units and at corporate headquarters. All
related actions have been substantially completed and were executed in
accordance with the company's initial plan. As a result of this restructuring, a
total of 252 positions were eliminated as of December 31, 1999.
In the first quarter of 1999, a plan was adopted to realign company
functions in connection with the contribution of the containerboard assets to
the PCA joint venture, and to close Tenneco's headquarters facility in
Greenwich, Connecticut. This plan, for which a $29 million pre-tax charge ($17
million after tax, or $0.10 per share) was recorded, included the elimination of
approximately forty positions. Approximately $30 million was received in the
second quarter of 1999 related to the sale of the Greenwich facility. These
restructuring actions were completed in 1999 and were executed in accordance
with the company's initial plan.
In the fourth quarter of 1999, Pactiv adopted an extensive restructuring
plan to exit non-core businesses and to reduce overhead costs. As a result, the
company recorded a $154 million charge ($91 million after tax, or $0.54 per
share). This charge was related to (1) the sale of the company's forest products
and aluminum foil container businesses in Europe ($68 million), for which cash
proceeds of $20 million were received in the fourth quarter of 1999, and the
sale of certain assets of the company's administrative service operations and
corporate aircraft operations ($10 million); (2) impairment of long-lived assets
held for use in the company's packaging polyethylene business ($68 million); and
(3) severance costs ($8 million) associated with the elimination of 161
positions, primarily in the company's international operations. The impairment
of the packaging polyethylene business assets was recorded following completion
of an evaluation of strategic alternatives for the business, and represented the
difference between the carrying value of the assets and their forecasted
discounted future cash flows.
33
37
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amounts related to the restructuring plans described above are shown in the
following table.
1998 CHARGED BALANCE AT 1999 CHARGED BALANCE AT
RESTRUCTURING CASH TO ASSET DECEMBER 31, RESTRUCTURING CASH TO ASSET DECEMBER 31,
CHARGE PAYMENTS ACCOUNTS 1998 CHARGES PAYMENTS ACCOUNTS 1999
(IN MILLIONS) ------------- -------- -------- ------------ ------------- -------- -------- ------------
Severance................. $20 $5 $-- $15 $ 24 $31 $ -- $ 8
Asset impairment.......... 12 -- 12 -- 157 -- 157 --
Other..................... -- -- -- -- 2 1 -- 1
--- -- --- --- ---- --- ---- ---
$32 $5 $12 $15 $183 $32 $157 $ 9
--- -- --- --- ---- --- ---- ---
Spin-off Transaction Costs
In the fourth quarter of 1999, the company recorded transaction costs
related to the spin-off which reduced income before interest expense, income
taxes, and minority interest, net income, and earnings per share by $136
million, $96 million, and $0.57, respectively. These costs were related to
special curtailment and termination benefits for former Tenneco employees ($72
million), professional services performed in connection with the spin-off ($49
million), and separation from Tenneco operations ($15 million).
5. TRANSACTIONS WITH THE FORMER PARENT (TENNECO)
Combined Equity
Combined equity in the statement of changes in shareowners' equity at
December 31, 1998 and 1997 represented Tenneco's cumulative net investment in
the combined businesses of the company. Changes in combined equity reflected the
aggregate of net income (loss), net cash and non-cash contributions from
(distributions to) Tenneco, accumulated other comprehensive income (loss),
changes in allocated corporate debt, and allocated corporate interest, net of
tax.
Corporate Debt and Interest Allocation
Tenneco's historical practice had been to incur indebtedness for the
consolidated group at the parent-company level, or at a limited number of
subsidiaries, rather than at the operating-company level. Consequently, prior to
the spin-off, corporate debt and related interest expense were allocated to
Pactiv, generally based on the ratio of the company's net assets to Tenneco's
consolidated net assets plus debt. Similarly, interest expense was allocated at
a rate equivalent to the weighted-average cost of all corporate debt, which was
6.3%, 7.0%, and 7.4% for 1999 (prior to the spin-off), 1998, and 1997,
respectively. Total interest expense allocated to the company in 1999, 1998, and
1997 was $118 million, $130 million, and $120 million, respectively. Although
interest costs and the related tax effect were allocated to the company for
financial-reporting purposes, Pactiv was not billed for these amounts. Changes
in allocated corporate debt and allocated after-tax interest expense were
included in combined equity. Although management believes that the historical
allocation of corporate debt and interest was reasonable, it is not necessarily
indicative of debt requirements and related interest costs of Pactiv as a
separate public company.
Notes and Advances Receivable from Tenneco
In the statement of changes in shareowners' equity, amounts shown for cash
contributions from (distributions to) Tenneco represented net cash changes in
notes and advances receivable from the former parent. Historically, Tenneco had
utilized notes and advances to centrally manage cash funding requirements of its
consolidated group. Amounts shown in the same statement for non-cash
contributions from (distributions to) Tenneco primarily reflected the transfer
of assets and liabilities.
34
38
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accounts and Notes Receivable and Accounts Payable -- Affiliated Companies
Accounts and notes receivable--affiliated companies, $44 million at
December 31, 1998, represented general and administrative costs incurred by
Pactiv and allocated to affiliates. Accounts payable--affiliated companies, $6
million at December 31, 1998, represented billings for costs incurred by
affiliates and allocated to Pactiv.
Employee Benefits
Certain employees of the company participated in Tenneco's stock option and
stock purchase plans. The stock option plan provided for the grant of stock
options and other stock awards at prices not less than market value on the date
of grant. In connection with the spin-off, outstanding Tenneco options held by
Pactiv employees were replaced by options of the company, preserving the
aggregate value of Tenneco options held prior to the spin-off. The stock
purchase plan allowed employees to purchase the former parent's stock at a 15%
discount, subject to certain thresholds. Pactiv has established a stock purchase
plan for its employees, which will become effective on April 1, 2000. Employees
of the company also participated in certain post-retirement and pension plans of
Tenneco. See notes 15 and 18 for information regarding these plans.
6. ACQUISITIONS
During 1999, the company made three acquisitions (the packaging businesses
of Whitesell Corporation and Schut Superflex B.V., and Simpla, SpA) and made
additional equity contributions to two of its joint ventures, investing a total
of $24 million. In 1998, the company made three acquisitions (the dual ovenable
paperboard tray manufacturing facility of Champion International, Richter
Manufacturing, and the protective-packaging assets of Sentinel Products
Corporation) and made additional equity contributions to a joint venture,
investing a total of $101 million.
In March 1997, Pactiv entered into an agreement to acquire the protective
and flexible packaging division of N.V. Koninklijke KNP BT (KNP BT) for $380
million, including, the assumption of debt and the issuance of preferred stock
of a subsidiary to the seller. The KNP BT acquisition was completed in April
1997.
All of the acquisitions were accounted for as purchases, which required
that purchase prices be allocated to assets acquired and liabilities assumed
based on their fair values, and that the excess of purchase prices over net
assets acquired be included in goodwill.
7. DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS
Discontinued Operations
In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging operation to a new joint
venture with Madison Dearborn Partners, Inc., called PCA. For the contribution,
which was completed in April 1999, Pactiv received approximately $2 billion in
the form of cash and the assumption of debt, and retained a 45% equity interest
in PCA (subsequently reduced to 43% as a result of equity issued to management)
which was valued at approximately $200 million.
The containerboard assets contributed to the joint venture represented
substantially all of the assets of the company's paperboard packaging operation,
and included four mills, sixty-seven corrugated plants, and an ownership or
leasehold interest in approximately 950,000 acres of timberland. Prior to the
transaction, the company borrowed $1.8 billion and used $1.2 billion of the
proceeds to acquire assets used by the containerboard business under operating
leases and timber cutting rights, and to purchase accounts receivable of this
business that had previously been sold to a third party. The remainder of the
borrowings ($600 million) was remitted to Tenneco to repay a portion of its
short-term debt. As a result of the
35
39
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
transaction, the company recorded an estimated loss of $293 million ($178
million after tax, or $1.07 per share) in the first quarter of 1999 based on the
amount by which the carrying value of the containerboard assets exceeded their
fair value, less selling costs. During 1999, the company recognized $13 million
of income on its equity investment in PCA. See note 21 for additional
information.
Under a transition service agreement, the company provides office space and
certain administrative services related to information processing, payroll,
benefits administration, office building administration, and accounting to PCA
based on contractual fee arrangements.
In April 1999, Tenneco reached an agreement, which closed in June 1999, to
sell the paperboard packaging operation's remaining business, its folding carton
operation, to Caraustar Industries for $73 million. As a result of the sale, the
company recorded a gain of $14 million ($9 million after tax, or $0.05 per
share), which was included in discontinued operations.
In the fourth quarter of 1999, the company recorded an additional $53
million loss ($37 million after tax, or $0.21 per share) on the disposition of
the paperboard packaging operation related to events that occurred subsequent to
the sales, including the final settlement of working capital, revisions to
actuarially determined estimates of pension plan curtailment costs, and changes
in estimates regarding retained liabilities.
Net assets as of December 31, 1999, 1998, and 1997, and results of
operations for the years then ended for the paperboard packaging operation were
as follows:
YEARS ENDED DECEMBER 31, (IN MILLIONS) 1999 1998 1997
- -------------------------------------- ------ ------ ------
Net assets at end of period (a)............................. $ 195 $ 366 $ 423
------ ------ ------
Sales....................................................... $ 445 $1,570 $1,431
------ ------ ------
Income (loss) from operations before income taxes and
interest allocation....................................... $ 32 $ 99 $ 63
Loss on containerboard business sale........................ (343) -- --
Gain on sale of folding carton business..................... 11 -- --
Gain on sale of joint venture with Caraustar................ -- 15 --
Gain on sale of non-strategic timberland assets............. -- 17 --
------ ------ ------
Income (loss) before interest and income taxes.............. (300) 131 63
Income tax expense (benefit)................................ (112) 48 19
------ ------ ------
Income (loss) before interest allocation.................... (188) 83 44
Allocated interest expense, net of income tax............... 5 26 23
------ ------ ------
Income (loss) from discontinued operations.................. $ (193) $ 57 $ 21
------ ------ ------
(a) Included allocated debt of $548 million and $473 million at December 31,
1998 and 1997, respectively.
Pactiv has retained responsibility for certain contingent liabilities of
its former paperboard packaging businesses, and has recorded related reserves
where, in the judgement of management, it is probable that a quantifiable
liability exists. Management believes that these liabilities will not have a
material effect on the financial position or results of operations of the
company.
In connection with the formation of the PCA joint venture, Pactiv entered
into a five-year agreement to purchase corrugated products from PCA on an arm's
length basis.
Extraordinary Loss
In the first quarter of 1999, the company recorded an extraordinary loss on
extinguishment of debt of $7 million (net of a $3 million tax benefit), or $0.04
per share, related to early retirement of debt in connection with the sale of
the containerboard assets.
36
40
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS
General
Before the spin-off, Tenneco realigned substantially all of its debt
through a combination of tender offers, exchange offers, and other refinancings.
The realignment was financed, in part, by the exchange of Pactiv public-debt
securities for Tenneco public-debt securities, and borrowings by Pactiv under
new credit facilities, which are described below. At the date of the spin-off,
Pactiv had total funded debt of $2.1 billion, comprised of new public-debt
securities and drawings under its credit facilities.
Former Tenneco notes and debentures with an aggregate principal amount of
$1.2 billion were exchanged, in a non-cash transaction, for new public-debt
securities of Pactiv, which were recorded based on the fair value of the debt on
the date of exchange. The terms of the company's public-debt securities are
similar to the terms of the series of Tenneco's original securities for which
they were exchanged, except that interest rates are approximately 50 basis
points higher. The terms of the new securities will not restrict Pactiv's
ability to declare dividends, authorize capital expenditures, or incur
additional unsecured debt.
Pactiv entered into a five-year, $750 million revolving-credit agreement
and a 364-day, $250 million revolving-credit agreement in connection with the
spin-off. Borrowings under these facilities of $644 million at the time of the
spin-off were used to fund a portion of the debt realignment. These facilities
do not impose any restriction on Pactiv's ability to declare dividends or make
capital investments. They do, however, include limitations related to liens,
subsidiary debt, disposing of all or substantially all of the company's assets,
and discontinuing Pactiv's primary businesses. These agreements require Pactiv
to comply with financial and other customary covenants, the most restrictive of
which are requirements related to the ratio of debt to earnings before interest,
taxes, depreciation, and amortization (EBITDA) and the ratio of EBITDA to
interest expense. None of these items are expected to limit the company's
ability to operate its business in the ordinary course. At Pactiv's option,
borrowings under the facilities bear interest at a floating rate based on LIBOR,
adjusted for reserve requirements, plus a specified margin, or based on a
specified prime or reference rate. Borrowings under these facilities may also
bear interest based on competitive bids.
At the time of the spin-off, Pactiv exercised its right to make a one-time
draw under a $1.5 billion term-loan agreement in the amount of $300 million at a
floating interest rate based on LIBOR, adjusted for reserve requirements, plus a
specified margin. As a result of the sale of the majority of Pactiv's interest
in PCA on February 2, 2000, all amounts borrowed under this facility were
subsequently repaid.
37
41
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Debt
A summary of long-term debt is set forth in the following table.
DECEMBER 31 (IN MILLIONS) 1999 1998
- ------------------------- ------ ------
Pactiv Corporation
Borrowings under five-year, $750 million revolving-credit
agreement.............................................. $ 561 $ --
Notes due 2005, effective interest rate of 7.5% (net of $4
million unamortized discount).......................... 295 --
Notes due 2007, effective interest rate of 8.0%........... 98 --
Debentures due 2017, effective interest rate of 8.1%...... 299 --
Debentures due 2025, effective interest rate of 8.0% (net
of $1 million unamortized discount).................... 275 --
Debentures due 2027, effective interest rate of 8.6% (net
of $4 million unamortized discount).................... 196 --
Subsidiaries
Notes due 2000 through 2016, average effective interest
rate of 8.0% in 1999 and 9.5% in 1998.................. 21 22
Less current maturities..................................... (4) (1)
------ ------
1,741 21
Allocated corporate debt from Tenneco, average effective
interest rate of 7.0% in 1998(a).......................... -- 1,291
------ ------
Total long-term debt........................................ $1,741 $1,312
------ ------
(a) See note 5 for information related to debt allocated by Tenneco.
The aggregate maturities and sinking-fund requirements for the issues
outstanding at December 31, 1999, are $4 million, $4 million, $4 million, $2
million, $563 million, and $1,177 million for 2000, 2001, 2002, 2003, 2004, and
thereafter, respectively.
At December 31, 1999, the total amount of floating-rate, long-term debt was
$561 million.
Short-Term Debt
A summary of short-term debt appears below.
DECEMBER 31 (IN MILLIONS) 1999 1998
- ------------------------- ---- ----
Term-loan borrowings........................................ $300 $ --
Allocated corporate debt from Tenneco....................... -- 583
Current maturities of long-term debt........................ 4 1
Other....................................................... 21 11
---- ----
$325 $595
---- ----
38
42
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The company uses lines of credit and overnight borrowings to finance
certain of its short-term capital requirements. Information regarding short-term
debt is shown below.
1999(A) 1998(A)
(DOLLARS IN MILLIONS) ------- -------
Outstanding borrowings at end of year....................... $ 321 $ 11
Weighted-average interest rate on borrowings at end of
year...................................................... 7.5% 18.7%
Maximum month-end borrowings during year.................... $ 321 $ 37
Average month-end borrowings during year.................... $ 88 $ 18
Weighted-average interest rate on average month-end
borrowings during year.................................... 9.0% 18.4%
(a) Includes borrowings under both committed credit facilities and uncommitted
lines of credit.
Financing Arrangements
A summary of the company's drawings under credit facilities follows:
COMMITTED CREDIT FACILITIES(A)
---------------------------------------------
TERM COMMITMENTS UTILIZED AVAILABLE
(DOLLARS IN MILLIONS) -------- ----------- -------- ---------
Credit agreements
Five-year revolving-credit agreement.............. 2004 $ 750 $561 $189
364-day revolving-credit agreement................ 2000 250 -- 250
Term-loan facility................................ 2001 300 300 --
------ ---- ----
$1,300 $861 $439
------ ---- ----
(a) Pactiv is required to pay utilization fees on borrowings under the
facilities, and facility fees on total commitments.
In conjunction with the debt realignment, the company entered into an
interest-rate swap to hedge its exposure to interest-rate movements. The company
settled this swap in November 1999 at a loss of $43 million. In addition, the
company paid $10 million in bank facility fees in connection with the
realignment of Tenneco debt. Both the loss on the swap and the bank facility
fees were deferred and are being recognized as additional interest expense over
the average life of the underlying debt.
9. FINANCIAL INSTRUMENTS
Asset and Liability Instruments
At December 31, 1999 and 1998, the fair value of cash and temporary cash
investments, short- and long-term receivables, accounts payable, and short- and
long-term debt (before allocation of debt by Tenneco at year-end 1998) were
considered to be the same as, or not materially different than, the recorded
amounts.
Instruments with Off Balance Sheet Risk
From time to time, Pactiv enters into foreign-currency forward purchase and
sale contracts with terms of less than one year to mitigate its exposure to
exchange-rate changes related to foreign-currency third-party trade receivables
and accounts payable.
39
43
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes foreign-currency contracts entered into by
the company at December 31, 1999.
NOTIONAL AMOUNT
---------------
PURCHASE SELL
(IN MILLIONS) -------- ----
Foreign currency contracts
European euros............................................ $ 5 $191
British pounds............................................ 59 60
Canadian dollars.......................................... 2 10
U.S. dollars.............................................. 224 20
---- ----
$290 $281
---- ----
Based on exchange rates at December 31, 1999, the cost of replacing these
contracts in the event of non-performance by the counterparties would not have
been material.
Prior to the spin-off, exposure to foreign-currency risk was primarily
hedged on a net basis by Tenneco. At December 31, 1998, Pactiv had purchase
contracts totaling $1 million, principally in U.S. dollars, and sell contracts
aggregating $1 million, primarily in British pounds.
Guarantees
The company issued payment and performance guarantees totaling
approximately $1 million in both 1999 and 1998, primarily related to letters of
credit and other financing and operating activities.
10. INVENTORIES
Inventories by major classification were as follows:
DECEMBER 31 (IN MILLIONS) 1999 1998
------------------------- ---- ----
Finished goods.............................................. $260 $246
Work in process............................................. 45 51
Raw materials............................................... 71 63
Other materials and supplies................................ 53 52
---- ----
$429 $412
---- ----
11. GOODWILL AND INTANGIBLES, NET
Goodwill and intangibles, net of amortization, were as follows:
DECEMBER 31 (IN MILLIONS) 1999 1998
------------------------- ---- ----
Goodwill.................................................... $ 671 $ 695
Intangibles
Trademarks................................................ 166 177
Patents................................................... 127 149
Other..................................................... 17 31
------ ------
$ 981 $1,052
------ ------
Goodwill amortization amounted to $20 million, $17 million, and $21 million
for 1999, 1998, and 1997, respectively. Amortization of intangible assets,
primarily trademarks and patents, amounted to $15 million, $18 million, and $17
million in 1999, 1998, and 1997, respectively.
40
44
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant, and equipment were as follows:
DECEMBER 31 (IN MILLIONS) 1999 1998
------------------------- ------ ------
Original cost
Land, buildings, and improvements......................... $ 461 $ 446
Machinery and equipment................................... 1,308 1,481
Other, including construction in progress................. 199 130
------ ------
1,968 2,057
Less accumulated depreciation and amortization.............. (572) (501)
------ ------
$1,396 $1,556
------ ------
The decrease in property, plant, and equipment in 1999 was principally
attributable to the write-down of polyethylene packaging assets and the sale of
assets used in the forest products and aluminum container businesses.
13. OTHER LONG-TERM ASSETS
Other long-term assets were as follows:
DECEMBER 31 (IN MILLIONS) 1999 1998
------------------------- ---- ----
Grantor trust obligations................................... $ 57 $ --
Investments in joint ventures............................... 19 17
Other....................................................... 93 148
---- ----
$169 $165
---- ----
14. INCOME TAXES
The domestic and foreign components of income (loss) from continuing
operations is summarized below.
1999 1998 1997
(IN MILLIONS) ----- ---- ----
U.S. income (loss) before income taxes...................... $(212) $108 $139
Foreign income before income taxes.......................... 53 42 43
----- ---- ----
Total income (loss) before income taxes..................... $(159) $150 $182
----- ---- ----
Following is a comparative analysis of the components of income tax expense
(benefit) applicable to continuing operations:
1999 1998 1997
(IN MILLIONS) ---- ---- ----
Current
U.S....................................................... $(74) $(11) $(57)
State and local........................................... 17 (2) 9
Foreign................................................... 10 3 5
---- ---- ----
(47) (10) (43)
---- ---- ----
Deferred
U.S....................................................... (20) 59 101
Foreign, state, and other................................. 20 18 17
---- ---- ----
-- 77 118
---- ---- ----
Total income tax expense (benefit).......................... $(47) $ 67 $ 75
---- ---- ----
41
45
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Current income tax expense for 1999, 1998, and 1997, included tax benefits
of $38 million, $45 million, and $41 million, respectively, related to the
allocation of interest expense from the former parent.
Following is a reconciliation of income taxes computed at the statutory
U.S. federal income tax rate (35%) with the income tax expense (benefit)
reflected in the statement of income (loss):
1999 1998 1997
(IN MILLIONS) ---- ---- ----
Tax expense (benefit) computed at the statutory U.S. federal
income tax rate........................................... $(56) $53 $64
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates and foreign losses
with no tax benefit.................................... 7 1 (8)
State and local taxes on income, net of U.S. federal
income tax benefit..................................... 5 3 18
Recognition of previously unbenefited loss
carryforwards.......................................... (1) -- --
Amortization of non-deductible goodwill................... 4 5 4
Spin-off transaction items................................ (10) -- --
Other..................................................... 4 5 (3)
---- --- ---
Income tax expense (benefit)................................ $(47) $67 $75
---- --- ---
Summarized below are the components of the company's net deferred-tax
liability.
DECEMBER 31 (IN MILLIONS) 1999 1998
------------------------- ---- ----
Deferred-tax assets
Tax-loss carryforwards
U.S. .................................................. $ 94 $ 95
State and local........................................ 1 7
Foreign................................................ 10 13
Post-retirement benefits other than pensions.............. 24 13
Other..................................................... 30 26
Valuation allowance(a).................................... (8) (8)
---- ----
Net deferred-tax assets.............................. 151 146
---- ----
Deferred-tax liabilities
Tax over book depreciation................................ 39 95
Pensions.................................................. 290 213
Other..................................................... 53 123
---- ----
Total deferred-tax liabilities....................... 382 431
---- ----
Net deferred-tax liabilities................................ $231 $285
---- ----
(a) Represents unrecognized tax benefits related to foreign tax-loss
carryforwards.
Of the $267 million of U.S. tax-loss carryforwards at December 31, 1999,
$127 million will expire in 2017, and the remainder will expire in 2019. The $15
million of state tax-loss carryforwards at December 31, 1999, will expire in
varying amounts over the period from 2000 to 2012. Of the $37 million of foreign
tax-loss carryforwards at December 31, 1999, $23 million will not expire, and
the remainder will expire in varying amounts over the period from 2000 to 2009.
In connection with the spin-off, Pactiv entered into a tax-sharing
agreement with Tenneco Automotive. In general, this agreement calls for tax
liabilities prior to the spin-off to be assigned based on the legal entity
bearing responsibility for the tax, and assigns responsibility for any tax
burden resulting from the spin-off. The tax-sharing agreement also assigns
responsibility for liabilities related to a 1996 tax-sharing agreement with
other former affiliates of Tenneco. See note 3 for further information regarding
the tax-sharing agreement.
42
46
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. COMMON STOCK
Pactiv has authorized 350 million shares ($0.01 par value) of common stock,
of which 168,372,798 shares were issued and outstanding as of December 31, 1999.
Reserved
Reserved shares of common stock at December 31, 1999, are detailed below.
RESERVED SHARES (IN THOUSANDS)
------------------------------
Thrift plans................................................ 5,000
Stock ownership plan........................................ 24,000
Employee stock purchase plan(a)............................. 4,000
------
33,000
------
(a) This plan will become effective on April 1, 2000.
Stock Plans
Stock Ownership Plan -- In November 1999, the company adopted a stock
ownership plan, which permits the granting of a variety of awards, including
common stock, restricted stock, performance shares, stock appreciation rights
(SARs), and stock options to directors, officers, and employees of Pactiv. Under
the plan, which will terminate on November 4, 2004, up to 24,000,000 shares of
common stock can be issued. In December 1996, Pactiv's former parent adopted a
similar plan under which certain key employees of Pactiv were granted restricted
stock. In connection with the spin-off, outstanding restricted stock of Tenneco
became fully vested, and, as a result, Pactiv recorded an after-tax compensation
expense of $7 million in 1999. All of the former parent's stock options granted
to Pactiv employees before the spin-off were canceled and replaced with options
to purchase the company's common stock. In this connection, the number of Pactiv
options received were such that the aggregate option value immediately after the
spin-off equaled the aggregate value immediately before the spin-off.
The company granted restricted stock under the stock ownership plan to
certain key employees. These awards generally require, among other things, that
grantees remain with the company during the restriction period. During 1999,
Pactiv granted 147,000 performance shares and 48,381 restricted shares to
certain key employees, with a weighted-average fair value of $13.44 based on the
market price of the company's stock on the grant date. These shares will vest
upon the attainment of specified performance goals in the three years following
the date of grant.
Details of stock options issued by Pactiv are summarized in the following
table.
WEIGHTED-
SHARES AVERAGE
UNDER EXERCISE
STOCK OPTIONS OPTION PRICE
- ------------- ---------- ---------
Outstanding, January 1, 1999................................ -- $ --
Granted................................................... 4,157,385 13.44
Exercised................................................. -- --
Tenneco options converted to Pactiv options............... 6,992,353 36.74
Canceled.................................................. (114,064) 36.76
----------
Outstanding, December 31, 1999.............................. 11,035,674 27.96
----------
Options exercisable at December 31, 1999.................... 5,151,326 37.15
Stock options expire ten to twenty years from date of grant, and vest over
periods ranging from one to three years.
43
47
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of stock options granted by Pactiv during 1999 was estimated
using the Black-Scholes option-pricing model, with the following
weighted-average assumptions: risk-free interest rate of 6.0%, expected life of
5 years, and expected volatility of 27.4%. The weighted-average fair value of
options granted during 1999 was $4.63.
The company exchanged Tenneco options for Pactiv options at the date of
spin-off. Black-Scholes option-pricing model assumptions and fair value for
these options are shown in the following table.
1999 1998 1997
---- ----- -----
ACTUARIAL ASSUMPTIONS
Risk-free interest rate (%)............................... 5.4 5.7 6.5
Life (years).............................................. 10 10 6
Volatility (%)............................................ 27.0 25.6 24.1
Dividend yield (%)........................................ 3.5 3.2 2.8
Weighted-average fair value ($)............................. 9.04 10.83 12.03
Summarized below is information about stock options outstanding at December
31, 1999.
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
----------------------- ----------- ---------------- ---------------- --------- ----------------
$13 to $21............. 4,153,810 9.8 years $13.44 -- $ --
$22 to $29............. 328,749 1.6 27.71 328,749 27.71
$30 to $37............. 3,196,344 13.6 34.17 2,127,131 34.92
$38 to $45............. 3,356,771 11.7 40.04 2,695,446 40.05
---------- ---------
11,035,674 5,151,326
---------- ---------
The company follows the requirements of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for
stock-based compensation plans. The company recorded after-tax, stock-based
compensation expense of $8 million, $3 million, and $4 million in 1999, 1998 and
1997, respectively. Had compensation costs been determined in accordance with
FAS No. 123, Accounting for Stock-Based Compensation, the company's pro-forma
net income for 1999, 1998, and 1997, would have been lower by $7 million ($0.04
per share), $14 million ($0.08 per share), and $13 million ($0.08 per share),
respectively.
Employee Stock Purchase Plan--In April 2000, the company will initiate a
stock purchase plan that allows U.S. and Canadian employees to purchase Pactiv
common stock at a 15% discount, subject to an annual limitation of $21,240.
Under a similar plan of the company's parent, Pactiv employees purchased 184,370
shares, 311,586 shares, and 216,665 shares of Tenneco stock in 1999, 1998, and
1997, respectively, with a weighted-average fair value $4.30, $6.31, and $11.14
in 1999, 1998, and 1997, respectively. Since the spin-off, the company's
employees no longer participate in the former parent's plan.
Grantor Trust--In November 1999, Pactiv established a grantor trust and
reserved 3,200,000 shares of common stock for the trust. This trust is a
so-called "rabbi trust" designed to assure the payment of deferred compensation
and supplemental pension benefits. The shares were issued to the trust in
January 2000.
Qualified Offer Rights Plan
In November 1999, Pactiv adopted a qualified offer rights plan (QORP). The
plan was adopted to deter coercive takeover tactics, and to prevent a potential
acquiror from gaining control of the company in a transaction which would not be
in the best interests of shareowners. Under the plan, if a person becomes
44
48
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the beneficial owner of 20% or more of the company's outstanding common stock,
other than pursuant to a qualified offer, each right will entitle its holder to
purchase common stock having a market value of twice the right's exercise price.
Rights held by the 20% or more holder would not be exercisable.
The rights would not be exercisable in connection with a qualified offer,
which is defined as an all-cash tender offer for all outstanding shares that is
fully financed, remains open for a period of at least sixty business days,
results in the offeror owning at least 85% of the common stock after
consummation of the offer, assures a prompt second-step acquisition of shares
not purchased in the initial offer at the same price as the initial offer, and
meets certain other requirements.
In connection with the adoption of the QORP, the board of directors also
adopted an evaluation mechanism. This mechanism calls for an independent board
committee to review, on an ongoing basis, the QORP and developments in rights
plans in general, and, if it deems appropriate, to recommend modification or
termination of the plan. The independent committee is required to report to the
board at least every three years as to whether the QORP continues to be in the
best interest of shareowners.
Earnings Per Share
In connection with the spin-off, one share of Pactiv common stock was
issued for each share of Tenneco common stock then owned. Accordingly, basic
earnings per share for 1999 was calculated using the former parent's
weighted-average number of shares outstanding from January 1, 1999 to November
4, 1999, and the weighted-average number of Pactiv shares outstanding from
November 5, 1999, to December 31, 1999. Diluted earnings per share was
calculated in the same manner, adjusting for the potential issuance of
additional shares related to stock options, restricted stock, and performance
shares.
Weighted-average basic and diluted shares outstanding were as follows:
DECEMBER 31 1999 1998 1997
----------- ----------- ----------- -----------
Basic....................................... 167,405,315 168,505,573 170,264,731
Diluted..................................... 167,663,438 168,834,531 170,801,636
16. PREFERRED STOCK
Pactiv had 50 million shares of preferred stock ($0.01 par value)
authorized but unissued at December 31, 1999. The company has reserved 750,000
preferred shares as junior preferred stock for the QORP.
17. MINORITY INTEREST
At December 31, 1999 and 1998, minority interest totaled $20 million and
$14 million, respectively, and was primarily related to preferred stock of a
subsidiary issued in connection with the KNP BT acquisition.
18. PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS
The company has pension plans that cover substantially all of its
employees. Benefits are based on years of service and, for most salaried
employees, final-average compensation. The company's funding policy is to
contribute to the plans amounts necessary to satisfy requirements mandated by
federal laws and regulations. Plan assets consist principally of equity and
fixed-income securities. Pactiv became the sponsor of Tenneco's retirement plan.
Benefits accrued under this plan for employees of Tenneco Automotive were frozen
as of November 30, 1999, and all related pension obligations and assets were
retained by the company. In addition, all pension obligations and assets
associated with participating employees of other former subsidiaries and
affiliates of Tenneco were similarly retained by Pactiv.
45
49
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The company has post-retirement, health-care, and life-insurance plans that
cover all of its salaried and certain of its U.S. hourly employees. For salaried
employees, the plans cover individuals who retire on or after attaining age
fifty-five with at least ten years service after reaching age forty-five. For
hourly employees, post-retirement benefit plans generally cover individuals who
retire in accordance with the various provisions of those plans. Benefits may be
subject to deductibles, co-payment provisions, and other limitations. The
company reserves the right to change post-retirement plans. These plans are not
funded.
Financial data pertaining to the company's pension and post-retirement
benefit plans appear below.
PENSION POST-RETIREMENT
PLANS PLANS
(IN MILLIONS) --------------- ---------------
1999 1998 1999 1998
------ ------ ------ ------
Changes in projected benefit obligations
Benefit obligations at September 30 of the previous
year................................................... $3,025 $2,654 $ 70 $ 70
Currency rate conversion.................................. 3 1 -- --
FAS 88 adjustment......................................... (35) -- -- --
Spin-off adjustment(a).................................... 285 -- -- --
Service cost for benefits earned.......................... 39 28 1 1
Interest cost on benefit obligations...................... 223 199 5 5
Plan amendments........................................... 1 44 -- --
Actuarial loss (gain)..................................... (169) 293 6 1
Benefits paid............................................. (233) (194) (10) (8)
Participant contributions................................. -- -- 1 1
------ ------ ---- ----
Benefit obligations at September 30....................... $3,139 $3,025 $ 73 $ 70
------ ------ ---- ----
Changes in fair value of plan assets
Fair value at September 30 of the previous year........... $3,430 $3,516 $ -- $ --
Currency rate conversion.................................. (1) -- -- --
Spin-off adjustment(a).................................... 338 -- -- --
Actual return on plan assets.............................. 564 102 -- --
Employer contributions.................................... 21 5 9 7
Participant contributions................................. 1 1 1 1
Benefits paid............................................. (233) (194) (10) (8)
------ ------ ---- ----
Fair value at September 30................................ $4,120 $3,430 $ -- $ --
------ ------ ---- ----
Development of amounts recognized in the statement of
financial position
Funded status at September 30............................. $ 981 $ 405 $(73) $(70)
Contributions during the fourth quarter................... 1 1 3 2
Unrecognized cost
Actuarial loss (gain).................................. (189) 200 16 11
Prior-service cost..................................... 31 71 (3) (4)
Transition asset....................................... (26) (43) -- --
------ ------ ---- ----
Net amount recognized at December 31...................... $ 798 $ 634 $(57) $(61)
------ ------ ---- ----
Amounts recognized in the statement of financial position
Prepaid benefit cost...................................... $ 849 $ 664 $ -- $ --
Accrued benefit cost...................................... (53) (56) (57) (61)
Intangible assets......................................... 1 22 -- --
Accumulated other comprehensive income.................... 1 4 -- --
------ ------ ---- ----
Net amount recognized at December 31...................... $ 798 $ 634 $(57) $(61)
------ ------ ---- ----
(a) Reflects the inclusion of Tenneco Automotive's pension benefits through the
spin-off date.
46
50
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The effect of pension plans on income from continuing operations was as
follows:
1999 1998 1997
(IN MILLIONS) ----- ----- -----
Service cost for benefits earned............................ $ (39) $ (28) $ (23)
Interest cost on benefit obligations........................ (223) (199) (178)
Expected return on plan assets.............................. 340 285 265
Actuarial gain (loss)....................................... (9) (1) --
Prior-service cost.......................................... (9) (11) (11)
FAS No. 87 transition gain.................................. 21 19 19
Settlement/curtailment gain................................. 5 -- --
----- ----- -----
Total pension plan income................................... $ 86 $ 65 $ 72
----- ----- -----
Amounts recognized in the statement of financial position pertaining to the
pension plan included current assets of $5 million, non-current assets of $941
million, current liabilities of $37 million, and non-current liabilities of $111
million at December 31, 1999, and current assets of $6 million, non-current
assets of $742 million, current liabilities of $25 million, and non-current
liabilities of $89 million at December 31, 1998.
Actuarial assumptions used to determine costs and benefit obligations for
the pension plans are shown below.
SEPTEMBER 30 1999 1998 1997
- ------------ ---- ---- ----
Actuarial assumptions
Discount rate............................................. 7.5% 7.0% 7.8%
Compensation increases.................................... 4.9 4.8 4.9
Return on assets.......................................... 10.0 10.0 10.0
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $56 million, $52 million, and $1 million,
respectively, at September 30, 1999, and $89 million, $83 million, and $27
million, respectively, at September 30, 1998.
The impact of post-retirement benefit plans on continuing operations was as
follows:
1999 1998 1997
(IN MILLIONS) ---- ---- ----
Service cost for benefits earned............................ $ 1 $ 2 $1
Interest cost on benefit obligations........................ 5 5 5
Prior-service cost.......................................... (1) (2) (2)
Actuarial loss.............................................. 1 1 1
--- --- --
Total post-retirement benefit plan costs.................... $ 6 $ 6 $5
--- --- --
Actuarial assumptions used to determine post-retirement benefit obligations
follow:
1999 1998 1997
---- ---- ----
Actuarial assumptions
Health-care cost trend.................................... 5.0% 5.0% 5.0%
Discount rate............................................. 7.5 7.0 7.8
Increasing the assumed health-care cost trend by 1% each year would
increase 1999, 1998, and 1997 post-retirement benefit obligations by
approximately $2 million each year; however, the aggregate of service and
interest costs would not change for 1999 and 1998, and would increase $2 million
for 1997.
47
51
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Decreasing the assumed health-care cost trend by 1% each year would
decrease post-retirement benefit obligations for 1999 by approximately $2
million, but would not change the aggregate of service and interest costs.
19. SEGMENT AND GEOGRAPHIC AREA INFORMATION
The company's operating segments include:
Consumer and foodservice/food packaging, which relates to the manufacture
and sale of disposable plastic, molded fiber, pressed paperboard, and aluminum
packaging products for the consumer, foodservice, and food packaging markets.
Protective and flexible packaging, which relates to the manufacture and
sale of plastic, paperboard, and molded fiber protective and flexible packaging
products. Major markets served by protective packaging products include
electronics, automotive, furniture, and e-commerce, whereas flexible-packaging
products are used mainly in food, medical, pharmaceutical, chemical, and
hygienic applications.
Other, which relates to corporate and administrative service operations and
pension plan income and expense.
Prior to the spin-off, the combined results of the consumer and
foodservice/food packaging and protective and flexible businesses were reported
under the specialty packaging segment by Tenneco. During the fourth quarter of
1999, the company changed the composition of its operating segments because of
modifications in its management-reporting structure triggered by the spin-off.
Segment information for the first three quarters of 1999, as well as total-year
1998 and 1997 has been restated to conform with current segment presentation.
The accounting policies of the segments are the same as those described in
note 3. Products are transferred between segments and geographic areas on a
basis intended to reflect, as nearly as possible, market values. No one customer
accounted for more than 10% of the company's 1999 sales. In general, the
company's backlog of orders is not significant or material.
The following table sets forth certain segment information.
SEGMENT
(IN MILLIONS) --------------------------------------
CONSUMER AND
FOODSERVICE/ PROTECTIVE AND RECLASSIFICATIONS
FOOD FLEXIBLE AND
PACKAGING PACKAGING OTHER ELIMINATIONS TOTAL
------------ -------------- ------ ----------------- ------
AT DECEMBER 31, 1999, AND FOR
THE YEAR THEN ENDED
Sales from external customers... $2,074 $ 847 $ -- $ -- $2,921
Depreciation and amortization... 129 39 16 -- 184
Income (loss) before interest,
income taxes, and minority
interest...................... 192(a) (2)(b) (203)(c) -- (13)
Loss from discontinued
operations.................... -- -- (193) -- (193)
Extraordinary loss.............. -- -- (7) -- (7)
Cumulative effect of changes in
accounting principles......... (1) (16) (15) -- (32)
Total assets.................... 2,503 955 1,450(d) (320) 4,588
Net assets of discontinued
operations.................... -- -- 195 -- 195
Investment in affiliated
companies..................... -- 19 -- -- 19
Capital expenditures............ 138 33 2 -- 173
Non-cash items other than
depreciation and
amortization.................. 88 65 (75)(e) -- 78
48
52
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT
(IN MILLIONS) --------------------------------------
CONSUMER AND
FOODSERVICE/ PROTECTIVE AND RECLASSIFICATIONS
FOOD FLEXIBLE AND
PACKAGING PACKAGING OTHER ELIMINATIONS TOTAL
------------ -------------- ------ ----------------- ------
AT DECEMBER 31, 1998, AND FOR
THE YEAR THEN ENDED
Sales from external customers... $1,985 $ 800 $ 6 $ -- $2,791
Depreciation and amortization... 116 36 23 -- 175
Income before interest, income
taxes, and minority
interest...................... 268(a) 60(b) (45)(c) -- 283
Income from discontinued
operations.................... -- -- 57 -- 57
Total assets.................... 2,172 1,088 1,580(d) (42) 4,798
Net assets of discontinued
operations.................... -- -- 366 -- 366
Investment in affiliated
companies..................... 7 10 -- -- 17
Capital expenditures............ 126 64 4 -- 194
Non-cash items other than
depreciation and
amortization.................. 22 -- (84)(e) -- (62)
AT DECEMBER 31, 1997, AND FOR
THE YEAR THEN ENDED
Sales from external customers... $1,966 $ 587 $ 10 $ -- $2,563
Depreciation and amortization... 114 29 20 -- 163
Income before interest, income
taxes, and minority
interest...................... 253 55 (2)(c) -- 306
Income from discontinued
operations.................... -- -- 21 -- 21
Cumulative effect of changes in
accounting principles......... (11) -- (27) -- (38)
Total assets.................... 2,426 818 1,412(d) (38) 4,618
Net assets of discontinued
operations.................... -- -- 423 -- 423
Investment in affiliated
companies..................... 7 2 -- -- 9
Capital expenditures............ 152 75 2 -- 229
Non-cash items other than
depreciation and
amortization.................. 10 -- (86)(e) -- (76)
(a) Includes restructuring and other charges of $66 million and $9 million in
1999 and 1998, respectively.
(b) Includes restructuring and other charges of $77 million and $9 million in
1999 and 1998, respectively.
(c) Includes pension plan income, unallocated corporate expenses, restructuring
and other charges of $40 million and $14 million in 1999 and 1998,
respectively, and spin-off transaction costs of $136 million in 1999.
(d) Includes assets related to pension plans (net), administrative service
operations, and the discontinued paperboard packaging business (1998 and
1997).
(e) Includes pension plan income.
49
53
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth certain geographic area information.
GEOGRAPHIC AREA
-------------------- RECLASSIFICATIONS
UNITED AND
STATES FOREIGN(A) ELIMINATIONS TOTAL
(IN MILLIONS) ------ ---------- ----------------- ------
AT DECEMBER 31, 1999, AND FOR THE YEAR THEN ENDED
Sales from external customers(b).................... $2,348 $573 $ -- $2,921
Long-lived assets(c)................................ 2,252 254 -- 2,506
Total assets........................................ 3,940 666 (18) 4,588
AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED
Sales from external customers(b).................... $2,212 $579 $ -- $2,791
Long-lived assets(c)................................ 2,168 295 -- 2,463
Total assets........................................ 4,131 691 (24) 4,798
AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED
Sales from external customers(b).................... $2,116 $447 $ -- $2,563
Long-lived assets(c)................................ 2,026 236 -- 2,262
Total assets........................................ 4,036 596 (14) 4,618
(a) Sales from external customers and long-lived assets for individual countries
were not material.
(b) Geographic assignment is based on location of selling business.
(c) Long-lived assets include all long-term assets other than net assets of
discontinued operations, goodwill, intangibles, and deferred taxes.
20. COMMITMENTS AND CONTINGENCIES
Capital Commitments
The company estimates that expenditures aggregating approximately $103
million will be required after December 31, 1999, to complete projects
authorized at that date, and for which substantial commitments have been made.
Purchase Commitments
In December 1999, the company entered into a five-year agreement with one
of its vendors to exclusively purchase certain materials at prices within a
specified range. The agreement does not include minimum purchase commitments.
Lease Commitments
Pactiv entered into a $175 million syndicated-lease agreement with a
third-party lessor and various lenders, a portion of which was used to
restructure or replace certain existing operating leases and public warehouse
arrangements, with the balance to be used to facilitate additional leasing
arrangements for other operating facilities. The syndicated-lease facility
contains customary terms and conditions, including residual-value guarantees,
default provisions, and financial covenants.
The company occupies certain warehousing facilities and its corporate
headquarters building under operating leases that are part of the
syndicated-lease agreement. Following the initial lease periods for the
properties, the company may extend the leases on terms negotiated with the
lessors, or purchase the leased assets under specified conditions. If the
purchase options are not exercised or the leases are not extended, the company
is required to make guaranteed residual payments to the lessors, which may be
refunded in full depending on the lessors' subsequent sales price for the
properties. Throughout the lease periods, the company is required to maintain
the properties. At December 31, 1999, residual guarantees on leased properties
were $61 million. The company has a commitment from the lessors to lease
additional
50
54
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
properties during 2000, and the value of the related residual guarantees is
expected to be approximately $82 million.
For properties under lease at December 31, 1999, annual lease payments are
expected to be approximately $5 million. For properties to be acquired during
2000, annual lease payments are anticipated to aggregate approximately $7
million. Lease agreements on these properties require the company to satisfy
certain financial ratio tests.
The company holds certain of its facilities, equipment, and other assets
under long-term leases. The minimum lease payments under non-cancelable
operating leases with lease terms in excess of one year are $34 million, $21
million, $14 million, $11 million, and $7 million for 2000, 2001, 2002, 2003,
and 2004, respectively, and $26 million for subsequent years.
Commitments under capital leases were not significant. Total rental costs
for continuing operations for 1999, 1998, and 1997 were $54 million, $35
million, and $37 million, respectively, including minimum rentals under
non-cancelable operating leases of $38 million, $45 million, and $42 million for
the corresponding periods.
Litigation
In May 1999, Tenneco, Pactiv, and a number of containerboard manufacturers
were named as defendants in a civil class-action antitrust lawsuit pending in
the United States district court for the eastern district of Pennsylvania. The
company also was named as a defendant in a related class-action antitrust
lawsuit. The lawsuits allege that the defendants conspired to raise linerboard
prices for corrugated containers and corrugated sheets from October 1, 1993
through November 30, 1995, in violation of Section 1 of the Sherman Act. The
lawsuits seek treble damages in an unspecified amount, plus attorney fees.
Pactiv's management believes that the allegations have no merit, are vigorously
defending the claims, and believe that the outcome will not have a material
adverse effect on the company's financial position or results of operations. As
between Tenneco and Pactiv, Pactiv is responsible for defending the claims and
for any liability resulting therefrom.
The company is party to various legal proceedings arising from its
operations.
Management believes that the outcome of these proceedings, individually and
in the aggregate, will not have a material effect on the company's financial
position or results of operations.
Environmental Matters
The company is subject to a variety of environmental and pollution-control
laws and regulations in all jurisdictions in which it operates. Pactiv provides
related reserves where it is probable that liabilities exist and where
reasonable estimates of the liabilities can be made. Estimated liabilities are
subject to change as more information becomes available regarding the magnitude
of possible clean-up costs, and the cost and effectiveness of alternative
clean-up technologies. However, management believes that any additional costs
that may be incurred as more information becomes available will not have a
material effect on the financial condition or results of operations of the
company.
21. SUBSEQUENT EVENTS
In an initial public offering, Pactiv sold the majority of its interest in
the PCA joint venture in February 2000. Net proceeds of $398 million were
primarily used to repay debt. A 6% common equity interest in PCA was retained by
the company.
51
55
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In December 1999, the company entered into an agreement to sell its
aluminum foil reroll facility in Clayton, New Jersey, and its aluminum packer
processor facility in Shelbyville, Kentucky, for approximately $45 million. The
proceeds from this transaction, which closed in January 2000, were primarily
used to repay debt.
In February 2000, the company announced its intention to repurchase
approximately $100 million of its own common stock. The company plans to use
borrowings to fund the stock repurchases.
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
CUMULATIVE
INCOME (LOSS) INCOME (LOSS) EFFECT OF
FROM FROM CHANGES IN NET
(IN MILLIONS) CONTINUING DISCONTINUED EXTRAORDINARY ACCOUNTING INCOME
QUARTER SALES OPERATIONS OPERATIONS LOSS PRINCIPLES (LOSS)
------------- ------ ------------- ------------- ------------- ---------- ------
1999
1st................................ $ 666 $ 6 $(172) $(7) $(32) $(205)
2nd................................ 738 46 9 -- -- 55
3rd................................ 754 4 8 -- -- 12
4th................................ 763 (168) (38) -- -- (206)
------ ----- ----- -- ---- -----
Total........................... $2,921 $(112) $(193) $(7) $(32) $(344)
------ ----- ----- -- ---- -----
1998
1st................................ $ 633 $ 18 $ 14 $-- $ -- $ 32
2nd................................ 738 51 23 -- -- 74
3rd................................ 696 15 25 -- -- 40
4th................................ 724 (2) (5) -- -- (7)
------ ----- ----- -- ---- -----
Total........................... $2,791 $ 82 $ 57 $-- $ -- $ 139
------ ----- ----- -- ---- -----
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
-------------------------------------------------------------------
CUMULATIVE
EFFECT OF
CHANGES IN
CONTINUING DISCONTINUED EXTRAORDINARY ACCOUNTING NET INCOME
QUARTER OPERATIONS OPERATIONS LOSS PRINCIPLES (LOSS)
- ------- ---------- ------------ ------------- ---------- ----------
1999(a)
1st................................... $ 0.03 $(1.03) $(0.04) $(0.19) $(1.23)
2nd................................... 0.28 0.05 -- -- 0.33
3rd................................... 0.01 0.05 -- -- 0.06
4th................................... (1.00) (0.22) -- -- (1.22)
------ ------ ------ ------ ------
Total.............................. $(0.67) $(1.15) $(0.04) $(0.19) $(2.05)
------ ------ ------ ------ ------
1998(a)
1st................................... $ 0.11 $ 0.08 $ -- $ -- $ 0.19
2nd................................... 0.30 0.14 -- -- 0.44
3rd................................... 0.09 0.15 -- -- 0.24
4th................................... (0.01) (0.03) -- -- (0.04)
------ ------ ------ ------ ------
Total.............................. $ 0.49 $ 0.34 $ -- $ -- $ 0.83
------ ------ ------ ------ ------
52
56
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
-------------------------------------------------------------------
CUMULATIVE
EFFECT OF
CHANGES IN
CONTINUING DISCONTINUED EXTRAORDINARY ACCOUNTING NET INCOME
QUARTER OPERATIONS OPERATIONS LOSS PRINCIPLES (LOSS)
------- ---------- ------------ ------------- ---------- ----------
1999(a)
1st................................... $ 0.03 $(1.03) $(0.04) $(0.19) $ (1.23)
2nd................................... 0.28 0.05 -- -- 0.33
3rd................................... 0.01 0.05 -- -- 0.06
4th................................... (1.00) (0.22) -- -- (1.22)
------ ------ ------ ------ -------
Total.............................. $(0.67) $(1.15) $(0.04) $(0.19) $ (2.05)
------ ------ ------ ------ -------
1998(a)
1st................................... $ 0.11 $ 0.08 $ -- $ -- $ 0.19
2nd................................... 0.30 0.14 -- -- 0.44
3rd................................... 0.09 0.15 -- -- 0.24
4th................................... (0.01) (0.03) -- -- (0.04)
------ ------ ------ ------ -------
Total.............................. $ 0.49 $ 0.34 $ -- $ -- $ 0.83
------ ------ ------ ------ -------
(a) The sum of amounts shown for individual quarters may not equal the total for
the year because of changes in the weighted-average number of shares
outstanding throughout the year.
The preceding notes are an integral part of the foregoing financial
statements.
53
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There has been no change in accountants, nor has there been any
disagreement on any matter of accounting principles or practices or financial
disclosure, which in either case is required to be reported pursuant to this
Item 9.
PART III
Item 10, "Directors and Executive Officers of the Registrant," Item 11,
"Executive Compensation," Item 12, "Security Ownership of Certain Beneficial
Owners and Management," and Item 13, "Certain Relationships and Related
Transactions," have been omitted from this report inasmuch as Pactiv Corporation
will file with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this report a
definitive Proxy Statement for the Annual Meeting of Shareowners of Pactiv
Corporation to be held on May 10, 2000, at which meeting the shareowners will
vote upon the election of directors. The information under the caption "Election
of Directors" in such Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS INCLUDED IN ITEM 8
See "Index to Financial Statements of Pactiv Corporation" set forth in Item
8, "Financial Statements and Supplementary Data."
54
58
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES INCLUDED IN ITEM 14
PAGE
----
Schedules of Pactiv Corporation -- Schedule II -- Valuation
and qualifying accounts -- three years ended December 31,
1999...................................................... 56
SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE
Schedule I -- Condensed financial information of
registrant................................................
Schedule III -- Real estate and accumulated depreciation....
Schedule IV -- Mortgage loans on real estate................
Schedule V -- Supplemental information concerning
property -- casualty insurance operations.................
55
59
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------- ---------- ----------------------- ---------- ---------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
----------- ---------- ---------- ---------- ---------- ---------
Allowance for doubtful accounts
Year ended December 31, 1999............ $11 $-- $-- $-- $11
Year ended December 31, 1998............ 11 5 -- 5 11
Year ended December 31, 1997............ 18 2 2 11 11
56
60
REPORTS ON FORM 8-K
The company filed two Current Reports on Form 8-K during the quarter ended
December 31, 1999. On October 28, 1999, the company filed a Current Report on
Form 8-K, including information pursuant to item 5 (other events) relating to
the public offering of Packaging Corporation of America. On November 12, 1999,
the company filed a Current Report on Form 8-K, including information pursuant
to item 2 (acquisition or disposition of assets), and item 5 (other events)
relating to the spin-off of the company from Tenneco Inc.
INDEX OF EXHIBITS
The following exhibits are filed as part of this Annual Report on Form 10-K
for the fiscal year ended December 31, 1999 (exhibits designated by an asterisk
are filed with this report; all other exhibits are incorporated by reference):
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2 Distribution Agreement by and between Tenneco Inc. and the
registrant (incorporated herein by reference to Exhibit 2 to
Pactiv Corporation's Current Report on Form 8-K dated
November 11, 1999, File No. 1-15157).
3.1 Restated Certificate of Incorporation of the registrant
(incorporated herein by reference to Exhibit 3.1 to Pactiv
Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-15157).
3.2 Amended and Restated By-laws of the registrant (incorporated
herein by reference to Exhibit 3.2 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
4.1 Specimen Stock Certificate of Pactiv Corporation Common
Stock (incorporated herein by reference to Exhibit 4.1 to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.2 Qualified Offer Plan Rights Agreement, dated as of November
4, 1999, by and between the registrant and First Chicago
Trust Company of New York, as Rights Agent (incorporated
herein by reference to Exhibit 4.2 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
4.3(a) Indenture, dated September 29, 1999, by and between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.1 to Tenneco
Packaging Inc.'s Registration Statement on Form S-4, File
No. 333-82923).
4.3(b) First Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(b) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(c) Second Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(c) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(d) Third Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(d) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(e) Fourth Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(e) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
57
61
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.3(f) Fifth Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(f) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.4 Registration Rights Agreement, dated as of November 4, 1999,
by and between the registrant and the trustees under the
Pactiv Corporation Rabbi Trust (incorporated herein by
reference to Exhibit 4.4 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
9 None.
10.1 Human Resources Agreement, dated as of November 4, 1999, by
and between Tenneco Inc. and the registrant (incorporated
herein by reference to Exhibit 16.1 to Tenneco Inc.'s
Current Report on Form 8-K dated November 4, 1999, File No.
1-12387).
10.2 Tax Sharing Agreement, dated as of November 3, 1999, by and
between Tenneco Inc. and the registrant (incorporated herein
by reference to Exhibit 16.2 to Tenneco Inc.'s Current
Report on Form 8-K dated November 4, 1999, File No. 12387).
10.3 Amended and Restated Transition Services Agreement, dated as
of November 4, 1999, by and between Tenneco Inc. and the
registrant (incorporated herein by reference to Exhibit 10.3
to Tenneco Automotive Inc.'s Quarterly Report on Form 10-Q
for quarterly period ended September 30, 1999, File No.
1-12387).
10.4 Trademark Transition License Agreement, dated as of November
4, 1999, by and between Tenneco Inc. and the registrant
(incorporated herein by reference to Exhibit 10.4 to Pactiv
Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-15157).
10.5 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Executive Incentive Compensation Plan (incorporated
herein by reference to Exhibit 10.5 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
10.6 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Supplemental Executive Retirement Plan (incorporated
herein by reference to Exhibit 10.6 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
10.7 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Change in Control Severance Benefit Plan for Key
Executives (incorporated herein by reference to Exhibit 10.7
to Pactiv Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, File No. 1-15157).
10.8 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Deferred Compensation Plan (incorporated herein by
reference to Exhibit 10.8 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.9 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Stock Ownership Plan (incorporated herein by reference
to Exhibit 10.9 to Pactiv Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999, File No.
1-15157).
10.10 Professional Services Agreement, dated August 22, 1996, by
and between Tenneco Business Services Inc. and Newport News
Shipbuilding Inc. (incorporated herein by reference to
Exhibit 10.28 of Tenneco Inc.'s Form 10, File No. 1-12387).
10.11 Pactiv Corporation Rabbi Trust (incorporated herein by
reference to Exhibit 10.11 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
58
62
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.12 Tenneco Rabbi Trust Agreement (incorporated herein by
reference to Exhibit 10.12 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.13(a) Contribution Agreement, dated as of January 25, 1999, by and
among the registrant, PCA Holdings LLC and Packaging
Corporation of America (the "Contribution
Agreement")(incorporated herein by reference to Exhibit
10.30 to Tenneco Inc.'s Current Report on Form 8-K dated
April 12, 1999, File 1-12387).
10.13(b) Letter Agreement, dated as of April 12, 1999, by and among
the registrant, PCA Holdings LLC and Packaging Corporation
of America, amending the Contribution Agreement
(incorporated herein by reference to Exhibit 10.31 to
Tenneco Inc.'s Current Report on Form 8-K dated April 12,
1999, File No 1-12387).
10.14 Stockholders Agreement, as amended, dated as of April 12,
1999, by and among the registrant, PCA Holdings LLC and
Packaging Corporation of America (incorporated herein by
reference to Exhibit 10.32 to Tenneco Inc.'s Current Report
on Form 8-K dated April 12, 1999, File No. 1-12387).
10.15 Registration Rights Agreement, as amended, dated as of April
12, 1999, by and among the registrant, PCA Holdings LLC and
Packaging Corporation of America (incorporated herein by
reference to Exhibit 10.33 to Tenneco Inc.'s Current Report
on Form 8-K dated April 12, 1999, File No. 1-12387).
10.16 Release Agreement dated as of October 18, 1999, by and
between Dana G. Mead and Tenneco Management Company, and
Modification of Release Agreement dated as of October 18,
1999, by and among Dana G. Mead, Tenneco Inc. and Tenneco
Management Company (incorporated herein by reference to
Exhibit 10.18 to Tenneco Automotive Inc.'s Quarterly Report
on Form 10-Q for quarterly period ended September 30, 1999,
File No. 1-12387).
10.17 Employment Agreement, dated as of March 11, 1997, by and
between Richard L. Wambold and Tenneco Inc. (incorporated
herein by reference to Exhibit 10.17 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
10.18 Short Term Credit Agreement, dated as of September 29, 1999,
among the registrant, Bank of America, N.A., as
Administrative Agent, Credit Suisse First Boston, as
Syndication Agent, Bank One, NA and Banque Nationale de
Paris, as Co-Documentation Agents, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 4.4 to Tenneco Packaging Inc.'s Registration
Statement on Form S-4, File No. 333-82923).
10.19 Long Term Credit Agreement, dated as of September 29, 1999,
among the registrant, Bank of America, N.A., as
Administrative Agent, Credit Suisse First Boston, as
Syndication Agent, Bank One, NA and Banque Nationale de
Paris, as Co-Documentation Agents, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 4.3 to Tenneco Packaging Inc.'s Registration
Statement on Form S-4, File No. 333-82923).
10.20 Term Loan Agreement, dated as of November 3, 1999, between
the registrant and Bank of America (incorporated herein by
reference to Exhibit 10.21 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.21 Letter of Agreement dated September 10, 1999, by and among
Tenneco Inc., Bank of America, N.A., and Bank of America
Securities LLC, related to Term Loan Agreement, dated as of
November 3, 1999, by and between the registrant and Bank of
America. (incorporated herein by reference to Exhibit 10.22
to Pactiv Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, File No. 1-15157).
59
63
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.22 Participation Agreement, dated as of October 28, 1999, among
the registrant, First Security Bank, N.A., Bank of America,
as Administrative Agent, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 10.23 to Pactiv Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999, File No.
1-15157).
*10.23 Agreement and General Release dated January 28, 2000,
between the registrant and Paul J. Griswold.
11 None.
*12 Computation of Ratio of Earnings to Fixed Charges.
13 None.
15 None.
16 None.
18 None.
21 List of subsidiaries of Pactiv Corporation (incorporated
herein by reference to Exhibit 21 to Tenneco Packaging
Inc.'s Registration Statement on Form 10, File No. 1-15157).
22 None.
*23 Consent of Arthur Andersen LLP.
*24 Powers of Attorney for the following directors of Pactiv
Corporation: Mark Andrews, Larry D. Brady, Robert J.
Darnall, Mary R. (Nina) Henderson, Roger B. Porter, Paul T.
Stecko.
*27.1 Financial Data Schedule, December 31, 1999.
*27.2 Amended Financial Data Schedule, December 31, 1997.
99 None.
60
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PACTIV CORPORATION
By: /s/ RICHARD L. WAMBOLD
------------------------------------
Richard L. Wambold
Chairman, President and
Chief Executive Officer
Date: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following on behalf of the registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD L. WAMBOLD Chairman, President, Chief Executive March 28, 2000
- --------------------------------------------- Officer and Director (principal
Richard L. Wambold executive officer)
/s/ ANDREW A. CAMPBELL Chief Financial Officer (principal March 28, 2000
- --------------------------------------------- financial and accounting officer)
Andrew A. Campbell
/s/ MARK ANDREWS* Director March 28, 2000
- ---------------------------------------------
Mark Andrews
/s/ LARRY D. BRADY* Director March 28, 2000
- ---------------------------------------------
Larry D. Brady
/s/ ROBERT J. DARNALL* Director March 28, 2000
- ---------------------------------------------
Robert J. Darnall
/s/ MARY R. (NINA) HENDERSON* Director March 28, 2000
- ---------------------------------------------
Mary R. (Nina) Henderson
/s/ ROGER B. PORTER* Director March 28, 2000
- ---------------------------------------------
Roger B. Porter
/s/ PAUL T. STECKO* Director March 28, 2000
- ---------------------------------------------
Paul T. Stecko
*By: /s/ JAMES V. FAULKNER, JR. March 28, 2000
- -----------------------------------------
James V. Faulkner, Jr.
Attorney-in-fact
61