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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
(mark one)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ]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)
<Table>
DELAWARE 36-2552989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 WEST FIELD COURT
LAKE FOREST, ILLINOIS 60045
(Address of principal executive offices) (Zip Code)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-2000
------------------------
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 twelve 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 ninety days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
Common stock, par value $0.01 per share: 158,485,165 as of July 31, 2002.
(See Notes to Financial Statements.)
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statement of Income....................... 3
Condensed Consolidated Statement of Financial
Position.............................................. 4
Condensed Consolidated Statement of Cash Flows......... 5
Notes to Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 20
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings*................................ 21
Item 2. Changes in Securities*............................ 21
Item 3. Defaults Upon Senior Securities*.................. 21
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 21
Item 5. Other Information*................................ 21
Item 6. Exhibits and Reports on Form 8-K.................. 22
</Table>
- ------------------------
* No response to this item is included herein either because it is inapplicable
or there is nothing to report.
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENT OF INCOME
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
(In millions, except share and per-share data) ------------ ------------ ------------ ------------
SALES..................................... $ 728 $ 728 $ 1,375 $ 1,408
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales, excluding depreciation and
amortization......................... 494 510 932 999
Selling, general, and administrative.... 74 69 150 134
Depreciation and amortization........... 39 43 79 88
Other expense, net...................... -- 1 -- 2
Restructuring and other................. (4) -- (4) --
------------ ------------ ------------ ------------
603 623 1,157 1,223
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES,
AND MINORITY INTEREST................... 125 105 218 185
Interest expense, net of interest
capitalized.......................... 24 28 47 57
Income tax expense...................... 40 32 68 53
Minority interest....................... 1 -- 1 1
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS......... 60 45 102 74
Income from discontinued operations, net of
income tax.............................. -- 24 -- 28
Cumulative effect of change in accounting
principles, net of income tax........... -- -- (72) --
------------ ------------ ------------ ------------
NET INCOME................................ $ 60 $ 69 $ 30 $ 102
============ ============ ============ ============
Average number of shares of common stock
outstanding
Basic................................... 158,230,119 158,689,891 158,765,987 158,530,819
Diluted................................. 160,538,835 159,250,514 160,820,126 158,904,514
EARNINGS PER SHARE
Basic and diluted earnings per share of common
stock
Continuing operations................... $ 0.38 $ 0.28 $ 0.64 $ 0.47
Discontinued operations................. -- 0.15 -- 0.17
Cumulative effect of change in accounting
principles........................... -- -- (0.45) --
------------ ------------ ------------ ------------
$ 0.38 $ 0.43 $ 0.19 $ 0.64
============ ============ ============ ============
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
3
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<Table>
<Caption>
JUNE 30, 2002 DECEMBER 31, 2001
(In millions, except share data) ------------- -----------------
ASSETS
Current assets
Cash and temporary cash investments....................... $ 39 $ 41
Accounts and notes receivable
Trade, less allowances of $13 and $12 at the respective
dates................................................ 316 259
Other.................................................. 22 29
Inventories
Finished goods......................................... 230 209
Work in process........................................ 47 43
Raw materials.......................................... 53 50
Other materials and supplies........................... 31 30
Other..................................................... 69 79
------ ------
Total current assets...................................... 807 740
------ ------
Property, plant, and equipment, net......................... 1,289 1,273
------ ------
Other assets
Goodwill, net............................................. 598 615
Intangible assets, net.................................... 284 293
Pension assets, net....................................... 1,101 1,045
Other..................................................... 64 94
------ ------
Total other assets........................................ 2,047 2,047
------ ------
TOTAL ASSETS................................................ $4,143 $4,060
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt, including current maturities of long-term
debt................................................... $ 5 $ 7
Accounts payable.......................................... 207 201
Other..................................................... 286 251
------ ------
Total current liabilities................................. 498 459
------ ------
Long-term debt.............................................. 1,204 1,211
------ ------
Deferred income taxes....................................... 607 594
------ ------
Deferred credits and other liabilities...................... 101 99
------ ------
Minority interest........................................... 8 8
------ ------
Shareholders' equity
Common stock (158,340,525 and 159,431,382 shares issued
and outstanding, after deducting 13,337,123 and
11,759,094 shares held in treasury, at the respective
dates)................................................. 2 2
Premium on common stock and other capital surplus......... 1,374 1,398
Accumulated other comprehensive loss...................... (24) (54)
Retained earnings......................................... 373 343
------ ------
Total shareholders' equity................................ 1,725 1,689
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $4,143 $4,060
====== ======
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<Table>
<Caption>
2002 2001
FOR THE SIX MONTHS ENDED JUNE 30 (In millions) ----- -----
OPERATING ACTIVITIES
Income from continuing operations........................... $ 102 $ 74
Adjustments to reconcile income from continuing operations
to cash provided by continuing operations:
Depreciation and amortization............................. 79 88
Deferred income taxes..................................... 48 38
Restructuring and other................................... (4) --
Noncash retiree benefits.................................. (54) (54)
Net working capital....................................... (10) 8
Other..................................................... 14 6
----- -----
Cash provided by operating activities....................... 175 160
----- -----
INVESTING ACTIVITIES
Net proceeds related to sale of discontinued operations..... -- 87
Net proceeds from sale of businesses and assets............. 5 71
Expenditures for property, plant, and equipment............. (53) (64)
Acquisitions of businesses and assets....................... (92) (13)
Other....................................................... 1 1
----- -----
Cash provided (used) by investing activities................ (139) 82
----- -----
FINANCING ACTIVITIES
Issuance of common stock.................................... 6 8
Purchase of common stock.................................... (35) --
Retirement of long-term debt................................ (8) (258)
Net decrease in short-term debt, excluding current
maturities of long-term debt.............................. (3) (2)
----- -----
Cash used by financing activities........................... (40) (252)
----- -----
Effect of foreign-exchange rate changes on cash and
temporary cash investments................................ 2 (1)
----- -----
DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS............. (2) (11)
Cash and temporary cash investments, January 1.............. 41 26
----- -----
CASH AND TEMPORARY CASH INVESTMENTS, JUNE 30................ $ 39 $ 15
===== =====
</Table>
The accompanying notes to financial statements are an integral part of this
statement.
5
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The Consolidated Statement of Income for the three- and six-month periods
ended June 30, 2002, and 2001, the Condensed Consolidated Statement of Financial
Position at June 30, 2002, and the Condensed Consolidated Statement of Cash
Flows for the six-month periods ended June 30, 2002, and 2001, are unaudited. In
the company's opinion, the accompanying financial statements contain all normal
recurring adjustments necessary to present fairly the results of operations,
financial position, and cash flows for the periods indicated. These statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles. It is presumed
that users of the accompanying interim financial information have read, or have
access to, the company's audited financial statements for the preceding year.
Accordingly, these statements should be read in conjunction with the company's
Form 10-K for the year ended December 31, 2001. Certain amounts in the prior
year's financial statements have been reclassified to conform with the
presentation used in 2002.
NOTE 2. CHANGES IN ACCOUNTING PRINCIPLES
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
business combinations initiated after June 30, 2001, be accounted for using the
purchase method of accounting and broadens the criteria for recording intangible
assets separate from goodwill. SFAS No. 142 does not permit goodwill and
indefinite-lived intangibles to be amortized, but requires that these assets be
reviewed at least annually for possible impairment. Intangible assets that are
not deemed to have an indefinite life will continue to be amortized over their
useful lives. Effective January 1, 2002, the company adopted SFAS No. 142 and
recorded a goodwill-impairment charge for certain Protective and Flexible
Packaging businesses of $83 million, $72 million after tax, or $0.45 per share,
as a cumulative effect of change in accounting principles in the first quarter
of 2002. See note 6 to the financial statements for additional information.
NOTE 3. RESTRUCTURING AND OTHER
In the fourth quarter of 2000, the company recorded a restructuring charge
of $71 million, $47 million after tax, or $0.29 per share. Of this amount, $45
million was for the impairment of assets held for sale, including those related
to the packaging polyethylene business and the company's interest in Sentinel
Polyolefins LLC, a protective-packaging joint venture. In January 2001, the
company received cash proceeds of $72 million from the disposition of these
assets. The remaining $26 million was related to the realignment of operations
and the exiting of low-margin businesses in the company's Protective and
Flexible Packaging unit. Specifically, this charge was for (1) plant closures in
North America and Europe, including the elimination of 202 positions ($6
million); (2) other workforce reductions (187 positions), mainly in Europe ($6
million); (3) impairment of European long-lived assets held for sale ($10
million); and (4) asset write-offs related to the elimination of certain
low-margin product lines ($4 million). The impairment charge for European assets
was recorded following completion of an evaluation of strategic alternatives for
the related businesses and represented the difference between the carrying value
of the assets and their fair value based on market estimates. Restructuring-plan
actions generally have been completed. Actual cash outlays for severance and
other costs were $3 million less than originally estimated, as 78 fewer
positions were eliminated, while charges for asset write-offs were $3 million
more than initially estimated. Additionally, the company recognized a benefit of
$6 million, $4 million after tax, or $0.02 per share, in the fourth quarter of
2001, primarily as a result of incurring a lower-than-expected loss on the sale
of the company's packaging polyethylene business.
In the fourth quarter of 2001, the company recorded a restructuring charge
of $18 million, $10 million after tax, or $0.06 per share. Of this amount, $5
million was for higher-than-anticipated expenses associated with the exit of
small, noncore European businesses announced in the fourth quarter of 2000. The
remaining
6
$13 million pertained to the adoption of a restructuring plan to consolidate
operations and reduce costs in the Consumer and Foodservice/Food Packaging ($5
million) and Protective and Flexible Packaging ($8 million) units. Specifically,
this charge was for (1) plant closures and consolidations in North America and
Europe, including the elimination of 283 positions ($10 million); (2) other
workforce reductions (99 positions -- $2 million); and (3) asset writedowns
related to the elimination of a North American product line ($1 million). The
cash cost of executing these restructuring programs is anticipated to be
approximately $5 million.
In the second quarter of 2002, the company recognized a benefit of $4
million, $2 million after tax, or $0.02 per share, related to a previously
recorded restructuring charge (netted against fixed assets), primarily as a
result of incurring a lower-than-anticipated loss on the sale of a noncore
European business.
Changes in restructuring-reserve balances are shown in the following table.
<Table>
<Caption>
SEVERANCE OTHER TOTAL
(In millions) --------- ----- -----
Balance at December 31, 2001................................ $ 6 $ 4 $10
Cash payments............................................... (3) (2) (5)
--- --- ---
Balance at June 30, 2002.................................... $ 3 $ 2 $ 5
=== === ===
</Table>
NOTE 4. ACQUISITIONS
On January 4, 2002, the company purchased MSP Schmeiser GmbH, a German
medical products company, for $3 million. On February 13, 2002, the company
purchased an egg-packaging production line from Amerpack S.A. de C.V. for $10
million.
Additionally, in January 2002, the company purchased the assets of two
small Italian protective-packaging companies. These purchases were recorded as
capital expenditures. The outstanding shares of a third small Italian
protective-packaging company, Forniture Industriali, were purchased in June 2002
for $1 million.
On June 18, 2002, the company purchased Winkler Forming Inc., a leading
thermoformer of amorphous polyethylene terephthalate (APET) products for food
packaging, for $78 million, including settlement of estimated working capital
adjustments with the seller. At June 30, 2002, the allocation of the purchase
price to the net assets of Winkler and the related recognition of $53 million of
goodwill were based on estimates, which may be adjusted in subsequent reporting
periods.
None of the acquisitions completed in 2002 were considered to be material
to the company, and therefore the inclusion of related pro-forma information is
not required.
NOTE 5. DISCONTINUED OPERATIONS
In the first quarter of 2001, the company sold a portion of its remaining
interest in Packaging Corporation of America (PCA) and recorded a related gain
of $8 million, $4 million after tax, or $0.02 per share. In April 2001, the
company sold its remaining interest in PCA and recorded a related gain of $49
million, $24 million after tax, or $0.15 per share. Net proceeds from the 2001
transaction totaled $87 million, which were used primarily to repay debt.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS
As of January 1, 2002, the company adopted SFAS No. 142. Following the
adoption of this standard, the company completed a review of its businesses and
tested recorded goodwill amounts for possible impairment. Goodwill was found to
be impaired for certain Protective and Flexible Packaging businesses that were
acquired prior to the company's spin-off from Tenneco Inc. These businesses have
recently faced increased competition and experienced lower operating margins. As
a result, the company recorded a goodwill-impairment charge of $83 million, $72
million after tax, or $0.45 per share, in the first quarter of 2002.
7
In accordance with SFAS No. 142, the company discontinued the amortization
of goodwill effective January 1, 2002, which had the effect of increasing pretax
earnings, net income, and earnings per share for the first six months of 2002 by
$9 million, $6 million, and $0.04, respectively.
Shown below is a comparison of income from continuing operations, net
income, and earnings per share for the three and six months ended June 30, 2002,
with amounts recorded in the same periods of 2001 adjusted to exclude the
amortization of goodwill.
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2002 2001 2002 2001
(In millions, except per-share data) ----- ----- ----- -----
NET INCOME
Income from continuing operations........................... $ 60 $ 45 $ 102 $ 74
Add: goodwill amortization, net of tax...................... -- 3 -- 6
----- ----- ----- -----
Adjusted income from continuing operations.................. 60 48 102 80
Income from discontinued operations, net of tax............. -- 24 -- 28
Cumulative effect of change in accounting principles, net of
tax....................................................... -- -- (72) --
----- ----- ----- -----
Adjusted net income......................................... $ 60 $ 72 $ 30 $ 108
===== ===== ===== =====
BASIC AND DILUTED EARNINGS PER SHARE
Income from continuing operations........................... $0.38 $0.28 $0.64 $0.47
Add: goodwill amortization, net of tax...................... -- 0.02 -- 0.04
----- ----- ----- -----
Adjusted income from continuing operations.................. 0.38 0.30 0.64 0.51
Income from discontinued operations, net of tax............. -- 0.15 -- 0.17
Cumulative effect of change in accounting principles, net of
tax....................................................... -- -- (0.45) --
----- ----- ----- -----
Adjusted net income......................................... $0.38 $0.45 $0.19 $0.68
===== ===== ===== =====
</Table>
Changes in the carrying amount of goodwill for the six months ended June
30, 2002, by operating segment are shown in the following table.
<Table>
<Caption>
CONSUMER
FOODSERVICE/FOOD PROTECTIVE AND
PACKAGING FLEXIBLE PACKAGING TOTAL
(In millions) ---------------- ------------------ -----
Balance, December 31, 2001............................. $376 $239 $615
Goodwill impairment.................................... -- (83) (83)
Goodwill addition...................................... 53 6 59
Translation adjustment................................. 1 6 7
---- ---- ----
Balance, June 30, 2002................................. $430 $168 $598
==== ==== ====
</Table>
Trademarks and other intangible assets at June 30, 2002, are shown in the
following table.
<Table>
<Caption>
ACCUMULATED
CARRYING AMOUNT AMORTIZATION NET
(IN MILLIONS) --------------- ------------ ---
Intangible assets subject to amortization
Patents.............................................. $184 $ 52 $132
Other................................................ 32 15 17
---- ---- ----
216 67 149
Intangible assets not subject to amortization
(primarily trademarks)............................... 135 -- 135
---- ---- ----
Total intangible assets................................ $351 $ 67 $284
==== ==== ====
</Table>
Amortization expense for intangible assets subject to amortization was $3
million for the three months ended June 30, 2002, and $6 million for the six
months ended June 30, 2002. Amortization expense is estimated to total $13
million, $12 million, $12 million, $12 million, and $11 million for years 2002,
2003, 2004, 2005, and 2006, respectively.
8
NOTE 7. CAPITAL STOCK
Earnings Per Share
Earnings from continuing operations per share of common stock outstanding
was computed as follows.
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
(IN MILLIONS, EXCEPT SHARE AND PER-SHARE DATA) ------------ ------------ ------------ ------------
BASIC EARNINGS PER SHARE
Income from continuing operations....... $ 60 $ 45 $ 102 $ 74
------------ ------------ ------------ ------------
Average shares of common stock
outstanding.......................... 158,230,119 158,689,891 158,765,987 158,530,819
------------ ------------ ------------ ------------
Earnings from continuing operations per
average share of common stock........ $ 0.38 $ 0.28 $ 0.64 $ 0.47
------------ ------------ ------------ ------------
DILUTED EARNINGS PER SHARE
Income from continuing operations....... $ 60 $ 45 $ 102 $ 74
------------ ------------ ------------ ------------
Average shares of common stock
outstanding.......................... 158,230,119 158,689,891 158,765,987 158,530,819
Effect of dilutive securities
Restricted stock..................... 28,766 16,450 27,001 14,460
Stock options........................ 1,923,143 364,164 1,687,177 191,034
Performance shares................... 356,807 180,009 339,961 168,201
------------ ------------ ------------ ------------
Average shares of common stock outstanding
including dilutive securities........ 160,538,835 159,250,514 160,820,126 158,904,514
------------ ------------ ------------ ------------
Earnings from continuing operations per
average share of common stock........ $ 0.38 $ 0.28 $ 0.64 $ 0.47
------------ ------------ ------------ ------------
</Table>
In November 1999, the company established a grantor trust and reserved
3,200,000 shares of Pactiv common stock for the trust, which were issued to it
in January 2000. This so-called "rabbi trust" is designed to assure payment of
deferred compensation and supplemental pension benefits. These shares are not
considered to be outstanding for purposes of financial reporting.
Stock-Based Compensation
The company follows requirements of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," in accounting for stock options.
NOTE 8. SEGMENT INFORMATION
The company has three operating segments: 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 products for protective-packaging markets such as electronics,
automotive, furniture, and e-commerce, and for flexible-packaging applications
in food, medical, pharmaceutical, chemical, and hygienic markets; and Other,
which relates to corporate and administrative service operations and
retiree-benefit income and expense.
9
The following table sets forth certain segment information.
<Table>
<Caption>
SEGMENT
------------------------------------------
CONSUMER AND PROTECTIVE RECLASSIFICATIONS
FOODSERVICE/ AND FLEXIBLE AND
FOOD PACKAGING PACKAGING OTHER ELIMINATIONS TOTAL
(IN MILLIONS) -------------- ------------ -------- ----------------- -----
FOR THE THREE MONTHS ENDED
JUNE 30, 2002
Sales to external customers......... $ 521 $207 $ -- $ -- $ 728
Income before interest, income
taxes, and minority interest...... 92 20(a) 13(b) -- 125
FOR THE THREE MONTHS ENDED
JUNE 30, 2001
Sales to external customers......... $ 524 $204 $ -- $ -- $ 728
Income before interest, income
taxes, and minority interest...... 76 12 17(b) -- 105
Income from discontinued operations,
net of tax........................ -- -- 24 -- 24
AT JUNE 30, 2002, AND FOR THE SIX
MONTHS THEN ENDED
Sales to external customers......... $ 977 $398 $ -- $ -- $1,375
Income before interest, income
taxes, and minority interest...... 159 34(a) 25(b) -- 218
Cumulative effect of change in
accounting principles, net of
tax............................... -- (72) -- -- (72)
Total assets........................ 2,081 691 1,487(c) (116) 4,143
AT JUNE 30, 2001, AND FOR THE SIX
MONTHS THEN ENDED
Sales to external customers......... $ 993 $415 $ -- $ -- $1,408
Income before interest, income
taxes, and minority interest...... 133 21 31(b) -- 185
Income from discontinued operations,
net of tax........................ -- -- 28 -- 28
Total assets........................ 2,011 744 1,416(c) (165) 4,006
</Table>
- ------------------------
(a) Includes restructuring credit of $4 million.
(b) Includes pension-plan income and unallocated corporate expenses.
(c) Includes assets related to pension plans (net) and administrative service
operations.
NOTE 9. ACCOUNTS AND NOTES RECEIVABLE
On a recurring basis, the company sells an undivided interest in a pool of
trade receivables meeting certain criteria to a third party as an alternative to
debt financing. Amounts sold were $35 million, $44 million, and $115 million at
June 30, 2002, December 31, 2001, and June 30, 2001, respectively. Such sales,
which represent a form of off-balance-sheet financing, are recorded as a
reduction of accounts and notes receivable in the statement of financial
position, and related proceeds are included in cash provided by operating
activities in the statement of cash flows. Discounts and fees related to these
sales were immaterial in the second quarter of 2002 and totaled $1 million in
the second quarter of 2001, and were included in other expense in the statement
of income. In the event that either Pactiv or the third-party purchaser of the
trade receivables were to discontinue this program, the company's debt might
increase by an amount corresponding to the level of sold receivables at such
time.
10
NOTE 10. SYNTHETIC LEASE COMMITMENTS
In November 1999, Pactiv entered into a $175 million synthetic-lease
agreement with a third-party lessor and various lenders to restructure or
replace certain existing operating leases and public warehouse arrangements and
to facilitate additional leasing arrangements for other operating facilities.
The synthetic-lease facility, which expires in November 2005, contains customary
terms and conditions covering, among other things, residual-value guarantees,
default provisions, and financial covenants. Cancellation of the lease
agreement, either before or at expiration, would require the company to make a
termination payment of $169 million, which represents off-balance-sheet debt in
that related funding might require the company to obtain alternative financing
for the properties.
Operating leases for the company's corporate headquarters building and
certain of its warehouse facilities are covered by the synthetic-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 leases are not extended or the
purchase options are not exercised, the company is required to make guaranteed
residual payments to the lessors that may be refunded partially or in full
depending on the amounts received by the lessors upon the sale of the
properties. Lease agreements for these properties require the company to satisfy
certain financial-ratio tests.
NOTE 11. COMPREHENSIVE INCOME
Details of total comprehensive income for the three- and six-month periods
ended June 30, 2002, and 2001, were as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2002 2001 2002 2001
----- ----- ---- ----
Net income.......................................... $60 $ 69 $30 $102
Other comprehensive income (loss)
Net currency translation gains (losses)........... 33 1 27 (18)
Reversal of previously recorded unrealized gains
on
securities held for sale(a).................... -- (26) -- (42)
Net changes in interest rate swaps................ 1 1 3 2
--- ---- --- ----
34 (24) 30 (58)
--- ---- --- ----
Total comprehensive income.......................... $94 $ 45 $60 $ 44
=== ==== === ====
</Table>
(a) Represents offset to gain on sale of PCA stock included in net income.
- ------------------------
The above notes are an integral part of the foregoing financial statements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION
Financial statements for all periods presented herein have been prepared on
a consolidated basis in accordance with generally accepted accounting principles
consistently applied. Certain amounts in the prior year's financial statements
have been reclassified to conform with the presentation used in 2002.
The company has three operating segments: 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 products for protective-packaging markets such as electronics,
automotive, furniture, and e-commerce, and for flexible-packaging applications
in food, medical, pharmaceutical, chemical, and hygienic markets; and Other,
which relates to corporate and administrative service operations and
retiree-benefit income and expense.
RESTRUCTURING AND OTHER
In the fourth quarter of 2000, the company recorded a restructuring charge
of $71 million, $47 million after tax, or $0.29 per share. Of this amount, $45
million was for the impairment of assets held for sale, including those related
to the packaging polyethylene business and the company's interest in Sentinel
Polyolefins LLC, a protective-packaging joint venture. In January 2001, the
company received cash proceeds of $72 million from the disposition of these
assets. The remaining $26 million was related to the realignment of operations
and the exiting of low-margin businesses in the company's Protective and
Flexible Packaging unit. Specifically, this charge was for (1) plant closures in
North America and Europe, including the elimination of 202 positions ($6
million); (2) other workforce reductions (187 positions), mainly in Europe ($6
million); (3) impairment of European long-lived assets held for sale ($10
million); and (4) asset write-offs related to the elimination of certain
low-margin product lines ($4 million). The impairment charge for European assets
was recorded following completion of an evaluation of strategic alternatives for
the related businesses and represented the difference between the carrying value
of the assets and their fair value based on market estimates. Restructuring-plan
actions generally have been completed. Actual cash outlays for severance and
other costs were $3 million less than originally estimated, as 78 fewer
positions were eliminated, while charges for asset write-offs were $3 million
more than initially estimated. Additionally, the company recognized a benefit of
$6 million, $4 million after tax, or $0.02 per share, in the fourth quarter of
2001, primarily as a result of incurring a lower-than-anticipated loss on the
sale of the company's packaging polyethylene business.
In the fourth quarter of 2001, the company recorded a restructuring charge
of $18 million, $10 million after tax, or $0.06 per share. Of this amount, $5
million was for higher-than-anticipated expenses associated with the exit of
small, noncore European businesses announced in the fourth quarter of 2000. The
remaining $13 million pertained to the adoption of a restructuring plan to
consolidate operations and reduce costs in the Consumer and Foodservice/Food
Packaging ($5 million) and Protective and Flexible Packaging ($8 million) units.
Specifically, this charge was for (1) plant closures and consolidations in North
America and Europe, including the elimination of 283 positions ($10 million);
(2) other workforce reductions (99 positions -- $2 million); and (3) asset
writedowns related to the elimination of a North American product line ($1
million). The cash cost of executing these restructuring programs is anticipated
to be approximately $5 million.
In the second quarter of 2002, the company recognized a benefit of $4
million, $2 million after tax, or $0.02 per share, related to a previously
recorded restructuring charge (netted against fixed assets), primarily as a
result of incurring a lower-than-anticipated loss on the sale of a noncore
European business.
12
THREE MONTHS ENDED JUNE 30, 2002, COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001
RESULTS OF CONTINUING OPERATIONS
Sales
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
(Dollars in millions) -------------------
2002 2001 CHANGE
----- ----- ------
Consumer and Foodservice/Food Packaging..................... $521 $524 (0.6)%
Protective and Flexible Packaging........................... 207 204 1.5
---- ----
Total....................................................... $728 $728 --%
---- ----
</Table>
Total company sales were even with last year. Excluding the positive impact
of foreign-currency exchange rates and the negative effect of divestitures,
sales grew 0.4% versus last year.
Volume in the Consumer and Foodservice/Food Packaging segment grew 8%.
Sales in the segment declined $3 million or 0.6%, reflecting the decline in
selling prices from the pass through of lower raw material costs. Significant
volume growth continued in Hefty(R) consumer products led by increases in waste
bags and tableware, both of which were boosted by sales of new
products -- Hefty(R) The Gripper(TM) tall kitchen bags and Hefty(R) Zoo Pals(TM)
disposable animal plates for children, respectively. Growth in foodservice/food
packaging reflected significant volume increases in the base business as well as
the contribution of innovative new products. Higher-margin products, such as
rigid-display packaging, agricultural products, and microwaveable home-meal
replacement items drove much of this growth.
Sales of protective- and flexible-packaging products increased $3 million,
or 1.5%, compared with 2001. Excluding the positive impact of foreign-currency
exchange rates and the negative effect of businesses divested in 2001, sales for
this segment rose 3.0%, driven by volume growth of 8%, offset partially by a
decline in selling prices as a result of the pass through of lower raw material
costs. The European flexible-packaging business and the North American
Hexacomb(R) business led the volume growth.
Operating Income (Income before Interest Expense, Income Taxes, and
Minority Interest)
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
(Dollars in millions) -------------------
2002 2001 CHANGE
----- ----- ------
Consumer and Foodservice/Food Packaging..................... $ 92 $ 76 21.1%
Protective and Flexible Packaging........................... 20 12 66.7
Other....................................................... 13 17 (23.5)
---- ----
Total....................................................... $125 $105 19.0%
---- ----
</Table>
Total company operating income for 2002 included the effect of reversing $4
million of a previously recorded restructuring charge in the Protective and
Flexible Packaging segment. Excluding the effect of this unusual item, operating
income by segment was as follows:
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
(Dollars in millions) -------------------
2002 2001 CHANGE
----- ----- ------
Consumer and Foodservice/Food Packaging..................... $ 92 $ 76 21.1%
Protective and Flexible Packaging........................... 16 12 33.3
Other....................................................... 13 17 (23.5)
---- ----
Total....................................................... $121 $105 15.2%
---- ----
</Table>
Excluding the unusual item, total company operating income was $121 million
in 2002, an increase of $16 million, or 15.2%, from 2001. The gain was driven
principally by 8% volume growth; improved gross
13
margin, primarily reflecting growth in higher-margin product lines and ongoing
productivity gains; and the elimination of goodwill amortization in 2002.
Operating income for the Consumer and Foodservice/Food Packaging segment
increased $16 million, or 21.1%, in 2002, driven principally by 8% volume growth
and productivity improvements. Also contributing to the increase in operating
income was the 2002 elimination of goodwill amortization, which totaled $3
million in the same period last year.
Operating income for the Protective and Flexible Packaging segment
increased $4 million, or 33.3%, versus the same period last year, mainly
reflecting an 8% volume increase, benefits from the restructuring program
initiated in January 2001, and the elimination of goodwill amortization, which
amounted to $1 million in the second quarter of 2001.
Operating income for the Other segment decreased $4 million from last year,
principally because of higher stock-based compensation costs related to the
increase in the company's stock price.
Interest Expense, Net of Interest Capitalized
Interest expense was $24 million in the second quarter of 2002, down $4
million, or 14.3%, from 2001, principally because of a decline in borrowings.
Income Taxes
The company's effective tax rate for the second quarter of 2002 was 40.0%,
compared with 41.4% for the same period in 2001.
Income from Continuing Operations
The company recorded net income from continuing operations of $60 million,
or $0.38 per share, in the second quarter of 2002, compared with $45 million, or
$0.28 per share, last year. Excluding the unusual item, second quarter 2002's
net income from continuing operations was $58 million, or $0.36 per share,
compared with $45 million, or $0.28 per share, in the second quarter of 2001.
DISCONTINUED OPERATIONS
In the second quarter of 2001, the company recorded income from
discontinued operations, net of income tax, of $24 million, or $0.15 per share,
which represented the after-tax gain on the sale of the company's remaining
holdings of Packaging Corporation of America stock.
SIX MONTHS ENDED JUNE 2002, COMPARED WITH SIX MONTHS ENDED JUNE 2001
RESULTS OF CONTINUING OPERATIONS
Sales
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
----------------
2002 2001 CHANGE
(Dollars in millions) ------ ------ ------
Consumer and Foodservice/Food Packaging..................... $ 977 $ 993 (1.6)%
Protective and Flexible Packaging........................... 398 415 (4.1)
------ ------ ----
Total....................................................... $1,375 $1,408 (2.3)%
------ ------ ----
</Table>
Total company sales declined $33 million, or 2.3%, versus last year.
Excluding the positive impact of foreign-currency exchange rates and the
negative effect of divestitures, sales were essentially even with last year.
Sales for the Consumer and Foodservice/Food Packaging segment were down $16
million, or 1.6%, from last year. Excluding the negative effect of divestitures,
sales for this segment were flat versus a year ago.
14
Volume in the Consumer and Foodservice/Food Packaging segment grew 6%, which was
offset by a decline in selling prices from the pass through of lower raw
material costs. Contributing to the volume growth was the introduction of new
products in wastebags (Hefty(R) The Gripper(TM) tall kitchen bag), tableware
(Hefty(R) Zoo Pals(TM) disposable animal plates for children), and foodservice
(products for major fast-food restaurants).
Sales of protective- and flexible-packaging products declined $17 million,
or 4.1%, compared with 2001. Excluding the positive impact of foreign-currency
exchange rates and the negative impact of divestitures in 2001, sales for this
segment improved 0.5%, reflecting volume growth of 4%, offset for the most part
by a decline in selling prices as a result of the pass through of lower raw
material costs.
Operating Income (Income before Interest Expense, Income Taxes, and
Minority Interest)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
(Dollars in millions) ----------------
2002 2001 CHANGE
----- ----- ------
Consumer and Foodservice/Food Packaging..................... $159 $133 19.5%
Protective and Flexible Packaging........................... 34 21 61.9
Other....................................................... 25 31 (19.4)
---- ----
Total....................................................... $218 $185 17.8%
---- ----
</Table>
Total company operating income for 2002 included the impact of reversing $4
million of a previously recorded restructuring charge in the Protective and
Flexible Packaging segment. Excluding the effect of this unusual item, operating
income by segment was as follows:
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
(Dollars in millions) ----------------
2002 2001 CHANGE
----- ----- ------
Consumer and Foodservice/Food Packaging..................... $159 $133 19.5%
Protective and Flexible Packaging........................... 30 21 42.9
Other....................................................... 25 31 (19.4)
---- ----
Total....................................................... $214 $185 15.7%
---- ----
</Table>
Excluding the unusual item, total company operating income was $214 million
in 2002, an increase of $29 million, or 15.7%, from 2001. The improvement was
driven principally by 6% volume growth; improved gross margin, primarily
reflecting growth in higher-margin product lines and benefits from the company's
productivity initiatives; and the elimination of goodwill amortization in 2002.
Operating income for the Consumer and Foodservice/Food Packaging segment
increased $26 million, or 19.5%, in 2002, driven principally by volume growth,
productivity improvements, and lower logistics costs partially resulting from
the implementation of the Customer Linked Manufacturing program. Also
contributing to the increase in operating income was the 2002 elimination of
goodwill amortization, which totaled $6 million in the same period last year.
Operating income for the Protective and Flexible Packaging segment
increased $9 million, or 42.9%, from 2001, mainly reflecting higher volume,
benefits from the restructuring program initiated in January 2001, and the 2002
elimination of goodwill amortization, which totaled $3 million in 2001.
Operating income for the Other segment was down $6 million or 19.4%, from
last year, primarily because of higher stock-based compensation costs related to
the increase in the company's stock price.
Interest Expense, Net of Interest Capitalized
Interest expense was $47 million in the first half of 2002, down $10
million, or 17.5%, from 2001, principally because of a decline in borrowings.
15
Income Taxes
The company's effective tax rate for the first six months of 2002 was
40.0%, compared with 41.5% for the same period in 2001.
Income from Continuing Operations
The company recorded net income from continuing operations of $102 million,
or $0.64 per share, in the first half of 2002, compared with $74 million, or
$0.47 per share, in 2001. Excluding the unusual item, net income from continuing
operations in 2002 was $100 million, or $0.62 per share, compared with $74
million, or $0.47 per share, in 2001.
DISCONTINUED OPERATIONS
In the first six months of 2001, the company recorded income from
discontinued operations, net of income tax, of $28 million, or $0.17 per share,
which represented the after-tax gain on the sale of the company's remaining
holdings of PCA stock.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001 CHANGE
(In millions) -------- ------------ ------
Short-term debt, including current maturities of long-term
debt...................................................... $ 5 $ 7 $ (2)
Long-term debt.............................................. 1,204 1,211 (7)
------ ------ -----
Total debt.................................................. 1,209 1,218 (9)
Minority interest........................................... 8 8 --
Shareholders' equity........................................ 1,725 1,689 36
------ ------ -----
Total capitalization........................................ $2,942 $2,915 $ 27
------ ------ -----
</Table>
The company's ratio of debt to total capitalization was 41.1% and 41.8% at
June 30, 2002, and December 31, 2001, respectively.
Shareholders' equity increased $36 million in the first six months of 2002,
primarily as a result of recording $30 million of net income, $30 million of
other comprehensive income (principally reflecting favorable foreign-currency
translation adjustments), and $11 million of shares issued to employee plans,
offset partially by $35 million of company stock repurchases.
Cash Flows
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
----------------------
2002 2001
(In millions) ------------ ------
Cash provided (used) by:
Operating activities.................................................. $ 175 $ 160
Investing activities.................................................. (139) 82
Financing activities.................................................. (40) (252)
</Table>
Cash provided by operating activities was $175 million in the 2002 versus
$160 million in the same period last year. The $15 million increase was driven
mainly by improved operating performance.
Investing activities used cash aggregating $139 million in 2002 and
generated cash of $82 million in the same period of 2001. The $139 million use
of cash in the current year primarily reflected outlays for acquisitions ($92
million) and capital items ($53 million). The $82 million generated in 2001
principally represented proceeds from the company's sale of its packaging
polyethylene business and the sale of its
16
remaining interest in PCA, offset, in part, by expenditures for property, plant,
and equipment and the acquisition of assets from a former joint venture.
Cash used by financing activities was $40 million in 2002, primarily for
the repurchase of company stock. Cash used by financing activities was $252
million in the same period of 2001, principally for the retirement of debt.
Capital Commitments
Commitments for authorized expenditures totaled approximately $115 million
at June 30, 2002. It is anticipated that the majority of these expenditures will
be funded over the next twelve months from existing cash and short-term
investments, internally generated cash, and borrowings.
Liquidity
The company utilizes various sources of funding to manage liquidity. Among
these are an asset securitization program and a synthetic lease agreement, which
represent off-balance sheet financing. Amounts financed under the securitization
program and the synthetic lease agreement were $35 million and $169 million,
respectively, at June 30, 2002. Termination of either the asset securitization
program or the synthetic lease agreements, or both, might require the company to
increase its debt by a corresponding amount. The company's management believes
that cash flow from operations, along with available borrowing capacity under
its credit facilities, will be sufficient to meet current and future liquidity
and capital requirements.
CHANGES IN ACCOUNTING PRINCIPLES
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
business combinations initiated after June 30, 2001, be accounted for using the
purchase method of accounting and broadens the criteria for recording intangible
assets separate from goodwill. SFAS No. 142 does not permit goodwill and
indefinite-lived intangibles to be amortized, but requires that these assets be
reviewed at least annually for possible impairment. Intangible assets that are
not deemed to have an indefinite life will continue to be amortized over their
useful lives. Effective January 1, 2002, the company adopted SFAS No. 142 and
recorded a goodwill-impairment charge for certain Protective and Flexible
Packaging businesses of $83 million, $72 million after tax, or $0.45 per share,
as a cumulative effect of change in accounting principles in the first quarter
of 2002. Adoption of SFAS 142 is expected to add $19 million pretax, $14 million
after tax, or $0.09 per share to annual earnings on a going-forward basis.
CRITICAL ACCOUNTING POLICIES
For a complete discussion of the company's critical accounting policies,
refer to Pactiv's most recent filing on Form 10-K.
Pension Income
The company has well-funded pension plans for current and former employees
and accounts for the pension plans in accordance with requirements of SFAS No.
87, "Employers Accounting for Pensions." Pension-plan income is included in the
statement of income as an offset to selling, general, and administrative
expenses. Such noncash income is determined based on a number of factors,
including estimates of returns on plan assets, employee compensation, and
participant life expectancy. Based on current estimates, the company projects
that its noncash pension income in 2003 is likely to decline by between $30 and
$40 million from its 2002 level. This decrease is expected to occur because of
the steep decline in equity market values and the impact of the company's
intention to reduce the expected long-term rate of return on pension assets in
2003 by one-half percent, to 9%. The company does not expect to be required to
make cash contributions to the pension plan for the foreseeable future (5
years), in that the plan is currently in an overfunded position under Employee
Retirement Income Security Act (ERISA) standards.
17
Under SFAS No. 87, the company might also be required to recognize an
"additional minimum pension liability" on its balance sheet as a result of the
sharp decline in equity market values. Such a noncash, nonincome related
adjustment could occur if the market value of the pension plan's assets were to
be less than the accumulated pension benefit obligations of the plan at the
company's annual measurement date of September 30. If this situation were to
occur, the company would be required to reduce shareholders' equity by a
significant amount (at least $600 million) at the end of the third quarter.
Conversely, shareholders' equity would be increased by a similarly significant
amount if, at a subsequent measurement date, the market value of pension plan
assets were to exceed pension benefit obligations. Such adjustments would have
no effect on income, cash flow, bank-covenant compliance, or requirements to
make contributions to the pension plan.
18
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section and in the notes to the
financial statements included in this Quarterly Report on Form 10-Q are
"forward-looking statements." These forward-looking statements generally can be
identified by the use of terms and phrases such as "will", "anticipate", "may",
"might", "could", "expect", "estimated", "projects", 'intends", and similar
terms and phrases. These forward-looking statements are not based on historical
facts, but rather on the company's current expectations or projections about
future events. Accordingly, these forward-looking statements are subject to
known and unknown risks and uncertainties. While the company believes that the
assumptions underlying these forward-looking statements are reasonable and makes
the statements in good faith, actual results almost always vary from expected
results, and the differences can be material. Among the factors that might cause
the company's actual results to differ materially from the future results
expressed or implied by these forward-looking statements are the factors listed
in the company's Annual Report on Form 10-K for the year ended December 31,
2001, and the following:
- changes in consumer demand and prices for the company's products,
including new products that the company may introduce, that could
negatively impact sales and margins;
- material substitutions and changes in costs of raw materials for the
company's products, including plastic resins, or of labor or utilities
that could negatively impact the company's expenses and margins;
- changes in laws or other governmental actions, including changes in
regulations such as those relating to air emissions or plastics
generally;
- changes in capital availability or costs;
- workforce factors such as strikes or other labor interruptions;
- the general economic, political, and competitive conditions in countries
in which the company operates, including currency fluctuations and other
risks associated with operating outside of the United States;
- the performance of the assets in the company's pension plans;
- the company's ability to realize anticipated savings from its
restructuring plans; and
- changes enacted by the Securities and Exchange Commission, the Financial
Accounting Standards Board or other regulatory or accounting bodies.
19
ITEM 3. 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 British pound.
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 June 30, 2002, all of which will mature in 2002.
<Table>
<Caption>
NOTIONAL AMOUNT WEIGHTED-AVERAGE NOTIONAL AMOUNT
IN FOREIGN CURRENCY SETTLEMENT RATE IN U.S. DOLLARS
(In millions, except settlement rates) ------------------- ---------------- ---------------
British pounds
-- Purchase............................ 8 1.532 12
-- Sell................................ (12) 1.532 (18)
U.S. dollars
-- Purchase............................ 18 1.000 18
-- Sell................................ (12) 1.000 (12)
</Table>
Interest Rates
The company is exposed to interest-rate risk on revolving-credit debt that
bears interest at a floating rate based on LIBOR. In addition, the company has
issued public-debt securities with fixed interest rates and original maturity
dates ranging from 3 to 25 years. Should the company decide to redeem these
securities prior to their stated maturity, it would incur costs based on the
fair value of the securities at that time.
In the first quarter of 2001, the company entered into interest-rate swap
agreements that effectively convert floating-rate debt on its synthetic-lease
obligations to fixed-rate debt. This action was taken to reduce the company's
exposure to interest-rate risk. These swaps are accounted for as cash flow
hedges, with changes in value recorded as accumulated other comprehensive
income, a component of shareholders' equity, on the balance sheet. During the
first quarter of 2002, the company exited these swap agreements, and, as a
result, related accumulated deferred net losses of $3 million will be expensed
over the remaining life of the underlying obligations.
20
PART II -- OTHER INFORMATION
ITEMS 1-3. NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company's 2002 Annual Meeting of Shareholders was held on May 17, 2002,
for the purpose of (i) electing directors, (ii) ratifying the appointment of
Ernst & Young LLP as independent public accountants for the year 2002, (iii)
approving the 2002 Incentive Compensation Plan, and (iv) acting upon such other
matters as might be properly brought before the meeting or any adjournment or
postponement thereof.
At the meeting, the following persons were elected to the company's Board
of Directors, each for a term to expire at the company's 2003 Annual Meeting of
Shareholders:
<Table>
<Caption>
NUMBER OF VOTES
------------------------
NOMINEE FOR WITHHELD
------- ----------- ---------
Larry D. Brady.............................................. 143,279,343 2,327,125
Robert J. Darnall........................................... 143,244,592 2,361,876
Mary R. (Nina) Henderson.................................... 142,490,688 3,115,780
Roger B. Porter............................................. 142,513,727 3,092,741
Paul T. Stecko.............................................. 141,543,108 4,063,360
Richard L. Wambold.......................................... 143,258,272 2,348,196
Norman H. Wesley............................................ 143,256,344 2,350,124
</Table>
The shareholders ratified the appointment of Ernst & Young LLP as the
company's independent public accountants for the year 2002, with 139,517,173
votes cast for ratification, 5,425,456 votes cast against ratification, 663,799
abstentions, and 40 broker non-votes. The shareholders approved the 2002
Incentive Compensation Plan, with 100,805,330 votes cast for the plan,
25,799,205 votes cast against the plan, 1,551,025 abstentions, and 17,450,908
broker non-votes.
ITEM 5. NONE
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
Exhibits designated with an asterisk in the following index are filed
herewith; all other exhibits are incorporated by reference:
<Table>
<Caption>
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 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).
3.1 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).
3.2 Amended and Restated By-laws of the registrant adopted May
17, 2001(incorporated herein by reference to Exhibit 3.2 to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, File No. 1-15157).
4.1 Specimen Stock Certificate of Pactiv Corporation Common
Stock (incorporated herein by reference to Exhibit 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).
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).
</Table>
22
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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.
1-12387).
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
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).
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).
</Table>
23
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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 No. 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).
10.18(a) First Amendment, dated as of September 27, 2000, among the
registrant, various financial institutions, and Bank of
America, N.A., as Administrative Agent, amending the Short
Term Credit Agreement (incorporated herein by reference to
Exhibit 10.18(a) to Pactiv Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000, File No.
1-15157).
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).
</Table>
24
<Table>
<Caption>
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 (incorporated by
reference to Exhibit 10.23 to Pactiv Corporation's Annual
Report on Form 10-K for the year ended December 31, 1999,
File No. 1-15157).
11 None.
*12 Computation of Ratio of Earnings to Fixed Charges.
13 None.
15 None.
16 None.
18 None.
19 None.
22 None.
23 None.
27.1 None.
*99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</Table>
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACTIV CORPORATION
By: /s/ ANDREW A. CAMPBELL
------------------------------------
Andrew A. Campbell
Senior Vice President and Chief
Financial Officer
(principal financial and accounting
officer)
Date: August 9th, 2002
26