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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) or 12(g) of
the Securities Exchange Act of 1934
------------------------------
TENNECO PACKAGING INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 36-2552989
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1900 WEST FIELD COURT 60045
LAKE FOREST, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(847) 482-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) of the Act:
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<CAPTION>
NAMES OF EACH EXCHANGE ON
TITLE OF CLASS TO BE SO REGISTERED WHICH CLASS IS TO BE REGISTERED
---------------------------------- -------------------------------
<S> <C>
Common Stock ($.01 Par Value) New York Stock Exchange
and associated Preferred Stock Purchase Rights
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) of the Act:
None
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<PAGE> 2
TENNECO PACKAGING INC.
I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN
REGISTRATION STATEMENT ON FORM 10 BY REFERENCE
Cross-reference sheet between Information Statement attached hereto as
Annex A and items of Form 10
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<CAPTION>
ITEM NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
- -------- ------------ ---------------------------------
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1. Business............................. Summary; Management's Discussion and Analysis
of Financial Condition and Results of
Operations; and Business.
2. Financial Information................ Summary; Unaudited Pro Forma Combined
Financial Statements of Packaging;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
and Combined Selected Financial Data.
3. Properties........................... Business.
4. Security Ownership of Certain
Beneficial Owners and Management... Management.
5. Directors and Executive Officers..... Management.
6. Executive Compensation............... Management.
7. Certain Relationships and Related
Transactions....................... Summary; The Spin-off; and Management.
8. Legal Proceedings.................... Business.
9. Market Price of and Dividends on
Registrant's Common Equity and
Related Stockholder Matters........ Summary; The Spin-off; and Description of
Capital Stock.
11. Description of Registrant's
Securities to be Registered........ Description of Capital Stock.
12. Indemnification of Directors and
Officers........................... Management.
13. Financial Statements and
Supplementary Data................. Summary; Unaudited Pro Forma Combined
Financial Statements of Packaging; and
Combined Financial Statements and Schedule of
The Businesses of Tenneco Packaging.
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II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements and Schedule.
The following is a list of financial information included in the
Information Statement and filed as a part of this Registration
Statement on Form 10:
(1) Unaudited Pro Forma Combined Financial Statements of Packaging
as of June 30, 1999, and for the six months ended June 30, 1999
and for the year ended December 31, 1998;
(2) Combined Financial Statements of the Businesses of Tenneco
Packaging as of June 30, 1999 (unaudited), December 31, 1998 and
1997, and for the six months ended June 30, 1999 and 1998
(unaudited) and the years ended December 31, 1998, 1997 and
1996; and
(3) Schedule II -- Valuation and Qualifying Accounts.
(b)Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
2 -- Form of Distribution Agreement by and between Tenneco
Inc. and Tenneco Packaging Inc. (incorporated herein by
reference to Exhibit 2 to Tenneco Packaging Inc.'s
Registration Statement on Form S-4, File No. 333-82923).
3.1 -- Certificate of Incorporation of Tenneco Packaging Inc.,
as amended, as currently in effect.**
3.2 -- Form of Restated Certificate of Incorporation of Tenneco
Packaging Inc., to be adopted prior to the spin-off.**
3.3 -- Amended By-laws of Tenneco Packaging Inc., as currently
in effect.**
3.4 -- Form of Amended and Restated By-laws of Tenneco Packaging
Inc., to be adopted prior to the spin-off.
4.1 -- Form of Specimen Stock Certificate of Tenneco Packaging
Inc. Common Stock.
4.2 -- Form of Qualified Offer Plan Rights Agreement by and
between Tenneco Packaging Inc. and First Chicago Trust
Company of New York, as Rights Agent.**
4.3 -- Indenture, dated September 29, 1999, by and between
Tenneco Packaging Inc. 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).
4.4 -- Form of Registration Rights Agreement between Tenneco
Packaging Inc. and the trustees under the Tenneco
Packaging Inc. Rabbi Trust, to be adopted in connection
with the spin-off.**
4.5 -- Long Term Credit Agreement, dated as of September 29,
1999, among Tenneco Packaging Inc., 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).
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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4.6 -- Short Term Credit Agreement, dated as of September 29,
1999, among Tenneco Packaging Inc., 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).
4.7 -- Form of First Supplemental Indenture, providing for the
issuance of 7.20% Notes due 2005, including the form of
notes (incorporated herein by reference to Exhibit 4.5 to
Tenneco Packaging Inc.'s Registration Statement on Form
S-4, File No. 333-82923).
4.8 -- Form of Second Supplemental Indenture, providing for the
issuance of 7.95% Debentures due 2025, including the form
of debentures (incorporated herein by reference to
Exhibit 4.6 to Tenneco Packaging Inc.'s Registration
Statement on Form S-4, File No. 333-82923).
4.9 -- Form of Third Supplemental Indenture, providing for the
issuance of 8% Notes due 2007, including the form of
notes (incorporated herein by reference to Exhibit 4.7 to
Tenneco Packaging Inc.'s Registration Statement on Form
S-4, File No. 333-82923).
4.10 -- Form of Fourth Supplemental Indenture, providing for the
issuance of 8 1/8% Debentures due June 15, 2017,
including the form of debentures (incorporated herein by
reference to Exhibit 4.8 to Tenneco Packaging Inc.'s
Registration Statement on Form S-4, File No. 333-82923).
4.11 -- Form of Fifth Supplemental Indenture, providing for the
issuance of 8 3/8% Debentures due 2027, including the
form of debentures (incorporated herein by reference to
Exhibit 4.9 to Tenneco Packaging Inc.'s Registration
Statement on Form S-4, File No. 333-82923).
9 -- None.
10.1 -- Form of Human Resources Agreement by and between Tenneco
Inc. and Tenneco Packaging Inc.
10.2 -- Form of Tax Sharing Agreement by and between Tenneco Inc.
and Tenneco Packaging Inc.**
10.3 -- Form of Trademark Transition License Agreement by and
between Tenneco Inc. and Tenneco Packaging Inc.**
10.4 -- Form of Tenneco Packaging Inc. Executive Incentive
Compensation Plan, to be adopted in connection with the
spin-off.**
10.5 -- Form of Tenneco Packaging Inc. Supplemental Executive
Retirement Plan, to be adopted in connection with the
spin-off.
10.6 -- Form of Tenneco Packaging Inc. Change in Control
Severance Benefit Plan for Key Executives, to be adopted
in connection with the spin-off.**
10.7 -- Form of Tenneco Packaging Inc. Deferred Compensation
Plan, to be adopted in connection with the spin-off.**
10.8 -- Form of Tenneco Packaging Inc. Stock Ownership Plan, to
be adopted in connection with the spin-off.**
10.9 -- 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).
10.10 -- Form of Tenneco Packaging Inc. Rabbi Trust, to be adopted
in connection with the spin-off.
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.11 -- Form of Tenneco Rabbi Trust Agreement, to be adopted in
connection with the spin-off.
10.12(a) -- Contribution Agreement, dated as of January 25, 1999, by
and among Tenneco Packaging Inc., 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).
10.12(b) -- Letter Agreement, dated as of April 12, 1999, by and
among Tenneco Packaging Inc., 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).
10.13 -- Stockholders Agreement, as amended, dated as of April 12,
1999, by and among Tenneco Packaging Inc., 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).
10.14 -- Registration Rights Agreement, as amended, dated as of
April 12, 1999, by and among Tenneco Packaging Inc., 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).
10.15 -- Form of Release Agreement by and between Dana G. Mead and
Tenneco Management Company, to be executed in connection
with the spin-off.
10.16 -- Employment Agreement, dated as of March 11, 1997, by and
between Richard L. Wambold and Tenneco Inc.**
10.17 -- Restricted Stock Contract, dated as of June 1, 1999, by
and between Paul J. Griswold and Tenneco Inc.**
10.18 -- Restricted Stock Contract, dated as of June 1, 1999, by
and between Richard L. Wambold and Tenneco Inc.**
11 -- None.
12 -- Computation of Ratio of Earnings to Fixed Charges.**
16 -- None.
21 -- Subsidiaries of Tenneco Packaging Inc.**
24 -- None.
27.1 -- Financial Data Schedule, December 31, 1998.**
27.2 -- Financial Data Schedule, June 30, 1999.**
99.1 -- Information Statement dated as of October 18, 1999
attached to this Registration Statement as Annex A.
99.2 -- Consents to be named as directors of Tenneco Packaging
Inc. for: Mark Andrews, Larry D. Brady, Roger B. Porter
and Paul T. Stecko (incorporated herein by reference to
Exhibit 99.5 to Tenneco Packaging Inc.'s Registration
Statement on Form S-4, File No. 333-82923).
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** Previously filed.
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III. SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Tenneco Packaging Inc.
By: /s/ DANA G. MEAD
----------------------------------
Dana G. Mead
Chairman and Chief Executive
Officer
Date: October 18, 1999
<PAGE> 7
ANNEX A
INFORMATION STATEMENT
TENNECO INC.
1275 KING STREET
GREENWICH, CONNECTICUT 06831-2946
(203) 863-1000 TENNECO
October 18, 1999
To All Tenneco Inc. Shareowners:
On October 12, 1999, the Board of Directors of Tenneco declared a dividend
of shares of Tenneco Packaging Inc. ("Packaging") to Tenneco shareowners. This
spin-off will separate Tenneco's packaging business from its automotive business
and represents the final step in the transformation of Tenneco from a highly
diversified industrial corporation to independent companies focused on their
core businesses. The spin-off will provide each company with independent access
to markets for equity and debt financing and will permit investors to make
separate investment decisions about each company.
Following the spin-off, Packaging, as a new independent public company,
will own and operate the packaging business that has been owned by Tenneco.
Packaging expects, however, to sell its 43% interest in Tenneco's former
paperboard business before the spin-off. Tenneco will continue to operate its
automotive business.
We expect that the spin-off will be effective on or about November 4, 1999.
If you are a shareowner of Tenneco at the close of business on October 29, 1999,
you will receive one share of Packaging common stock for each share of Tenneco
common stock held as of that time. You do not need to take any action as a
Tenneco shareowner. You should receive your Packaging shares shortly after
November 4, 1999. The New York Stock Exchange has authorized the listing of the
Packaging shares, which we expect will trade under the symbol "PTV." We expect
that regular trading in Packaging stock will begin the first business day after
the spin-off. Tenneco has received a ruling from the IRS that the spin-off will
be tax-free to Tenneco and its shareowners for federal income tax purposes.
In connection with the spin-off, Tenneco Inc. will change its name to
Tenneco Automotive Inc. ("Automotive"). Also in connection with the spin-off,
Tenneco Packaging Inc. will change its name. After the spin-off, Tenneco stock
certificates you hold will represent an investment in Automotive. The spin-off
will not change the number of Tenneco shares that you own. However, immediately
following the spin-off, Automotive plans to effect a one-for-five reverse stock
split of the then-outstanding shares of Automotive stock. You should not send in
your Tenneco stock certificates until requested to do so in connection with the
reverse stock split.
This Information Statement contains detailed information about Packaging
and the spin-off, which we encourage you to read carefully. After you read this
Information Statement, you may have questions. Please feel free to contact the
additional sources of information that you will find on pages 3, 17 and 88.
Yours sincerely,
DANA G. MEAD LOGO
DANA G. MEAD
Chairman and Chief Executive Officer
<PAGE> 8
INFORMATION STATEMENT
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SPIN-OFF OF
TENNECO PACKAGING INC.
(TO BE RENAMED)
THROUGH A DISTRIBUTION OF ALL OF ITS COMMON STOCK
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Tenneco Packaging Inc. - On the spin-off date, Tenneco Inc. will distribute
(to be renamed) all of the common stock of Tenneco Packaging Inc.
1900 West Field Court (to be renamed) to owners of Tenneco common stock
Lake Forest, Illinois 60045 as of the close of business on October 29, 1999.
(847) 482-2000
</TABLE>
Proposed Trading Symbol:
New York Stock Exchange -- PTV
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THE SPIN-OFF AND THE OWNERSHIP OF THE STOCK OF TENNECO PACKAGING INC. (TO BE
RENAMED) INVOLVE RISKS. YOU SHOULD READ "RISK FACTORS" BEGINNING ON PAGE 12.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
THE MATERIAL IN THIS INFORMATION STATEMENT MAY BE REVISED OR COMPLETED. WE HAVE
FILED A REGISTRATION STATEMENT RELATING TO THE COMMON STOCK OF TENNECO PACKAGING
INC. (TO BE RENAMED) WITH THE SECURITIES AND EXCHANGE COMMISSION. WE WILL NOT
ISSUE THESE SECURITIES BEFORE THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS
INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY THESE SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
INFORMATION STATEMENT IS TRUTHFUL OR ACCURATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
October 18, 1999
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY..................................................... -1-
Questions and Answers about Packaging, the Spin-off,
and Tenneco........................................... -1-
Packaging.............................................. -4-
The Spin-off........................................... -5-
Summary Historical and Pro Forma Combined Financial
Data.................................................. -7-
Recent Developments.................................... -11-
RISK FACTORS................................................ -12-
Risks Relating to Our Business......................... -12-
Risks Relating to Our Stock............................ -14-
Risks Relating to the Transaction...................... -15-
THE SPIN-OFF................................................ -17-
Introduction........................................... -17-
Reasons for the Spin-off............................... -17-
Manner of Spin-off..................................... -18-
Corporate Restructuring Transactions................... -18-
Debt Realignment....................................... -19-
Conditions to the Spin-off............................. -20-
Relationship Between Automotive and Packaging After the
Spin-off.............................................. -21-
Trading of Packaging Common Stock...................... -24-
U.S. Federal Income Tax Aspects of the Spin-off........ -25-
Reasons for Furnishing the Information Statement....... -27-
CAPITALIZATION AND NEW FINANCING............................ -28-
Capitalization......................................... -28-
New Financing.......................................... -29-
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF
PACKAGING................................................. -31-
SUPPLEMENTAL FINANCIAL INFORMATION.......................... -37-
COMBINED SELECTED FINANCIAL DATA............................ -38-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. -41-
BUSINESS.................................................... -59-
Industry Overview and Key Terms........................ -59-
Our Products and Markets............................... -60-
Growth Strategy........................................ -61-
Marketing, Distribution and Customers.................. -64-
Analysis of Revenues................................... -64-
Competition............................................ -65-
International.......................................... -65-
Properties............................................. -65-
Raw Materials.......................................... -66-
Environmental Regulation............................... -66-
Other.................................................. -66-
Legal Proceedings...................................... -67-
Containerboard Packaging Interest...................... -67-
</TABLE>
i
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MANAGEMENT.................................................. -68-
Board of Directors..................................... -68-
Executive Officers..................................... -69-
Stock Ownership of Management.......................... -70-
Committees of the Board of Directors................... -70-
Executive Compensation................................. -71-
Liability and Indemnification of Directors and
Officers.............................................. -76-
PRINCIPAL SHAREOWNERS....................................... -78-
DESCRIPTION OF CAPITAL STOCK................................ -79-
Authorized Capital Stock............................... -79-
Packaging Common Stock................................. -79-
Packaging Preferred Stock.............................. -79-
Anti-takeover Effects of Certain Provisions............ -80-
ADDITIONAL INFORMATION...................................... -88-
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE OF THE
BUSINESSES OF TENNECO PACKAGING........................... F-1
</TABLE>
ii
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SUMMARY
This summary highlights selected information from this document, but does
not contain all the details concerning the spin-off and Packaging, including
information that may be important to you. To better understand the spin-off and
Packaging, you should carefully review this entire document.
Unless the context otherwise requires, in this document:
- "Packaging," "we," "us," and "our" refer to the packaging business of
Tenneco, including Tenneco Packaging Inc., for periods before the
spin-off. For periods after the spin-off, those terms refer to Tenneco
Packaging Inc., which will be renamed, and its subsidiaries.
- "Tenneco" refers to Tenneco Inc. and its subsidiaries. Before the
spin-off, this term includes Tenneco's automotive and packaging
businesses. After the spin-off it will not include Tenneco's packaging
business.
- We also use the term "Automotive" to refer to Tenneco Inc. and those
companies that will be its subsidiaries when the spin-off is completed,
which will own and operate its automotive business and which will be
renamed Tenneco Automotive Inc.
QUESTIONS AND ANSWERS ABOUT PACKAGING, THE SPIN-OFF AND TENNECO
Q: What is Packaging?
A: We are a global supplier of specialty packaging and consumer products.
Specialty packaging is an industry term that refers to packaging that is
used by commercial customers and designed for a specific application or
product. We are currently owned by Tenneco. We will become an independent,
publicly traded company upon completion of the spin-off. Also, we own a 43%
common equity interest in a joint venture that manufactures containerboard
and related packaging products. Containerboard is made primarily from wood
pulp and recycled paper and is used to make cartons, boxes and containers.
We plan to sell our interest in the containerboard joint venture in a
registered public offering, and we expect the sale to be completed before
the spin-off. See "Business" and "Business -- Containerboard Packaging
Interest."
Q: What is the spin-off?
A: The spin-off is the final step in the transformation of Tenneco from a
diversified industrial company to independent companies focused on their
core businesses. The spin-off will separate Tenneco's remaining businesses
and create two publicly traded companies:
- Packaging -- a global manufacturer and marketer of specialty packaging
and consumer products; and
- Automotive -- a global designer, manufacturer and distributor of a
variety of automotive emissions control and ride control systems.
In connection with the spin-off, Tenneco will declare and pay to each of
its shareowners a dividend of one share of Packaging common stock for each
share of Tenneco common stock held as of the close of business on October
29, 1999. Immediately after the spin-off, Tenneco's shareowners will
continue to own all of Tenneco's current businesses, but they will own them
through their investments in Automotive and Packaging.
Q: Why is this transaction structured as a spin-off?
A: The spin-off is the most tax-efficient means of separating Tenneco's
businesses. Tenneco has received from the IRS a letter ruling that the
spin-off is tax-free to Tenneco and its shareowners for federal income tax
purposes.
Q: What steps must Tenneco take to accomplish the spin-off?
A: We will not do the spin-off unless Tenneco has completed its corporate
restructuring transactions and it has realigned substantially all of its
debt.
1
<PAGE> 12
Q: What are the corporate restructuring transactions?
A: As Tenneco is currently organized, ownership of its subsidiaries is based on
geographic location and tax considerations rather than on the businesses in
which the subsidiaries are involved. Therefore, Tenneco will need to
restructure its existing businesses so that:
- the assets, liabilities and operations of its packaging business and
administrative services operations will be owned directly and indirectly
by Packaging; and
- the assets, liabilities and operations of its automotive business will
be owned directly and indirectly by Tenneco and its non-packaging
subsidiaries.
Q: What is the debt realignment?
A: Tenneco's historical practice has been to incur debt for its consolidated
group at the parent-company level or at a limited number of its
subsidiaries, rather than at the operating-company level, and to manage
centrally various cash functions. Therefore, before the spin-off, Tenneco
will realign substantially all of its existing debt. The purpose of the
debt realignment is to allocate the debt between Automotive and us before
the companies are separated. Tenneco expects to accomplish the debt
realignment through some combination of tender offers, exchange offers,
prepayments and other refinancings.
As part of the debt realignment, on October 5, 1999, Tenneco made a public
offer to exchange some of our debt for some of its outstanding public debt
and offered to purchase its remaining public debt for cash. Tenneco expects
to repay its other non-public debt and repurchase subsidiary preferred
stock. To finance these cash payments, we and Automotive will each make
borrowings under new credit facilities and Automotive has issued new senior
subordinated debt.
If the debt realignment and spin-off had occurred on June 30, 1999, we
would have been allocated debt for money borrowed of about $2.2 billion on
a pro forma basis. This does not give effect to the application of any
proceeds from our planned sale of our remaining interest in the
containerboard joint venture. See "The Spin-off -- Debt Realignment."
Q: Why is Tenneco separating its businesses?
A: Tenneco's board of directors determined that the spin-off is in the best
interests of Tenneco's shareowners because divergent industry trends
increasingly require Tenneco's packaging and automotive businesses to
pursue different strategies. Each business has distinct financial,
investment and operating characteristics. Separating the businesses will:
- enable each company to concentrate its attention and financial resources
on its own core business and provide each company with independent access
to markets for equity and debt financing;
- permit investors to make separate investment decisions about the two
companies, based on their performance and other characteristics, and
enhance the likelihood that each company will achieve appropriate market
valuation of each of the two businesses; and
- allow each company to create employee compensation programs
custom-tailored to the operations of their business, including an
employee stock ownership plan for Automotive and stock-based and other
incentive programs, which will more directly reward employees of each
business based on the success of that business. See "The Spin-off --
Reasons for the Spin-off."
Q: What do Tenneco shareowners have to do to participate in the spin-off?
A: Nothing. Because the spin-off of our shares is a dividend, no proxy or vote
is necessary. We expect the spin-off will occur on or about November 4,
1999. If you own Tenneco common stock as of 5:00 p.m. New York City time on
October 29, 1999, your brokerage account will be credited with shares of
Packaging common stock, or you will be mailed certificates representing
shares of Packaging common stock. You do not need to mail in your
certificates of Tenneco common stock to receive your Packaging common stock
certificates. See "The Spin-off -- Manner of Spin-off." After the spin-off,
your Tenneco common stock certificates will represent an investment in
Automotive. The spin-off will not change the number of shares of Tenneco
common stock that you own. However, immediately
2
<PAGE> 13
following the spin-off, Automotive plans to effect a one-for-five reverse
stock split of the then-outstanding shares of Automotive stock. You should
not send in your Tenneco stock certificates until requested to do so in
connection with the reverse stock split.
Q: Are there risks to owning Packaging common stock?
A: Yes. Our specialty packaging and consumer products business is subject to
general business risks relating to our operation of the business. In
addition, our separation from Tenneco presents other risks relating to the
listing of our stock for the first time and the nature of the spin-off
transaction. These risks are described in the "Risk Factors" section
beginning on page 12. We encourage you to read this section.
Q: Will Automotive and Packaging be related after the spin-off?
A: Automotive will not own any of our common stock after the spin-off, and we
will not own any Automotive common stock after the spin-off. However, each
company's benefit plans and trusts will own a limited amount of the other
company's common stock. See "The Spin-off -- Relationship Between
Automotive and Packaging After the Spin-off -- Benefit Plan Ownership of
Stock." We will also enter into agreements with Tenneco that provide for
the separation of our business from the automotive business. Additionally,
four experienced members of Tenneco's board of directors will serve on our
board of directors as well as Automotive's. See "The
Spin-off -- Relationship Between Automotive and Packaging After the
Spin-off."
Q: Where can Tenneco shareowners get more information?
A: You may contact First Chicago Trust Company of New York, the agent for the
spin-off, at First Chicago Trust Company of New York, Attn: General
Correspondence, P.O. Box 2500, Jersey City, NJ 07303-2500, telephone
number: (800) 519-3111. You may also direct questions to Tenneco Investor
Relations at Tenneco Inc., 1275 King Street, Greenwich, Connecticut 06831,
Attention: Stan March, telephone number: 203/863-1170.
3
<PAGE> 14
PACKAGING
Packaging, a Delaware corporation, is a global supplier of specialty
packaging and consumer products with 1998 revenues of approximately $2.8
billion. We operate 89 manufacturing facilities throughout the world and employ
over 15,000 people. We are currently owned by Tenneco. We will be an
independent, publicly traded company after the spin-off (NYSE: PTV).
OUR BUSINESS
We operate two units: (a) consumer products and food/foodservice packaging;
and (b) protective and flexible packaging. Our industry uses many terms that
refer to technical processes and products which we explain in more detail under
the section titled "Business -- Industry Overview and Key Terms" beginning on
page 59.
Consumer Products and Food/Foodservice Packaging. We manufacture, market
and sell consumer products such as plastic storage bags for food and household
items, plastic waste bags, foam and molded fiber disposable tableware, and
disposable aluminum cookware. We sell many of these products under such
recognized brand names as Hefty(R), Baggies(R), Hefty One-Zip(R), Kordite(TM)
and E-Z Foil(R).
We manufacture food packaging products for the food processing industry,
such as molded fiber egg cartons, foam meat trays, aluminum containers and
modified atmosphere packaging, which extends the shelf life of meat products. In
addition, we provide plastic zipper closures for a variety of flexible packaging
applications. We also provide food packaging products for supermarket in-store
use. These products include clear rigid display packaging, microwaveable
containers, plastic foam trays, and bags. For our foodservice customers, we
offer products that help merchandize and serve both on-premises and takeout
meals.
Protective and Flexible Packaging. We manufacture, market and sell
packaging used for cushioning, bracing, surface protection and insulation in the
automotive, computer, electronic, furniture, durable goods and building and
construction products industries. These products include our sheet foams and air
encapsulated bubble products, padded mailers and customized packaging systems.
Our flexible packaging products provide a variety of efficient and
attractive solutions for 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 used for sterile intravenous fluid delivery, modified atmosphere
films, stand-up pouches, food and hygiene packaging, and disposable surgical
kits custom designed for specific procedures.
GROWTH STRATEGY
We are pursuing a growth strategy driven by highly focused internal
programs which are comple-mented by strategic acquisitions. By effectively
implementing this growth strategy, we increased the total revenues of our
specialty packaging and consumer products business from $845 million in 1995 to
approximately $2.8 billion in 1998. During this same period, our income from
continuing operations from this business increased from $39 million to $328
million, representing a compound annualized growth rate of 103%. See "Combined
Selected Financial Data" and "Business -- Growth Strategy."
OUR CONTAINERBOARD PACKAGING INTEREST
In April 1999, we contributed our containerboard packaging business to a
new joint venture with an affiliate of Madison Dearborn Partners, Inc. We
received cash and debt assumption totaling approximately $2 billion and retained
a 45% common equity interest in the joint venture. The joint venture
manufactures containerboard, as well as corrugated containers and lumber and
related wood products. The 1998 pro forma revenues of the joint venture were
$1.57 billion. We plan to sell our interest in the venture, now at 43% due to
subsequent equity issuances to management, in a registered public offering. We
expect the sale to be completed before the spin-off, with the net proceeds used
to retire that portion of Tenneco's debt that would otherwise be allocated to us
in Tenneco's debt realignment. See "Business -- Containerboard Packaging
Interest" and note (e) to "Unaudited Pro Forma Combined Financial Statements of
Packaging."
4
<PAGE> 15
THE SPIN-OFF
The spin-off will complete the separation of Tenneco's businesses and
create two independent companies -- Packaging and Automotive.
SHARES TO BE DISTRIBUTED... 171,356,195 shares of Packaging common stock (based
on Tenneco shares outstanding as of June 30, 1999).
DISTRIBUTION RATIO......... One share of Packaging common stock for each share
of Tenneco common stock held as of the close of
business on the Record Date.
RECORD DATE................ October 29, 1999.
SPIN-OFF DATE.............. On or about November 4, 1999.
TAX TREATMENT.............. Tax-free to Tenneco and Tenneco shareowners.
CORPORATE RESTRUCTURING
TRANSACTIONS............... Before the spin-off, Tenneco and its subsidiaries
will restructure Tenneco's existing businesses,
assets and liabilities so that:
- the assets, liabilities and operations of
Tenneco's packaging business and certain
corporate assets and services will be owned
directly and indirectly by Packaging; and
- the assets, liabilities and operations of
Tenneco's automotive business will be owned
directly and indirectly by Tenneco and its
non-packaging subsidiaries. See "The
Spin-off -- Corporate Restructuring
Transactions."
DEBT REALIGNMENT........... Before the spin-off, Tenneco will realign
substantially all of its existing debt. Tenneco
expects to realign its debt through some
combination of tender offers, exchange offers,
prepayments and other refinancings. To finance this
debt realignment, Packaging and Automotive each
expect to make borrowings under a new credit
facility, and Automotive has issued new
subordinated debt. See "The Spin-off -- Debt
Realignment."
DISTRIBUTION AND ANCILLARY
AGREEMENTS................. The distribution agreement to be entered into
between Tenneco and Packaging will establish the
terms of the spin-off. Packaging and Automotive
also will enter into five ancillary agreements,
which will facilitate the separation of Tenneco's
packaging business from its automotive business and
facilitate the operation of Automotive and
Packaging as separate companies. The five ancillary
agreements cover human resources, insurance, tax
sharing, transition services and trademark
licensing. See "The Spin-off -- Relationship
Between Automotive and Packaging After the
Spin-off."
LISTING AND TRADING........ Packaging has been authorized to list its common
stock on the New York Stock Exchange under the
symbol "PTV". We expect that "when-issued" trading
for Packaging common stock will develop on or about
October 27, 1999 and continue through the spin-off
date. "When-issued" trades are completed only if
the stock is issued. We expect that normal NYSE
trading in Packaging common stock will begin the
first business day after the spin-off. See "The
Spin-off -- Trading of Packaging Common Stock."
The combined trading prices of Packaging common
stock and Automotive common stock after the
spin-off, without giving effect to Automotive's
planned reverse stock split, may or may not equal
the trading price of Tenneco common stock before
the spin-off. In addi-
5
<PAGE> 16
tion, the trading price of each company's common
stock may fluctuate significantly. See "Risk
Factors" and "The Spin-off -- Trading of Packaging
Common Stock."
DIVIDEND POLICY............ Packaging's dividend policy will be established by
its board of directors from time to time based on
the results of Packaging's operations, financial
condition and other business considerations that
the board of directors considers relevant.
Packaging expects that its annual dividend for the
foreseeable future will be set to approximate the
Standard & Poor's 500 average dividend yield.
Automotive's dividend policy will be established by
its board of directors from time to time based on
the results of Automotive's operations, financial
condition and other business considerations that
its board of directors deems relevant. Also,
because Automotive will be highly leveraged and
restricted with respect to the payment of
dividends, its annual dividend is expected to be
nominal.
The combined annual dividends of Packaging and
Automotive after the spin-off will be less than
Tenneco's annual dividend before the spin-off. See
"Risk Factors" and "Description of Capital
Stock -- Packaging Common Stock."
CONDITIONS TO THE
SPIN-OFF................... Tenneco received a ruling from the Internal Revenue
Service on August 20, 1999, which was supplemented
on October 6, 1999, that the spin-off will be
tax-free to Tenneco and its stockholders for
federal income tax purposes. The spin-off is
subject to, among other things, receipt and
continued effectiveness of a determination that the
spin-off will be tax-free for federal income tax
purposes. The spin-off is also conditioned upon the
successful completion of the corporate
restructuring transactions and the debt
realignment. See "The Spin-off -- Conditions to the
Spin-off."
6
<PAGE> 17
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following summary combined financial data as of December 31, 1998 and
1997, and for the years ended December 31, 1998, 1997, and 1996, were derived
from the audited Combined Financial Statements of The Businesses of Tenneco
Packaging. The following summary combined financial data as of December 31,
1996, 1995, and 1994, and for the years ended December 31, 1995 and 1994, are
unaudited and were derived from Tenneco's accounting records. The following
summary combined financial data as of and for each of the six months ended June
30, 1999 and 1998 were derived from the unaudited Combined Financial Statements
of The Businesses of Tenneco Packaging. In our opinion, the summary combined
financial data of Packaging as of December 31, 1996, 1995, and 1994, and for the
years ended December 31, 1995 and 1994, and as of and for the six months ended
June 30, 1999 and 1998, include all adjusting entries, consisting only of normal
recurring adjustments, necessary to present fairly the information set forth.
You should not regard the results of operations for the six months ended June
30, 1999 as indicative of the results that may be expected for the full year.
The following summary unaudited pro forma combined financial data as of and
for the six months ended June 30, 1999, and for the year ended December 31,
1998, reflect the effects of:
- the debt realignment; and
- the spin-off and related transactions.
The unaudited pro forma combined statement of income data have been
prepared as if these transactions occurred on January 1, 1998; the unaudited pro
forma combined balance sheet data have been prepared as if these transactions
occurred on June 30, 1999. The summary unaudited pro forma combined financial
data are not necessarily indicative of what our results of operations would have
been had the transactions described above actually been consummated on the dates
assumed and are not necessarily indicative of the results of operations for any
future period.
Our debt balances in the summary unaudited pro forma combined financial
data do not reflect the application of any proceeds from the planned sale of our
remaining interest in the containerboard joint venture. We expect the sale to be
completed before the spin-off, with the net proceeds used to retire the Tenneco
debt that would otherwise be allocated to us in the debt realignment. If the
sale occurs after the spin-off, the net proceeds will be used to retire our
debt.
There is other information we believe is relevant to understanding our
results of operations following the spin-off. These items relate to corporate
overhead costs incurred by Tenneco and its administrative services operations
that we expect will differ following the spin-off. For further information you
should see "Supplemental Financial Information" on page 37 of this document.
You should read all of this information in conjunction with the following,
each of which is included elsewhere in this document:
- Unaudited Pro Forma Combined Financial Statements of Packaging (page 31);
- Combined Selected Financial Data (page 38);
- Management's Discussion and Analysis of Financial Condition and Results
of Operations (page 41); and
- Combined Financial Statements of the Businesses of Tenneco Packaging
(page F-1).
(continued on next page)
7
<PAGE> 18
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------------------------------------- -----------
PRO FORMA PRO FORMA
1998 1998(A) 1997(A) 1996(A) 1995 1994 1999
--------- ------- ------- ------- ---- ---- ---------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA(b):
Net sales and operating
revenues --
Specialty........... $ 2,785 $ 2,785 $ 2,553 $ 1,987 $ 845 $ 636 $ 1,404
Other............... 6 6 10 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total............. $ 2,791 $ 2,791 $ 2,563 $ 1,987 $ 845 $ 636 $ 1,404
=========== =========== =========== =========== =========== =========== ===========
Income from continuing
operations before
interest expense,
income taxes, and
minority interest --
Specialty........... $ 328 $ 328 $ 308 $ 249 $ 39 $ 68 $ 190
Other(c)............ (40) (45) (2) (15) (6) 17 (43)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total............. 288 283 306 234 33 85 147
Interest expense(d)..... 164 133 124 102 91 48 81
Income tax expense
(benefit)............. 57 67 75 67 (3) 19 20
Minority interest....... 1 1 1 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
continuing
operations............ 66 82 106 65 (55) 18 46
Income (loss) from
discontinued
operations, net of
income tax(e)......... NA 57 21 71 224 75 NA
Extraordinary loss, net
of income tax(f)...... NA -- -- (2) -- -- NA
Cumulative effect of
changes in accounting
principles, net of
income tax(g)......... NA -- (38) -- -- -- NA
----------- ----------- ----------- ----------- -----------
Net income (loss)....... NA $ 139 $ 89 $ 134 $ 169 $ 93 NA
=========== =========== =========== =========== ===========
Average number of shares
of common stock
outstanding(h) --
Basic................... 168,505,573 168,505,573 170,264,731 169,609,373 172,764,198 162,307,189 166,937,362
Diluted................. 168,834,531 168,834,531 170,801,636 170,526,112 173,511,654 162,912,425 167,319,412
Earnings (loss) per
average share of common
stock(h) --
Basic:
Continuing
operations.......... $ .39 $ .49 $ .63 $ .38 $ (.32) $ .11 $ .28
Discontinued
operations(e)....... NA .34 .12 .42 1.30 .46 NA
Extraordinary
loss(f)............. NA -- -- (.01) -- -- NA
Cumulative effect of
changes in
accounting
principles(g)....... NA -- (.23) -- -- -- NA
----------- ----------- ----------- ----------- -----------
$ .83 $ .52 $ .79 $ .98 $ .57
=========== =========== =========== =========== ===========
Diluted:
Continuing
operations.......... $ .39 $ .49 $ .63 $ .38 $ (.32) $ .11 $ .28
Discontinued
operations(e)....... NA .34 .12 .42 1.29 .46 NA
Extraordinary
loss(f)............. NA -- -- (.01) -- -- NA
Cumulative effect of
changes in
accounting
principles(g)....... NA -- (.23) -- -- -- NA
----------- ----------- ----------- ----------- -----------
$ .83 $ .52 $ .79 $ .97 $ .57
=========== =========== =========== =========== ===========
BALANCE SHEET DATA(b):
Net assets of
discontinued
operations(e)......... NA $ 366 $ 423 $ 459 $ 393 $ 236 $ 133
Total assets............ NA 4,798 4,618 4,028 3,358 1,630 4,749
Short-term debt(d)...... NA 595 158 123 205 49 1,010(i)
Long-term debt(d)....... NA 1,312 1,492 1,073 880 478 1,186(i)
Debt allocated to
discontinued
operations(d)......... NA 548 473 394 369 285 --
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------------
1999(A) 1998(A)
------- -------
<S> <C> <C>
STATEMENT OF INCOME
DATA(b):
Net sales and operating
revenues --
Specialty........... $ 1,404 $ 1,361
Other............... -- 10
----------- -----------
Total............. $ 1,404 $ 1,371
=========== ===========
Income from continuing
operations before
interest expense,
income taxes, and
minority interest --
Specialty........... $ 190 $ 175
Other(c)............ (46) (2)
----------- -----------
Total............. 144 173
Interest expense(d)..... 68 67
Income tax expense
(benefit)............. 24 37
Minority interest....... -- --
----------- -----------
Income (loss) from
continuing
operations............ 52 69
Income (loss) from
discontinued
operations, net of
income tax(e)......... (163) 37
Extraordinary loss, net
of income tax(f)...... (7) --
Cumulative effect of
changes in accounting
principles, net of
income tax(g)......... (32) --
----------- -----------
Net income (loss)....... $ (150) $ 106
=========== ===========
Average number of shares
of common stock
outstanding(h) --
Basic................... 166,937,362 169,341,555
Diluted................. 167,319,412 169,936,676
Earnings (loss) per
average share of common
stock(h) --
Basic:
Continuing
operations.......... $ .31 $ .41
Discontinued
operations(e)....... (.98) .22
Extraordinary
loss(f)............. (.04) --
Cumulative effect of
changes in
accounting
principles(g)....... (.19) --
----------- -----------
$ (.90) $ .63
=========== ===========
Diluted:
Continuing
operations.......... $ .31 $ .41
Discontinued
operations(e)....... (.98) .22
Extraordinary
loss(f)............. (.04) --
Cumulative effect of
changes in
accounting
principles(g)....... (.19) --
----------- -----------
$ (.90) $ .63
=========== ===========
BALANCE SHEET DATA(b):
Net assets of
discontinued
operations(e)......... $ 133 $ 382
Total assets............ 4,486 4,788
Short-term debt(d)...... 367 335
Long-term debt(d)....... 1,494 1,488
Debt allocated to
discontinued
operations(d)......... -- 479
</TABLE>
(continued on next page)
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<PAGE> 19
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------------------------------------- -----------
PRO FORMA PRO FORMA
1998 1998(A) 1997(A) 1996(A) 1995 1994 1999
--------- ------- ------- ------- ---- ---- ---------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Minority interest....... NA 14 15 -- -- -- 14
Combined equity......... NA 1,776 1,839 1,843 1,531 703 1,286
STATEMENT OF CASH FLOWS
DATA(b):
Net cash provided
(used) by operating
activities.......... NA $ 577 $ 405 $ 263 $ 479 $ 283 NA
Net cash provided
(used) by investing
activities.......... NA (514) (654) (669) (1,791) (146) NA
Net cash provided
(used) by financing
activities.......... NA (67) 239 399 1,327 (142) NA
Capital expenditures
for continuing
operations.......... NA (194) (229) (216) (265) (134) NA
OTHER DATA:
EBITDA(j)............... $ 463 $ 458 $ 469 $ 365 $ 78 $ 121 $ 241
Ratio of earnings to
fixed charges(k)...... 1.68 1.99 2.31 2.15 NM 1.72 1.74
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------------
1999(A) 1998(A)
------- -------
<S> <C> <C>
Minority interest....... 14 15
Combined equity......... 1,340 1,829
STATEMENT OF CASH FLOWS
DATA(b):
Net cash provided
(used) by operating
activities.......... $ (45) $ 288
Net cash provided
(used) by investing
activities.......... (866) (221)
Net cash provided
(used) by financing
activities.......... 920 (66)
Capital expenditures
for continuing
operations.......... (75) (101)
OTHER DATA:
EBITDA(j)............... $ 238 $ 261
Ratio of earnings to
fixed charges(k)...... 2.00 2.45
</TABLE>
- -------------------------
(a) For a discussion of the significant items affecting comparability of the
financial information for the years ended December 31, 1998, 1997, and 1996,
and for the six months ended June 30, 1999 and 1998, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this document.
(b) During the periods presented, we completed numerous acquisitions, the most
significant of which were the acquisitions of Mobil Plastics for $1.3
billion in late 1995, Amoco Foam Products for $310 million in August 1996,
and the protective and flexible packaging business of N.V. Koninklijke KNP
BT for $380 million in April 1997. See Note 6 to the Combined Financial
Statements of The Businesses of Tenneco Packaging. See also "Business --
Growth Strategy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(c) Historical and pro forma income from continuing operations before interest
expense, income taxes and minority interest for "Other" includes costs which
were incurred by Tenneco's corporate and administrative services operations
which were not allocated to Tenneco's operating segments. Because these
functions will be a part of Packaging upon the spin-off, they are included
in our historical combined financial statements. We expect our costs for
these functions will differ following the spin-off. See "Supplemental
Financial Information" included elsewhere in this document for further
information.
(d) Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Accordingly, historical amounts include debt
and related interest expense allocated to Packaging from Tenneco based on
the portion of Tenneco's investment in Packaging which Tenneco deemed to be
debt. This allocation is generally based upon the ratio of Packaging's net
assets to Tenneco's consolidated net assets plus debt. An allocation of debt
and its related interest expense has also been made to Packaging's
discontinued operations based on the ratio of the discontinued operations'
net assets to Packaging's combined net assets plus debt. Management believes
that the allocation of corporate debt and related interest expense for the
historical periods is reasonable. This historical allocation, however, is
not indicative of the total amount of debt that Packaging will have upon
completion of the debt realignment or of the debt and interest that may be
incurred by Packaging as a separate public entity. See "Combined Financial
Statements of The Businesses of Tenneco Packaging" included elsewhere in
this document.
(e) Discontinued operations for the periods presented consist of our paperboard
packaging segment, which was discontinued in June 1999 following the
decision to sell Packaging's remaining common equity interest in its
containerboard joint venture. Loss from discontinued operations for the six
months ended June 30, 1999 includes an after-tax loss of $178 million, or
$1.07 per diluted common share, resulting from the contribution of our
containerboard assets to the containerboard joint venture. See Note 7 to the
Combined Financial Statements of The Businesses of Tenneco Packaging
included elsewhere in this document.
(f) Represents our costs related to prepayment of debt. See Note 7 to the
Combined Financial Statements of The Businesses of Tenneco Packaging
included elsewhere in this document.
(g) In 1999, we implemented the American Institute of Certified Public
Accountants Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." In 1997, we implemented the Financial Accounting Standards
Board's Emerging Issues Task Force Issue 97-13, "Accounting for Costs
Incurred in Connection with a Consulting Contract that Combines Business
Process Reengineering and Information Technology Transformation." See Note 3
to the Combined Financial Statements of The Businesses of Tenneco Packaging
included elsewhere in this document for additional information regarding
changes in accounting principles.
(h) In the spin-off, Tenneco shareowners will receive one share of our common
stock for each share of Tenneco common stock outstanding. Accordingly, basic
and diluted earnings per share for Packaging were calculated using Tenneco's
historical weighted average shares outstanding and weighted average shares
outstanding adjusted to include estimates of additional shares that would be
issued if potentially dilutive common shares had been issued, respectively.
(continued on next page)
9
<PAGE> 20
(i) Our pro forma debt balances reflect debt allocated to us in the debt
realignment before application of any proceeds from the planned sale of our
remaining interest in the containerboard joint venture. We expect the sale
to be completed before the spin-off, with the net proceeds used to retire
the Tenneco debt that would otherwise be allocated to us in the debt
realignment. If the sale occurs after the spin-off, the net proceeds will be
used to retire our debt. See "Unaudited Pro Forma Combined Financial
Statements."
(j) EBITDA represents income from continuing operations before interest expense,
income taxes, minority interest and depreciation and amortization. EBITDA is
not a calculation based upon generally accepted accounting principles. We
derived the amounts included in the EBITDA calculation, however, from
amounts included in the Combined Statements of Income of The Businesses of
Tenneco Packaging or Unaudited Pro Forma Combined Statements of Income of
Packaging included elsewhere in this document. EBITDA should not be
considered as an alternative to net income or operating income as an
indicator of our operating performance or as an alternative to operating
cash flows as a measure of liquidity. We have reported EBITDA because we
believe EBITDA is a measure commonly reported and widely used by investors
and other interested parties as an indicator of a company's ability to incur
and service debt. We believe EBITDA assists investors in comparing a
company's performance on a consistent basis without regard to depreciation
and amortization, which can vary significantly depending upon accounting
methods (particularly when acquisitions are involved) or nonoperating
factors. However, the EBITDA measure presented in this document may not
always be comparable to similarly titled measures reported by other
companies due to differences in the components of the calculation.
(k) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges, excluding
capitalized interest. Fixed charges consist of interest expense, the portion
of rental expense considered representative of the interest factor and
capitalized interest. The historical ratios are based upon the amount of
interest expense on corporate debt allocated to us by Tenneco as discussed
in (d) above. We derived the pro forma ratios from the Unaudited Pro Forma
Combined Financial Statements included elsewhere in this document. For the
year ended December 31, 1995, earnings were inadequate to cover fixed
charges by $59 million.
10
<PAGE> 21
RECENT DEVELOPMENTS
On October 8, 1999, Tenneco released limited third quarter 1999 financial
information. The results that were reported were before interest and taxes and
did not include third quarter results for Tenneco's corporate and administrative
services operations, which are expected to be reported October 25, when Tenneco
issues its consolidated third quarter earnings. Tenneco's corporate and
administrative services operations will be a part of Packaging upon the
spin-off; as such, these costs have been included in our historical combined
financial statements.
Our specialty segment's third quarter 1999 revenues were $754 million, up 8
percent over the 1998 third quarter revenue of $701 million. Our specialty
segment's operating income in the quarter was $71 million, down $15 million from
$86 million in the prior year quarter. Our specialty segment's earnings before
interest, taxes, depreciation and amortization (EBITDA) declined to $115 million
from $124 million a year earlier.
Our consumer products and foodservice/food packaging business recorded
revenues of $534 million, 8 percent higher than the third quarter 1998, due to a
combination of unit volume growth and higher selling prices. Operating income of
$54 million was $14 million lower than the third quarter 1998, as selling price
increases lagged behind a rapid escalation in raw material prices, principally
polyethylene. In addition, consumer advertising and promotional expenditures
increased to support the growth of the Hefty(R) OneZip(R) product.
Protective and flexible packaging third quarter revenues reached $220
million, up 6 percent from $206 million in 1998. Operating income in the period
was $20 million, up 11 percent over prior period operating income of $18
million.
In addition, we incurred $3 million of overhead expenses related to the
restructuring of Tenneco.
Based on our forecast of resin costs and pricing actions, we expect the
negative impact on margins from increased resin costs to begin to be offset
sometime in the fourth quarter of 1999. However, significant improvement is
unlikely until early next year. Since the beginning of the second quarter of
1999, published industry prices for polyethylene (butene) have increased by 80
percent. We are taking aggressive pricing actions to recover these cost
increases, but do not expect a return to normal margins until early next year
when resin prices are expected to stabilize and then decline.
Packaging's management is evaluating Packaging's strategy in light of its
competitive position as a new stand-alone public company and, as part of this
evaluation, is analyzing its business operations and assets. Specifically, the
evaluation includes a review of Packaging's strategic and competitive position
in market segments and operations where results are not meeting management's
expectations. Although plans are still being developed and have not been
finalized or approved, potential options could include the disposition,
restructuring or rationalization of assets and operations. Packaging expects to
complete its evaluation in the fourth quarter of 1999. Based on its continuing
analysis, Packaging has revised its original estimate of the potential charge it
would expect to take upon final approval of the plan. Packaging currently
estimates that its evaluation could result in an aggregate pre-tax charge of up
to approximately $175 million, of which approximately 10% could be cash.
11
<PAGE> 22
RISK FACTORS
In addition to the other information included in this Information
Statement, you should be aware of the following risk factors in connection with
the spin-off and ownership of our shares.
We also caution you that this Information Statement contains
forward-looking statements. The words "believes," "should be," "anticipates,"
"plans," "expects," "intends" and "estimates," and similar expressions, identify
these forward-looking statements. These forward-looking statements are contained
principally under the headings "Summary," "Risk Factors," "Unaudited Pro Forma
Combined Financial Statements of Packaging," "Supplemental Financial
Information," "Management's Discussion and Analysis and Results of Operations,"
and "Business." Although we believe that our expectations reflected in these
forward-looking statements are based on reasonable assumptions, our expectations
may not prove to be correct. Because these forward-looking statements are also
subject to risks and uncertainties, actual results may differ materially from
the expectations expressed by such forward-looking statements. Important factors
that could cause actual results to differ materially from the expectations
reflected in our forward-looking statements include those set forth below, as
well as:
- general economic, business and market conditions;
- operating hazards associated with our business;
- labor disruptions at our plants or with any of our significant customers
or suppliers;
- customer acceptance of new products;
- availability or costs of operating funds, including changes in interest
rates or market perceptions of us;
- changes by the Financial Accounting Standards Board or the Securities and
Exchange Commission of authoritative generally accepted accounting
principles or policies;
- the impact of laws and regulations, including environmental laws and
regulations; and
- the occurrence or non-occurrence of circumstances beyond our control.
RISKS RELATING TO OUR BUSINESS
CYCLICAL DEMAND -- THE CYCLICAL DEMAND FOR OUR PRODUCTS COULD ADVERSELY AFFECT
OUR OPERATING RESULTS BECAUSE LESS DEMAND FOR OUR PRODUCTS COULD REDUCE OUR
PROFITABILITY.
Demand for our products is cyclical in nature because it follows the demand
for the goods that are packaged with our products or the demand for services
such as construction. Accordingly, our demand is subject to general economic
conditions that affect demand in the durable goods, consumer, building,
construction and automotive markets. Growth in the economy generally stimulates
demand for these products or services, while a weakening economy tends to
decrease demand. Consequently, adverse economic conditions could have a material
adverse effect on our operating results because less demand for our products
would reduce our profitability.
COST OF RAW MATERIALS -- VOLATILE RAW MATERIAL PRICES COULD ADVERSELY AFFECT OUR
OPERATING RESULTS BECAUSE HIGHER COSTS TO MANUFACTURE ITS PRODUCTS WOULD LIKELY
REDUCE PACKAGING'S PROFITABILITY.
Plastic resins, aluminum rollstock, linerboard and recycled fiber are the
basic raw materials used in the manufacture of most of our products. The costs
of these materials may be volatile and are a function of, among other things,
the manufacturing capacity for those materials and the costs of their
components. If we fail to obtain price increases for our products in a timely
manner following a raw material cost increase, if we reduce our product prices
without a corresponding reduction in raw material costs or if we are unable to
renegotiate favorable raw material supply contracts, our operating results could
be adversely affected because higher costs to manufacture our products would
likely reduce our profitability. See "Summary -- Recent Developments."
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GROWTH STRATEGY -- WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY INTEGRATE
ACQUIRED BUSINESSES OR THAT FUTURE ACQUISITIONS WILL NOT ADVERSELY AFFECT OUR
OPERATING RESULTS AND FINANCIAL CONDITION.
Our growth strategy contemplates further acquisitions of specialty
packaging and consumer products businesses, as well as related businesses.
Pursuing an acquisition strategy could adversely affect our operating results
and financial condition because of:
- unanticipated liabilities;
- the diversion of management attention;
- increased goodwill amortization;
- higher interest costs; and
- our dependence on retaining or hiring and training key personnel and
integrating the acquired business.
See "Business -- Growth Strategy."
ADVANCED TECHNOLOGY -- IF WE DO NOT ADAPT TO TECHNOLOGICAL ADVANCES IN OUR
INDUSTRY AS QUICKLY AS OUR COMPETITORS, OUR OPERATING RESULTS AND FINANCIAL
CONDITION COULD BE ADVERSELY AFFECTED BECAUSE OF OUR HIGHER OVERHEAD AND
MANUFACTURING COSTS AND REDUCED APPEAL OF OUR PRODUCTS.
We compete in markets and industries that require sophisticated
manufacturing systems and other advanced technology to deliver state-of-the-art
specialty packaging solutions. These systems and technologies will have to be
refined and updated as the underlying technologies advance. We cannot assure you
that, as systems and technologies become outdated, we will be able to replace
them, to replace them as quickly as our competitors or to develop and market new
and better products in the future. Higher overhead and manufacturing costs due
to a failure to update and improve processes could limit our ability to compete
favorably as to price.
YEAR 2000 ISSUE -- IF NOT FULLY RESOLVED, THE YEAR 2000 ISSUE COULD ADVERSELY
AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Many of our computer software systems, as well as some hardware and
equipment utilizing date-sensitive data, were designed to use two-digit date
fields. Consequently, these systems, hardware and equipment will not be able to
recognize dates properly beyond the year 1999. If we are unable to complete on a
timely and cost-efficient basis the remediation or replacement of critical
systems or equipment not yet in compliance, or develop alternative procedures,
or if our major suppliers, financial institutions or others with whom we conduct
business are unsuccessful in implementing timely solutions, Year 2000 issues
could have a material adverse effect on our financial condition and our results
of operations. This adverse effect could result from interruptions in our
ability to manufacture our products, process and ship orders, and properly bill
and collect accounts receivable.
For more information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000" beginning on page
50.
INDEPENDENT PUBLIC COMPANY -- WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO
SUCCESSFULLY TRANSITION TO AN INDEPENDENT PUBLIC COMPANY.
Upon completion of the spin-off, our major operations will consist of
Tenneco's packaging business. We have never operated as a stand-alone company
and historically have been able to rely, to some degree, on the earnings, assets
and cash flow of Tenneco's other businesses for capital requirements and certain
administrative services. Accordingly, our pro forma combined financial
statements included in this document may not necessarily reflect the results of
operations and financial condition that would have been achieved if we had
operated independently during the periods presented.
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INTERNATIONAL OPERATIONS -- WE ARE SUBJECT TO RISKS RELATED TO OUR INTERNATIONAL
OPERATIONS.
We have manufacturing and distribution facilities in many countries,
principally in North America and Europe. For 1998, about 21% of our revenues
were derived from our international operations. International operations are
subject to various risks which could have a material adverse effect on those
operations or on our business as a whole including:
- exposure to local economic conditions;
- exposure to local political conditions, including the risk of seizure of
assets by a foreign government;
- currency exchange rate fluctuations;
- controls on the repatriation of cash; and
- export and import restrictions.
RISKS RELATING TO OUR STOCK
MARKET VALUE -- THE COMBINED POST-SPIN-OFF VALUE OF PACKAGING AND TENNECO STOCK
MAY NOT EQUAL
OR EXCEED THE PRE-SPIN-OFF VALUE OF TENNECO STOCK.
We cannot assure you that the combined market value or trading prices of
Automotive common stock and Packaging common stock after the spin-off, including
the planned one-for-five reverse stock split of Automotive, will be equal to or
greater than the market value or trading price of Tenneco common stock before
the spin-off. After completing the spin-off, you will own shares of Automotive
common stock and shares of Packaging common stock. After the spin-off, Packaging
common stock will be listed and traded on the New York Stock Exchange. Tenneco
common stock is now listed and traded on the New York, Chicago, Pacific and
London Stock Exchanges. We expect Tenneco will continue to trade on those
exchanges after the spin-off, when it will represent your investment in
Automotive. After the spin-off, Automotive will be highly leveraged and
initially restricted with respect to the payment of dividends. See "The
Spin-off -- Trading of Packaging Common Stock."
DIVIDENDS -- THE COMBINED PACKAGING AND AUTOMOTIVE DIVIDENDS AFTER THE SPIN-OFF
WILL BE SIGNIFICANTLY LESS THAN TENNECO DIVIDENDS BEFORE THE SPIN-OFF.
Our dividend policy will be established by our board of directors from time
to time based on our results of operations and our financial condition, as well
as other business considerations. We expect that our annual dividend for the
foreseeable future will be set to approximate the Standard & Poor's 500 average
dividend yield.
Automotive's dividend policy will also be established by its board of
directors from time to time based on its results of operations and financial
condition, as well as other business considerations. Also, because Automotive
will be highly leveraged and restricted under its loan agreements with respect
to the payment of dividends, its annual dividend is expected to be nominal.
The combined annual dividends of Packaging and Automotive after the
spin-off will be less than Tenneco's annual dividend before the spin-off. See
"Description of Capital Stock -- Packaging Common Stock."
ANTI-TAKEOVER PROVISIONS -- YOUR OPPORTUNITIES TO SELL YOUR STOCK AT PRICES
ABOVE MARKET VALUE MAY BE REDUCED BECAUSE OF FEATURES OF OUR CERTIFICATE OF
INCORPORATION, BYLAWS AND QUALIFIED OFFER RIGHTS PLAN, AND RESTRICTIONS RELATING
TO THE IRS RULING THAT COULD DISCOURAGE ACQUISITION PROPOSALS.
Provisions of our Restated Certificate of Incorporation and our Amended and
Restated Bylaws, along with our Qualified Offer Rights Plan and Delaware
statutory law, could discourage potential acquisition proposals and could delay
or prevent a change in control of Packaging. In addition, provisions in the tax
sharing agreement that we will enter into with Automotive in connection with the
spin-off and restrictions
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relating to the IRS letter ruling could discourage acquisition proposals. These
provisions and restrictions could diminish your opportunities to participate in
tender offers, including tender offers at a price above the then-current market
value of our common stock. These provisions and restrictions may also inhibit
fluctuations in the market price of our common stock that could result from
takeover attempts. They could also make it more difficult for third parties to
cause the immediate removal and replacement of the members of our board of
directors and management without the concurrence of our board of directors. See
"Description of Capital Stock -- Anti-takeover Effects of Certain Provisions."
For more information regarding the IRS letter ruling, see "The Spin-off -- U.S.
Federal Income Tax Aspects of the Spin-off -- Tax Ruling beginning on page 25."
RISKS RELATING TO THE TRANSACTION
U.S. FEDERAL INCOME TAX CONSIDERATIONS -- IF THE SPIN-OFF IS TAXABLE, WE COULD
BE ADVERSELY AFFECTED BY THE RESULTING CORPORATE TAX LIABILITY, AND YOU COULD BE
REQUIRED TO PAY TAX ON YOUR PACKAGING SHARES.
If the spin-off were not to qualify as a tax-free distribution for U.S.
federal income tax purposes, then, in general, a very substantial corporate tax
would be payable by the consolidated tax group of which Tenneco is the common
parent. Each member of that consolidated group, which includes Packaging, would
be severally liable for that tax. Packaging and Automotive will enter into a tax
sharing agreement in connection with the spin-off regarding the allocation and,
in some circumstances sharing, of that potential tax liability between them. See
"The Spin-off -- Relationship Between Automotive and Packaging After the
Spin-off" and "The Spin-off -- U.S. Federal Income Tax Aspects of the Spin-off."
If the spin-off occurred and it were not to qualify as a tax-free distribution,
the resulting tax liability would have a material adverse effect on the
financial condition and, as such, business of Packaging and/or Automotive, as
applicable.
Tenneco has received a letter ruling from the IRS to the effect that, among
other things, the spin-off will qualify as a tax-free distribution. The ruling
is based upon various factual representations and assumptions. If any of those
factual representations and assumptions were untrue or incomplete in a material
respect, or the facts upon which that ruling is based are materially different
from the facts at the time of the spin-off, the spin-off could become taxable to
Tenneco and Tenneco shareowners who receive Packaging common stock. In addition,
the IRS letter ruling does not address the applicability or effect of any state,
local or foreign tax laws.
If the spin-off were not to qualify as a tax-free distribution, Tenneco
shareowners who receive shares of Packaging common stock in the spin-off would
be treated as if they had received a taxable distribution in an amount equal to
the fair market value of Packaging common stock received, except as described in
the next paragraph. See "The Spin-off -- U.S. Federal Income Tax Aspects of the
Spin-off."
Furthermore, if the spin-off otherwise qualifies as a tax-free distribution
but there is a change in control of Packaging or Automotive after the spin-off
that is considered part of a plan or a series of transactions related to the
spin-off, Tenneco -- which after the spin-off will be Automotive -- would incur
a very substantial tax liability on the distribution of our common stock to its
shareowners. Packaging would be responsible for this resulting tax liability in
the case of a Packaging change in control, and Automotive would be responsible
for this resulting tax liability in the case of an Automotive change in control.
In these circumstances, however, Tenneco shareowners who received common stock
would not recognize gain or loss as a result of the spin-off. See "The
Spin-off -- U.S. Federal Income Tax Aspects of the Spin-off" and "The
Spin-off -- Relationship Between Automotive and Packaging After the Spin-off."
FRAUDULENT CONVEYANCE MATTERS -- POTENTIAL LIABILITIES MAY ARISE DUE TO
FRAUDULENT TRANSFER CONSIDERATIONS, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND OUR RESULTS OF OPERATIONS.
In connection with the spin-off, Tenneco will undertake numerous corporate
restructuring transactions and realign its debt, which, along with the spin-off,
are subject to federal and state fraudulent conveyance laws. Under these laws,
if a court were to determine that one of the parties did not receive fair
consideration and, at the time, was insolvent, had unreasonably small capital or
was unable to pay its debts
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as they came due, the court could reverse the transactions or the spin-off or
impose a liability on one of the parties, including Packaging.
LEGAL DIVIDEND -- IF THE SPIN-OFF IS NOT A LEGAL DIVIDEND, IT COULD BE HELD
INVALID BY A COURT AND ADVERSELY AFFECT OUR FINANCIAL CONDITION AND OUR RESULTS
OF OPERATIONS.
The corporate restructuring transactions, the debt realignment and the
spin-off are subject to state corporate distribution statutes. We cannot assure
you that a court will not later determine that the spin-off, one or more of the
corporate restructuring transactions or the debt realignment was invalid under
state corporate law and reverse the transactions. The resulting complications
and cost could have a material adverse effect on our financial condition and our
results of operations. For example, under Delaware law, a corporation may only
pay dividends to its stockholders either: (a) out of its surplus, which is net
assets minus capital; or (b) if there is no surplus, out of its net profits for
the fiscal year in which the dividend is declared and/or the preceding fiscal
year, subject to some restrictions.
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THE SPIN-OFF
INTRODUCTION
The spin-off is the final step in the transformation of Tenneco from a
highly diversified industrial corporation to independent companies focused on
their core businesses. In July 1998, Tenneco's board of directors authorized its
management to develop a broad range of strategic alternatives which could result
in the separation of its then-remaining businesses: automotive, specialty
packaging and paperboard packaging. Earlier this year, we separated our
paperboard packaging business from the rest of Tenneco's operations. First, we
contributed our containerboard packaging business, which constituted the
majority of our paperboard packaging business, to a new joint venture for cash
and debt assumption of approximately $2 billion plus a 45% common equity
interest. We plan to sell our remaining 43% interest in this joint venture
through an initial registered public offering. Second, we sold the balance of
our paperboard packaging business, the folding carton operation, for $72.5
million. The cash proceeds from these transactions were used to repay some of
Tenneco's consolidated lease and debt obligations.
The spin-off will complete the separation of Tenneco's businesses and
create two independent companies -- Packaging and Automotive. We, Packaging,
will own and operate Tenneco's remaining packaging business, and Automotive will
own and operate Tenneco's automotive business.
Tenneco and we will enter into a distribution agreement which establishes
the terms of the spin-off and governs various aspects of our post-spin-off
relationship with Tenneco, which will be Automotive after the spin-off. Until
the spin-off, Tenneco may terminate the distribution agreement without our
approval. In addition, Tenneco and we will enter into ancillary agreements to
facilitate further the separation of Tenneco's automotive and packaging
businesses and to govern additional aspects of our ongoing relationship with
Automotive.
In this document, descriptions of provisions of the distribution agreement
and the ancillary agreements are only summaries and may not contain information
about provisions that you think are important. These descriptions are qualified
in their entirety by references to the complete text of the agreements, which we
encourage you to read. The form of the distribution agreement and the form of
each of the ancillary agreements are included as an exhibit to our Registration
Statement on Form 10 under the Securities Exchange Act of 1934, as amended,
relating to our common stock.
Tenneco shareowners with inquiries relating to the spin-off should contact
First Chicago Trust Company of New York at First Chicago Trust Company of New
York, Attn: General Correspondence, P.O. Box 2500, Jersey City, NJ 07303-2500,
telephone number: (800) 519-3111, or Tenneco Investor Relations, 1275 King
Street, Greenwich, Connecticut 06831, Attention: Stan March, telephone number:
203/863-1170.
REASONS FOR THE SPIN-OFF
The spin-off is designed to separate Tenneco's packaging business from its
automotive business, each of which have distinct financial, investment and
operating characteristics, so that each can adopt strategies and pursue
objectives appropriate to its specific needs.
Business Focus and Access to Capital Markets
As a result of the spin-off, each of Packaging and Automotive will be able
to focus all of its attention and financial resources on its own core business
and on exploring and implementing the most appropriate growth opportunities.
Through independent access to equity and debt financing markets, the companies
expect to have greater financial flexibility to pursue acquisitions, joint
ventures, alliances and internal growth.
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Investor Understanding; Public Relations
After the spin-off, investors should be able to better evaluate the
financial performance, strategies and other characteristics of each of the
companies. This will permit investors to make investment decisions based on each
company's performance and potential, and enhance the likelihood that each
company will achieve appropriate market valuation. In addition, each company
will be able to focus its public relations efforts on cultivating a separate
identity.
Employee Incentives
The spin-off will allow each company's executive management team to develop
compensation systems for employees that are custom-tailored to the different
businesses, including an employee stock ownership plan for Automotive and
stock-based and other incentive programs. These programs will more directly
reward employees based on each company's individual success.
MANNER OF SPIN-OFF
Tenneco will accomplish the spin-off by distributing the common stock of
Packaging to Tenneco shareowners as a dividend. On October 12, 1999, the Tenneco
board of directors formally declared the dividend necessary to effect the
spin-off. Each Tenneco shareowner of record as of the close of business on
October 29, 1999, which is the "record date," will be entitled to participate in
the spin-off. On the spin-off date, those same Tenneco shareowners will each
receive one share of Packaging common stock for each share of Tenneco common
stock that they hold as of the record date. Although the spin-off will not occur
unless certain conditions are satisfied, we expect that the spin-off will take
place on or about November 4, 1999. See "-- Conditions to the Spin-off."
Before the spin-off date, Tenneco will deliver all of the outstanding
shares of Packaging common stock to the spin-off agent for transfer and
distribution to Tenneco common stock shareowners as of the close of business on
the record date. As soon as possible on or after the spin-off date, Tenneco will
deliver to the spin-off agent, as agent for those Tenneco shareowners,
certificates representing shares of Packaging common stock. The spin-off agent
will then mail, on or about the spin-off date, certificates representing the
shares of Packaging common stock to Tenneco common stock shareowners as of the
close of business on the record date.
No Tenneco shareowner will be required to pay cash or other consideration
for the shares of Packaging common stock to be received in the spin-off, or to
surrender or exchange shares of Tenneco common stock in order to receive
Packaging common stock.
Our board of directors will adopt a Qualified Offer Rights Plan before the
spin-off, which will entitle each Tenneco shareowner, as of the close of
business on October 29, 1999, to one preferred share purchase right for every
share of Packaging common stock he or she receives in the spin-off. Certificates
evidencing the number of shares of Packaging common stock issued also will
represent the same number of rights issued under the Qualified Offer Rights
Plan. See "Description of Capital Stock -- Anti-takeover Effects of Certain
Provisions -- Qualified Offer Rights Plan." Unless the context otherwise
requires, references in this Information Statement to Packaging's common stock
include the related rights issued under our Qualified Offer Rights Plan.
CORPORATE RESTRUCTURING TRANSACTIONS
Before the spin-off, Tenneco will effect various corporate restructuring
transactions designed to restructure its existing businesses so that, in
general, the assets, liabilities and operations of (a) its packaging business
and administrative services operations will be owned and operated, directly or
indirectly, by us and (b) its automotive business will be owned and operated,
directly and indirectly, by Tenneco and its non-packaging subsidiaries.
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Packaging's assets upon completion of these corporate restructuring
transactions generally will be:
- those related to the conduct of Tenneco's past and current packaging
business and administrative services operations, as reflected on the
unaudited pro forma combined balance sheet of Packaging as of June 30,
1999, which is attached to the distribution agreement as an exhibit;
- those assets that were acquired after June 30, 1999 and are of a nature
or type that would have been included on our June 30, 1999 pro forma
balance sheet had they been acquired earlier; and
- all rights expressly allocated to Packaging and its subsidiaries under
the distribution agreement or any of the ancillary agreements.
Automotive's assets upon completion of the corporate restructuring
transactions generally will be:
- all of Tenneco's assets not expressly allocated to us or our subsidiaries
as described above.
Packaging's liabilities generally will include:
- those liabilities related to the Packaging assets described above and the
current and past conduct of Tenneco's packaging and administrative
services operations;
- liabilities for possible violations of securities laws in connection with
the spin-off related to disclosures or omissions regarding Packaging's
business, results of operations, prospects or management; and
- those liabilities expressly allocated to Packaging or its subsidiaries
under the distribution agreement or any ancillary agreement.
Automotive's liabilities generally will include:
- those liabilities related to the automotive assets described above and
the current and past conduct of Tenneco's automotive business;
- liabilities for possible violations of securities laws in connection with
the spin-off related to disclosures or omissions regarding Automotive's
business, results of operations, prospects or management;
- those liabilities expressly allocated to Automotive or its subsidiaries
under the distribution agreement or any ancillary agreement; and
- all other liabilities of Tenneco or any of its subsidiaries which do not
constitute Packaging liabilities.
In addition, Packaging and Automotive will each be responsible for one-half
of any third-party liability imposed on either party that is both (1) related to
the transactions undertaken as part of the spin-off, such as the debt
realignment, and (2) based on a claim (a) under Delaware corporate law, such as
a claim for a breach of fiduciary duties, or (b) under applicable securities
laws, but only to the extent the alleged violation is not specifically related
to disclosures or omissions about either party's business operations as provided
by such party.
DEBT REALIGNMENT
After the spin-off, Automotive and Packaging each will, in general, be
responsible for the debts, liabilities and obligations related to the business
or businesses that it owns and operates following completion of the corporate
restructuring transactions. See "-- Corporate Restructuring Transactions."
Tenneco's historical practice, however, has been to incur debt for its
consolidated group at the parent-company level or at a limited number of its
subsidiaries, rather than at the operating-company level, and to manage
centrally various cash functions. Accordingly, the distribution agreement will
provide for the realignment of Tenneco's debt pursuant to a debt realignment
plan.
The specific goal of the debt realignment will be to reach approximately
the relative allocation between Packaging and Automotive of Tenneco's debt at
the time of the spin-off, after giving effect to the repurchase of subsidiary
preferred stock and payment of transaction fees and expenses, that is reflected
in the June 30, 1999 pro forma balance sheets of Packaging and Tenneco that are
included elsewhere in this document. See "Unaudited Pro Forma Combined Financial
Statements of Packaging" and "-- Corporate
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Restructuring Transactions." These pro forma balance sheets will also be
attached to the distribution agreement as exhibits. Packaging and Automotive
will agree in the distribution agreement to use their respective reasonable
commercial efforts to achieve this relative allocation.
If the debt realignment and spin-off had occurred on June 30, 1999, we
would have had pro forma indebtedness for money borrowed of $2.2 billion. We
intend to use the net proceeds of our sale of our containerboard joint venture
interest to retire our debt, although this sale is not part of the debt
realignment. If this sale is completed before the spin-off, the net proceeds
will be used to retire Tenneco debt that otherwise would be allocated to us in
the debt realignment. See "Unaudited Pro Forma Combined Financial Statements of
Packaging."
The debt realignment is expected to be accomplished through some
combination of tender offers, exchange offers, prepayments and other
refinancings. As part of the debt realignment, Tenneco has offered to purchase
for cash approximately $1,283 million of its public debt (the "Tenneco Debt
Tender Offer"). Also, we expect that before the spin-off Tenneco and its
subsidiaries will repay in cash other existing non-public debt and that Tenneco
will repurchase outstanding subsidiary preferred stock. These payments are
expected to be financed by (a) internally generated cash, (b) borrowings by
Automotive under a new credit facility and new subordinated debt financing that
was issued by Automotive in connection with the spin-off, and (c) borrowings by
Packaging under one or more new credit facilities entered into by Packaging in
connection with the spin-off. See "Capitalization and Financing."
Tenneco also made a public offer to exchange up to $1,176 million of
aggregate principal amount of new Packaging debt for an equal amount of certain
Tenneco public debt pursuant to a debt exchange offer (the "Debt Exchange
Offer"). Our debt is expected to have similar maturities to the Tenneco public
debt for which it is being exchanged. Upon completion of the Debt Exchange Offer
we expect to have approximately $1,166 million aggregate principal amount of
public debt outstanding, bearing interest at a weighted average effective rate
of approximately 8.2% and with a weighted average maturity of approximately 17.5
years. The public offering of our debt in the Debt Exchange Offer was made by
means of a separate prospectus that constitutes a part of our Registration
Statement on Form S-4 (File No. 333-82923) which has been filed with the SEC.
As part of the Tenneco Debt Tender Offer and Debt Exchange Offer, Tenneco
has solicited consents from the holders of the Tenneco public debt to amendments
to the indenture under which Tenneco issued its public debt. These amendments
would, among other things, specifically permit Tenneco to consummate the
spin-off without compliance with any covenants contained in the indenture.
Consummation of the Tenneco Debt Tender Offer and Debt Exchange Offer is
conditioned on, among other things, acceptance of the Debt Exchange Offer and
the Tenneco Debt Tender Offer by holders of at least a majority of the aggregate
principal amount of the Tenneco public debt of all series taken together so that
the requested amendments to the indenture are approved.
Accordingly, after giving effect to the debt realignment and the spin-off,
Tenneco (in other words, Automotive) will be responsible for all of Tenneco's
public debt that remains outstanding and any borrowings under the new Automotive
credit facility and subordinated debt financing described above. We will be
responsible for our public debt and any borrowings under our new credit
facilities. Completion of the debt realignment is a condition to the obligation
of Tenneco to complete the spin-off, although Tenneco may substitute one or more
different financing transactions for any of the components of the debt
realignment described above.
CONDITIONS TO THE SPIN-OFF
The spin-off is conditioned on, among other things, formal declaration of
the spin-off by the Tenneco Board of Directors. Other conditions to the spin-off
will include:
- execution and delivery of the ancillary agreements and completion of
various pre-spin-off transactions, such as the corporate restructuring
transactions and the debt realignment;
- a determination to the effect that for federal income tax purposes, (1)
the spin-off will be tax-free to Tenneco and its shareowners under
Section 355(a) and Section 361(c)(1) of the Internal
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Revenue Code, and (2) specified internal restructuring transactions
involving Tenneco or its subsidiaries to be effected pursuant to the
corporate restructuring transactions will also be tax-free;
- approval for listing on the NYSE of our common stock;
- registration of our common stock under the Exchange Act;
- receipt of all material consents to the corporate restructuring
transactions, the spin-off and transactions contemplated in the
distribution agreement; and
- the absence of any prohibition of the spin-off by any law or governmental
authority.
On August 20, 1999, we received an IRS letter ruling that satisfies the
federal income tax condition referred to above provided the ruling remains in
effect at the time of the spin-off. Even if all the conditions to the spin-off
are satisfied, Tenneco has reserved the right to amend or terminate the
distribution agreement and the related transactions before the spin-off. The
Tenneco board of directors has not attempted to identify or establish objective
criteria for evaluating the particular types of events or conditions that would
cause the Tenneco board of directors to consider amending or terminating the
spin-off. See "-- Relationship Between Automotive and Packaging After the
Spin-off -- Distribution Agreement." Although the conditions described above may
be waived by Tenneco to the extent permitted by law, the Tenneco board of
directors presently has no intention to proceed with the spin-off unless each of
these conditions is satisfied.
RELATIONSHIP BETWEEN AUTOMOTIVE AND PACKAGING AFTER THE SPIN-OFF
Below are summary descriptions of the distribution agreement and principal
ancillary agreements that Tenneco and Packaging will enter into in connection
with the spin-off as well as a description of the stock arrangements that will
exist between Automotive and Packaging after the spin-off. These agreements are
intended to facilitate the separation of Tenneco's packaging business from its
automotive business and to facilitate the operation of each of Automotive and
Packaging as separate companies.
Distribution Agreement
In addition to providing for the terms of the spin-off and the various
actions to be taken before the spin-off, the distribution agreement will contain
other provisions governing the relationship between Automotive and Packaging
before and after the spin-off.
Responsibility for Liabilities. The distribution agreement will provide
that after the spin-off date: (a) Automotive will assume, pay, perform and
discharge all its allocated liabilities according to their terms, and (b)
Packaging will assume, pay, perform and discharge its allocated liabilities
according to their terms. See "--Corporate Restructuring Transactions." The
distribution agreement will provide for cross-indemnities so that: (a)
Automotive must indemnify Packaging and its respective subsidiaries, directors,
officers, employees and agents, and other related parties, against all losses
arising out of or in connection with Automotive's allocated liabilities or the
breach of the distribution agreement or any ancillary agreement by Automotive;
and (b) Packaging must indemnify Automotive and its respective subsidiaries,
directors, officers, employees and agents, and other related, parties against
all losses arising out of or in connection with Packaging's liabilities or the
breach of the distribution agreement or any ancillary agreement by Packaging.
Further Assurances. Automotive and Packaging agree to use all reasonable
efforts to take or cause to be taken all action reasonably necessary or
advisable to consummate the transactions contemplated by and carry out the
purposes of the distribution agreement.
Information Sharing. The distribution agreement will provide for the
transfer and sharing of books and records between Automotive and Packaging and
will grant to each party access to specified information in the other's
possession, subject to confidentiality requirements and legal privilege issues.
Amendment and Termination. Before the spin-off, the distribution agreement
may be amended or terminated by Tenneco in its discretion. After completion of
the spin-off, the distribution agreement may be amended or terminated only by a
written agreement signed by Automotive and Packaging. Some
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<PAGE> 32
amendments or terminations after the spin-off also will require the consent of
third-party beneficiaries to the extent that the distribution agreement has
expressly guaranteed them rights.
Intercompany Accounts. According to the distribution agreement, in general
all intercompany receivables, payables and loans between Tenneco's automotive
business, on the one hand, and its packaging business and administration
services operations, on the other hand, that did not arise from ordinary trading
transactions will be settled, capitalized or converted into ordinary trade
obligations as of the close of business on the spin-off date. Further, all
intercompany agreements between these businesses, other than those contemplated
in connection with the spin-off and specified trade supply agreements will be
terminated.
Expenses. Tenneco will use a portion of the funds borrowed by Tenneco and
Packaging as part of the debt realignment to fund the payment of fees, costs and
expenses associated with the spin-off. Accordingly, the allocation of debt
described above under "-- Debt Realignment" includes additional debt incurred to
fund these fees, costs and expenses. Under the distribution agreement, other
specified fees, costs and expenses related to the spin-off but not funded in
connection with the debt realignment will be shared equally by Tenneco and
Packaging. All other fees, costs and expenses will be paid by the party
incurring such fees, costs or expenses.
Benefit Plan Ownership of Stock
After the spin-off, a number of benefit plans or trusts maintained by us
will own stock in Automotive. The General Employee Benefit Trust ("GEBT"), which
will fund all U.S. defined benefit pension plans maintained by us will own at
the time of the spin-off approximately 4,100,000 shares of Automotive common
stock. The Packaging thrift plans will own at the time of the spin-off
approximately 3,000,000 shares of Automotive common stock. Also, the Automotive
thrift plan will own some Packaging stock at the time of the spin-off.
Human Resources Agreement
The human resources agreement to be entered into between Tenneco and
Packaging will govern labor, employment, compensation and benefit matters in
connection with the spin-off. Under the human resources agreement, after the
spin-off date, each of Automotive and Packaging will:
- continue employment of each of their respective retained employees,
subject to their rights to terminate employees, with the same
compensation as before the spin-off date;
- continue to honor all related existing collective bargaining agreements
in accordance with their terms;
- recognize related incumbent labor organizations, subject to their rights
to seek changes in their relationships with the organizations; and
- continue sponsorship of hourly employee benefit plans in accordance with
their terms.
We will become the sponsor of the Tenneco Retirement Plan and of the
Tenneco Thrift Plan and Tenneco Thrift Plan for Hourly Employees (collectively
the "Tenneco Thrift Plan") on the spin-off date. Automotive will establish one
or more thrift plans similar to the Tenneco Thrift Plan to which the account
balances of retained and former employees of Automotive in the Tenneco Thrift
Plan will be transferred. The benefits accrued by Automotive employees in the
Tenneco Retirement Plan will be frozen as of the last day of the calendar month
including the spin-off date, and we will amend the Tenneco Retirement Plan to
provide that all benefits accrued through that day by Automotive employees are
fully vested and non-forfeitable. Generally, each of Automotive and Packaging
will retain liabilities with respect to benefits accrued by its current and
former employees under the Tenneco Inc. Supplemental Executive Retirement Plan
and with respect to the welfare benefits of its current and former employees and
their dependents. In addition, as the spin-off date, Packaging will succeed to
sponsorship of the Tenneco Inc. Deferred Compensation Plan; participation by
current and former employees of Automotive in that plan will be
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<PAGE> 33
discontinued, and Automotive will succeed to liabilities with respect to its
current and former employees under that plan. See "Management -- Executive
Compensation."
Under the human resources agreement, Tenneco common stock options held by
Packaging employees will be replaced by options to purchase shares of our common
stock on terms economically equivalent to the old Tenneco options. Tenneco
common stock options held by Automotive employees will be adjusted to maintain
equivalent economic terms to the options outstanding immediately prior to the
spin-off.
Tax Sharing Agreement
The tax sharing agreement to be entered into between Automotive and
Packaging will provide for the allocation of tax liabilities between the parties
arising before, as a result of and after the spin-off. As a general rule,
Automotive will be liable for all taxes not specifically allocated to us under
the terms of the tax sharing agreement. Generally, we will be liable for taxes
imposed exclusively on us and our affiliates engaged in the packaging and
administrative services business (the "Packaging Group"). In the case of U.S.
federal income taxes imposed on the combined activities of Automotive and the
Packaging Group, we will generally be liable to Automotive for federal income
taxes attributable to the activities of the Packaging Group. Liability for
foreign income taxes and non-income taxes will generally be allocated to the
legal entity on which the taxes are imposed. In the case of state income taxes
imposed on the combined activities of the business groups, we will generally be
liable for the tax that would be imposed if the Packaging Group had filed
combined returns for its group.
In general, and except as provided below, any taxes imposed on or resulting
from any or all of the spin-off, the corporate restructuring transactions and
the debt realignment ("transaction taxes") shall be the responsibility of the
legal entity on which the taxes are imposed. However, if any transaction taxes
arise due to any action taken or permitted by Automotive or Packaging that is
inconsistent with any representations or warranties made in connection with the
IRS letter ruling requested and received by Tenneco in connection with the
spin-off, that entity, either Automotive or Packaging, will be responsible for
the resulting tax liability. Additionally, if any transaction taxes arise under
Section 355(e) of the Internal Revenue Code of 1986, as amended (the "Code"), as
a result of a 50% Ownership Shift (as defined in the section below titled
"-- U.S. Federal Income Tax Aspects of the Spin-off"), then the resulting
corporate tax burden will be borne by the entity, either Automotive or
Packaging, that experienced the 50% Ownership Shift. Any income tax liability
that results from the spin-off, corporate restructuring transactions or debt
realignment, but which is not due to either a 50% Ownership Shift or an action
that is inconsistent with the tax treatment contemplated in the IRS letter
ruling request, will be shared equally by Automotive and Packaging.
Each of Automotive and Packaging will agree not to take or permit certain
actions inconsistent or partially inconsistent with the IRS letter ruling
request on or before the period ending two calendar years from the date of the
spin-off, unless the action has been consented to by the other. These agreements
could restrict the ability of Automotive or Packaging to engage in certain
corporate transactions, redeem stock, dispose of assets except in the ordinary
course of business, or be the target of an acquisition transaction during that
period.
Transition Services Agreement
Tenneco's administrative services operations currently provide a number of
services to Tenneco's operating units. These services include (1) financial
accounting services; (2) employee benefits administration for all major salaried
and hourly benefit plans; (3) human resources and payroll services; (4)
mainframes and distributed systems operations; (5) telecommunications and
network operations and management; (6) help desk support; and (7) disaster
recovery support. When the spin-off is complete, Tenneco's administrative
services operations will be a part of Packaging. Accordingly, Automotive and
Packaging will enter into a transition services agreement under which Packaging
will continue to provide Automotive with specified administrative services for a
term to be determined before the spin-off. Tenneco and Packaging are, however,
currently analyzing the alternatives with respect to the administrative services
operations, which could involve a sale or outsourcing arrangement. Because
Automotive will retain a portion of the administrative support for Tenneco's
European operations, however, Automotive will also agree to provide Packaging
with specified administrative services for its European operations for an
initial
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<PAGE> 34
period of six months beginning on the date of the spin-off. After the initial
six-month period, Packaging may elect to have Automotive continue to provide
specified services for up to six additional months on a month-to-month basis.
The price for all services will be negotiated between the parties and be based
on the full cost for the services.
Trademark Transition License Agreement
After the spin-off, Automotive or one of its subsidiaries will hold the
rights to various trademarks, servicemarks, tradenames and similar intellectual
property, including rights in the marks "Tenneco," "Ten" and "Tenn" alone and in
combination with other terms and/or symbols and variations thereof
(collectively, the "Trademarks"), in the United States and throughout the world.
In connection with the spin-off, we will enter into a trademark transition
license agreement with Automotive. Under this agreement, Automotive or one of
its subsidiaries will grant to us a limited, royalty-free license to use the
Trademarks with respect to packaging businesses, subject to quality standards
and other conditions. The license will expire (1) 60 days after the spin-off,
with respect to the use of the Trademarks in corporate names, (2) 9 months after
the spin-off, with respect to stationery and similar supplies in inventory and
(3) 18 months after the spin-off, with respect to signage.
Insurance Agreement
The insurance agreement to be entered into between Automotive and Packaging
will provide for the separation and administration of existing insurance
programs and the purchase of "run-off " policies for fiduciaries and directors
and officers. In general, the insurance agreement will provide that Packaging
and Automotive will obtain coverage for the period ending in December 1996
through Tenneco's pre-existing policies. For the period between December 1996
and the spin-off, Automotive and Packaging will obtain coverage through
Tenneco's existing policies plus supplemental coverage to be purchased by
Tenneco. Tenneco also will purchase "run-off" insurance policies that remain in
effect for seven years and provide coverage for acts prior to the spin-off by
directors, officers and fiduciaries of benefit and pension plans. Packaging and
Automotive will each be responsible for administering their respective insurance
programs after the spin-off and for purchasing insurance as necessary to cover
their respective losses arising after the spin-off. The insurance agreement also
allocates responsibility for the payment of premiums and deductibles, and the
distribution of insurance proceeds.
Directors
When the spin-off is completed, Packaging and Automotive will share four
common directors, Dana G. Mead, Paul T. Stecko, Mark Andrews and Roger B.
Porter. Each company will endeavor to limit the involvement of Messrs. Mead,
Stecko, Andrews and Porter in situations that could give rise to potential
conflicts of interest, including requesting them to abstain from voting as a
director of either Packaging or Automotive on matters which present a conflict
of interest between the companies. We believe that the number of these conflict
situations will be minimal.
TRADING OF PACKAGING COMMON STOCK
See "Risk Factors" for a discussion of certain considerations relating to
the market for and trading prices of our common stock following the spin-off.
A regular public market for our common stock has not existed prior to the
date of this Information Statement. Shares of our common stock have been
approved for listing on the NYSE under the symbol "PTV," and "regular" trading
will begin on the first business day after the spin-off date. In addition, we
expect that "when-issued" trading for our common stock will develop on or about
the record date and continue through the spin-off date. "When-issued" trading
means that shares are traded prior to the time stock certificates are actually
available or issued. None of these trades, however, will settle until after the
spin-off date, when regular trading in our common stock has begun. If the
spin-off does not occur, all when-issued trading will be null and void.
Tenneco expects that its common stock will continue to trade on a regular
basis through and after the spin-off date. Any shares of common stock of Tenneco
sold between the record date and the spin-off date will be accompanied by a due
bill attached representing our common stock to be distributed in the spin-
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<PAGE> 35
off. In addition, between the record date and the spin-off date, the common
stock of Tenneco may also trade on a when-issued basis, reflecting an assumed
post-distribution value for Tenneco common stock.
Shares of our common stock received by Tenneco shareowners in connection
with the spin-off will be freely transferable, except for shares received by
persons who may be deemed to be "affiliates" of Packaging under the Securities
Act of 1933, as amended. Persons who are affiliates of Packaging will be
permitted to sell their shares of our common stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act. There would not, however, be
any 90-day waiting period before sales could be made by affiliates under Rule
144 of the Securities Act, as long as the other provisions of Rule 144 are met.
U.S. FEDERAL INCOME TAX ASPECTS OF THE SPIN-OFF
General
The following is a summary description of the material federal income tax
aspects of the spin-off. This summary is not intended as a complete description
of all of the tax consequences of the spin-off or the other transactions
contemplated in connection with the spin-off and does not discuss tax
consequences under the laws of state, local or foreign governments or any other
jurisdiction. Moreover, the tax treatment of a shareowner may vary, depending
upon his, her or its particular situation. In this regard, certain shareowners,
including insurance companies, tax-exempt organizations, financial institutions
or broker-dealers, persons who are not citizens or residents of the United
States or who are foreign corporations, foreign partnerships or foreign trusts
or estates, as defined for United States federal income tax purposes,
shareowners that hold shares as part of a position in a "straddle" or as part of
a "hedging" or "conversion" transaction for United States federal income tax
purposes and shareowners with a "functional currency" other than the United
States dollar, may be subject to special rules not discussed below. In addition,
this summary applies only to shares which are held as capital assets. The
following discussion may not be applicable to a shareowner who acquired his, her
or its shares pursuant to the exercise of stock options or otherwise as
compensation.
The following discussion is based on currently existing provisions of the
Code, existing, proposed and temporary treasury regulations thereunder and
current administrative rulings and court decisions. All of the foregoing are
subject to change, which may or may not be retroactive, and any such changes
could affect the validity of the following discussion.
Each shareowner is urged to consult his, her or its own tax advisor as to
the particular tax consequences to him, her or it of the spin-off described
herein, including the applicability and effect of any state, local or foreign
tax laws, and the possible effects of changes of applicable tax laws.
Tax Ruling
Tenneco has received an IRS letter ruling and supplemental ruling to the
effect, among other things, that:
- no gain or loss will be recognized by, and no amount will otherwise be
included in the income of, any holder of Tenneco common stock as a
result of the spin-off;
- the aggregate basis of the Automotive common stock, after giving effect
to the spin-off, and the Packaging common stock in the hands of each
holder of Automotive common stock will be the same as the basis of the
Tenneco common stock held by such holder immediately before the spin-
off, allocated in proportion to the fair market value of the Tenneco
common stock, after giving effect to the spin-off, and the Packaging
common stock on the spin-off date;
- the holding period of the Packaging common stock received in the
spin-off by each holder of Tenneco's common stock will include the
period during which such holder held Tenneco common stock with respect
to which the distribution of Packaging common stock is made, provided
that the Tenneco common stock is held as a capital asset by such holder
on the spin-off date; and
- no gain or loss will be recognized by Tenneco on its distribution of
Packaging common stock to its shareowners.
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A letter ruling from the IRS, while generally binding on the IRS, may under
certain circumstances be retroactively revoked or modified by the IRS. The
rulings obtained from the IRS are based on certain facts, representations and
assumptions. Generally, an IRS letter ruling would not be revoked or modified
retroactively provided that there has been no misstatement or omission of
material facts, the facts at the time of the transaction are not materially
different from the facts upon which the IRS letter ruling was based and there
has been no change in the applicable law. We are not aware of any facts or
circumstances that would cause the representations and assumptions to be untrue
or incomplete in any material respect. Automotive and Packaging will agree to
certain restrictions on their further actions to help preserve the tax-free
nature of the spin-off. See "-- Relationship Between Automotive and Packaging
After the Spin-off."
The Spin-off
We have received an IRS letter ruling to the effect that the spin-off will
qualify as a tax-free distribution under Section 355 of the Code. Assuming that
the spin-off so qualifies:
- the holders of Tenneco common stock will not recognize gain or loss upon
receipt of shares of Packaging common stock;
- each holder of Tenneco common stock will allocate his, her or its
aggregate tax basis in the Tenneco common stock immediately before the
spin-off among Tenneco common stock, after giving effect to the
spin-off, and Packaging common stock in proportion to their respective
fair market values on the spin-off date;
- the holding period of each holder of Tenneco common stock for Packaging
common stock will include the holding period for his, her or its Tenneco
common stock, provided that Tenneco common stock is held as a capital
asset at the time of the spin-off; and
- Tenneco will not recognize any gain or loss on its distribution of
Packaging common stock to its shareowners.
If the spin-off were not to qualify as a tax-free distribution under
Section 355 of the Code, then in general a corporate level federal income tax
would be payable by the consolidated group of which Tenneco is the common
parent, which tax would be based upon the gain, computed as the difference
between the fair market value of the Packaging common stock and Tenneco's
adjusted basis in such stock, realized by Tenneco upon its distribution of the
Packaging common stock to its shareowners in the spin-off. If Tenneco were to
recognize gain on the spin-off, such gain and the resulting tax liability likely
would be very substantial.
Furthermore, if the spin-off were not to qualify as a tax-free distribution
under Section 355 of the Code, then each holder of Tenneco common stock who
receives shares of Packaging common stock in the spin-off would be treated as if
such shareowner received a taxable distribution in an amount equal to the fair
market value of Packaging common stock received, which would result in: (a) a
dividend to the extent paid out of Tenneco's current and accumulated earnings
and profits; then (b) a reduction in such shareowner's basis in Tenneco's common
stock to the extent the amount received exceeds the amount referenced in clause
(a); and then (c) gain from the sale or exchange of Tenneco common stock to the
extent the amount received exceeds the sum of the amounts referenced in clauses
(a) and (b). Each shareowner's basis in his, her or its Packaging common stock
would be equal to the fair market value of such stock at the time of the
spin-off.
Section 355(e) of the Code, which was enacted in 1997, generally provides
that a company that distributes shares of a subsidiary in a spin-off that is
otherwise tax-free will incur federal income tax liability if 50% or more, by
vote or value, of the capital stock of either the company making the
distribution or the spun-off subsidiary is acquired (a "50% Ownership Shift") by
one person or more than one person acting together pursuant to a plan or series
of related transactions that includes the spin-off. This provision can be
triggered by certain reorganizations involving the acquisition of the assets of
the company making the distribution or the spun-off subsidiary. There is a
presumption that any 50% ownership shift that occurs within two years before or
after the spin-off is pursuant to a plan that includes the spin-off. However,
the presumption may be rebutted by establishing that the spin-off and the
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<PAGE> 37
acquisitions are not part of a plan or series of related transactions. Among the
representations made by Tenneco and Packaging to the IRS in connection with the
request for the IRS letter ruling is the representation that the spin-off is not
part of such a plan or series of related transactions. If Automotive or
Packaging were to undergo a 50% Ownership Shift, particularly if it occurred
within two years after the spin-off date, there can be no assurance that the IRS
would not assert that the ownership shift occurred pursuant to a plan or series
of related transactions and therefore that the spin-off is taxable under Code
Section 355(e).
If the spin-off is taxable solely under Code Section 355(e), Tenneco will
recognize gain equal to the difference between the fair market value of
Packaging's common stock and Tenneco's adjusted tax basis in that stock.
However, holders of Tenneco common stock would not recognize gain or loss as a
result of the spin-off. If Tenneco were to recognize gain in the spin-off, that
gain and the resulting tax liability likely would be very substantial.
The tax sharing agreement to be entered into between Packaging and
Automotive will allocate responsibility for the possible corporate tax burden
resulting from the spin-off. In the event the spin-off is taxable under Code
Section 355(e) as a result of a 50% Ownership Shift, then the resulting
corporate tax burden will be borne by that entity, Automotive or Packaging, with
respect to which the 50% Ownership Shift has occurred. Similarly, if the
spin-off is taxable due to any other action taken or permitted by Tenneco or
Packaging that is inconsistent with the factual representations or assumptions
on which the IRS letter ruling is based, that entity, Automotive or Packaging,
will be responsible for the resulting tax liability. Any income tax liability
that results from the spin-off, but which is not due to either a 50% Ownership
Shift or any action taken or permitted by either company that is inconsistent
with the IRS letter ruling, will be shared equally by Automotive and Packaging.
Current Treasury regulations require each holder of Tenneco common stock
who receives Packaging common stock pursuant to the spin-off to attach to his,
her or its federal income tax return for the year in which the spin-off occurs a
detailed statement setting forth such information as may be appropriate in order
to show the applicability of Code Section 355(a) to the spin-off. Automotive
will convey the appropriate information to each holder of record of Tenneco
common stock as of the record date.
Back-up Withholding Requirements
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of, Packaging common stock
unless the shareowner: (a) is a corporation or comes within certain other exempt
categories, and, when required, demonstrates these facts; or (b) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A shareowner who does not supply Packaging with
his, her or its correct taxpayer identification number may be subject to
penalties imposed by the IRS. Any amount withheld under these rules will be
creditable against the shareowner's federal income tax liability. Shareowners
should consult their tax advisors as to their qualification for exemption from
backup withholding and the procedure for obtaining such an exemption. If
information reporting requirements apply to a shareowner, the amount of
dividends paid with respect to such shares will be reported annually to the IRS
and to such shareowner.
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by Tenneco and Packaging
solely to provide information to Tenneco shareowners who will receive Packaging
common stock in the spin-off. It is not, and is not to be construed as, an
inducement or encouragement to buy or sell any securities of Tenneco or
Packaging. The information contained in this Information Statement is believed
by Tenneco and Packaging to be accurate as of the date set forth on its cover.
Changes may occur after that date, and neither Packaging nor Tenneco will update
the information except in the normal course of their respective public
disclosure practices.
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CAPITALIZATION AND NEW FINANCING
CAPITALIZATION
The following table sets forth the unaudited historical capitalization of
Packaging as of June 30, 1999, and unaudited pro forma capitalization of
Packaging as of June 30, 1999, after giving effect to the debt realignment and
the spin-off and related transactions, each as if they occurred on that date.
The pro forma capitalization reflects debt allocated to Packaging in the debt
realignment before any application of any proceeds from Packaging's planned sale
of its remaining interest in its containerboard joint venture. You should read
this table in conjunction with the "Combined Financial Statements of The
Businesses of Tenneco Packaging" and related notes, the "Unaudited Pro Forma
Combined Financial Statements of Packaging" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of Packaging, each
contained elsewhere in this document.
<TABLE>
<CAPTION>
PACKAGING
------------------------
JUNE 30, 1999
------------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Short-term debt:
Allocated from Tenneco.................................... $ 358(a) $ --
Borrowings under new Packaging credit facilities.......... -- 1,001
Other..................................................... 9 9
------ ------
367 1,010(b)
------ ------
Long-term debt:
Allocated from Tenneco.................................... 1,474(a) --
New securities............................................ -- 1,166(c)
Other..................................................... 20 20
------ ------
1,494 1,186(b)
------ ------
Total debt.................................................. 1,861 2,196(b)
------ ------
Minority interest........................................... 14 14
------ ------
Common stock................................................ -- 2
Paid-in capital............................................. -- 1,284
Retained earnings........................................... -- --
Combined equity............................................. 1,340 --
------ ------
Total equity......................................... 1,340 1,286
------ ------
Total capitalization........................................ $3,215 $3,496
====== ======
</TABLE>
- -------------------------
(a) Represents debt allocated to Packaging from Tenneco based on the portion of
Tenneco's investment in Packaging which Tenneco deemed to be debt. This
allocation is generally based on the ratio of Packaging's net assets to
Tenneco's consolidated net assets plus debt. Tenneco's historical practice
has been to incur debt for its consolidated group at the parent company
level or at a limited number of subsidiaries, rather than at the operating
company level, and to centrally manage various cash functions. Management
believes that the historical allocation of corporate debt is reasonable.
This historical allocation, however, is not indicative of the total amount
of debt that Packaging will have upon completion of the debt realignment or
of the debt that may be incurred by Packaging as a separate public entity.
(b) Represents debt allocated to Packaging in the debt realignment before
application of any proceeds from Packaging's planned sale of its remaining
interest in its containerboard joint venture. Packaging expects the sale to
be completed before the spin-off, with the net proceeds used to retire the
Tenneco debt that would otherwise be allocated to Packaging in the debt
realignment. If the sale occurs after the spin-off, the net proceeds will be
used to retire Packaging debt.
(c) Represents the $1,176 million aggregate principal amount of new securities
assumed to be exchanged pursuant to the exchange offers, which will be
recorded based on the net carrying amount of the original securities upon
consummation of the exchange offers. At this time, Packaging and Tenneco
cannot determine the ultimate amount of original securities that will be
exchanged, and that amount could vary significantly. The pro forma
capitalization assumes that 100% of the original securities are tendered
before the early exchange time and exchanged for new securities in the
exchange offers and that such new securities are not substantially different
from the original securities.
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NEW FINANCING
In connection with the spin-off, Packaging has entered into the following
credit facilities: (1) a $750 million long-term revolving senior credit
facility; and (2) a $250 million 364-day revolving senior credit facility.
Packaging may also enter into a $1.5 billion term loan facility in connection
with the spin-off, as described below. A definitive agreement for the $1.5
billion term loan facility has not been completed. Accordingly, the terms of the
$1.5 billion term loan are preliminary and may change as a result of the
negotiation of a definitive agreement.
Initial borrowings under one or more of these facilities are expected to
occur on or shortly before the spin-off. See "The Spin-off -- Debt Realignment"
for a description of how Packaging intends to use the proceeds of the initial
borrowings.
$750 MILLION LONG-TERM SENIOR REVOLVING CREDIT FACILITY
Packaging has entered into a senior credit facility with a syndicate, or
group, of banks and financial institutions. This facility is a revolving credit
facility of up to $750 million, which will terminate on September 29, 2004. Part
of the total facility will be a swingline facility of up to $50 million, from
only one lender in the group, which provides for borrowings to be made on
shorter notice than for the other loans.
The proceeds of the loans made under this facility will be used by
Packaging for refinancing existing indebtedness of Tenneco or its subsidiaries,
including Packaging, as part of the debt realignment, for working capital and
for other general corporate purposes.
Maturity. This senior credit facility provides that all amounts outstanding
at the termination of the facility in 2004 will become due then. Prior to that
date, funds may be borrowed, repaid, and reborrowed, without premium or penalty.
Covenants. This facility will require Packaging to maintain compliance with
the following financial tests:
- minimum interest coverage ratio, which is the ratio of consolidated
earnings before interest expense, income taxes, minority interest,
depreciation and amortization ("EBITDA") to consolidated cash interest
expense, as of the last day of any fiscal period; and
- maximum total debt to EBITDA ratio, which is the ratio of Packaging's
indebtedness, less certain exclusions, to EBITDA.
The senior credit facility imposes prohibitions and limitations that are
customary for similar facilities and transactions, including, among other
things, on Packaging's ability to incur specified liens, incur subsidiary
indebtedness, dispose of all or substantially all of its assets, and discontinue
its primary businesses.
Interest. At Packaging's option, borrowings under this facility, except for
competitive bid loans and swingline facility loans, will 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 plus a
specified margin.
Each competitive bid loan will bear interest at the rate quoted in the
respective bid. Each swingline loan is expected to bear interest at a minimum
rate, which may be negotiated higher, based on the higher of a specified prime
or reference rate and the federal funds rate plus an applicable margin.
$250 MILLION 364 DAY SENIOR REVOLVING CREDIT FACILITY
Packaging has entered into an additional revolving credit facility of up to
$250 million.
This senior credit facility will terminate on September 27, 2000, 364 days
after its signing date, and all amounts outstanding at termination to become due
then.
29
<PAGE> 40
Initial borrowings will occur under this facility at the same time as under
Packaging's $750 million Long-Term Senior Revolving Credit Facility described
above or thereafter during its term, and that proceeds of the loans will be used
for the same purposes as the Long-Term Facility. The financial tests,
prohibitions and limitations, interest rates and other material terms of this
facility are the same as for the Long-Term Facility.
$1.5 BILLION TERM LOAN FACILITY
A lender has committed to provide Packaging up to $1.5 billion of term loan
financing which Packaging intends to use in the event it does not sell its
containerboard joint venture interest before the spin-off for general corporate
and other purposes. Although the terms of this financing have not been
finalized, Packaging expects that borrowings under this facility would be due 18
months after funding and 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 plus a specific margin, at Packaging's option.
Packaging expects this financing would include covenants similar to those
described above for the revolving credit facilities.
30
<PAGE> 41
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF PACKAGING
The following Unaudited Pro Forma Combined Balance Sheet of Packaging as of
June 30, 1999, and the Unaudited Pro Forma Combined Statements of Income for the
six months ended June 30, 1999 and the year ended December 31, 1998, reflect the
effects of:
- the debt realignment; and
- the spin-off of Packaging and related transactions.
The Unaudited Pro Forma Combined Balance Sheet has been prepared as if
these transactions occurred on June 30, 1999; the Unaudited Pro Forma Combined
Statements of Income have been prepared as if these transactions occurred as of
January 1, 1998. The Unaudited Pro Forma Combined Financial Statements are not
necessarily indicative of the results that would have actually occurred if these
transactions had been consummated as of June 30, 1999 or January 1, 1998, or
results which may be attained in the future.
The Unaudited Pro Forma Combined Financial Statements were derived from the
historical Combined Financial Statements of The Businesses of Tenneco Packaging
included elsewhere in this document. Net assets included in these historical
financial statements that are not already owned directly or indirectly by us
will be transferred to us before the spin-off as part of the corporate
restructuring transactions. The accounting for the transfer of assets and
liabilities pursuant to the corporate restructuring transactions represents a
reorganization of companies under common control and, accordingly, all assets
and liabilities are reflected at their historical cost in our historical
combined financial statements.
The pro forma adjustments, as described in the Notes to the Unaudited Pro
Forma Combined Financial Statements, are based upon available information and
upon certain assumptions that management believes are reasonable. Our pro forma
debt and interest expense balances do not give effect to the application of any
proceeds from the planned sale of our remaining interest in the joint venture.
We expect the sale to be completed before the spin-off, with the net proceeds
used to retire the Tenneco debt that would otherwise be allocated to us in the
debt realignment. If the sale does not occur before the spin-off, the net
proceeds will be used to retire our debt. You should also read the Combined
Financial Statements of The Businesses of Tenneco Packaging, and related notes,
included elsewhere in this document.
31
<PAGE> 42
PACKAGING
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------
SPIN-OFF PACKAGING
PACKAGING DEBT AND RELATED PRO FORMA
HISTORICAL REALIGNMENT TRANSACTIONS COMBINED
---------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments.............. $ 18 $ -- $ -- $ 18
Receivables...................................... 375 -- 119(b) 494
Inventories...................................... 447 -- -- 447
Prepayments and other............................ 72 -- -- 72
------ ------ ------- ------
Total current assets........................ 912 -- 119 1,031
Plant, property, and equipment, net................ 1,495 -- -- 1,495
Goodwill and intangibles, net...................... 1,028 -- -- 1,028
Other assets and deferred charges.................. 918 59(a) 85(c) 1,062
Net assets of discontinued operations.............. 133 -- -- 133
------ ------ ------- ------
Total assets................................ $4,486 $ 59 $ 204 $4,749
====== ====== ======= ======
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt.................................. $ 367 $ 643(a) $ -- $1,010(e)
Trade payables................................... 357 -- -- 357
Other current liabilities........................ 336 -- -- 336
------ ------ ------- ------
Total current liabilities................... 1,060 643 -- 1,703
Long-term debt..................................... 1,494 (308)(a) -- 1,186(e)
Deferred income taxes.............................. 380 (52)(a) 34(c) 362
Other liabilities and deferred credits............. 198 -- -- 198
Minority interest.................................. 14 -- -- 14
Equity:
Combined equity.................................. 1,340 (224)(a) 119(b) --
51(c)
(1,286)(d)
Common stock..................................... -- -- 2(d) 2
Paid-in capital.................................. -- -- 1,284(d) 1,284
Retained earnings................................ -- -- --(d) --
------ ------ ------- ------
Total liabilities and equity................ $4,486 $ 59 $ 204 $4,749
====== ====== ======= ======
</TABLE>
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
32
<PAGE> 43
PACKAGING
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1999
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------
SPIN-OFF PACKAGING
PACKAGING DEBT AND RELATED PRO FORMA
HISTORICAL REALIGNMENT TRANSACTIONS COMBINED
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues.......... $ 1,404 $-- $-- $ 1,404
Other income, net......................... (18) -- -- (18)
------------ --- --- ------------
1,386 -- -- 1,386
------------ --- --- ------------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation
shown below)........................... 924 -- -- 924
Engineering, research, and development.... 18 -- -- 18
Selling, general, and administrative...... 206 -- (3)(c) 203
Depreciation and amortization............. 94 -- -- 94
------------ --- --- ------------
1,242 -- (3) 1,239
------------ --- --- ------------
INCOME BEFORE INTEREST EXPENSE, INCOME
TAXES, AND MINORITY INTEREST.............. 144 -- 3 147
Interest expense............................ 68 13(f) -- 81(e)(f)
Income tax expense.......................... 24 (5)(g) 1(g) 20
Minority interest........................... -- -- -- --
------------ --- --- ------------
INCOME FROM CONTINUING OPERATIONS........... $ 52 $(8) $ 2 $ 46(e)
============ === === ============
EARNINGS PER SHARE
Average shares of common stock --
Basic................................ 166,937,362 166,937,362
Diluted.............................. 167,319,412 167,319,412
Income from continuing operations
Basic................................ $ .31 $ .28
Diluted.............................. $ .31 $ .28
</TABLE>
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
33
<PAGE> 44
PACKAGING
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------
SPIN-OFF PACKAGING
PACKAGING DEBT AND RELATED PRO FORMA
HISTORICAL REALIGNMENT TRANSACTIONS COMBINED
---------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues..... $ 2,791 $ -- $ -- $ 2,791
Other income, net.................... (3) -- -- (3)
------------ ---- ---- ------------
2,788 -- -- 2,788
------------ ---- ---- ------------
COSTS AND EXPENSES
Cost of sales (exclusive of
depreciation shown below)......... 1,870 -- -- 1,870
Engineering, research, and
development....................... 33 -- -- 33
Selling, general, and
administrative.................... 427 -- (5)(c) 422
Depreciation and amortization........ 175 -- -- 175
------------ ---- ---- ------------
2,505 -- (5) 2,500
------------ ---- ---- ------------
INCOME BEFORE INTEREST EXPENSE, INCOME
TAXES, AND MINORITY INTEREST......... 283 -- 5 288
Interest expense....................... 133 31(f) -- 164(e)(f)
Income tax expense..................... 67 (12)(g) 2(g) 57
Minority interest...................... 1 -- -- 1
------------ ---- ---- ------------
INCOME FROM CONTINUING................. $ 82 $(19) $ 3 $ 66
============ ==== ==== ============
EARNINGS PER SHARE
Average shares of common stock --
Basic........................... 168,505,573 168,505,573
Diluted......................... 168,834,531 168,834,531
Income from continuing operations --
Basic........................... $ .49 $ .39
Diluted......................... $ .49 $ .39
</TABLE>
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
34
<PAGE> 45
PACKAGING
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
(a) To reflect debt allocated to Packaging in the debt realignment. The
adjustment to equity reflects the net impact of the debt realignment, the
recording of debt issue costs and deferred income taxes related to the
exchange offers and other transaction costs. Pro forma long-term debt
includes $1,166 million of new securities ($1,176 million aggregate
principal amount) assumed to be exchanged in the exchange offers, and $20
million of long-term debt of Packaging subsidiaries. Pro forma short-term
debt includes $1,001 million borrowed under Packaging's new credit
facilities to be entered into as part of this debt realignment and $9
million of short-term debt of Packaging subsidiaries. At this time,
Packaging and Tenneco cannot determine the ultimate amount of the original
securities which will be exchanged into new securities, and this amount
could vary significantly. These pro forma adjustments assume that 100% of
the original securities subject to the exchange offers will be tendered
before the early exchange time and exchanged for new securities and the new
securities will be recorded at the net carrying amount of the original
securities (in other words, the new securities are assumed not to be
"substantially different"). The results of the exchange offers could vary
based on a number of factors, including the timing and level of acceptance
of the exchange offers, the interest rate of the exchanged securities and
whether the exchanges will be considered extinguishments for accounting
purposes. Based on current interest rate markets, Packaging expects that the
exchange offers will not be extinguishments for accounting purposes.
Therefore, Packaging does not expect to recognize an extraordinary loss
attributable to the debt exchange. Other costs, including transaction costs
related to the spin-off and contractual employment obligations, are expected
to be incurred by Packaging in connection with the corporate restructuring
transactions and the spin-off which Packaging estimates will be
approximately $70 million after-tax. The effects on Packaging's debt of
these costs has been reflected in this pro forma adjustment. However, these
charges have not been included in the unaudited pro forma combined statement
of income.
(b) To reflect the purchase of Packaging accounts receivable at fair value which
had previously been sold to a third party.
(c) To reflect the transfer to Packaging of prepaid pension costs attributable
to Automotive employees and the corresponding reduction in net periodic
pension costs and the increase in prepaid pension cost attributable to the
curtailment of the pension benefits related to Automotive employees.
Automotive employees will no longer participate in the Tenneco Retirement
Plan following the spin-off and Packaging will become the sponsor of this
plan. These prepaid pension costs will be transferred to Packaging in
connection with the corporate restructuring transactions. Packaging
estimates that a curtailment gain of approximately $30 million will be
recognized relating to the freezing of Automotive employees' pension
benefits in connection with the spin-off. This gain has not been included in
the unaudited pro forma combined statements of income.
(d) To reflect the spin-off of Packaging common stock to holders of Tenneco
common stock at an exchange ratio of one share of Packaging common stock for
each share of Tenneco common stock.
(e) The Packaging pro forma debt balances do not give effect to the application
of any proceeds from the planned sale of Packaging's remaining interest in
Packaging's containerboard joint venture. Packaging expects the sale to be
completed before the spin-off, with the proceeds used to repay the Tenneco
debt that would otherwise be allocated to Packaging in the debt realignment.
If the sale occurs after the spin-off, the net proceeds will be used to
retire Packaging debt. In September 1999, the joint venture, Packaging
Corporation of America, filed a registration statement for Packaging to sell
its interest in a registered public offering. Based on indications of value
in that registration statement, estimated net proceeds ranging from $525
million to $600 million are anticipated to be received from the sale of
Packaging's remaining interest in its containerboard joint venture. For each
$50 million of after-tax proceeds received from the sale, pro forma interest
expense would be reduced by approximately $3 million on an annual basis and
pro forma income from continuing operations would be increased by
approximately $2 million on an annual basis, or $0.01 per diluted common
share.
35
<PAGE> 46
PACKAGING
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(f) To reflect the adjustment to interest expense from the allocation of Tenneco
debt to Packaging in the debt realignment as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1999 1998
---------------- ------------
(IN MILLIONS)
<S> <C> <C>
Interest expense on historical debt(1)....... $(68) $(133)
Interest expense on the new securities(2).... 46 93
Interest expense on Packaging's new credit
facilities(3).............................. 31 63
Amortization of debt financing costs(4)...... 4 8
---- -----
Adjustment to interest expense............... $ 13 $ 31
==== =====
</TABLE>
------------------------
(1) Weighted average outstanding debt and average annual effective
interest rates were $1,836 million and 7.3% for the six months
ended June 30, 1999, and $1,900 million and 7.0% for the year ended
December 31, 1998.
(2) Weighted average outstanding debt and average annual effective
interest rate for the new securities were assumed to be
approximately $1,166 million and 7 7/8% for the six months ended
June 30, 1999 and the year ended December 31, 1998.
(3) Weighted average outstanding debt and average annual effective rate
for Packaging's new credit facilities were assumed to be $1,001
million and 6 1/4% for the six months ended June 30, 1999 and the
year ended December 31, 1998.
(4) Represents the amortization of deferred debt financing costs.
A 1/8% change in the assumed interest rates would change annual pro forma
interest expense by approximately $3 million, before the effect of income
taxes.
(g) To reflect the income tax expense effects of pro forma adjustments at an
assumed statutory tax rate of 40%.
36
<PAGE> 47
SUPPLEMENTAL FINANCIAL INFORMATION
RESULTS OF OPERATIONS
Packaging's historical and pro forma earnings before interest expense,
income taxes, and minority interest ("EBIT") are shown in the following table:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
(MILLIONS)
<S> <C> <C>
Historical EBIT............................................. $283 $144
Pro forma EBIT.............................................. $288 $147
</TABLE>
These historical and pro forma results include certain items that Packaging
believes require additional explanation. These items include costs which Tenneco
incurred at the corporate level but did not fully allocate to its operating
divisions, such as administrative services, corporate overhead, and costs
related to Tenneco's operation as a public company. Because these functions will
become part of Packaging following the spin-off, these costs have been included
in Packaging's historical and pro forma EBIT. These items also included a
restructuring charge recorded in the fourth quarter of 1998. The following
information discusses these items in detail and their financial impact on
Packaging's EBIT.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
(MILLIONS)
<S> <C> <C>
- Restructuring charge -- Packaging recorded a
restructuring charge in the fourth quarter of 1998
designed to reduce administrative and operational
costs. Refer to Note 4, "Restructuring and Other
Charges," on page F-14 of The Combined Financial
Statements of the Businesses of Tenneco Packaging for
further information.................................. $32 $29
- Restructuring savings -- The portion of the
restructuring plan designed to reduce operational
costs is expected to result in lower costs of sales.
See "Restructuring and Other Charges" in Packaging's
Management's Discussion and Analysis for a discussion
of expected savings from restructuring............... $13 $ 6
- Corporate overhead reductions -- Packaging's smaller,
less complex corporate structure is expected to
result in corporate overhead costs that are lower by
approximately $12 million than Tenneco incurred
historically. Also, Packaging's EBIT includes costs
associated with Tenneco's administrative services
operations. Although the administrative services
operations provide a number of services to Tenneco's
operating units, some of these corporate level costs
were not previously allocated to Tenneco's operating
segments. Had all the administrative services
operations costs been allocated based on a usage
charge, Packaging estimates that approximately $28
million would have been billed to Automotive for
1998. See page F-11, "General and Administrative
Expenses" in Note 3 to the Combined Financial
Statements of the Businesses of Tenneco Packaging.... $40 $20
</TABLE>
37
<PAGE> 48
COMBINED SELECTED FINANCIAL DATA
The following combined selected financial data as of December 31, 1998 and
1997, and for the years ended December 31, 1998, 1997, and 1996, were derived
from the audited Combined Financial Statements of The Businesses of Tenneco
Packaging. The following combined selected financial data as of December 31,
1996, 1995, and 1994, and for the years ended December 31, 1995 and 1994, are
unaudited and were derived from Tenneco's accounting records. The following
combined selected financial data as of and for each of the six months ended June
30, 1999 and 1998 were derived from the unaudited Combined Financial Statements
of The Businesses of Tenneco Packaging.
In the opinion of Packaging's management, the combined selected financial
data of Packaging as of December 31, 1996, 1995, and 1994, and for the years
ended December 31, 1995 and 1994, and as of and for the six months ended June
30, 1999 and 1998, include all adjusting entries, consisting only of normal
recurring adjustments, necessary to present fairly the information set forth.
You should not regard the results of operations for the six months ended June
30, 1999 as indicative of the results that may be expected for the full year.
There is other information Packaging believes is relevant to understanding
its results of operations following the spin-off. These items relate to
corporate overhead incurred by Tenneco and its administrative services
operations that Packaging expects will differ following the spin-off. For
further information you should see "Supplemental Financial Information" included
elsewhere in this document.
You should read all of this information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Combined Financial Statements of The Businesses of Tenneco Packaging, and
related notes, included elsewhere in this document.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1998(a) 1997(a) 1996(a) 1995 1994
------- ------- ------- ---- ----
(Dollars in millions except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA(b):
Net sales and operating
revenues --
Specialty............. $ 2,785 $ 2,553 $ 1,987 $ 845 $ 636
Other................. 6 10 -- -- --
------------ ------------ ------------ ------------ ------------
Total............... $ 2,791 $ 2,563 $ 1,987 $ 845 $ 636
============ ============ ============ ============ ============
Income from continuing
operations before
interest expense, income
taxes, and minority
interest --
Specialty............. $ 328 $ 308 $ 249 $ 39 $ 68
Other(c).............. (45) (2) (15) (6) 17
------------ ------------ ------------ ------------ ------------
Total............... 283 306 234 33 85
Interest expense(d)....... 133 124 102 91 48
Income tax expense
(benefit)............... 67 75 67 (3) 19
Minority interest......... 1 1 -- -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from
continuing operations... 82 106 65 (55) 18
Income (loss) from
discontinued operations,
net of income tax(e).... 57 21 71 224 75
Extraordinary loss, net of
income tax(f)........... -- -- (2) -- --
Cumulative effect of
changes in accounting
principles, net of
income tax(g)........... -- (38) -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss)......... $ 139 $ 89 $ 134 $ 169 $ 93
============ ============ ============ ============ ============
(continued on next page)
<CAPTION>
Six Months
Ended
June 30,
---------------------------
1999(a) 1998(a)
------- -------
(Dollars in millions except per share amounts)
<S> <C> <C>
STATEMENTS OF INCOME
DATA(b):
Net sales and operating
revenues --
Specialty............. $ 1,404 $ 1,361
Other................. -- 10
------------ ------------
Total............... $ 1,404 $ 1,371
============ ============
Income from continuing
operations before
interest expense, income
taxes, and minority
interest --
Specialty............. $ 190 $ 175
Other(c).............. (46) (2)
------------ ------------
Total............... 144 173
Interest expense(d)....... 68 67
Income tax expense
(benefit)............... 24 37
Minority interest......... -- --
------------ ------------
Income (loss) from
continuing operations... 52 69
Income (loss) from
discontinued operations,
net of income tax(e).... (163) 37
Extraordinary loss, net of
income tax(f)........... (7) --
Cumulative effect of
changes in accounting
principles, net of
income tax(g)........... (32) --
------------ ------------
Net income (loss)......... $ (150) $ 106
============ ============
</TABLE>
38
<PAGE> 49
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1998(a) 1997(a) 1996(a) 1995 1994
------- ------- ------- ---- ----
(Dollars in millions except per share amounts)
<S> <C> <C> <C> <C> <C>
Average number of shares of
common stock
outstanding(h) --
Basic..................... 168,505,573 170,264,731 169,609,373 172,764,198 162,307,189
Diluted................... 168,834,531 170,801,636 170,526,112 173,511,654 162,912,425
Earnings (loss) per average
share of common
stock(h) --
Basic:
Continuing operations... $ .49 $ .63 $ .38 $ (.32) $ .11
Discontinued
operations(e)......... .34 .12 .42 1.30 .46
Extraordinary loss(f)... -- -- (.01) -- --
Cumulative effect of
changes in accounting
principles(g)......... -- (.23) -- -- --
------------ ------------ ------------ ------------ ------------
$ .83 $ .52 $ .79 $ .98 $ .57
============ ============ ============ ============ ============
Diluted:
Continuing operations... $ .49 $ .63 $ .38 $ (.32) $ .11
Discontinued
operations(e)......... .34 .12 .42 1.29 .46
Extraordinary loss(f)... -- -- (.01) -- --
Cumulative effect of
changes in accounting
principles(g)......... -- (.23) -- -- --
------------ ------------ ------------ ------------ ------------
$ .83 $ .52 $ .79 $ .97 $ .57
============ ============ ============ ============ ============
BALANCE SHEET DATA(b):
Net assets of discontinued
operations(e)........... $ 366 $ 423 $ 459 $ 393 $ 236
Total assets.............. 4,798 4,618 4,028 3,358 1,630
Short-term debt(d)........ 595 158 123 205 49
Long-term debt(d)......... 1,312 1,492 1,073 880 478
Debt allocated to
discontinued
operations(d)........... 548 473 394 369 285
Minority interest......... 14 15 -- -- --
Combined equity........... 1,776 1,839 1,843 1,531 703
STATEMENT OF CASH FLOWS
DATA(b):
Net cash provided (used)
by operating
activities.............. $ 577 $ 405 $ 263 $ 479 $ 283
Net cash provided (used)
by investing
activities.............. (514) (654) (669) (1,791) (146)
Net cash provided (used)
by financing
activities.............. (67) 239 399 1,327 (142)
Capital expenditures for
continuing operations... (194) (229) (216) (265) (134)
OTHER DATA:
EBITDA(i)................. $ 458 $ 469 $ 365 $ 78 $ 121
Ratio of earnings to fixed
charges(j).............. 1.99 2.31 2.15 NM 1.72
<CAPTION>
Six Months
Ended
June 30,
---------------------------
1999(a) 1998(a)
------- -------
(Dollars in millions except per share amounts)
<S> <C> <C>
Average number of shares of
common stock
outstanding(h) --
Basic..................... 166,937,362 169,341,555
Diluted................... 167,319,412 169,936,676
Earnings (loss) per average
share of common
stock(h) --
Basic:
Continuing operations... $ .31 $ .41
Discontinued
operations(e)......... (.98) .22
Extraordinary loss(f)... (.04) --
Cumulative effect of
changes in accounting
principles(g)......... (.19) --
------------ ------------
$ (.90) $ .63
============ ============
Diluted:
Continuing operations... $ .31 $ .41
Discontinued
operations(e)......... (.98) .22
Extraordinary loss(f)... (.04) --
Cumulative effect of
changes in accounting
principles(g)......... (.19) --
------------ ------------
$ (.90) $ .63
============ ============
BALANCE SHEET DATA(b):
Net assets of discontinued
operations(e)........... $ 133 $ 382
Total assets.............. 4,486 4,788
Short-term debt(d)........ 367 335
Long-term debt(d)......... 1,494 1,488
Debt allocated to
discontinued
operations(d)........... -- 479
Minority interest......... 14 15
Combined equity........... 1,340 1,829
STATEMENT OF CASH FLOWS
DATA(b):
Net cash provided (used)
by operating
activities.............. $ (45) $ 288
Net cash provided (used)
by investing
activities.............. (866) (221)
Net cash provided (used)
by financing
activities.............. 920 (66)
Capital expenditures for
continuing operations... (75) (101)
OTHER DATA:
EBITDA(i)................. $ 238 $ 261
Ratio of earnings to fixed
charges(j).............. 2.00 2.45
</TABLE>
- -------------------------
(a) For a discussion of the significant items affecting comparability of the
financial information for the years ended December 31, 1998, 1997, and 1996,
and for the six months ended June 30, 1999 and 1998, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this document.
(b) During the periods presented, Packaging completed numerous acquisitions, the
most significant of which were the acquisitions of Mobil Plastics for $1.3
billion in late 1995, Amoco Foam Products for $310 million in August 1996,
and the protective and flexible packaging business of N.V. Koninklijke KNP
BT for $380 million in April 1997. See Note 6 to the Combined Financial
Statements of The Businesses of Tenneco Packaging. See also, "Business --
Growth Strategy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(c) Income from continuing operations before interest expense, income taxes and
minority interest for "Other" includes costs which were incurred by
Tenneco's corporate and administrative services operations which were not
allocated to Tenneco's operating segments. Because those functions will be a
part of Packaging upon the spin-off, they are included in Packaging's
historical
(continued on next page)
39
<PAGE> 50
combined financial statements. Packaging expects its costs for these
functions will differ following the spin-off. See "Supplemental Financial
Information" included elsewhere in this document for further information.
(d) Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Accordingly, historical amounts include debt
and related interest expense allocated to Packaging from Tenneco based on
the portion of Tenneco's investment in Packaging which Tenneco deemed to be
debt. This allocation is generally based upon the ratio of Packaging's net
assets to Tenneco's consolidated net assets plus debt. An allocation of debt
and its related interest expense has also been made to Packaging's
discontinued operations based on the ratio of the discontinued operations'
net assets to Packaging's combined net assets plus debt. Management believes
that the historical allocation of corporate debt and interest expense is
reasonable. This historical allocation is not, however, indicative of the
total amount of debt that Packaging will have upon completion of the debt
realignment or of the debt and interest that may be incurred by Packaging as
a separate public entity. See the Combined Financial Statements of The
Businesses of Tenneco Packaging included elsewhere in this document.
(e) Discontinued operations for the periods presented consist of Packaging's
paperboard packaging segment, which was discontinued in June 1999 following
the decision to sell Packaging's remaining interest in Packaging's
containerboard joint venture. Loss from discontinued operations for the six
months ended June 30, 1999 included an after-tax loss of $178 million, or
$1.07 per diluted common share, resulting from the contribution of
Packaging's containerboard assets to the joint venture. See Note 7 to the
Combined Financial Statements of the Businesses of Tenneco Packaging
included elsewhere in this document.
(f) Represents Packaging's costs related to prepayment of debt. See Note 7 to
the Combined Financial Statements of The Businesses of Tenneco Packaging
included elsewhere in this document.
(g) In 1999, Packaging implemented the American Institute of Certified Public
Accountants Statement of Position No. 98-5, "Reporting on the Costs of
Start-Up Activities." In 1997, Packaging implemented the Financial
Accounting Standards Board's Emerging Issues Task Force Issue No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation." See Note 3 to the Combined Financial Statements of The
Businesses of Tenneco Packaging included elsewhere in this document for
additional information regarding changes in accounting principles.
(h) In the spin-off, Tenneco stockholders will receive one share of Packaging
common stock for each share of Tenneco common stock outstanding.
Accordingly, basic and diluted earnings per share for Packaging were
calculated using Tenneco's historical weighted average shares outstanding
and weighted average shares outstanding adjusted to include estimates of
additional shares that would be issued if potentially dilutive common shares
had been issued, respectively.
(i) EBITDA represents income from continuing operations before interest expense,
income taxes, minority interest and depreciation and amortization. EBITDA is
not a calculation based upon generally accepted accounting principles. The
amounts included in the EBITDA calculation, however, are derived from
amounts included in the Combined Statements of Income of The Businesses of
Tenneco Packaging included elsewhere in this document. EBITDA should not be
considered as an alternative to net income or operating income as an
indicator of the operating performance of Packaging, or as an alternative to
operating cash flows as a measure of liquidity. Packaging has reported
EBITDA because it believes EBITDA is a measure commonly reported and widely
used by investors and other interested parties as an indicator of a
company's ability to incur and service debt. Packaging believes EBITDA
assists investors in comparing a company's performance on a consistent basis
without regard to depreciation and amortization, which can vary
significantly depending upon accounting methods (particularly when
acquisitions are involved) or nonoperating factors. However, the EBITDA
measure presented in this document may not always be comparable to similarly
titled measures reported by other companies due to differences in the
components of the calculation.
(j) For purposes of computing this ratio, earnings generally consist of income
from continuing operations before income taxes and fixed charges, excluding
capitalized interest. Fixed charges consist of interest expense, the portion
of rental expense considered representative of the interest factor and
capitalized interest. The historical ratios are based upon the amount of
interest expense on corporate debt allocated to Packaging by Tenneco as
discussed in (d) above. For the year ended December 31, 1995, earnings were
inadequate to cover fixed charges by $59 million.
40
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following review of Packaging's financial condition and results of
operations should be read in conjunction with the Combined Financial Statements
of The Businesses of Tenneco Packaging, and the related notes, presented on
pages F-1 through F-31. Packaging includes the assets, liabilities and
operations of Tenneco's specialty packaging and paperboard packaging businesses
as well as Tenneco's corporate and administrative service operations.
STRATEGIC ALTERNATIVES ANALYSIS
In July 1998, Tenneco's Board of Directors authorized management to develop
a broad range of strategic alternatives which could result in the separation of
the automotive, paperboard packaging, and specialty packaging businesses. As
part of that strategic alternatives analysis, Tenneco has taken the following
actions:
- In January 1999, Packaging reached an agreement to contribute the
containerboard assets of its paperboard packaging segment to a new joint
venture with an affiliate of Madison Dearborn Partners, Inc. The
contribution of the containerboard assets to the joint venture was
completed in April 1999. Packaging received consideration of cash and
debt assumption totaling approximately $2 billion and a 45 percent common
equity interest in the joint venture valued at approximately $200
million. Packaging now owns a 43 percent common equity interest due to
subsequent management equity issuances.
- In April 1999, Packaging reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operation, to
Caraustar Industries. This transaction closed in June 1999.
- Also in April 1999, Tenneco announced that its Board of Directors had
approved the separation of its automotive and packaging businesses into
two separate, independent companies.
- In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture. In
September 1999, the joint venture, Packaging Corporation of America,
filed a registration statement for Packaging to sell its interest in a
registered public offering. Packaging expects the sale to be completed
before the spin-off discussed below.
The containerboard assets contributed to the new joint venture represented
substantially all of the assets of Packaging's paperboard packaging segment and
included four mills, 67 corrugated products plants, and an ownership or
controlling interest in approximately 950,000 acres of timberland. Before the
transaction, Packaging borrowed approximately $1.8 billion and used
approximately $1.2 billion to acquire assets used by the containerboard business
under operating leases and timber cutting rights and to purchase containerboard
business accounts receivable that had previously been sold to a third party. The
remainder of the borrowings was remitted to Tenneco and used to repay a portion
of short-term debt. Packaging then contributed the containerboard business
assets, subject to the new indebtedness and the containerboard business
liabilities, to the joint venture in exchange for $247 million in cash and the
45 percent interest in the joint venture. As a result of the sale transaction,
Packaging recognized a pre-tax loss of $293 million, $178 million after-tax, or
$1.07 per diluted common share. This loss was included in discontinued
operations in the first quarter of 1999.
As a result of the decision to sell Packaging's remaining interest in the
containerboard joint venture, Packaging's paperboard packaging segment is
presented as a discontinued operation in the Combined Financial Statements of
The Businesses of Tenneco Packaging contained elsewhere in this document. Refer
to Note 7 for further information.
The separation of Tenneco's automotive and packaging businesses will be
accomplished by the spin-off of the common stock of Packaging to Tenneco
shareowners. At the time of the spin-off, Packaging will include Tenneco's
specialty packaging business ("Specialty"), Tenneco's administrative services
operations, and the remaining interest in the containerboard joint venture if
the sale has not been completed. Tenneco
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<PAGE> 52
and Packaging are, however, currently analyzing the alternatives with respect to
the administrative services operations, which could include a sale or
outsourcing arrangement.
Before the spin-off, Tenneco will realign substantially all of its existing
debt through some combination of tender offers, exchange offers, prepayments and
other refinancings. This debt realignment will be financed by internally
generated cash, borrowings by Tenneco under a new credit facility, the issuance
by Tenneco of senior subordinated notes and borrowings by Packaging under new
credit facilities. See "The Spin-off -- Debt Realignment." Tenneco currently
expects that, subject to discussions with debt rating agencies, Packaging's debt
will be rated investment grade and Automotive's debt will be rated non-
investment grade.
Also before the spin-off, Tenneco will restructure its existing businesses,
assets, and liabilities through a series of corporate restructuring
transactions. As Tenneco is currently organized, ownership of its subsidiaries
is based on geographic location and tax considerations rather than on the
businesses in which the subsidiaries are involved. Therefore, Tenneco will need
to restructure its existing businesses so that the assets, liabilities, and
operations of its packaging business and administrative services operations will
be owned by Packaging, and the assets, liabilities, and operations of its
automotive businesses will be owned by Tenneco.
The spin-off is subject to conditions, including formal declaration of the
spin-off by the Tenneco Board of Directors, Tenneco's receipt, and the continued
effectiveness, of a determination that the spin-off will be tax-free for U.S.
federal income tax purposes, and the successful completion of the debt
realignment and corporate restructuring transactions. In August 1999, Tenneco
received a letter ruling from the Internal Revenue Service that the spin-off
will be tax-free for U.S. federal income tax purposes to Tenneco and its
shareowners and as a result the specialty packaging segment is presented as a
discontinued operation in the accompanying financial statements. After
discontinuing the specialty packaging segment, Tenneco's sole continuing
operation is its Automotive segment. Refer to Notes to Combined Financial
Statements of the Businesses of Tenneco Packaging contained elsewhere in this
document for further information.
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1998, Tenneco's Board of Directors approved an
extensive restructuring plan designed to reduce administrative and operational
overhead costs in every part of Tenneco's business. As a result, Packaging
recorded a pre-tax charge to income from continuing operations of $32 million,
$20 million after-tax or $.12 per diluted common share. Of the pre-tax charge,
$10 million relates to operational restructuring plans and $22 million relates
to a staff and cost reduction plan.
The operational restructuring plans provide for Packaging to eliminate
production lines at two plants, exit four joint ventures, and eliminate 104
positions. The staff and cost reduction plan for Packaging involves the
elimination of 184 administrative positions in Packaging's business operations
and in Packaging's corporate operations including Tenneco's corporate operations
that will become a part of Packaging in connection with the spin-off.
The fixed assets for the production lines to be eliminated, as well as the
joint venture investments, were written down to their fair value, less costs to
sell, in the fourth quarter of 1998. Fair value for the production lines was
estimated at scrap value less removal costs. Fair value for the joint ventures
was determined to be zero as Packaging is relinquishing its interests in the
ventures. No significant net cash proceeds are expected to be received from the
ultimate disposal of these assets, which should be complete by the fourth
quarter of 1999. The effect of suspending depreciation for the production lines
is approximately $1 million on an annual basis.
As of December 31, 1998 and June 30, 1999, approximately 158 and 233
employees, respectively, had been terminated. This restructuring is being
executed according to Packaging's initial plan and Packaging expects to complete
all restructuring actions by the fourth quarter of 1999.
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<PAGE> 53
In the first quarter of 1999, in connection with Packaging's contribution
of its containerboard assets to a new joint venture, Tenneco adopted a plan to
realign its headquarters functions that will become a part of Packaging in
connection with the spin-off. This plan involves the severance of approximately
40 employees, and the closing of the Greenwich, Connecticut headquarters
facility. Tenneco reached an agreement to sell its headquarters facility in
Greenwich, and recorded an impairment charge in the first quarter of 1999, based
on the selling price less costs to sell. The carrying value of the facility
before the impairment was $43 million. Annual depreciation will be reduced by $3
million as a result of the sale. The charge for this plan was recorded in
Packaging's corporate operations in the amount of $29 million pre-tax, $17
million after-tax, or $.10 per diluted common share. Packaging collected
approximately $30 million in the second quarter of 1999 related to the sale of
these assets.
Amounts related to the restructuring plans described above are shown in the
following table:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
-----------------------------------
1998 CHARGED BALANCE AT CHARGED BALANCE AT
RESTRUCTURING CASH TO ASSET DECEMBER 31, RESTRUCTURING CASH TO ASSET JUNE 30,
CHARGE PAYMENTS ACCOUNTS 1998 CHARGE PAYMENTS ACCOUNTS 1999
------------- -------- -------- ------------ ------------- -------- -------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Severance............... $20 $5 $-- $15 $16 $12 $-- $19
Asset impairments....... 12 -- 12 -- 13 -- 13 --
--- -- --- --- --- -- --- ---
$32 $5 $12 $15 $29 $12 $13 $19
=== == === === === == === ===
</TABLE>
Packaging expects to realize annual savings of $13 million related to the
operational restructuring plans and $40 million related to the fourth quarter
1998 staff and cost reduction plan. In addition, Packaging expects to realize
annual savings of $11 million related to its plan to realign its headquarters
functions. These annual savings will be fully realized upon completion of the
restructuring actions in the fourth quarter of 1999.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
RESULTS OF CONTINUING OPERATIONS
Net Sales and Operating Revenues
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1999 1998 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Specialty........................................... $1,404 $1,361 3%
Intergroup sales and other.......................... -- 10 NM
------ ------
$1,404 $1,371 2%
====== ======
</TABLE>
Packaging's revenue in its specialty segment increased by 3 percent over
the first half of 1998. The second half 1998 acquisitions of Sentinel and
Champion International's Belvidere, Illinois dual-ovenable paperboard tray
manufacturing facility generated $21 million of the revenue increase. Lower
prices due to lower raw material costs were offset by overall unit volume growth
of 8 percent. The largest increases were in North American protective packaging,
Hefty OneZip(R) bags, foodservice containers, disposable tableware and
industrial products.
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<PAGE> 54
Income Before Interest Expense, Income Taxes and Minority Interest
("Operating Income")
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998 % CHANGE
---- ---- --------
(MILLIONS)
<S> <C> <C> <C>
Specialty............................................ $ 190 $ 175 9%
Other................................................ (46) (2) NM
----- -----
$ 144 $ 173 (17%)
===== =====
</TABLE>
Packaging's operating income in its specialty segment increased by $15
million over the comparable period of 1998. The second half 1998 acquisitions of
Sentinel and Champion International's Belvidere, Illinois dual-ovenable
paperboard tray manufacturing facility produced $4 million of operating income
during the first half of 1999. First half operating income also reflected $5
million of non-recurring Year 2000 and systems implementation costs, and $3
million of overhead costs related to the separation of the paperboard segment.
Adjusting for these two items, Specialty Packaging's operating income improved
by 13 percent. This improvement was driven by lower manufacturing costs and
strong unit volumes, partially offset by lags in passing through rising raw
material costs.
Packaging's "Other" operating loss for both periods reflects unallocated
corporate overhead and costs at Packaging's data center and administrative
services operations. In addition, the first half of 1999 includes a $29 million
charge recorded in the first quarter to realign Tenneco's headquarters functions
as discussed above in the " Restructuring and Other Charges" section.
Operating Income as a Percentage of Revenue
Operating income as a percentage of revenue for the first six months of
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998 % CHANGE
----- ----- ---------
<S> <C> <C> <C>
Specialty.............................................. 13.5% 12.9% 5%
Total.................................................. 10.3% 12.6% (18%)
</TABLE>
Specialty's operating income as a percentage of revenue increased as the
operating income of the segment grew at three times the rate of revenue growth.
On a consolidated basis, total operating income as a percentage of revenue
declined as the operating income decreased 17 percent while revenue grew 2
percent.
Excluding the first quarter 1999 restructuring charge, operating income as
a percentage of revenue was as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998 % CHANGE
----- ----- ---------
<S> <C> <C> <C>
Specialty.............................................. 13.5% 12.9% 5%
Total.................................................. 12.3% 12.6% (2%)
</TABLE>
Interest Expense, net of interest capitalized
Interest expense for the first half of 1999 was even with the first half of
1998. Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries. Accordingly, interest expense in each period includes an
allocation of interest on Tenneco corporate debt. This allocation was based, in
general, on the ratio of Packaging's net assets to Tenneco's consolidated net
assets plus debt. See Note 5 to the Combined Financial Statements of The
Businesses of Tenneco Packaging for a further discussion of the allocation of
Tenneco consolidated debt and interest expense to Packaging.
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<PAGE> 55
Income Taxes
Packaging's effective tax rate for the first half of 1999 was 31 percent,
compared to 35 percent in last year's period.
DISCONTINUED OPERATIONS AND EXTRAORDINARY CHARGE
Loss from discontinued operations in the first half of 1999 was $163
million, net of an income tax benefit of $102 million, or $.98 per diluted
common share. This included a loss on the contribution of the containerboard
assets of $178 million, net of an income tax benefit of $115 million, or $1.07
per diluted common share.
Discontinued operations generated income of $37 million, net of income tax
expense of $25 million, or $.22 per diluted common share, during the first half
of 1998.
The current year's first six months also includes an extraordinary charge
to cover the cost of early retirement of debt in connection with the
contribution of the containerboard assets of $7 million, net of income tax
expense of $3 million, or $.04 per diluted common share.
See Note 7 to the Combined Financial Statements of The Businesses of
Tenneco Packaging for a further discussion of discontinued operations.
OUTLOOK
See "Summary -- Recent Developments" for information concerning Packaging's
expectations for third quarter 1999 results of operations.
CHANGES IN ACCOUNTING PRINCIPLES
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use. This statement requires prospective application,
for fiscal years beginning after December 15, 1998. Packaging adopted SOP 98-1
on January 1, 1999. The impact of this new standard did not have a significant
effect on Packaging's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred. This statement was effective for fiscal years beginning after
December 15, 1998. This statement requires previously capitalized costs related
to start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. Packaging previously
capitalized costs related to the start-up of new foreign operations and its
administrative service operations. Packaging adopted SOP 98-5 on January 1,
1999, and recorded an after-tax charge for the cumulative effect of this change
in accounting principle upon adoption of $32 million, net of a $9 million tax
benefit, or $.19 per diluted common share. The change in accounting principle
decreased the loss before cumulative effect of change in accounting principle by
$4 million, net of $2 million in income tax expense, or $.02 per diluted common
share, for the six months ended June 30, 1999. If the new accounting method had
been applied retroactively, net income for the six months ended June 30, 1998,
and the years ended December 31, 1998, 1997, and 1996, would have been lower by
$7 million, net of a $5 million income tax benefit, or $.04 per diluted common
share, $14 million, net of an $8 million tax benefit, or $.08 per diluted common
share, $7 million, net of a $3 million tax benefit, or $.04 per diluted common
share, and $7 million, net of a $4 million tax benefit, or $.04 per diluted
share, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes new accounting and reporting
standards requiring that all derivative instruments, including derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or
45
<PAGE> 56
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting treatment. This statement cannot be applied retroactively and is
effective for all fiscal years beginning after June 15, 2000. Packaging is
currently evaluating the new standard but has not yet determined the impact it
will have on its financial position or results of operations.
EARNINGS PER SHARE
Packaging's income from continuing operations was $.31 per diluted common
share for the first half of 1999, compared to $.41 per diluted common share for
last year's first half. All references to earnings per share in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are on a diluted basis unless otherwise noted. The current year's
period also included a loss from discontinued operations of $.98 per diluted
common share, a $.04 per share extraordinary loss on early retirement of debt in
connection with the contribution of the containerboard assets, and $.19 per
diluted common share of charges related to the cumulative effect of changes in
accounting principles noted above. First half 1998 included $.22 per diluted
common share of income from discontinued operations. Net income per diluted
common share was $.63 in the first half of 1998, as compared to a loss of $.90
per diluted common share in this year's period.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, %
1999 1998 CHANGE
-------- ------------ ------
(MILLIONS)
<S> <C> <C> <C>
Short-term debt and current maturities........... $ 367 $ 595
Long-term debt................................... 1,494 1,312
Debt allocated to discontinued operations........ -- 548
------ ------ ---
Total debt.................................. 1,861 2,455 (24%)
Minority interest................................ 14 14 --%
Combined equity.................................. 1,340 1,776 (25%)
------ ------
Total capitalization........................ $3,215 $4,245 (24%)
====== ======
</TABLE>
Packaging's debt to total capitalization ratio was 57.8 percent at both
June 30, 1999, and December 31, 1998. Debt allocated from Tenneco to Packaging
declined due to the contribution by Packaging of its containerboard assets to
the joint venture.
Equity declined primarily as a result of the net loss for the first six
months, which included the loss on the containerboard assets as well as the
charge associated with the plan to realign the Greenwich, Connecticut
headquarters facility. See the Statements of Changes in Combined Equity in the
Combined Financial Statements of The Businesses of Tenneco Packaging contained
elsewhere in this document for a description of factors affecting equity.
In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture. Packaging
expects the sale to be completed before the spin-off, with the net proceeds used
to retire Tenneco debt that would otherwise be allocated to Packaging in the
debt realignment. If the sale occurs after the spin-off, the net proceeds will
be used to retire Packaging debt.
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<PAGE> 57
Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1999 1998
---- ----
(MILLIONS)
<S> <C> <C>
Cash provided (used) by:
Operating activities...................................... $ (45) $ 288
Investing activities...................................... (866) (221)
Financing activities...................................... 920 (66)
</TABLE>
Cash flow provided by continuing operating activities declined by $163
million for the first six months of 1999 compared to the same period in 1998,
primarily due to higher working capital levels. This was mainly attributable to
higher receivables, lower payables and a seasonal build in inventories during
the 1999 period.
Cash flow from Tenneco's discontinued paperboard operations declined by
$170 million in the first six months of 1999 compared to the 1998 period. This
is primarily attributable to the purchase of containerboard business accounts
receivable in contemplation of the contribution of the containerboard business
to the joint venture in April 1999. Additionally, lower linerboard and medium
prices resulted in lower operating cash flow for the containerboard business.
Excluding the effects of the discontinued paperboard operations, cash used
by investing activities was lower during the first six months of 1999 by $127
million compared to the first six months of 1998. Reduced capital spending,
lower systems related expenditures and lower acquisition activity contributed to
the decline.
As described above, Packaging borrowed approximately $1.8 billion in the
second quarter in connection with the formation of the containerboard joint
venture and used approximately $1.2 billion of that amount to purchase leased
assets and timber cutting rights of that business. The remaining proceeds of
these borrowings, plus additional cash proceeds of approximately $306 million
from the containerboard and folding carton transactions, were used to retire
Tenneco's short-term debt in the second quarter. Accordingly, absent the
borrowings described above, cash used by financing activities was $840 million
for the first six months of 1999.
Packaging contributed the containerboard business to the new joint venture
subject to the approximately $2.2 billion in new debt. The debt reduction which
resulted from this contribution is shown on the statements of cash flows as a
non-cash financing activity.
Capital Commitments
Packaging estimates that expenditures aggregating approximately $110
million will be required after December 31, 1998, to complete facilities and
projects authorized at that date, and substantial commitments have been made in
connection with those projects.
Liquidity
Historically, Packaging's excess net cash flows from operating and
investing activities have been used by its parent, Tenneco, to meet consolidated
debt and other obligations. Conversely, when Packaging's cash requirements have
been in excess of cash flows from operations, Tenneco has utilized its
consolidated credit facilities to fund Packaging's obligations. Also, depending
on market and other conditions, Packaging has utilized external sources of
capital to meet specific funding requirements. Packaging's management believes
that, after the spin-off, Packaging's cash flows from operations combined with
available borrowing capacity under the new credit facilities described below,
will generally be sufficient to meet its future capital requirements for the
following year.
As described under "The Spin-Off-Debt Realignment," Tenneco intends to
realign its debt before the spin-off. As part of this debt realignment,
Packaging will (1) issue the new securities in the exchange
47
<PAGE> 58
offers and (2) make new borrowings under new credit facilities entered into in
connection with the spin-off. Cash proceeds will be remitted to Tenneco to fund
the debt realignment. Funding under these financings will be subject to the
satisfaction of numerous conditions.
The terms of the new public debt securities will be substantially identical
to the terms of the corresponding series of Tenneco's original securities for
which they are exchanged, except that (1) Packaging will be the issuer and (2)
the interest rates will be different. The terms of the new securities will not
restrict Packaging's ability to make dividends or capital expenditures or incur
additional unsecured debt.
In addition, Packaging has entered into a five year $750 million long-term
revolving credit facility and a $250 million 364-day revolving credit facility
in connection with the spin-off. Initial borrowings under these facilities will
be used to fund a portion of the debt realignment. After the spin-off,
additional borrowings may be used for general corporate purposes. These
facilities do not include any general restrictions on Packaging's ability to pay
dividends or make capital expenditures. They do, however, include limitations on
incurring liens and subsidiary debt, disposing of all or substantially all of
its assets and discontinuing its primary businesses. These facilities require
Packaging to comply with specified financial ratios, as well as other customary
covenants and agreements. Borrowings under these facilities will 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 plus a
specified margin, at Packaging's option. Borrowings under these facilities also
may bear interest based on competitive bids.
A lender has committed to provide Packaging up to $1.5 billion of term loan
financing, which Packaging intends to use in the event it does not sell its
containerboard joint venture interest before the spin-off, for general corporate
and other purposes . Although the terms of this financing have not been
finalized, Packaging expects that borrowings under this facility would be due 18
months after funding and 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 plus a specified margin, at Packaging's
option. Packaging expects this financing would include covenants similar to
those described above for the revolving credit facilities. See "Capitalization
and Financing -- Financing" for further information.
Before the spin-off Packaging expects to enter into a $175 million
syndicated lease facility with a third party lessor and various lenders, the
proceeds of which will be used to restructure or replace certain existing
operating leases and public warehouse arrangements and to facilitate additional
leasing arrangements for other operating facilities. Packaging expects that the
syndicated lease facility will contain customary terms and conditions, including
a residual value guarantee, default provisions and financial covenants.
ENVIRONMENTAL MATTERS
Packaging and a number of its subsidiaries and affiliates are parties to
environmental proceedings. 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 and which do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments indicate that remedial efforts are probable and the costs can be
reasonably estimated. Estimates of the liability are based upon currently
available facts, existing technology, and presently enacted laws and regulations
taking into consideration the likely effects of inflation and other societal and
economic 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. These estimated liabilities are subject to
revision in future periods based on actual costs or new information. These
liabilities are included in the balance sheet at their undiscounted amounts.
Recoveries are evaluated separately from the liability and, when assured, are
recorded and reported separately from the associated liability in the combined
financial statements.
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<PAGE> 59
As of July 1, 1999, Packaging has been designated as a potentially
responsible party at three Superfund sites and it has estimated its share of the
liability at these sites to be approximately $2 million in the aggregate. In
addition, Packaging also may have liability to remediate several current or
former facilities and it has estimated its share of the remediation costs at
these facilities to be approximately $4 million in the aggregate. For both the
Superfund sites and its current and former facilities, Packaging has established
reserves that it believes are adequate for these costs. Although Packaging
believes its estimates of remediation costs are reasonable and based on the
latest information, the clean-up costs are estimates and are subject to revision
as more information becomes available about the extent of remediation required.
At certain sites, Packaging expects that other parties will contribute to the
remediation costs. In addition, at the Superfund sites, the Comprehensive
Environmental Response, Compensation and Liability Act provides that Packaging's
liability could be joint and several meaning that Packaging could be required to
pay in excess of its share of remediation costs. Packaging's understanding of
the financial strength of other potentially responsible parties at both the
Superfund sites and at its current and former facilities has been considered,
where appropriate, in Packaging's determination of its estimated liability.
Packaging believes that any adjustment to the costs associated with its current
status as a potentially responsible party at the Superfund sites or as a liable
party at its current or former facilities will not be material to its
consolidated financial position or results of operations.
Packaging estimates that its capital expenditures for environmental matters
for 1999 and 2000 will not be material.
DERIVATIVE FINANCIAL INSTRUMENTS
Foreign Currency Exchange Rate Risk
Packaging currently manages its exposure to changes in foreign currency
rates by making loans with a Tenneco affiliate in the functional currency of the
operating company concerned. The Tenneco affiliate then integrates all of
Tenneco's foreign currency denominated intercompany loans and enters into
foreign currency forward purchase and sale contracts to mitigate its net
exposure to changes in foreign exchange rates. This reduces Packaging's need to
enter into forward contracts with third parties. Packaging expects that,
following the spin-off, its use of foreign currency forward purchase and sale
contracts will increase.
Additionally, Packaging from time to time enters into foreign currency
forward purchase and sale contracts to mitigate its exposure to changes in
exchange rates on intercompany and third party trade receivables and payables.
Packaging does not currently enter into derivative financial instruments for
speculative purposes.
The administration of these activities is concentrated at a London-based
Tenneco affiliate. This affiliate enters into forward purchase and sell
contracts with Tenneco's operating divisions to hedge the divisions' exposure to
changes in foreign currency exchange rates. The affiliate then enters into
contracts with third parties to hedge Tenneco's consolidated exposure. At
December 31, 1998, Packaging had purchase contracts with this affiliate of
approximately one million dollars, primarily in U.S. dollars, and sell contracts
of approximately one million dollars, primarily in British pounds. At December
31, 1997, Packaging had purchase contracts of approximately two million dollars,
primarily in Belgian francs and German marks, and sell contracts of
approximately two million dollars, primarily in British pounds and French
francs. Packaging's purchase and sell contracts as of June 30, 1999 and December
31, 1998 were not materially different.
Interest Rate Risk
Tenneco's financial instruments that are sensitive to market risk for
changes in interest rates are its debt securities. Tenneco primarily uses
commercial paper to finance its short-term capital requirements. Since
commercial paper generally matures in three months or less, Tenneco pays a
current market rate of interest on these borrowings. Tenneco finances its
long-term capital requirements with long-term debt with original maturity dates
ranging up to 30 years. All of Tenneco's existing long-term debt obligations
have fixed interest rates. Consequently, Tenneco is not exposed to cash flow or
fair value risk from market
49
<PAGE> 60
interest rate changes on its long-term debt portfolio. Should Tenneco decide to
redeem its long-term debt securities prior to their stated maturities, it would
generally incur costs based on the fair value of the debt at that time.
Packaging's interest expense in each period includes an allocation of
interest on Tenneco corporate debt. The allocated interest expense carries with
it exposure to Tenneco's interest rate risk. The table below provides
information about Tenneco's financial instruments that are sensitive to interest
rate risk as of December 31, 1998.
<TABLE>
<CAPTION>
Estimated Maturity Dates Fair Value at
---------------------------------------------------- December 31,
1999 2000 2001 2002 2003 THEREAFTER Total(b) 1998(a)
---- ---- ---- ---- ---- ---------- -------- -------------
(Millions Except Effective Interest Rates)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term (excluding current
maturities)......................... $821 $ -- $ -- $ -- $ -- $ -- $ 821 $ 821
Average effective interest rate..... 5.9% --% --% --% --% --%
Long-term debt (including current
maturities)......................... $250 $ 10 $187 $498 $ 7 $1,583 $2,535 $2,606
Average effective interest rate..... 6.4% 12.0% 6.8% 6.8% 11.2% 7.6%
</TABLE>
- -------------------------
(a) Fair value of short-term debt was considered to be the same as or was not
determined to be materially different from the carrying amount. The fair
value of fixed-rate long term debt was generally based on the market value
of Tenneco debt offered in open market exchanges at December 31, 1998.
(b) At December 31, 1998, short-term and long-term Tenneco debt allocated to
Packaging was $583 million and $1,291 million, respectively. Corporate debt
allocated to Packaging's discontinued operations was $548 million at
December 31, 1998.
Tenneco's financial instruments that are sensitive to interest rate risk as
of June 30, 1999 are not materially different from the table presented above. In
connection with the debt realignment, Packaging will enter into a new credit
facility which will be subject to interest rate risks.
In connection with the spin-off, the above described instruments, which are
sensitive to interest rate risk, are expected to be refinanced.
The statements and other information, including the tables, in this
"Derivative Financial Instruments" section constitute "forward-looking
statements."
YEAR 2000
Many computer software systems, as well as some hardware and equipment
utilizing date-sensitive data, were designed to use a two-digit date field.
Consequently, these systems, hardware and equipment will not be able to properly
recognize dates beyond the year 1999 (the "Year 2000 issue"). Packaging's
significant technology transformation projects have addressed the Year 2000
issue in those areas where replacement systems are being installed for other
business reasons. Where existing systems and equipment are expected to remain in
place beyond 1999, Packaging has a detailed process in place to identify and
assess Year 2000 issues and to remediate, replace or establish alternative
procedures addressing non-Year 2000 compliant systems, hardware and equipment.
Packaging has substantially completed inventorying its systems and
equipment, including computer systems and business applications, as well as
date-sensitive technology embedded in its equipment and facilities. Packaging
continues to plan for and undertake remediation, replacement or establishment of
alternative procedures for non-compliant Year 2000 systems and equipment; and
test remediated, replaced or alternative procedures for systems and equipment.
Packaging believes that approximately 70 percent of its major business
applications systems and approximately 90 percent of its manufacturing equipment
had achieved Year 2000 compliance as of June 30, 1999. Packaging has confirmed
that none of its products are date-sensitive. Remediation, replacement or
establishment of alternative procedures for systems and equipment have been and
are being
50
<PAGE> 61
undertaken on a business priority basis. This is ongoing and was completed at
some locations in 1998 with the remainder expected to be completed through the
third quarter of 1999. Testing will occur in the same time frame.
Based upon current estimates, Packaging believes that costs to address Year
2000 issues and implement the necessary changes to its existing systems and
equipment, including costs incurred to date, will range from $25 to $30 million.
As of June 30, 1999, approximately $17 million of the costs had been incurred.
These costs are being expensed as they are incurred, except that in some
instances Packaging may determine that replacing existing computer systems or
equipment may be more effective and efficient, particularly where additional
functionality is available. These replacements would be capitalized and would
reduce the estimated expense associated with Year 2000 issues.
Packaging has also contacted its major suppliers, financial institutions,
and others with whom it conducts business to determine whether they will be able
to resolve in a timely manner Year 2000 problems possibly affecting Packaging. A
majority of these entities, including critical suppliers, have responded by
advising as to the status of their efforts and by stating that they expect to
become Year 2000 compliant in a timely manner. Based on these responses,
critical suppliers have been assigned a risk rating. This process is ongoing.
Packaging intends to continue corresponding with critical high risk third
parties to obtain information and updates on their Year 2000 efforts, and to
assess new suppliers, financial institutions and others with whom it begins to
conduct business.
If Packaging is unable to complete on a timely and cost-effective basis the
remediation or replacement of critical systems or equipment not yet in
compliance, or develop alternative procedures, or if those with whom Packaging
conducts business are unsuccessful in implementing timely solutions, Year 2000
issues could have a material adverse effect on Packaging's financial condition
or results of operations. Possible worst case scenarios include interruptions in
Packaging's ability to manufacture its products, process and ship orders, and
bill and collect accounts receivable due to internal system failures or the
system failures of its suppliers or customers. Packaging believes it will be
able to timely resolve its own Year 2000 issues.
As part of its planning and readiness activities, Packaging is developing
Year 2000 contingency plans for critical business processes such as banking,
data center operations and just-in-time manufacturing operations. Contingency
plans are being developed on a business unit basis, where needed, to respond to
previously undetected Year 2000 problems and business interruption from
suppliers. Contingency plans will include alternative suppliers, as necessary,
as well as assuring the availability of key personnel at year end to address
unforeseen Year 2000 problems.
EURO CONVERSION
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 beginning January 1, 1999. In October 1997, Tenneco
established a cross-functional Euro Committee, comprised of representatives of
Tenneco's operational divisions, including Packaging, as well as its corporate
offices. That Committee had two principal objectives: (1) to determine the
impact of the Euro on Tenneco's business operations; and (2) to recommend and
facilitate implementation of those steps necessary to ensure that Tenneco would
be fully prepared for the Euro's introduction. As of January 1, 1999, Packaging
had implemented those Euro conversion procedures that it had determined to be
necessary and prudent to adopt by that date, and is on track to becoming fully
"Euro ready" on or before the conclusion of the three-year Euro transition
period. Packaging believes that the costs associated with transitioning to the
Euro will not be material to its combined financial position or the results of
its operations.
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<PAGE> 62
YEARS 1998 AND 1997
RESULTS OF CONTINUING OPERATIONS
Packaging reported income from continuing operations of $82 million for the
year ended December 31, 1998, compared to $106 million for the same period in
1997. The 1998 figure includes a $20 million after-tax charge to reduce overhead
and manufacturing costs throughout every part of Packaging's business. Excluding
the restructuring charge, Packaging's income from continuing operations for the
1998 period was $102 million. The decline resulted from costs related to
Packaging's data center consolidation effort, offset by record results in the
Specialty segment. Higher interest expense and a higher tax rate also
contributed to the earnings decline.
Net Sales and Operating Revenues
<TABLE>
<CAPTION>
%
1998 1997 CHANGE
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Specialty........................................... $2,785 $2,553 9%
Intergroup sales and other.......................... 6 10 (40%)
------ ------
$2,791 $2,563 9%
====== ======
</TABLE>
Packaging's revenue increase in its Specialty segment of $232 million
resulted primarily from full-year inclusion of the protective and flexible
packaging businesses acquired from N.V. Koninklijke KNP BT in 1997 and from the
May 1998 acquisition of Richter Manufacturing. The KNP BT businesses contributed
$160 million of incremental revenue in 1998 measured through the first
anniversary of their acquisition in late April 1997. Richter Manufacturing
revenue during 1998 was $39 million. The remaining revenue increase reflects
higher unit volumes in numerous product lines which more than offset lower
pricing.
Operating Income
The following table presents operating income by segment for the years 1998
and 1997:
<TABLE>
<CAPTION>
%
1998 1997 CHANGE
---- ---- ------
(MILLIONS)
<S> <C> <C> <C>
Specialty.............................................. $328 $308 6%
Other.................................................. (45) (2) NM
---- ----
$283 $306 (8%)
==== ====
</TABLE>
As described earlier in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, Packaging recorded a pre-tax
restructuring charge to income from continuing operations of $32 million, $20
million after-tax, in the fourth quarter of 1998. The restructuring charge
affected Packaging's segments as follows: Specialty -- $18 million and
Other -- $14 million.
Excluding these restructuring charges, a comparison of Packaging's 1998 and
1997 operating income is as follows:
<TABLE>
<CAPTION>
%
1998 1997 CHANGE
---- ---- ------
(MILLIONS)
<S> <C> <C> <C>
Specialty............................................... $346 $308 12%
Other................................................... (31) (2) NM
---- ----
$315 $306 3%
==== ====
</TABLE>
Packaging's operating income increase in its Specialty segment reflected
$24 million from acquired businesses measured through the one-year anniversary
of their acquisitions, as well as higher unit volumes, primarily in Hefty
One-Zip(R), food service foam, and consumer tableware products. Lower raw
material
52
<PAGE> 63
costs approximately offset price reductions to customers. In addition, Specialty
incurred approximately $7 million in one-time costs related to an information
systems project in North America.
Packaging's operating loss in its "Other" segment increased in 1998 over
1997 levels primarily as a result of higher costs related to Packaging's data
center consolidation effort, which more than offset lower unabsorbed costs at
Packaging's administrative services operation.
Operating Income as a Percentage of Revenue
Operating income as a percentage of revenue for 1998 and 1997, including
the fourth quarter 1998 restructuring charge, were as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
---- ---- --------
<S> <C> <C> <C>
Specialty.................................................. 11.8% 12.1% (2%)
Total...................................................... 10.1% 11.9% (15%)
</TABLE>
The Specialty segment's operating income as a percentage of revenue
contracted as the growth rate of operating income, including the restructuring
charge, was 6 percent compared with the 9 percent growth rate of revenues. On a
consolidated basis, total operating income as a percentage of revenue contracted
even further, as the operating income, including both the restructuring charge
and the increased costs in the other segment, decreased 8 percent while revenue
grew 9 percent.
Excluding the fourth quarter 1998 restructuring charge, operating income as
a percentage of revenue for the same periods were as follows:
<TABLE>
<CAPTION>
1998 1997 % CHANGE
---- ---- --------
<S> <C> <C> <C>
Specialty.................................................. 12.4% 12.1% 2%
Total...................................................... 11.3% 11.9% (5%)
</TABLE>
Interest Expense, net of interest capitalized
Interest expense for 1998 was $9 million, or 7 percent, higher than for
1997. As described above, interest expense in each period includes an allocation
of interest on Tenneco corporate debt. This allocation was based, in general, on
the ratio of Packaging's net assets to Tenneco consolidated net assets plus
debt. See Note 5 to the Combined Financial Statements of The Business of Tenneco
Packaging contained elsewhere in this document for a further discussion of the
allocation of Tenneco consolidated debt and interest expense to Packaging.
Income Taxes
Packaging's effective tax rate for 1998 was 45 percent, compared to 41
percent for 1997. The effective tax rate was higher than the statutory rate in
both periods primarily as a result of state and local income taxes.
DISCONTINUED OPERATIONS
Discontinued operations generated income of $57 million, net of income tax
expense of $38 million, or $.34 per diluted common share for 1998.
Discontinued operations generated income of $21 million, net of income tax
expense of $14 million, or $.12 per diluted common share during 1997.
Fourth quarter 1998 results from discontinued operations for the paperboard
packaging business includes a pre-tax charge of $14 million related to
Packaging's restructuring plan to reduce administrative and operational overhead
costs. The paperboard packaging restructuring plan involves closing four box
plants and the elimination of 78 positions at those plants.
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<PAGE> 64
Income from the discontinued paperboard packaging business in 1998 also
included a $15 million pre-tax gain on the sale of its remaining 20 percent
interest in a recycled paperboard joint venture with Caraustar Industries and a
$17 million pre-tax gain on the sale of non-strategic timberland assets. In
1997, income from discontinued operations included a $38 million pre-tax gain on
refinancing of two containerboard mill leases and a $5 million pre-tax gain from
a timberland management transaction.
See Note 7 to the Combined Financial Statements of The Businesses of
Tenneco Packaging contained elsewhere in this document for a further discussion
of discontinued operations.
CHANGES IN ACCOUNTING PRINCIPLES
As required by the FASB's Emerging Issues Task Force ("EITF") Issue 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation," Packaging recorded an after-tax charge of $38 million, net of a
tax benefit of $24 million, or $.23 per diluted common share, in the fourth
quarter of 1997. EITF Issue 97-13 establishes the accounting treatment and an
allocation methodology for consulting and other costs incurred in connection
with information technology transformation efforts. This charge was reported as
a cumulative effect of change in accounting principle.
EARNINGS PER SHARE
Income from continuing operations was $.49 per diluted common share for
1998, compared to $.63 per diluted common share in 1997. Discontinued operations
provided income of $.34 and $.12 per diluted common share, for 1998 and 1997,
respectively. In 1997, Packaging also recorded a charge for the cumulative
effect of a change in accounting principle noted above of $.23 per diluted
common share, resulting in net income of $.52 per diluted common share, compared
to $.83 per diluted common share in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
<TABLE>
<CAPTION>
%
1998 1997 CHANGE
---- ---- ------
(MILLIONS)
<S> <C> <C> <C>
Short-term debt and current maturities................ $ 595 $ 158
Long-term debt........................................ 1,312 1,492
Debt allocated to discontinued operations............. 548 473
------ ------
Total debt..................................... 2,455 2,123 16%
Minority interest..................................... 14 15 (7%)
Combined equity....................................... 1,776 1,839 (3%)
------ ------
Total capitalization........................... $4,245 $3,977 7%
====== ======
</TABLE>
Packaging's debt to capitalization ratio was 57.8 percent at December 31,
1998, compared to 53.4 percent at December 31, 1997. The increase in the ratio
is attributable to additional corporate debt allocated to Packaging from Tenneco
during 1998, as well as a decline in equity. See Note 5 to the Combined
Financial Statements of The Businesses of Tenneco Packaging for a further
discussion of the allocation of Tenneco consolidated debt and interest expense
to Packaging. See the Statements of Changes in Combined Equity of The Businesses
of Tenneco Packaging for a description of factors affecting equity.
54
<PAGE> 65
Cash Flows
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Cash provided (used) by:
Operating activities...................................... $ 577 $ 405
Investing activities...................................... (514) (654)
Financing activities...................................... (67) 239
</TABLE>
Cash flow from operating activities increased by $172 million from 1997 to
1998. Of this amount, $74 million was produced by continuing operations and $98
million was produced by discontinued operations. The increase from continuing
operations was primarily attributable to working capital, which increased
significantly during 1997 to support the growth in revenues over 1996 levels.
Working capital decreased slightly during 1998 as revenue growth moderated. Cash
flow from discontinued operations improved due to higher earnings in 1998
resulting from improved containerboard pricing.
Investing activities used $140 million less cash during 1998 than in 1997.
A significantly reduced level of acquisitions was partially offset by a higher
level of capital spending for discontinued operations. This increased spending
was primarily to acquire some leased timberlands in contemplation of the
separation of the containerboard assets from Packaging's other businesses.
Acquisitions in 1998 included: Champion International's dual-ovenable paperboard
tray manufacturing facility in Belvidere, Illinois; Richter Manufacturing and
Sentinel Products. In 1997, acquisitions related primarily to the protective and
flexible packaging businesses of KNP.
Financing activities used $67 million in 1998, compared to providing $239
million in 1997, a change of $306 million. Packaging retired $82 million less
debt during 1998. During 1998, Packaging remitted $56 million to Tenneco. During
1997, Tenneco contributed $331 million to Packaging.
YEARS 1997 AND 1996
RESULTS OF CONTINUING OPERATIONS
Net Sales and Operating Revenues
<TABLE>
<CAPTION>
%
1997 1996 CHANGE
---- ---- ------
(MILLIONS)
<S> <C> <C> <C>
Specialty............................................. $2,553 $1,987 28%
Intergroup sales and other............................ 10 -- NM
------ ------
$2,563 $1,987 29%
====== ======
</TABLE>
Packaging experienced increases in revenues from its Specialty segment of
$566 million during 1997 over 1996. This growth was primarily generated by unit
volume sales growth and revenues earned by companies acquired in 1996 and 1997.
The protective and flexible packaging businesses acquired from KNP in late April
1997, along with revenues from the Amoco Foam products business calculated
through the first anniversary of its August 1996 acquisition, contributed $491
million to this revenue growth during 1997. Unit volume sales increases,
primarily in the consumer markets and clear plastic containers, accounted for
significant revenue increases as well. Partially offsetting revenue growth from
acquisitions and volumes was lower product pricing, reflecting lower raw
material prices, which negatively impacted revenues by $53 million.
55
<PAGE> 66
Operating Income
<TABLE>
<CAPTION>
%
1997 1996 CHANGE
---- ---- ------
(MILLIONS)
<S> <C> <C> <C>
Specialty............................................... $308 $249 24%
Other................................................... (2) (15) NM
---- ----
$306 $234 31%
==== ====
</TABLE>
Packaging's higher operating income from its Specialty segment in 1997
resulted primarily from $76 million in operating income generated by the
protective and flexible packaging businesses acquired from KNP in late April
1997 and the Amoco Foam products acquisition calculated through the first
anniversary of its August 1996 acquisition. A portion of the 1997 earnings
increase from the foam products acquisition resulted from cost savings realized
by the integration of the acquired company into the Specialty segment's existing
business.
Packaging's operating loss in its "Other" segment increased in 1997
compared to 1996 before a charge of $17 million related to the acceleration of
employee benefits in connection with Tenneco's December 1996 corporate
reorganization. The increase resulted from a higher level of unallocated
administrative costs related to Packaging's administrative services operation,
which began operation in late 1996.
Operating Income as a Percentage of Revenue
Operating income as a percentage of revenue for 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996 % CHANGE
---- ---- --------
<S> <C> <C> <C>
Specialty............................................... 12.1% 12.5% (3%)
Total................................................... 11.9% 11.8% 1%
</TABLE>
Specialty segment's operating income as a percentage of revenue contracted
from 1996 to 1997 as the growth rate of operating income was 24 percent compared
with the 28 percent growth rate of revenues. On a consolidated basis, total
operating income as a percentage of revenue expanded slightly, as the operating
income grew 31 percent while revenue grew 29 percent.
Interest Expense, net of interest capitalized
Interest expense for 1997 was $22 million or 22 percent higher than for
1996. As described above, interest expense in each period includes an allocation
of interest on Tenneco corporate debt. This allocation was based, in general, on
the ratio of Packaging's net assets to Tenneco consolidated net assets plus
debt. See Note 5 to the Combined Financial Statements of The Businesses of
Tenneco Packaging included elsewhere in this document for a further discussion
of the allocation of Tenneco consolidated debt and interest to Packaging.
Income Taxes
Packaging's effective tax rate for 1997 was 41 percent, compared to 51
percent for 1996. The 1997 and 1996 effective tax rate was higher than the
statutory rate as a result of state and local income taxes.
DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS
Discontinued operations generated income of $21 million, net of income tax
expense of $14 million, or $.12 per diluted common share, during 1997.
Discontinued operations generated income of $71 million, net of income tax
expense of $47 million, or $.42 per diluted common share, for 1996.
Income from discontinued operations in 1997 included a $38 million pre-tax
gain which resulted from the refinancing of two containerboard mill leases.
Income from the discontinued paperboard packaging
56
<PAGE> 67
business in 1996 included a $50 million pre-tax gain on the sale of certain
recycled paperboard assets to a joint venture with Caraustar Industries and a
pre-tax charge of $6 million to reorganize Packaging's folding carton
operations.
The extraordinary loss reported in 1996 of $2 million, net of an income tax
benefit of $1 million, or $.01 per diluted common share, relates to premium paid
on early retirement of debt in anticipation of the corporate reorganization
effected in the fourth quarter of 1996.
See Note 7 to the Combined Financial Statements of The Businesses of
Tenneco Packaging included elsewhere in this document for a further discussion
of discontinued operations.
EARNINGS PER SHARE
Income from continuing operations was $.63 per diluted common share in
1997, up from $.38 per diluted common share in 1996. Discontinued operations
produced income of $.12 and $.42 per diluted common share, for 1997 and 1996,
respectively. Packaging recorded the cumulative effect of a change in accounting
principle discussed above of $.23 per diluted common share, resulting in net
income of $.52 per diluted common share for 1997. Packaging also recorded an
extraordinary loss of $.01 per diluted common share in 1996, related to early
retirement of debt, resulting in net income per diluted common share of $.79.
Average shares of common stock outstanding increased slightly during 1997. For
further information regarding the calculation of earnings per share, see Note 3
to the Combined Financial Statements of The Businesses of Tenneco Packaging.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
<TABLE>
<CAPTION>
%
1997 1996 CHANGE
---- ---- ------
(MILLIONS)
<S> <C> <C> <C>
Short-term debt and current maturities................ $ 158 $ 123
Long-term debt........................................ 1,492 1,073
Debt allocated to discontinued operations............. 473 394
------ ------
Total debt.................................. 2,123 1,590 34%
Minority interest..................................... 15 -- NM
Combined equity....................................... 1,839 1,843 --
------ ------
Total capitalization........................ $3,977 $3,433 16%
====== ======
</TABLE>
Packaging's debt to capitalization ratio was 53.4 percent at December 31,
1997, compared to 46.3 percent at December 31, 1996. The increase in the ratio
is attributable to additional corporate debt allocated to Packaging from Tenneco
during 1997. See Note 5 to the Combined Financial Statements of The Businesses
of Tenneco Packaging for a further discussion of the allocation of Tenneco
consolidated debt and interest expense to Packaging.
Cash Flows
<TABLE>
<CAPTION>
1997 1996
---- ----
(MILLIONS)
<S> <C> <C>
Cash provided (used) by:
Operating activities...................................... $ 405 $ 263
Investing activities...................................... (654) (669)
Financing activities...................................... 239 399
</TABLE>
57
<PAGE> 68
Operating activities provided $405 million in 1997 and $263 million in
1996. Discontinued operations provided $110 million of the increase. Continuing
operations benefited from higher income and cash flow benefits from tax refunds
during 1997, resulting primarily from tax benefits derived from the December
1996 reorganization and debt realignment, and a 1996 tax net operating loss,
which was carried back to earlier years. These positive benefits were largely
offset by increased working capital associated with higher revenue levels and
increased cash outflows associated with the fourth quarter 1996 restructuring
initiatives.
Investing activities used $15 million less cash in 1997 than in 1996. Lower
capital expenditures for discontinued operations and lower acquisitions for both
continuing and discontinued operations were largely offset by lower proceeds
from the sale of discontinued operations.
Financing activities generated $160 million less cash in 1997 than in 1996.
Packaging retired $69 million more debt and Tenneco contributed $91 million less
cash to Packaging in 1997 than in 1996.
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<PAGE> 69
BUSINESS
We are a global supplier of specialty packaging and consumer products with
1998 revenues of approximately $2.8 billion. We operate 89 manufacturing
facilities throughout the world and employ over 15,000 people. We manufacture
and sell plastic, aluminum and paper-based consumer products, such as disposable
tableware, plastic food storage and waste bags. Our food packaging products
include molded fiber cartons, and foam, clear plastic, aluminum and pressed
paperboard containers as well as zipper closures and modified atmosphere
packaging. We also offer: (a) protective packaging designed to protect and
cushion products made and shipped by various manufacturers; and (b) flexible
packaging, such as polypropylene medical bags, surgical drapes and printed
barrier films used for disposable diaper liners and other products. We pursue a
growth strategy driven by highly focused internal programs which are
complemented by strategic acquisitions.
INDUSTRY OVERVIEW AND KEY TERMS
Many of the markets we serve are growing faster than the overall growth of
the United States gross domestic product. Most of our revenue comes from
products made from different types of plastics, with the balance coming from
paper and aluminum products. According to A.C. Nielsen, the unit volume growth
trend as of June 12, 1999 for the zippered food storage bag market is 6.0% per
year. Additionally, unit volume in the market for foam disposable foodservice
packaging is projected to grow 6-7% annually for the next five years, according
to a study prepared by a market research group. Several markets within the
protective packaging industry are growing 6-8% per year in sales according to
U.S. Industry and Trade Outlook '99.
Specialty packaging is an industry term which generally refers to packaging
used by commercial customers that is designed and manufactured for a specific
application or product. Examples include:
- rigid, clear plastic containers used in supermarkets to display bakery
goods;
- sponge-like foam plastic packaging used to cushion and protect computers,
TVs and stereos; and
- flexible plastic bags used for sterile intravenous fluid delivery.
The specialty packaging industry may be divided into sub-categories based on the
characteristics of the packaging, the industry in which the packaging is used,
or the primary function of the packaging. Examples include flexible packaging,
foodservice packaging and protective packaging. Individual packaging products
may fall into more than one sub-category of specialty packaging.
Protective packaging is the industry term used to describe specialty
packaging that satisfies the protection and transportation needs of commercial
customers. Protective packaging is designed and manufactured to ensure the
integrity and safety of the customer's product from the point it leaves the
manufacturing floor until it reaches its final destination. Flexible packaging
is an industry term used to describe the sub-category of specialty packaging for
customers whose products or distribution channels require a custom-designed
flexible plastic package. Food/foodservice packaging describes specialty
packaging designed and manufactured for customers in the food industry. This
includes customers who process and prepare food for consumption, known as food
packers and processors. It also includes other customers in the food
distribution channel such as wholesalers and supermarkets.
Specialty packaging generally is constructed from plastic or paper which is
engineered, designed and manufactured to meet the customer's specific need in a
particular product or application. The basic raw materials used to make plastic
specialty packaging are different types of plastics obtained from chemical
companies, often in pelletized form, known as plastic resins. Plastic resins
come in three general forms based on their chemical composition: polyolefins,
polystyrenes and polyvinyl chloride. Polyolefins include polyethylene and
polypropylene.
The plastic resins are subjected to various manufacturing processes that
result in intermediate forms of the plastic. It may be solid or a sponge-like
material called foam. Depending on its thickness, the material may be called
film, sheet or plank.
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The plastic films, sheets and planks are then combined, shaped and cut to
produce different specialty packaging:
- polypropylene medical bags -- layered plastic films combined to produce
plastic bags that hold fluid for intravenous delivery;
- printed barrier films -- flexible printed packaging designed to protect a
wide range of products from chemicals to foods;
- modified atmosphere packaging -- packaging that is principally used with
foods to preserve freshness and designed to protect the contents from
penetration by oxygen;
- foam containers -- lightweight containers designed to package individual
servings of food, often in the fast-food, take-out food, or other
foodservice context;
- engineered foam plank and foam sheet -- packaging material of different
shapes and thicknesses designed to protect and cushion goods, primarily
while in transit;
- polyethylene stretch film -- strong, puncture-resistant packaging used to
contain and protect goods for transportation, often used to secure
individual goods on pallets;
- polyolefin foam -- foam packaging that is stronger and more resilient
than conventional plastic foam and which may be formed into a soft,
rubber-like material that is flexible, elastic and resilient; and
- converted protective packaging -- packaging designed and configured for a
specific product application, such as the plastic foam used to secure
home electronics inside the boxes in which they are shipped and foam pipe
insulation.
Many of our packaging products are manufactured using paperboard or other
materials created from wood pulp or recycled paper:
- paperboard honeycomb -- paperboard box material designed and engineered
using geometrically shaped paperboard between flat layers of linerboard
to enhance the cushioning characteristics of the container;
- customized packaging systems -- refers to paper or plastic packaging
combined with a unique machine or device to package a specific product or
type of products;
- linerboard -- paperboard used for the flat outer face of containerboard
packaging;
- molded fiber -- a material created from recycled paper that may be formed
into various shapes, such as egg cartons;
- pressed paperboard -- plastic coated paperboard used to make food
containers; and
- dual-ovenable paperboard -- plastic coated paperboard that may be heated
in either a microwave or a conventional oven.
OUR PRODUCTS AND MARKETS
We manufacture, market and sell plastic and paper-based consumer products
and food/foodservice packaging as well as protective and flexible packaging.
Approximately 80% of our revenue comes from products made from different types
of plastics, with the balance from paper and aluminum products.
Consumer Products and Food/Foodservice Packaging
We manufacture, market and sell consumer products, such as plastic storage
bags for food and household items, plastic waste bags, foam and molded fiber
disposable tableware and disposable aluminum cookware. We sell many of these
products under such recognized brand names as Hefty(R), Baggies(R), Hefty
One-Zip(R), Kordite(TM) and E-Z Foil(R). These products are typically used by
consumers in their homes, and we market and sell them through a variety of
retailers, including supermarkets, mass merchandisers and other stores where
consumers purchase household goods.
Our food packaging products protect food during distribution, assist
retailers in merchandising food and help customers prepare and serve meals in
their homes. For food processors, we offer dual-ovenable
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paperboard products, molded fiber egg cartons, foam meat trays, aluminum
containers and modified atmosphere packaging, which extends the shelf life of
meat products.
In addition, we provide plastic zipper closures for a variety of flexible
packaging applications. Our food packaging products for supermarket in-store use
include clear rigid display packaging used in produce, deli and bakery
applications, microwaveable containers used for prepared, ready-to-eat meals,
plastic foam trays for meat and produce, and bags for produce and bakery
applications.
For our foodservice customers, we offer products that help merchandize and
serve both on-premises and takeout meals. These products 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.
Protective and Flexible Packaging
We manufacture, market and sell protective packaging for use in the
automotive, computer, electronic, furniture, durable goods, building and
construction products industries. Our sheet foams and air encapsulated bubble
products, for example, are used for cushioning and surface protection. Our
paperboard honeycomb and engineered foam plank products protect against shock,
vibration and thermal damage. We also offer other converted protective packaging
products, including padded mailers, a variety of laminated protective coverings
and customized packaging systems.
Our flexible packaging products provide a variety of cost-effective,
efficient and attractive solutions for 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 used for sterile intravenous fluid delivery, modified
atmosphere films, stand-up pouches, food and hygiene packaging, and disposable
surgical kits custom designed for specific procedures.
We also offer polyethylene stretch film, specialty aluminum materials and
film and foam products for use in the construction industry.
GROWTH STRATEGY
We have grown, and plan to continue to grow, by pursuing internal growth
and strategic acquisitions. By pursuing this growth strategy, we increased the
total revenues of our specialty packaging and consumer products business from
$845 million in 1995 to approximately $2.8 billion in 1998. During this same
period, our income from continuing operations from this business, before
interest, income taxes and minority interest, increased from $39 million to $328
million, representing a compound annualized growth rate of 103%. See "Combined
Selected Financial Data."
As a separate, publicly traded company, we expect to have greater
flexibility to pursue our growth strategy. The increased flexibility will come
from greater focus on a single enterprise and the enhanced access to capital
markets that comes from the ability of investors and lenders to analyze and
understand a single business platform. We expect growth opportunities will come
from additional product development and expansion initiatives as well as
additional strategic acquisitions, joint ventures and strategic alliances.
Internal Growth
Since 1995, we have executed a strategy that focuses our business on
markets that have strong underlying growth characteristics and attractive
margins. We offer our customers "material neutral" solutions. In other words,
our goal is not to sell customers a particular product line. Rather, through our
custom design centers and broad product line, we strive to create the best
packaging solutions for our customers, tailored precisely to their needs. With
this approach and our worldwide geographical coverage, we have become a primary
supplier to national and international manufacturers and distributors and have
developed long-term relationships with key players in the consolidating
packaging and food service distribution sector. We intend to use these
relationships to quickly identify and capture new growth
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markets with attractive margins as they develop, which should expand our
customer base and our market share.
We seek to add to our base business by developing new packaging solutions
for markets where we believe our experience and familiarity give us a
competitive advantage. In addition, we grow market share for our existing
products by taking advantage of (a) our broad product line of superior quality
products and our long-term relationships with key manufacturers and
distributors, (b) our product development and design services, (c) our
investment in developing state-of-the-art service capabilities, and (d) our
ongoing effort focused on reducing costs and improving the productivity of our
operations. Both of our businesses have shown significant recent internal
growth.
Product Breadth/Relationships With Key Manufacturers and Distributors
Our ability to provide "one-stop shopping" through our broad product line
is an important selling point with customers. In addition, we have cultivated
long-term relationships with key manufacturers and distributors who recognize
our strong positions in multiple product categories. These relationships,
coupled with our complete product line, are allowing us to grow our market share
for existing products. For example, in foodservice packaging, we hold the number
one market share position in the United States and Canada with respect to four
of our five main product categories based on unit volume. Management estimates
that products representing 80% of sales in our protective packaging business
hold the number one or number two market share position in North America, based
on sales revenue.
New Products/Design Services
We further fuel our internal growth by developing and commercializing
proprietary new products and by designing value-added product-line extensions.
In 1998, our consumer products and food/foodservice packaging business
introduced over 80 new products and product-line extensions. In our protective
and flexible packaging business, where custom design services drive revenues, we
developed over 500 custom product application in 1998. We believe our new
product innovation and design services will remain a key factor in driving
future internal growth.
- Consumer Products and Food/Foodservice Packaging. During the last twelve
months, in our consumer products and food/foodservice packaging
business, we added jumbo two-gallon bags and sandwich bags to our
existing Hefty One-Zip(R) quart and half-gallon food storage and freezer
bag offerings. We are also leveraging our patented One-Zip(R) closure
system by expanding into other zipper closure applications, such as
SlideRite(TM) retail packaging for baby wipes, fresh produce,
supermarket deli bags and other recloseable flexible packaging. In the
United States we have the leading market share with Hefty(R) disposable
tableware, and our E-Z Foil(R) brand disposable aluminum cookware line
leads its competition by a wide margin in both sales and market share.
Our new product innovations include ActiveTech(TM) packaging, a
proprietary modified atmospheric package used by food processors for
case-ready meat. ActiveTech(TM) packaging extends the shelf life of
fresh, unfrozen red meat in a package that maintains the appearance of
freshly packaged meat.
- Protective and Flexible Packaging. In our protective and flexible
packaging business, new protective packaging products include engineered
foams, and Profiles(R), a foam-based material used in various markets,
such as building products and furniture, and custom designed to provide
many benefits, including insulation, cushioning and surface protection.
Recent flexible packaging innovations include high-end graphic stand-up
pouches for soups and detergents and Propyflex(R)medical bags for
fluids. Propyflex(R), a non-polyvinyl chloride barrier film, satisfies
the requirements for flexibility and transparency even after
sterilization and provides a cost-effective packaging by eliminating the
need for secondary wrap.
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State-of-the-Art Service Capabilities
To further take advantage of our broad product line offering and strong
alignment with national distributors, we have developed and implemented our
Customer Linked Manufacturing system. CLM is a state-of-the-art production
planning and order fulfillment system which enables our customers to do business
with us easily and efficiently. CLM eliminates costs from the entire supply
chain and provides both our customers and us with a competitive advantage.
Productivity/Cost Reduction
Our strong focus on improving productivity and reducing costs in our
manufacturing and logistics operations is key to supporting the growth of our
base business. For example, the unit manufacturing costs have continuously
declined net of inflation for some of our products, such as our foam products,
rigid display packaging and performance films. This has allowed us to maintain
or improve our profit margins.
Strategic Acquisitions
Strategic acquisitions have been, and will continue to be, an important
element of Packaging's overall growth strategy. Our management has a proven
record of identifying and acquiring businesses and rapidly integrating them into
one of our business groups. We pursue acquisitions that offer synergies through,
among other things, rationalizing product lines, reconfiguring and upgrading
manufacturing capabilities and reducing operating, selling, distribution,
purchasing and administrative costs. We also pursue acquisitions that strengthen
our brand presence and expand our product offerings and markets.
Consumer Products and Food/Foodservice Packaging. We plan to grow our
consumer products and food/foodservice packaging business by acquiring similar
businesses whose products and markets will complement our own. We will focus on
acquiring specialized engineering and manufacturing capabilities that augment
and enhance our existing processes and allow us to produce top-quality products
efficiently. Since the beginning of 1995, our consumer products and
food/foodservice packaging business has grown through the following
acquisitions:
- In 1995, we more than doubled our sales with the acquisition of Mobil
Plastics. This acquisition expanded our product offerings to include
foam containers, meat and poultry trays, disposable plates and bowls,
polyethylene film products, produce bags and stretch film, as well as
the well-known consumer products Baggies(R) food bags and Hefty(R) waste
bags and tableware. This acquisition also added state-of-the-art
manufacturing capabilities and new product technologies, including the
One-Zip(R) closure system.
- In August 1996, we acquired Amoco Foam Products Company, which enhanced
our distribution capabilities and market coverage, especially among food
processors. Amoco Foam's product portfolio included foam tableware,
hinged lid containers, food trays and residential and commercial
insulation products.
- In September 1998, we augmented our dual-ovenable paperboard
manufacturing capacity by acquiring a Champion International facility in
Belvidere, Illinois. As a result, we have the capability to manufacture
this product, which may be heated in a conventional or a microwave oven,
for a broad spectrum of uses in various products.
Protective and Flexible Packaging. We intend to continue our global growth
strategy of acquiring custom engineering and design capabilities that will
provide multi-material packaging solutions to markets with strong underlying
growth characteristics. Management estimates that this strategy has made us one
of the largest producers of protective packaging in the United States. Since the
beginning of 1995, our protective and flexible packaging business has grown
through the following acquisitions:
- In 1995, continuing our growth strategy of acquiring specialty packaging
applications, we entered the protective packaging sector by buying
Hexacomb, a manufacturer of paperboard honeycomb products.
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- In 1997, we acquired the protective and flexible packaging businesses of
KNP BT, which operated in Europe and North America. With this
acquisition, we entered the European protective and flexible packaging
markets and enhanced our global specialty packaging position. This
acquisition also broadened the scope of our protective packaging
business to include sheet foam, engineered foam and air encapsulated
bubble and mailer applications. We also acquired two honeycomb plants in
1997.
- In April 1998, we acquired Richter Manufacturing, a West Coast
manufacturer and distributor of protective packaging products. This
acquisition expanded the geographical coverage of our North American
protective packaging operation.
- In December 1998, we acquired the foam packaging assets of Sentinel
Products, a North American producer of specialty polyolefin foams. This
acquisition further diversified our protective packaging product
offering and increased our manufacturing capacity. We also formed a
global joint venture, Sentinel Polyolefin LLC, with Sentinel to produce
and market chemically blown polyolefin foam applications in a wide
variety of non-packaging markets, including the automotive, sports and
leisure, medical and adhesive tape markets.
MARKETING, DISTRIBUTION AND CUSTOMERS
Our sales and marketing staff of 500 people is organized along three main
product groups: consumer products, foodservice and supermarket products, and
protective and flexible packaging products.
The consumer product group sells waste bags, food storage bags, disposable
plates and bowls and disposable aluminum cookware primarily to grocery stores
and mass merchandisers. These products are sold through a direct sales force and
a national network of brokers' and manufacturers' representatives.
The foodservice, supermarket and food packer and processor sales
organizations sell a broad array of disposable, rigid and flexible packaging
made from plastic, aluminum, molded fiber and pressed paperboard materials. The
products include disposable plates and bowls, carry out containers, rigid
display containers, microwavable and dual-ovenable food containers, food and
specialty retail bags and foil wrap. Our foodservice and supermarket sales are
made primarily through a network of independent distributors. Food packer and
processor sales are made primarily direct to large processors, with some sales
through distributors.
The protective and flexible packaging group sells to distributors,
fabricators and directly to end-users worldwide.
No material portion of our business is dependent upon a single customer or
even a few customers and no one customer accounted for more than 10% of our
aggregate net sales for the fiscal year ended December 31, 1998. In general, the
backlog of orders is not significant or material to an understanding of our
business.
ANALYSIS OF REVENUES
The following tables set forth for each of the years 1996 through 1998, and
for the six months ended June 30, 1999, information relating to our sales from
continuing operations:
<TABLE>
<CAPTION>
NET SALES (MILLIONS)
-------------------------------------------
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------
JUNE 30, 1999 1998 1997 1996
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Disposable plastic, fiber, and aluminum packaging
products.............................................. $1,038 $2,126 $2,105 $1,862
Plastic and fiber protective/flexible packaging
products.............................................. 311 607 399 78
Other................................................... 55 52 49 47
------ ------ ------ ------
Total.............................................. $1,404 $2,785 $2,553 $1,987
====== ====== ====== ======
</TABLE>
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<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------------
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------
JUNE 30, 1999 1998 1997 1996
------------- ---- ---- ----
<S> <C> <C> <C> <C>
TOTAL SALES
Disposable plastic, fiber, and aluminum packaging
products.............................................. 74% 76% 83% 94%
Plastic and fiber protective/flexible packaging
products.............................................. 22 22 15 4
Other................................................... 4 2 2 2
--- --- --- ---
Total.............................................. 100% 100% 100% 100%
=== === === ===
SALES BY GEOGRAPHIC AREA(a)
United States........................................... 78% 80% 83% 89%
European Union.......................................... 18 17 15 8
Canada.................................................. 2 1 1 2
Other areas............................................. 2 2 1 1
--- --- --- ---
Total.............................................. 100% 100% 100% 100%
=== === === ===
</TABLE>
- -------------------------
(a) See Note 14 to the Combined Financial Statements of The Businesses of
Tenneco Packaging included elsewhere in this document for information about
foreign and domestic operations.
COMPETITION
We operate in markets that are highly competitive and face substantial
competition throughout all of our product lines from numerous global, national
and regional companies, ranging from the largest packaging companies to small,
emerging companies. Companies that compete with us may have greater financial
and other resources than we do, while others are significantly smaller with
lower fixed costs and possibly greater operating flexibility. In addition to
price, competition with respect to many of our products is based on quality,
service supplier response time and timely and complete order fulfillment. In
addition, other packaging producers supply alternative materials and structures
and serve different geographic regions through various distribution channels.
INTERNATIONAL
Packaging operates facilities and sells products in countries throughout
the world. As a result, Packaging 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 or remittance of dividends and other payments by
foreign subsidiaries, impositions or increase of withholding and other taxes on
remittances and other payments by foreign subsidiaries, hyperinflation in
foreign countries where Packaging does business, and imposition or increase of
investment and other restrictions by foreign governments.
PROPERTIES
Headquarters Locations
We lease our executive offices at 1900 West Field Court, Lake Forest,
Illinois 60045, and our telephone number at that address is (847) 482-2000.
Manufacturing and Engineering Facilities
In North America, we operate 65 facilities in 18 states, Canada and Mexico.
Plastic and aluminum disposable foodservice and consumer products, stretch films
and building products are manufactured at 25 plants. The protective packaging
operations convert paperboard into honeycomb products at 12 plants. An
additional 13 plants apply extrusion, foaming and converting technologies to
produce clear, foamed, flexible or rigid plastic protective packaging from
polystyrene, polyolefins, such as polyethylene and
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polypropylene, and kraft papers. Molded fiber packaging is produced at seven
locations, and an eighth location manufactures tooling for the molded fiber
plants. Finally, ovenable paperboard products are manufactured at two
facilities. A research and development center for food packaging and process
development is located in a new facility in Canandaigua, New York. Design
centers for protective and flexible packaging and process development are
located in Buffalo Grove, Illinois, Grand Rapids and Troy, Michigan and Santa Fe
Springs, California. In addition, we participate in two North American joint
ventures, Sentinel Polyolefin LLC and Tenneco Packaging de Mexico.
We own 24 international manufacturing operations. 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 products plants in Egypt and Germany
make high quality flexible films, bags, labels and pouches, printed and
converted paper bags and disposable medical packaging. Omni-Pac is a European
subsidiary operation that manufactures molded fiber and cushion packaging with
manufacturing facilities in Elsfleth, Germany and Great Yarmouth, England. Our
Alupak subsidiary operation in Belp, Switzerland produces smoothwall aluminum
portion packs and specialty food packaging applications. Single-use thermoformed
plastic food containers and films are manufactured at four facilities in
England, Scotland and Wales. We also have a wood products operation in Romania.
In addition, we operate or participate in several international joint ventures,
including a folding carton plant in Dongguan, China, a recycling venture in
Budapest, Hungary and a corrugated converting facility in Shaoxing, China.
We believe that substantially all of our plants and equipment are, in
general, well maintained and in good operating condition. They are considered
adequate for present needs, and as supplemented by planned construction, are
expected to remain adequate for the near future.
We are of the opinion that we, or our subsidiaries, have generally
satisfactory title to the properties owned and used in our businesses, subject
to liens for current taxes and easements, restrictions and other liens which do
not materially detract from the value of the properties or our interest in the
properties or the use of those properties in our businesses.
RAW MATERIALS
Plastic resins, such as polystyrene, polyethylene, polypropylene and
polyvinyl chloride, aluminum rollstock, linerboard and recycled fiber constitute
the principal raw materials used in the manufacture of most of our products.
Generally, these raw materials are readily available from a wide variety of
suppliers. The costs of these materials may be volatile, and are a function of,
among other things, the manufacturing capacity for those materials and the costs
of their components, which may also vary. Costs for our plastic resin and
recycled fiber tend to fluctuate with economic factors which generally affect us
and our competitors. The availability of raw materials was adequate in 1998 and
the first three months of 1999 and is expected to remain adequate throughout the
remainder of 1999.
ENVIRONMENTAL REGULATION
The packaging industry, in general, and we are subject to existing and
potential federal, state, local and foreign legislation designed to reduce air
emissions. In addition, various consumer and special interest groups have
lobbied from time to time for the implementation of these and other similar
measures. Although we believe that the legislation and regulations promulgated
to date and the initiatives to date have not had a material adverse effect on
us, we cannot assure you that any such future legislative or regulatory efforts
or future initiatives would not have a material adverse effect on us.
OTHER
As of July 1, 1999, we employed approximately 15,000 people, 14% of whom
were covered by collective bargaining agreements. Four of those agreements,
covering a total of 247 employees, are scheduled for renegotiation before
December 31, 1999. In Europe, approximately 2,240 employees are governed by
works councils. We regard our employee relations as generally satisfactory. We
own a number
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of domestic and foreign patents and trademarks and other intellectual property
relating to our products which are important to the manufacture, marketing and
distribution of our products. In addition, our administrative services
operations hold numerous software licenses and own computer equipment.
Our administrative services operations design, implement and administer
administrative service programs and data processing, providing the following
services: (a) financial accounting services; (b) employee benefits
administration for all major salaried and hourly benefit plans; (c) human
resources and payroll services; (d) mainframes and distributed systems
operations; (e) telecommunications and network operations and management; (f)
help desk support; and (g) disaster recovery support. After the spin-off,
Packaging will continue to provide some of these services to Automotive. See
"The Spin-off -- Relationship Between Automotive and Packaging After the
Spin-off." We are currently analyzing our alternatives with respect to those
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
LEGAL PROCEEDINGS
See "-- Management's Discussion and Analysis of Financial Condition and
Results of Operations" for information about Packaging's potential environmental
liability.
In May 1999, Tenneco Inc., Tenneco Packaging Inc. 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 Winoff case). Tenneco Packaging Inc. also was
named as a defendant in a related class action antitrust lawsuit (the General
Refractories case). In re Linerboard Antitrust Litigation; Winoff v. Stone
Container Corp., et al; General Refractories v. Stone Container Corp., et al.
(MDL No. 1261; E. D. Penn.). The lawsuits allege that the defendants conspired
to raise linerboard prices for corrugated containers and corrugated sheets,
respectively, 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. Tenneco and Packaging believe that the allegations
have no merit, are vigorously defending the claims, and believe the outcome of
this litigation will not have a material adverse effect on Tenneco's or
Packaging's financial position or results of operations. Under and in accordance
with the distribution agreement, as between Tenneco and Packaging, Packaging is
responsible for defending the claims and for any liability resulting from these
actions.
Packaging and its subsidiaries are parties to various other legal
proceedings arising from their operations. We believe that the outcome of these
other proceedings, individually and in the aggregate, will not have a material
adverse effect on our financial position or results of operations.
CONTAINERBOARD PACKAGING INTEREST
On April 12, 1999, we contributed all of our containerboard packaging
business to a new joint venture, in which it now owns a 43 percent common equity
interest. For a description of the contribution and Packaging's plans to sell
its remaining joint venture interest in a registered public offering, see
"Unaudited Pro Forma Combined Financial Statements of Packaging" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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MANAGEMENT
BOARD OF DIRECTORS
Upon completion of the spin-off, our Board of Directors will consist of six
members. Each director will serve an annual term that will expire at our annual
shareowners' meeting in each year and until his or her successor has been
elected and qualified. Information concerning the individuals who will serve as
our directors as of the date of the spin-off is provided below.
DANA G. MEAD, CHAIRMAN OF THE BOARD -- Mr. Mead is currently the Chairman
and Chief Executive Officer of Tenneco and has served as an executive officer of
Tenneco since April 1992, when he joined Tenneco as Chief Operating Officer.
Prior to joining Tenneco, Mr. Mead served as an Executive Vice President of
International Paper Company, a manufacturer of paper, pulp, and wood products,
from 1988, and served as Senior Vice President of that company from 1981. He is
also a director of Packaging Corporation of America, Textron Inc., Zurich Allied
AG, Pfizer Inc. and Newport News Shipbuilding Inc. Mr. Mead is 63 years old and
has been a director of Tenneco since 1992. Upon completion of the spin-off, he
will resign as Chief Executive Officer of Tenneco, but will continue, on a
non-executive basis, as the Chairman of the Board of Automotive and Packaging
through March 2000.
MARK ANDREWS -- Mr. Andrews has been Chairman of Andrews Associates, Inc.,
a government consulting firm, since February 1987. From 1963 to 1980, he served
in the U.S. House of Representatives, and from 1980 to 1986 he served in the
U.S. Senate. He is also a director of Union Storage Co. Mr. Andrews is 73 and
has been a director of Tenneco since 1987. Mr. Andrews will continue as a
director of Automotive upon the spin-off.
LARRY D. BRADY -- Mr. Brady was President of FMC Corporation, a producer of
chemicals and machinery for industry, agriculture, and government, from 1993 to
June 1999. In August 1999, he became the President and Chief Operating Officer
of UNOVA, Inc., an industrial technologies company. Before 1993, Mr. Brady
served in various executive capacities with FMC Corporation for more than five
years. Mr. Brady is 56 years old and has been a director of Tenneco since
January 1998. Mr. Brady will not be continuing as a director of Automotive after
the spin-off.
ROGER B. PORTER -- Mr. Porter is Director of the Center for Business and
Government at Harvard University and is the IBM Professor of Business and
Government. Mr. Porter has served on the faculty at Harvard University since
1977. Mr. Porter also held senior economic policy positions in the Ford, Reagan
and Bush White Houses, serving as special assistant to the President and
executive secretary of the Economic Policy Board from 1974 to 1977, as deputy
assistant to the President and director of the White House Office of Policy
Development from 1981 to 1985, and as assistant to the President for economic
and domestic policy from 1989 to 1993. He is also a director of RightCHOICE
Managed Care, Inc., National Life Insurance Company, and Zions Bancorporation.
Mr. Porter is 53 years old and has been a director of the Tenneco since January
1998. He will continue as a director of Automotive upon the spin-off.
PAUL T. STECKO -- Mr. Stecko became the Chief Executive Officer of
Packaging Corporation of America, Packaging's containerboard joint venture, in
connection with the April 1999 formation of that venture. From November 1998 to
April 1999, Mr. Stecko served as President and Chief Operating Officer of
Tenneco. From January 1997 to November 1998, Mr. Stecko served as Chief
Operating Officer of Tenneco. From December 1993 through January 1997, Mr.
Stecko served as Chief Executive Officer of Packaging. Prior to joining Tenneco,
Mr. Stecko spent 16 years with International Paper Company. He is also a
director of State Farm Mutual Insurance Company and the Chairman of the Board of
Packaging Corporation of America. Mr. Stecko is 54 years old and has been a
director of Tenneco since November 1998. He will continue as a director of
Automotive upon the spin-off.
RICHARD L. WAMBOLD -- Mr. Wambold will be the Chief Executive Officer of
Packaging upon the spin-off and has been serving as its President since June
1999. From June 1997 to May 1999, he was Executive Vice President and General
Manager of Packaging's specialty packaging and consumer products
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<PAGE> 79
units. Prior to joining Packaging in 1994, Mr. Wambold was Executive Vice
President of Case Corporation's construction equipment and worldwide parts
business.
EXECUTIVE OFFICERS
The following table provides information concerning the persons who will
serve as our executive officers upon completion of the spin-off. Each of the
named persons has been, or before the spin-off will be, elected to the office
indicated opposite his name. The executive officers will serve at the discretion
of our Board. Officers are elected at the annual meeting of directors held
immediately following the annual meeting of shareowners.
<TABLE>
<CAPTION>
AGE AT
NAME JUNE 30, 1999 POSITION
---- ------------- --------
<S> <C> <C>
Richard L. Wambold............. 47 Chief Executive Officer
Paul J. Griswold............... 47 Senior Vice President -- Protective and Flexible
Packaging
James V. Faulkner, Jr. ........ 55 Vice President and General Counsel
James D. Morris................ 45 Vice President and GM Operations
Peter Lazaredes................ 48 Vice President -- Supermarket and Foodservice
Packaging
Andrew A. Campbell............. 53 Vice President and Chief Financial Officer
</TABLE>
RICHARD L. WAMBOLD -- See "-- Board of Directors," above, for information
concerning Mr. Wambold.
PAUL J. GRISWOLD -- Mr. Griswold was named Senior Vice
President -- Protective and Flexible Packaging in May 1997. Since joining
Packaging in 1994, he has held various senior management positions in
Packaging's protective and flexible packaging units. With over 20 years of
packaging-related experience, Mr. Griswold began his career at International
Paper Company, holding positions in sales, marketing and operations, and was
later Vice President, Packaging for Pepsi Cola International.
JAMES V. FAULKNER, JR. -- Mr. Faulkner joined Packaging in 1995 as its Vice
President and General Counsel. Prior to that he was Vice President -- Law for
Tenneco. Mr. Faulkner began his legal career with Lord, Day & Lord and was later
Associate General Counsel of Union Pacific Corporation and Senior Vice President
of USPCI, a wholly owned subsidiary of Union Pacific. He has 25 years experience
in staff and operational legal positions.
JAMES D. MORRIS -- Mr. Morris will be Vice President and GM Operations upon
the spin-off. Since 1995 he has held various senior management positions in
Packaging's specialty packaging unit, including oversight of manufacturing,
engineering and product development. He also has responsibility for the sales,
marketing and business planning of the processor packer operations of the
specialty packaging unit. Mr. Morris joined Packaging in connection with its
1995 acquisition of Mobil Plastics. He spent 20 years with Mobil in assignments
which included manager of polyethylene manufacturing, regional manufacturing
manager and plant manager.
PETER J. LAZAREDES -- Mr. Lazaredes will be Vice President -- Supermarket
and Foodservice Packaging upon the spin-off. Since 1996 he has held various
senior management positions in Packaging's speciality packaging unit, including
responsibility for the marketing and sales of rigid and flexible containers to
the foodservice and institutional markets. Mr. Lazaredes joined Packaging in
1996 from Amoco Foam Products where he was General Manager of the tableware
business unit from 1992. He spent 15 years with Amoco in sales and marketing
positions for packaging, fabrics and fibers divisions.
ANDREW A. CAMPBELL, -- Mr. Campbell will be Vice President and Chief
Financial Officer upon the spin-off. Since May 1999 he has served as Acting
Chief Financial Officer and Financial Consultant of Foamex International Inc.
Prior to that, he served as Executive Vice President, Finance and Administration
and Chief Financial Officer of Dominick's Supermarkets Inc. from July 1998 to
November 1998. Prior to that, Mr. Campbell had been Senior Vice President,
Finance and Chief Financial Officer for Safety Kleen Corporation from April 1997
to June 1998. Prior to that, Mr. Campbell was President of
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<PAGE> 80
Duplex Products, Inc. from 1995 to May 1996 and Vice President, Finance and
Chief Financial Officer of that company from November 1994 to 1995.
STOCK OWNERSHIP OF MANAGEMENT
The following table shows, as of June 30, 1999, the number of shares of
Tenneco common stock beneficially owned by: (1) each person who will be a
director of Packaging upon the spin-off; (2) each person who is named in the
Summary Compensation Table below; and (3) all persons who will be directors or
executive officers of Packaging upon the spin-off, as a group. The table also
shows: (a) Tenneco common stock equivalents held by these directors and
executive officers under benefit plans; and (b) the total number of shares of
Tenneco common stock and common stock equivalents held. Upon the spin-off,
holders of Tenneco common stock will receive one share of Packaging common stock
for each share of Tenneco common stock held.
<TABLE>
<CAPTION>
SHARES OF TENNECO TOTAL TENNECO
TENNECO COMMON STOCK COMMON STOCK SHARES AND
DIRECTORS OWNED(1)(2)(3) EQUIVALENTS(4) EQUIVALENTS
- --------- -------------------- -------------- -------------
<S> <C> <C> <C>
Mark Andrews......................... 14,155 1,600 15,755
Larry D. Brady....................... 2,000 3,381 5,381
Dana G. Mead......................... 765,821 44,737 810,558
Roger B. Porter...................... 2,000 3,420 5,420
Paul T. Stecko....................... 314,362 -- 314,362
Richard L. Wambold................... 90,872 -- 90,872
EXECUTIVE OFFICERS
Paul J. Griswold..................... 34,574 -- 34,574
James V. Faulkner, Jr................ 22,086 -- 22,086
James D. Morris...................... 27,827 -- 27,827
Peter J. Lazaredes................... 17,147 -- 17,147
All executive officers and directors
as a group......................... 1,290,844(5) 53,138 1,343,982(5)
</TABLE>
- ---------------
(1) Each director and executive officer has sole voting and investment power
over the shares beneficially owned (or has the right to acquire shares as
described in note (2) below) as set forth in this column, except for: (a)
restricted shares; and (b) shares that executive officers and directors have
the right to acquire pursuant to stock options. Generally, Tenneco
restricted shares will be vested prior to the spin-off. In connection with
the spin-off the Tenneco stock options held by the executive officers listed
above will be replaced with Packaging stock options which have equivalent
economic terms. Tenneco stock options held by directors will be replaced in
the same manner, except that one-half of the options held by Messrs. Mead,
Andrews and Porter will continue as Tenneco options, adjusted to maintain
equivalent economic terms upon the spin-off, and options held by Mr. Stecko
will terminate unless exercised prior to the spin-off.
(2) Includes restricted shares. At June 30, 1999, Messrs. Andrews, Mead,
Wambold, Griswold, Morris and Lazaredes held 6,547; 66,025; 15,000; 10,000;
5,000; and 5,000 restricted shares, respectively. Also includes shares that
are subject to options which are exercisable within 60 days of June 30, 1999
for Messrs. Andrews, Brady, Mead, Porter, Stecko, Wambold, Griswold,
Faulkner, Morris and Lazaredes to purchase 2,000; 2,000; 616,176; 2,000;
288,814; 49,077; 19,357; 19,312; 14,993; and 8,603 shares, respectively.
(3) Less than one percent of the outstanding shares of Tenneco common stock.
(4) Common stock equivalents are distributed in shares of Tenneco common stock
or, in some circumstances cash after the individual ceases to serve as a
director or officer. Common stock equivalents held by directors who are not
employees of Tenneco will be vested and distributed prior to the spin-off.
Mr. Mead's stock equivalent units are credited to his account under the
Tenneco Inc. Deferred Compensation Plan and are, therefore, already vested.
(5) Includes 1,022,332 shares that are subject to options that are exercisable
within 60 days of June 30, 1999, by all executive officers and directors as
a group, and includes 107,572 restricted shares for all executive officers
and directors as a group.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board will establish three standing committees as permitted by our
Bylaws, which will have the following described responsibilities and authority:
The Audit Committee, comprised solely of outside directors, will have the
responsibility, among other things, to: (1) recommend the selection of our
independent public accountants; (2) review and approve
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<PAGE> 81
the scope of the independent public accountants' audit activity and extent of
non-audit services; (3) review with management and such independent public
accountants the adequacy of our basic accounting system and the effectiveness of
our internal audit plan and activities; (4) review with management and the
independent public accountants our certified financial statements and exercise
general oversight of our financial reporting process; and (5) review with us
litigation and other legal matters that may affect our financial condition and
monitor compliance with our business ethics and other policies.
The Compensation/Nominating/Governance Committee, comprised solely of
outside directors, will have the responsibility, among other things, to: (1)
establish the salary rate of officers and employees of Packaging and its
subsidiaries; (2) examine periodically our compensation structure; and (3)
supervise our welfare and pension plans and compensation plans. It will also
have significant corporate governance responsibilities, among other things, to:
(a) review and determine the desirable balance of experience, qualifications and
expertise among members of the our Board; (b) review possible candidates for
membership on our Board and recommend a slate of nominees for election as
directors at our annual shareowners' meeting; (c) review the function and
composition of the other committees of our Board and recommend membership on
these committees; and (d) review the qualifications and recommend candidates for
election as our officers.
The Three-year Independent Director Evaluation Committee, comprised solely
of outside directors, will have the responsibility, among other things, to
review our Qualified Offer Rights Plan, which will be adopted prior to the
spin-off, at least every three years and, if it deems it appropriate, recommend
that the full Board modify or terminate that plan.
EXECUTIVE COMPENSATION
The following table shows the compensation paid by Tenneco and/or its
direct and indirect subsidiaries, including Packaging, for 1998, to: (1) the
person who will become our Chief Executive Officer upon the spin-off; and (2)
each of the persons who will be included among the four most highly compensated
executive officers of Packaging upon the spin-off, based on 1998 compensation,
other than our Chief Executive Officer. The table shows the amounts paid to
these persons for all services provided to Tenneco and its subsidiaries,
including Packaging. Mr. Campbell had no compensation from Tenneco and its
subsidiaries prior to 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -----------------------
-------------------------------------- RESTRICTED
OTHER ANNUAL STOCK ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(2) AWARDS(3) OPTIONS(4) COMPENSATION(5)
--------------------------- --------- -------- --------------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Wambold......................... $355,472 $220,000 $152,685 $187,800 45,000 $11,643
Chief Executive Officer
Paul J. Griswold........................... $275,500 $125,000 $ 31,165 $187,800 20,000 $ 9,812
Senior Vice President --
Protective and Flexible Packaging
James V. Faulkner, Jr. .................... $266,568 $ 82,000 $ 25,760 -- 10,000 $17,674
Vice President and
General Counsel
James D. Morris............................ $206,004 $115,000 $ 29,405 $187,800 20,000 $14,139
Vice President and
GM Operations
Peter J. Lazaredes......................... $182,773 $ 73,000 $ 30,730 $177,800 20,000 $12,704
Vice President --
Supermarket and
Protective Packaging
</TABLE>
- ---------------
(1) Includes base salary plus amounts paid in lieu of matching contributions to
the Tenneco Thrift Plan.
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<PAGE> 82
(2) Includes amounts attributable to: (a) the value of personal benefits
provided by Tenneco to executive officers, such as the personal use of
Tenneco-owned property and relocation expenses; (b) reimbursement for taxes;
and (c) amounts paid as dividend equivalents on performance share equivalent
units ("Dividend Equivalents"). The amount of each personal benefit that
exceeds 25% of the estimated value of the total personal benefits provided
by Tenneco, reimbursement for taxes, and amounts paid as Dividend
Equivalents to the individuals named in the table for 1998 was as follows:
$58,908 for relocation expenses, $47,171 for reimbursement of taxes, $15,600
in Dividend Equivalents and $30,000 perquisite allowance for Mr. Wambold;
$342 for reimbursement of taxes, $10,320 in Dividend Equivalents and $20,000
perquisite allowance for Mr. Griswold; $5,760 in Dividend Equivalents and
$20,000 perquisite allowance for Mr. Faulkner; $6,600 in Dividend
Equivalents and $20,000 perquisite allowance for Mr. Morris, and $17,530 in
relocation expenses, $1,200 in Dividend Equivalents and $12,000 perquisite
allowance for Mr. Lazaredes.
(3) Includes the dollar value of grants of restricted shares based on the price
of Tenneco common stock on the date of grant. At December 31, 1998, Messrs.
Wambold, Griswold, Faulkner, Morris and Lazaredes held 28,000 18,600 4,800
10,500 and 6,000 restricted shares and/or performance share equivalent
units, respectively. The value at December 31, 1998, based on a per share/
equivalent unit price of $34.063 on that date, of all restricted
shares/performance units held was $953,764 for Mr. Wambold, $633,572 for Mr.
Griswold, $163,502 for Mr. Faulkner, $357,662 for Mr. Morris and $204,378
for Mr. Lazaredes. Generally, restricted shares and performance share
equivalent units will be vested prior to the spin-off. Dividends/Dividend
Equivalents will be paid on the restricted shares/performance share
equivalent units held by each individual.
(4) In connection with the spin-off, the Tenneco stock options held by the
persons listed above will be replaced with options to purchase Packaging
common stock, the number and exercise price of which will be adjusted so
that the new Packaging options have equivalent economic terms as the old
Tenneco options.
(5) Includes amounts attributable during 1998 to benefit plans of Tenneco as
follows:
(a) The amounts contributed pursuant to Tenneco's Thrift Plan for the
accounts of Messrs. Wambold, Griswold, Faulkner, Morris and Lazaredes
were $10,000; $6,650; $8,000; $10,000 and $10,000, respectively.
(b) The dollar values paid by Tenneco for insurance premiums under the
Tenneco group life insurance plan (including dependent life) for Messrs.
Wambold, Griswold, Faulkner, Morris and Lazaredes were $1,643; $3,162;
$9,674; $4,139 and $2,704, respectively.
Packaging anticipates that, at the time of the spin-off, the annual salary
of Messrs. Wambold and Griswold will be increased to $600,000 and $325,000,
respectively, and that bonus targets after the spin-off will be adjusted and may
result in higher bonuses for some or all of the persons named in the Summary
Compensation Table.
Packaging also anticipates making a grant of stock options immediately
following the spin-off. This grant is intended to represent a three-year award.
Messrs. Wambold, Griswold, Faulkner, Morris and Lazaredes are expected to
receive options to purchase 750,000, 300,000, 200,000, 200,000 and 200,000
shares of Packaging common stock, respectively.
Packaging anticipates that immediately following the spin-off, Messrs.
Wambold, Griswold, Faulkner, Morris and Lazaredes will be granted 30,000,
15,000, 10,000, 10,000, and 10,000 performance share equivalent units,
respectively.
OPTIONS GRANTED IN 1998
The following table shows the number of options to purchase Tenneco common
stock that were granted by Tenneco during 1998 to the persons named in the
Summary Compensation Table above.
<TABLE>
<CAPTION>
SHARES OF
COMMON PERCENT OF
STOCK TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS TO TENNECO EMPLOYEES EXERCISE EXPIRATION GRANT DATE
NAME GRANTED(#)(1) IN 1998 (%) PRICE($)(2) DATE PRESENT VALUE(3)
- ---- ------------- -------------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Mr. Wambold................ 45,000 2.6% $36.63 2008 $463,050
Mr. Griswold............... 20,000 1.1% $36.63 2008 $205,800
Mr. Faulkner............... 10,000 .5% $36.63 2008 $102,900
Mr. Morris................. 20,000 1.1% $36.63 2008 $205,800
Mr. Lazaredes.............. 10,000 .5% $36.63 2008 $102,900
10,000 .5% $37.31 2018 $104,500
</TABLE>
- ---------------
(1) In connection with the spin-off, the Tenneco stock options held by the
persons listed above will be replaced with options to purchase Packaging
common stock, the number and exercise price of which will be adjusted so
that the new Packaging options have equivalent economic terms to the old
Tenneco options.
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<PAGE> 83
(2) All options were granted with exercise prices equal to 100% of the fair
market value of a share of Tenneco common stock on the date of grant.
(3) The Black-Scholes valuation was performed using the following assumptions:
25.6% volatility, 5.7% risk free interest rate, 3.2% expected dividend rate
and 10 year option life. Mr. Lazaredes' option grant that expires in 2018 is
valued assuming that such options are exercised by the 10th year.
OPTIONS AT 1998 YEAR-END
The following table shows the number of options to purchase Tenneco common
stock held as of December 31, 1998 by the persons named in the Summary
Compensation Table above. No Tenneco options were exercised in 1998, and there
were no in-the-money options as of December 31, 1998.
<TABLE>
<CAPTION>
TOTAL NUMBER OF
UNEXERCISED OPTIONS HELD
AT DECEMBER 31, 1998(1)
-------------------------------
NAME EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------
<S> <C> <C>
Mr. Wambold................................................. 29,820 107,023
Mr. Griswold................................................ 10,949 58,109
Mr. Faulkner................................................ 14,043 31,501
Mr. Morris.................................................. 6,662 48,330
Mr. Lazaredes............................................... 5,269 19,634
</TABLE>
- ---------------
(1) In connection with the spin-off, the Tenneco stock options held by the
persons listed above will be replaced with options to purchase Packaging
common stock, the number and exercise price of which will be adjusted so
that the new Packaging options have equivalent economic terms to the old
Tenneco options.
LONG-TERM INCENTIVE PLAN
PERFORMANCE SHARE EQUIVALENT UNIT AWARDS IN 1998
The following table shows information concerning performance-based awards
made to the persons named in the Summary Compensation Table above, during 1998
by Tenneco.
<TABLE>
<CAPTION>
PERFORMANCE
NUMBER OF OR OTHER ESTIMATED FUTURE PAYOUTS
SHARES, UNITS PERIOD UNTIL UNDER NON-STOCK PRICE BASED PLANS(1)
OR OTHER MATURATION OR ---------------------------------------
NAME RIGHTS(1)(2) PAYOUT(3) THRESHOLD(4) TARGET(4) MAXIMUM(4)
- ---- ------------- ------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Mr. Wambold.................. 6,500 4 years 25% 100% 150%
Mr. Griswold................. 5,000 4 years 25% 100% 150%
Mr. Faulkner................. 2,400 4 years 25% 100% 150%
Mr. Morris................... 3,000 4 years 25% 100% 150%
Mr. Lazaredes................ 1,000 4 years 25% 100% 150%
</TABLE>
- ---------------
(1) Estimated future payouts are based on earnings per share ("EPS") from
continuing operations; however, generally, performance share equivalent
units will be deemed to be earned at the target level and vested prior to
the spin-off.
(2) Each performance share equivalent unit represents one share of Tenneco's
common stock that may be earned and the number of performance share
equivalent units listed in this column represents the maximum number of
performance share equivalent units that may be earned under this award.
(3) Performance share equivalent units are earned at the rate of 25% per year
based on achievement of annual EPS goals; however, generally performance
share equivalent units will be deemed to be earned at the target level and
vested prior to the spin-off.
(4) Represents maximum performance share equivalent units earned where the goals
were consistently within the indicated performance range on an individual
year and accumulated four-year basis; however, generally performance share
equivalent units will be deemed to be earned at the target level and vested
prior to the spin-off.
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<PAGE> 84
PENSION PLAN TABLE
The following table shows the aggregate estimated annual benefits payable
upon normal retirement pursuant to the Tenneco Retirement Plan and the Tenneco
Inc. Supplemental Executive Retirement Plan to persons in specified remuneration
and years of credited participation classifications. The Tenneco Retirement Plan
will be assumed by Packaging in connection with the spin-off, and Packaging will
adopt a supplemental executive retirement plan that is substantially identical
to Tenneco's current plan.
<TABLE>
<CAPTION>
YEARS OF CREDITED PARTICIPATION
ANNUAL -------------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30 35
- ------------ ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$250,000............. $19,642 $ 39,285 $ 58,928 $ 78,571 $ 98,214 $117,857 $137,500
300,000............. 23,571 47,142 70,714 94,285 117,857 141,428 165,000
350,000............. 27,500 55,000 82,500 110,000 137,500 165,000 192,500
400,000............. 31,428 62,857 94,285 125,714 157,142 188,571 220,000
450,000............. 35,357 70,714 106,071 141,428 176,785 212,142 247,500
500,000............. 39,285 78,571 117,857 157,142 196,428 235,714 275,000
550,000............. 43,214 86,428 129,642 172,857 216,071 259,285 302,500
600,000............. 47,142 94,285 141,428 188,571 235,714 282,857 330,000
650,000............. 51,071 102,142 153,214 204,285 255,357 306,428 357,500
700,000............. 55,000 110,000 165,000 220,000 275,000 330,000 385,000
</TABLE>
- ---------------
(1) The benefits shown above are computed as a straight life annuity and are
based on years of credited participation and the employee's average
compensation (salary and bonus). These benefits are not subject to any
deduction for Social Security or other offset amounts. The years of credited
participation for Messrs. Wambold, Griswold, Faulkner, Morris and Lazaredes
are 21, 4, 5, 24 and 18, respectively. See the Summary Compensation Table
above for salary and bonus information for these individuals.
(2) If Mr. Wambold completes five years of service in the period commencing
January 1, 1997, he will be entitled to benefits commencing at age 55
determined by multiplying his average salary plus bonus, determined over a
three-year period, by 25% plus 2.5% for each year of service in the period
commencing January 1, 1997, up to a maximum of 50%. Mr. Faulkner is entitled
to special early retirement benefits and, if he remains with Packaging
through December 31, 2002, his benefit will be determined by adding three
years of participation and age to his actual participation and age.
Compensation of Directors
Fee Structure. Following the spin-off, each director who is not also an
employee of Packaging or its subsidiaries, an "outside director," will be paid a
yearly retainer fee of $35,000 for service on our Board of Directors. In
general, 100% of that fee will be paid in the form of stock-settled common stock
equivalents (the "directors' stock equivalents"), as described below. A director
may elect, however, to have up to 40% or $14,000, of the fee paid in cash. These
outside directors will also receive cash attendance fees and committee chair and
membership fees, and reimbursement of their expenses for attending meetings of
the Board of Directors. Outside directors will receive $1,000 for each meeting
of the Board of Directors attended, and each one who serves as a Chairman of the
Audit Committee or the Compensation/ Nominating/Governance Committee will be
paid a fee of $7,000 per chairmanship. Outside directors who serve as members of
these committees will be paid $4,000 per committee membership. Members of the
Three-year Independent Director Evaluation Committee will receive $1,000 plus
expenses for each meeting of that committee attended.
Common Stock Equivalents/Options. As described above, all or a portion of
an outside director's retainer fee will be paid in common stock equivalent
units. These directors' stock equivalents will be payable in shares of our
common stock after an outside director ceases to serve as a director. Final
distribution of these shares may be made either in a lump sum or in installments
over a period of years. The directors' stock equivalents are issued at 100% of
the fair market value on the date of the grant. Each outside director will also
receive an annual grant of an option to purchase up to 3,000 shares of our
common stock as additional incentive compensation. Directors options: (a) will
be granted with per share exercise prices equal to 100% of the fair market value
of a share of our common stock on the day the option is granted; (b) will have
terms of ten years; and (c) will fully vest six months from the grant date. Once
vested, the directors options will be exercisable at any time during the option
term.
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<PAGE> 85
We expect that restricted shares of Tenneco common stock and director's
stock equivalents held by outside directors will be vested prior to the
completion of the spin-off, and these directors will be paid an amount in cash
to defray taxes incurred on that vesting.
Deferred Compensation Plan. We will have a voluntary deferred compensation
plan for outside directors. Under this plan, an outside director may elect,
prior to the commencement of the next calendar year, to have some or all of the
cash portion, that is up to 40% or $14,000, of his or her retainer fee and some
or all of his or her meeting fees credited to a deferred compensation account.
The plan will provide these directors with various investment options. The
investment options will include stock equivalent units of our common stock,
which may be paid out in either cash or shares of our common stock.
Termination of Employment and Change-in-Control Arrangements
We will maintain a key executive change-in-control severance benefit plan
similar to the existing Tenneco plan and incorporating some provisions of the
Tenneco benefits protection trust. The purpose of the plan is to enable us to
continue to attract, retain and motivate highly qualified employees by
eliminating, to the maximum practicable extent, any concern on the part of those
employees that their job security or benefit entitlements will be jeopardized by
a "change-in-control" of Packaging, as that term will be defined in the plan.
The plan will be designed to achieve this purpose through the provision of
severance benefits for key employees and officers whose positions are terminated
following a change-in-control, as provided in the plan. Under the plan, we
expect that Messrs. Wambold, Griswold, Faulkner, Morris and Lazaredes would have
become entitled to receive payments from us in the amount of $2,040,000,
$1,305,000, $1,146,999, $1,115,001 and $999,000, respectively, had their
positions been terminated on August 31, 1999 following a change-in-control based
on their current 1999 salaries of $450,000, $300,000, $285,000, $260,000 and
$260,000, respectively. In addition, restricted shares held in the name of those
individuals under the restricted stock plans we will adopt would have
automatically reverted to us, and we would have been obliged to pay those
individuals the fair market value of the shares. Their performance share
equivalent units would also have been fully vested and paid. The spin-off does
not constitute a "change-in-control" of Tenneco or Packaging for purposes of the
Tenneco or Packaging change-in-control severance benefit plans. The Tenneco
benefits protection trust will be terminated prior to the spin-off.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Upon the spin-off, Messrs. Wambold and Griswold will be granted Packaging
restricted stock with a value on the grant date equal to the pre-spin-off value
of 25,000 and 15,000 shares of Tenneco common stock, respectively. One-third of
such restricted stock will vest each year following the spin-off, assuming that
the grantee remains employed through that date.
In connection with the spin-off, Mr. Mead will resign as Chief Executive
Officer of Tenneco, and he is expected to enter into a revised agreement. Under
that agreement, it is expected that: (1) Mr. Mead will be paid an amount
equivalent to three times the total of his annual salary plus bonus; (2) if
certain performance goals are met, he will be entitled to an adjusted target
bonus for 1999 prorated through the date of his separation; (3) his stock
options will be made exercisable, one-half will be replaced by Packaging options
and one-half will continue as Automotive options (the number and exercise price
of such options being determined under the generally applicable rules to be
applied in connection with the spin-off and which maintain the economic
equivalent of the currently outstanding options); (4) for purposes of Tenneco's
Supplemental Executive Retirement Plan, he will be treated as though he had
remained employed until age 65; and (5) he will be granted options to purchase
up to 50,000 shares of Packaging common stock and options to purchase up to
50,000 shares of Automotive common stock at the time of the spin-off. Mr. Mead's
agreement is with an entity which will be a subsidiary of Packaging after the
spin-off and the expense associated therewith is included in the spin-off
expenses and is part of the debt realignment.
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During 1999, Mr. Mead was indebted to an affiliate of Tenneco in connection
with a relocation loan of approximately $400,000. In September 1999, that
obligation was canceled.
Benefit Plans Following the Spin-off
We will succeed to sponsorship of the Tenneco Retirement Plan and the
Tenneco Thrift Plan. The plans are qualified under Section 401(a) of the Code.
The Tenneco Retirement Plan is a defined benefit pension plan. The Tenneco
Thrift Plan is comprised of 401(k) plans with employer matching contributions as
specified in the plans. Packaging will also continue its sponsorship of a
defined benefit pension plan covering hourly employees.
We will also succeed to sponsorship of two non-qualified deferred
compensation plans as to our employees or directors: (1) the 1997 Tenneco Inc.
Board of Directors Deferred Compensation Plan; and (2) the Tenneco Inc. Deferred
Compensation Plan. Packaging will succeed to liabilities for benefits under the
Tenneco Inc. Supplemental Executive Retirement Plan as to all participants other
than those who are employees or former employers of Automotive. The 1997 Tenneco
Inc. Board of Directors Deferred Compensation Plan and the Tenneco Inc. Deferred
Compensation Plan will be merged as of the spin-off. All of these plans are
unfunded; however, we will establish one or more rabbi trusts, from which assets
may be available to pay benefits in specified circumstances.
We will adopt an executive incentive compensation plan similar to Tenneco's
plan to provide annual cash bonuses to eligible employees.
We expect we may adopt an employee stock purchase plan similar to the one
maintained by Tenneco, under which approximately 4,000,000 shares of our common
stock would be available for purchase. Tenneco will approve the adoption of such
a plan as our sole shareowner prior to the spin-off.
We will adopt a plan calling for the grant of stock options, restricted
stock, performance share equivalent units and other stock rights patterned after
the 1996 Tenneco Inc. Stock Ownership Plan. Approximately 24,000,000 shares of
our common stock will be available for grant under this plan. This plan will be
approved by Tenneco as our sole shareowner prior to the spin-off.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Elimination of Liability of Directors
The Certificate provides that a director of Packaging will not be liable to
us or our shareowners for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the General Corporation Law of the State of
Delaware ("DGCL") as the same exists or may thereafter be amended. Based on the
DGCL, as presently in effect, a director of Packaging will not be personally
liable to us or our shareowners for monetary damages for breach of fiduciary
duty as a director, except for liability:
- for any breach of the director's duty of loyalty to Packaging or our
shareowners;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions; or
- for any transactions from which the director derived an improper personal
benefit.
While the Certificate provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Certificate will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions of the Certificate described
above apply to an officer of Packaging only if he or she is a director of
Packaging and is acting in his or her capacity as director and do not apply to
officers of Packaging who are not directors.
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Indemnification of Directors and Officers
The Bylaws provide that we will indemnify and hold harmless, to the fullest
extent permitted by applicable law as it presently exists or may thereafter be
amended, any person (a "Covered Person") who was or is made or is threatened to
be made a party or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "proceeding"), by
reason of the fact that he, or a person for whom he is the legal representative,
is or was a director or officer of Packaging or, while a director or officer of
Packaging, is or was serving at the request of Packaging as a director, officer,
employee or agent of another company or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses, including
attorneys' fees, reasonably incurred by that Covered Person. The Bylaws also
provide that, notwithstanding the foregoing, but except as described in the
second following paragraph, we will be required to indemnify a Covered Person in
connection with a proceeding or part thereof commenced by that Covered Person
only if the commencement of the proceeding or part thereof by the Covered Person
was authorized by our Board.
The Bylaws further provide that we will pay the expenses including
attorneys' fees incurred by a Covered Person in defending any proceeding in
advance of its final disposition; provided, however, that, to the extent
required by law, the payment of expenses in advance of the final disposition of
the proceeding will be made only upon receipt of an undertaking by that Covered
Person to repay all amounts advanced if it should be ultimately determined that
the Covered Person is not entitled to be indemnified under the relevant section
of the Bylaws or otherwise.
Pursuant to the Bylaws, if a claim for indemnification or payment of
expenses thereunder is not paid in full within 30 days after a written claim
therefor by the Covered Person has been received by Packaging, the Covered
Person may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, will be entitled to be paid the expense of
prosecuting such claim. The Bylaws provide that, in any such action, we will
have the burden of proving that the Covered Person is not entitled to the
requested indemnification or payment of expenses under applicable law.
The Bylaws also provide:
- that the rights conferred on any Covered Person thereby are not exclusive
of any other rights which that Covered Person may have or thereafter
acquire under any statute, provision of the Certificate, the Bylaws,
agreement, vote of shareowners or disinterested directors or otherwise;
- that our obligation, if any, to indemnify or to advance expenses to any
Covered Person who was or is serving at its request as a director,
officer, employee or agent of another company, partnership, joint
venture, trust, enterprise or nonprofit entity will be reduced by any
amount that Covered Person may collect as indemnification or advancement
of expenses from such other company, partnership, joint venture, trust,
enterprise or nonprofit enterprise; and
- that any repeal or modification of the relevant provisions of the Bylaws
will not adversely affect any right or protection thereunder of any
Covered Person in respect of any act or omission occurring prior to the
time of such repeal or modification.
The Bylaws also expressly state that the provisions thereof will not limit
our right, to the extent and in the manner permitted by law, to indemnify and to
advance expenses to persons other than Covered Persons when and as authorized by
appropriate corporate action.
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PRINCIPAL SHAREOWNERS
All of our capital stock is currently owned by Tenneco. In the spin-off,
Tenneco shareowners will receive one share of our common stock per share of
Tenneco common stock. The following table sets forth information about those
persons that we expect to hold more than 5% of our common stock upon completion
of the spin-off. It is based on our knowledge of those persons who owned more
than 5% of Tenneco's common stock on October 8, 1999. Before giving effect to
the spin-off, the following table sets forth, as of October 8, 1999, the name,
address, and Tenneco common stock ownership for each person known by Tenneco to
be the beneficial owner of more than five percent of Tenneco's outstanding
common stock, the only class of voting securities outstanding.
<TABLE>
<CAPTION>
SHARES OF COMMON PERCENT OF EXPECTED
NAME AND ADDRESS STOCK EXPECTED OUTSTANDING PACKAGING
OF BENEFICIAL OWNER(1) TO BE OWNED(1) COMMON STOCK(1)
- ---------------------- ---------------- ---------------------
<S> <C> <C>
Barrow, Hanley, Mewhinney & Strauss, Inc.................. 20,761,040(2) 12.18%(2)
One McKinney Plaza
3232 McKinney Avenue
15th Floor
Dallas, Texas 75204-2429
Morgan Stanley Dean Witter & Co. ......................... 10,662,171(3) 6.26%(3)
1585 Broadway
New York, New York 10036
Highfields Capital Management LP, Highfields GP LLC,
Jonathan S. Jacobson, and Richard L. Grubman............ 10,063,900(4) 5.90%(4)
c/o Highfields Capital Management
200 Clarendon Street
Boston, Massachusetts 02117
</TABLE>
- ------------------------
(1) The foregoing information is based on information contained in filings made
with the Securities and Exchange Commission.
(2) Barrow, Hanley, Mewhinney & Strauss, Inc. has indicated that it has sole
voting power over 4,533,840 shares of Tenneco common stock, shared voting
power over 16,227,200 shares of Tenneco common stock, and sole dispositive
power over 20,761,040 shares of Tenneco common stock. Barrow, Hanley also
advised Tenneco that it is a registered investment advisor and these shares
are held on behalf of various clients.
(3) Morgan Stanley Dean Witter & Co. has indicated that it has sole voting power
over 10,504,928 shares of Tenneco common stock.
(4) Highfields Capital Management LP, Highfields GP LLC, Jonathan S. Jacobson
and Richard L. Grubman have indicated that they have sole voting and
disposition power over 10,063,900 shares of Tenneco common stock directly
owned by Highfields Capital I LP, Highfields Capital II LP and Highfields
Capital Ltd.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Under our Restated Certificate of Incorporation (the "Certificate"), our
authorized capital stock will consist of 350,000,000 shares of common stock and
50,000,000 shares of preferred stock. We will not issue any preferred stock in
the spin-off. Based on the number of shares of Tenneco outstanding on June 30,
1999, Tenneco will distribute up to approximately 171,356,195 shares of
Packaging common stock in the spin-off. The Certificate provides that Packaging
shareowners do not have any preemptive right to subscribe to an additional issue
of Packaging stock or to any securities of Packaging convertible into Packaging
stock.
PACKAGING COMMON STOCK
Packaging common shareowners will be entitled to one vote for each share on
all matters on which shareowners generally are entitled to vote, and except as
otherwise required by law or provided with respect to any series of preferred
stock, Packaging common shareowners will possess 100% of the voting power. The
Certificate does not provide for cumulative voting.
Subject to the preferential rights of any outstanding preferred stock,
Packaging common shareowners will be entitled to such dividends as may be
declared from time to time by the Packaging Board and paid from funds legally
available therefor, and Packaging common shareowners will be entitled to receive
pro rata all assets of Packaging available for distribution upon liquidation.
All shares of Packaging common stock received in the spin-off will be fully paid
and nonassessable.
There is no established public trading market for Packaging common stock,
although a "when issued" market is expected to develop prior to the spin-off
date. We have applied to the New York Stock Exchange for the listing of
Packaging common stock upon official notice of issuance and we expect to receive
approval of such listing prior to the spin-off.
Our dividend policy will be established by our board of directors from time
to time. Subject to legal and contractual restrictions, its decisions regarding
dividends will be based on all considerations that in its business judgment are
relevant at the time, including past and projected earnings, cash flows,
economic, business and securities market conditions and anticipated developments
concerning our business and operations. We expect that our dividend policy for
the foreseeable will be set to approximate the Standard & Poor's 500 average
dividend yield. For additional information concerning the payment of dividends
by us, see "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Our cash flow and our consequent ability to pay any dividends on Packaging
common stock will be substantially dependent upon our earnings and cash flow
available after debt service and the availability of such earnings by way of
dividends, distributions, loans and other advances.
Under the DGCL, we may pay dividends out of "surplus" as determined in
accordance with the DGCL or, if there is no surplus, out of net profits for the
fiscal year in which the dividends are declared and/or the preceding fiscal
year, subject to certain restrictions.
The Certificate provides that the business and affairs of Packaging will be
managed by or under the direction of a Board of Directors, consisting of not
less than five nor more than sixteen directors, the exact number to be
determined from time to time by the Board of Directors.
PACKAGING PREFERRED STOCK
Under the Certificate, the Packaging Board of Directors is authorized to
issue preferred stock, in one or more series, and to fix the number of shares
constituting such series and the designation of such series, the voting powers,
if any, of the shares of such series, and the preferences and relative,
participating,
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optional or other special rights, if any, and any qualifications, limitations or
restrictions thereof, of the shares of such series. See "-- Anti-takeover
Effects of Certain Provisions."
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS
The Certificate, the Bylaws, the rights to be issued in accordance with the
Qualified Offer Rights Plan and Delaware statutory law contain provisions that
could make the acquisition of control of Packaging by means of a tender offer, a
proxy contest or otherwise more difficult. The description set forth below is
intended as a summary only and is qualified in its entirety by reference to the
Certificate, the Bylaws and the Qualified Offer Rights Plan Agreement which are
attached as exhibits to our Registration Statement on Form 10 under the Exchange
Act relating to our common stock.
Special Meetings
The Bylaws provide that, subject to the rights of the holders of any series
of preferred stock of Packaging to elect additional directors under specified
situations, special meetings of shareowners will be called by the Packaging
Board. The business permitted to be conducted at any special meeting of
shareowners is limited to the purposes specified in our notice of meeting.
Advance Notice Provisions for Shareowner Nominations and Shareowner
Proposals
The Bylaws establish an advance notice procedure for shareowners to make
nominations of candidates for election of directors before an annual meeting or
special meeting of shareowners or to bring other business before an annual
meeting or special meeting of shareowners (the "Shareowner Notice Procedure").
The Shareowner Notice Procedure provides that nominations of persons for
election to the Board of Directors and the proposal of business to be considered
by the shareowners may be made at an annual meeting of shareowners only:
- pursuant to Packaging's notice of meeting;
- by or at the direction of the Board of Directors; or
- by any shareowner who was a shareowner of record at the time the
requisite notice is delivered, who is entitled to vote at the meeting and
who complies with the notice procedures set forth in the Shareowner
Notice Procedure.
Under the Shareowner Notice Procedure, the shareowner must have given
timely notice of any nomination or proposal in writing to the Secretary of
Packaging. For shareowner notice in respect of the annual meeting of Packaging's
shareowners to be timely, the notice must generally be delivered to the
Secretary of Packaging not less than 90 days nor more than 120 days prior to the
first anniversary of the previous year's annual meeting. The Shareowner Notice
Procedure also provides that for the purpose of our first annual meeting of
shareowners held after 1999, the anniversary date shall be deemed to be May 11,
1999.
Under the Shareowner Notice Procedure, a shareowner's notice to Packaging
in respect of an annual meeting, must contain the following information:
- as to each person whom the shareowner proposes to nominate for election
as a director all information relating to the person that is required to
be disclosed in solicitations of proxies for election of directors in an
election contest, or is otherwise required, in each case pursuant to the
Exchange Act, and the person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected;
- as to any other business that the shareowner proposes to bring before the
meeting:
- a brief description of the business desired to be brought before the
meeting;
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- the text of the proposal including the text of any resolutions proposed
for consideration and in the event that the business includes a proposal
to amend the Bylaws, the language of the proposed amendment;
- the reasons for conducting the business at the meeting; and
- any material interest in the business of the shareowner and the
beneficial owner, if any, on whose behalf the proposal is made; and
- as to the shareowner giving the notice and the beneficial owner, if any,
on whose behalf the nomination or proposal is made:
- the name and address of the shareowner and of the beneficial owner;
- the class and number of shares of capital stock which are owned
beneficially and of record by the shareowner and the beneficial owner;
- a representation that the shareowner is a holder of record of Packaging
stock entitled to vote at the meeting and intends to appear in person or
by proxy at the meeting to propose the business or nomination; and
- a representation whether the shareowner or the beneficial owner, if any,
intends or is part of a group which intends:
- to deliver a proxy statement and/or form of proxy to holders of at
least the percentage of the Packaging's capital stock required to
approve the proposal or elect the nominee and/or
- otherwise to solicit proxies from shareowners is support of the
proposal or nomination.
The Shareowner Notice Procedure provides that Packaging may require any
proposed nominee to furnish such other information as it may reasonably require
to determine the eligibility of such proposed nominee to serve as a director.
The Shareowner Notice Procedure provides that nominations of persons for
election to the Board of Directors may be made at a special meeting of
shareowners at which directors are to be elected pursuant to Packaging's notice
of meeting
- by or at the direction of the Board of Directors; or
- provided that the Board of Directors has determined that directors shall
be elected at such meeting, by any shareowner who is a shareowner of
record at the time the requisite notice is delivered, who is entitled to
vote at the meeting and upon such election and who complies with the
notice procedures set forth in the Shareowner Notice Procedure.
Under the Shareowner Notice Procedure, the shareowner must have given
timely notice thereof in writing to the Secretary of Packaging. For shareowner
notice in respect of a special meeting of shareowners at which directors are to
be elected to be timely, the notice must be delivered to the Secretary of
Packaging not earlier than 120 days prior to such special meeting and not later
than the later of 90 days prior to such special meeting or the tenth day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. The shareowner notice must contain the information
required under the Shareowner Notice Procedure in respect of an annual meeting
of shareowners.
The Shareowner Notice Procedure provides that:
- only the persons who are nominated in accordance with these procedures
are eligible to be elected at an annual or special meeting of shareowners
to serve as directors and only that business shall be conducted at a
meeting of shareowners as shall have been brought before the meeting in
accordance with these procedures; and
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- the chairman of the meeting shall have the power and duty:
- to determine whether a nomination or any business proposed to be brought
before the meeting was made or proposed in accordance with these
procedures; and
- if any proposed nomination or business was not made or proposed in
compliance with such procedures, to declare that the nomination shall be
disregarded or that the proposed business shall not be transacted.
By requiring advance notice of nominations by shareowners, the Shareowner
Notice Procedure will afford the Packaging Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the Packaging Board, to inform shareowners about such
qualifications. By requiring advance notice of other proposed business, the
Shareowner Notice Procedure will also provide a more orderly procedure for
conducting annual meetings of shareowners and, to the extent deemed necessary or
desirable by the Packaging Board, will provide the Packaging Board with an
opportunity to inform shareowners, prior to such meetings, of any business
proposed to be conducted at such meetings, together with any recommendations as
to the Packaging Board's position regarding action to be taken with respect to
such business, so that shareowners can better decide whether to attend such a
meeting or to grant a proxy regarding the disposition of any such business.
Although the Bylaws do not give the Packaging Board any power to approve or
disapprove shareowner nominations for the election of directors or proper
shareowner proposals for action, they may have the effect of precluding a
contest for the election of directors or the consideration of shareowner
proposals if the proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
Packaging and its shareowners.
Record Date Procedure for Shareowner Action by Written Consent
The Bylaws establish a procedure for the fixing of a record date in respect
of action proposed to be taken by Packaging's shareowners by written consent in
lieu of a meeting. The Bylaws provide that any person seeking to have the
shareowners authorize or take corporate action by written consent without a
meeting shall, by written notice, request that a record date be fixed for such
purpose. The Packaging Board may fix a record date for such purpose which shall
be no more than 10 days after the date upon which the resolution fixing the
record date is adopted by the Packaging Board. If the Packaging Board fails
within 10 days after Packaging receives such notice to fix a record date for
such purpose, the Bylaws provide that the record date shall be the day on which
the first written consent is delivered to Packaging unless prior action by the
Packaging Board is required under the DGCL, in which event the record date shall
be at the close of business on the day on which the Packaging Board adopts the
resolution taking such prior action. The Bylaws also provide that the Secretary
of Packaging or, under certain circumstances, two inspectors designated by the
Secretary shall promptly conduct such ministerial review of the sufficiency of
any written consents of shareowners duly delivered to Packaging and of the
validity of the action to be taken by shareowner consent as he deems necessary
or appropriate.
Shareowner Meetings
The Bylaws provide that the Packaging Board and the chairman of a meeting
may adopt rules for the conduct of stockholder meetings and specify the types of
rules that may be adopted such as:
- the establishment of an agenda;
- rules relating to presence at the meeting of persons other than
shareowners;
- restrictions on entry at the meeting after commencement thereof; and
- the imposition of time limitations for questions by participants at the
meeting.
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Preferred Stock
The Certificate authorizes the Packaging Board to provide for series of
preferred stock and, with respect to each such series, to fix the number of
shares constituting such series and the designation of such series, the voting
powers, if any, of the shares of such series, and the preferences and relative,
participating, optional or other special rights, if any, and any qualifications,
limitations or restrictions thereof, of the shares of such series.
We believe that the ability of the Packaging Board to issue one or more
series of preferred stock will provide Packaging with flexibility in structuring
possible future financings and acquisitions and in meeting other corporate needs
which might arise. The authorized shares of preferred stock, as well as shares
of common stock, will be available for issuance without further action by
Packaging's shareowners, unless such action is required by the rules of any
stock exchange or automated quotation system on which Packaging's securities may
be listed or traded. The NYSE currently requires shareowner approval as a
prerequisite to listing shares in several instances, including where the present
or potential issuance of shares could result in a 20% increase in the number of
shares of common stock outstanding or in the amount of voting securities
outstanding. If the approval of Packaging's shareowners is not required for the
issuance of shares of preferred stock or Packaging common stock, the Packaging
Board may determine not to seek shareowner approval.
Although the Packaging Board has no intention at the present time of doing
so, it could issue a series of preferred stock that could, depending on the
terms of such series, impede the completion of a merger, tender offer or other
takeover attempt. The Packaging Board will make any determination to issue such
shares based on its judgment as to the best interests of Packaging and its
shareowners. The Packaging Board, in so acting, could issue preferred stock
having terms that could discourage an acquisition attempt through which an
acquiror may be able to change the composition of the Packaging Board, including
a tender offer or other transaction that some, or a majority, of Packaging's
shareowners might believe to be in their best interests or in which shareowners
might receive a premium for their stock over the then current market price of
such stock.
Business Combinations
The Certificate prohibits "Business Combinations" (as defined in the
Certificate) with "Interested Stockholders" (as defined in the Certificate)
without the approval of the holders of at least 66 2/3% in voting power of the
outstanding shares of stock entitled to vote in the election of directors
("Voting Stock") not owned by an Interested Stockholder unless:
- approved by a majority of the "Continuing Directors" (as defined in the
Certificate); or
- certain detailed requirements have been satisfied as to:
- the value and type of consideration to be paid to Packaging's
shareowners;
- the maintenance of Packaging's dividend policy;
- the public disclosure of the Business Combination; and
- the absence of any major change in Packaging's business or equity
capital structure without the approval of a majority of the Continuing
Directors.
The Certificate generally defines an "Interested Stockholder" as any person who:
- is or has announced or publicly disclosed a plan or intention to become
the beneficial owner of Voting Stock representing five percent or more of
the votes entitled to be cast by the holders of all then outstanding
shares of Voting Stock; or
- is an affiliate or associate of Packaging and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner of Voting Stock representing five percent or more of the
votes entitled to be cast by the holders of all then outstanding shares
of Voting Stock.
The Certificate defines a "Continuing Director" as any member of the Packaging
Board who is not an affiliate or associate or representative of the Interested
Stockholder and was a member of Packaging Board
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prior to the time that the Interested Stockholder became an Interested
Stockholder, and any successor thereto who is not an affiliate or associate or
representative of the Interested Stockholder and is recommended or elected to
succeed the Continuing Director by a majority of Continuing Directors.
Amendment of Certain Provisions of the Certificate and By-laws
Under the DGCL and the Certificate, the Packaging Board or shareowners may
amend the Bylaws. The Certificate also provides that any proposal to amend the
provisions of the Certificate regarding Business Combinations proposed by or on
behalf of an Interested Stockholder requires the affirmative vote of the holders
of 66 2/3% in voting power of the outstanding shares of Voting Stock, excluding
Voting Stock beneficially owned by any Interested Stockholder, unless the
amendment is unanimously recommended by the members of the Packaging Board and
each of the members of the Packaging Board qualifies as a Continuing Director.
Approval by the Packaging Board, together with the affirmative vote of the
holders of a majority in voting power of the outstanding shares of Voting Stock,
is required to amend all other provisions of the Certificate. The Business
Combination supermajority voting requirement could have the effect of making
more difficult any amendment by shareowners of the Business Combination
provisions of the Certificate described above, even if a majority of Packaging's
shareowners believe that such amendment would be in their best interest.
Qualified Offer Rights Plan
Prior to the spin-off, the Packaging Board will adopt a Qualified Offer
Rights Plan and cause to be issued, with each share of Packaging common stock to
be distributed in the spin-off, one preferred share purchase right (a "Right").
Each Right will entitle the registered holder to purchase from Packaging one
one-thousandth of a share of Series A Junior Participating Preferred Stock of
Packaging (the "Series A Junior Preferred Stock") at a specific price (the
"Purchase Price"), subject to adjustment. The Purchase Price, description and
terms of the Rights will be set forth in a Qualified Offer Plan Rights Agreement
between Packaging and First Chicago Trust Company of New York, as Rights Agent
(the "Rights Agent"). The Rights will expire as set forth in the Qualified Offer
Plan Rights Agreement "Final Expiration Date"), unless the Final Expiration Date
is advanced or extended or unless the Rights are earlier redeemed or exchanged
by Packaging, in either case as described below.
In connection with the adoption of the Qualified Offer Rights Plan, the
Packaging Board will also adopt a "TIDE" (Three-year Independent Director
Evaluation) mechanism. Under the TIDE mechanism, an independent Packaging Board
committee will review, on an ongoing basis, the Qualified Offer Rights Plan and
developments in rights plans generally, and, if it deems appropriate, recommend
modification or termination of the Qualified Offer Rights Plan. This independent
committee will report to the Packaging Board at least every three years as to
whether the Qualified Offer Rights Plan continues to be in the best interests of
the Packaging shareowners.
Holders of the Rights cannot exercise the Rights until the "Distribution
Date." Under the Qualified Offer Rights Plan, a "Distribution Date" occurs upon
the earlier of:
- 10 days following a public announcement that a person or group of
affiliated or associated persons has become an "Acquiring Person"; or
- 10 business days, or such later date as may be determined by action of
the Packaging Board prior to such time as any person or group of
affiliated persons becomes an Acquiring Person, following the
commencement of, or announcement of an intention to make, a tender offer
or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 20% or more of the
outstanding shares of Packaging common stock.
Except in certain situations, a person or group of affiliated or associated
persons becomes an "Acquiring Person" upon acquiring beneficial ownership of 20%
or more of the outstanding shares of Packaging common stock. Until the
Distribution Date, the Rights will be evidenced by Packaging common stock
certificates.
84
<PAGE> 95
Holders of the Rights cannot exercise the Rights in connection with a
"Qualified Offer," which:
- is an all-cash tender offer for all outstanding Packaging common stock
that is fully financed and that remains open for a period of at least 60
business days;
- results in the offeror owning at least 85% of the outstanding shares of
Packaging common stock after consummation of the offer, excluding certain
shares;
- 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.
The Qualified Offer Rights Plan provides that, until the Distribution Date
or earlier expiration of the Rights, the Rights will be transferred with and
only with Packaging common stock. Until the Distribution Date or earlier
expiration of the Rights, new Packaging common stock certificates issued after
the Record Date upon transfer or new issuances of Packaging common stock will
contain a notation incorporating the Qualified Offer Rights Plan by reference.
Until the Distribution Date or earlier expiration of the Rights, the surrender
for transfer of any certificates for shares of Packaging common stock
outstanding as of the Record Date, even without such notation, will also
constitute the transfer of the Rights associated with the shares of Packaging
common stock represented by such certificate. As soon as practicable following
the Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of Packaging common stock as
of the close of business on the Distribution Date and such separate Right
Certificates alone will evidence the Rights.
The Qualified Offer Rights Plan provides that the Purchase Price payable,
and the number of shares of Series A Junior Preferred Stock or other securities
or property issuable, upon exercise of the Rights shall adjust from time to time
to prevent dilution:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Junior Preferred Stock;
- upon the grant to holders of the Series A Junior Preferred Stock of
certain rights or warrants to subscribe for or purchase Series A Junior
Preferred Stock at a price, or securities convertible into Series A
Junior Preferred Stock with a conversion price, less than the
then-current market price of the Series A Junior Preferred Stock; or
- upon the distribution to holders of the Series A Junior Preferred Stock
of evidences of indebtedness or assets, excluding regular periodic cash
dividends or dividends payable in Series A Junior Preferred Stock, or of
subscription rights or warrants, other than those referred to above.
The Qualified Offer Rights Plan provides that the number of outstanding
Rights shall adjust in the event of a stock dividend on Packaging's common stock
payable in shares of Packaging common stock or subdivisions, consolidations or
combinations of Packaging's common stock occurring, in any such case, prior to
the Distribution Date.
The terms of the shares of Series A Junior Preferred Stock do not vest
Packaging with the authority to redeem such shares. Each share of Series A
Junior Preferred Stock will be entitled, when, as and if declared, to a minimum
preferential quarterly dividend payment as set forth in the Qualified Offer
Rights Plan.
In the event of liquidation, dissolution or winding up of Packaging, the
holders of the Series A Junior Preferred Stock will be entitled to a minimum
preferential payment as set forth in the Qualified Offer Rights Plan.
Each share of Series A Junior Preferred Stock will have 1000 votes, voting
together with the Packaging common stock. Finally, in the event of any merger,
consolidation or other transaction in which outstanding shares of Packaging
common stock are converted or exchanged, each share of Series A Junior
85
<PAGE> 96
Preferred Stock will be entitled to receive 1000 times the amount received per
share of Packaging common stock. These rights are protected by customary
antidilution provisions.
Because of the nature of the Series A Junior Preferred Stock's dividend,
liquidation and voting rights, the value of the one one-thousandth interest in a
share of Series A Junior Preferred Stock purchasable upon exercise of each Right
should approximate the value of one share of Packaging common stock.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, each holder of a Right, other than Rights the
Acquiring Person may beneficially own, which will thereupon become void, will
thereafter have the right to receive upon exercise of a Right that number of
shares of Packaging common stock having a market value of two times the exercise
price of the Right.
In the event that, after a person or group has become an Acquiring Person,
a person acquires Packaging in a merger or other business combination
transaction or Packaging sells 50% or more of its consolidated assets or earning
power, proper provisions will be made so that each holder of a Right, other than
Rights beneficially owned by an Acquiring Person, which will have become void,
will thereafter have the right to receive upon the exercise of a Right that
number of shares of common stock of the person with whom Packaging has engaged
in the foregoing transaction or its parent that at the time of such transaction
have a market value of two times the exercise price of the Right.
At any time after any person or group becomes an Acquiring Person and prior
to the earlier of one of the events described in the previous paragraph or the
acquisition by such Acquiring Person of 50% or more of the outstanding shares of
Packaging common stock, the Packaging Board may exchange the Rights, other than
Rights owned by such Acquiring Person which will have become void, in whole or
in part, for shares of Packaging common stock or Series A Junior Preferred
Stock, or a series of Packaging's preferred stock having equivalent rights,
preferences and privileges, at an exchange ratio of one share of Packaging
common stock, or a fractional share of Series A Junior Preferred Stock, or other
preferred stock, equivalent in value thereto, per Right.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Series A Junior Preferred Stock or
Packaging common stock will be issued, other than fractions of Series A Junior
Preferred Stock which are integral multiples of one one-thousandth of a share of
Series A Junior Preferred Stock, which may, at Packaging's election be evidenced
by depositary receipts, and in lieu thereof an adjustment in cash will be made
based on the current market price of the Series A Junior Preferred Stock or
Packaging common stock.
At any time prior to the time an Acquiring Person becomes such, the
Packaging Board may redeem the Rights in whole, but not in part, at a price of
$.01 per Right (the "Redemption Price") payable, at Packaging's option in cash,
shares of Packaging common stock or such other form of consideration as the
Packaging Board shall determine. The redemption of the Rights may be made
effective at such time, on such basis and with such conditions as the Packaging
Board in its sole discretion may establish. Immediately upon any redemption of
the Rights, the right to exercise the Rights will terminate and the only right
of the holders of Rights will be to receive the Redemption Price.
For so long as the Rights are then redeemable, Packaging may, except with
respect to the Redemption Price, amend the Qualified Offer Rights Plan in any
manner. After the Rights are no longer redeemable, Packaging may, except with
respect to the Redemption Price, amend the Qualified Offer Rights Plan in any
manner that does not adversely affect the interests of holders of the Rights.
Until a Right is exercised or exchanged, the holder thereof, as such, will
have no rights as a Packaging shareowner, including, without limitation, the
right to vote or to receive dividends.
A copy of the Qualified Offer Rights Plan Agreement is being filed with the
Securities and Exchange Commission as an Exhibit to Packaging's Registration
Statement on Form 10. A copy of the Qualified Offer Rights Plan Agreement is
available free of charge from Packaging. This summary description of the Rights
does not purport to be complete and is qualified in its entirety by reference to
the Qualified Offer
86
<PAGE> 97
Rights Plan, as the same may be amended from time to time, which is hereby
incorporated herein by reference. The Rights are being registered under the
Exchange Act, together with Packaging common stock, pursuant to such
Registration Statement. In the event that the Rights become exercisable,
Packaging will register the shares of Packaging Junior Preferred Stock for which
the Rights may be exercised, in accordance with applicable law.
Anti-takeover Legislation
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any "business combination"
with any "interested stockholder" for a three-year period following the time
that such stockholder becomes an interested stockholder unless:
- prior to such time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding certain shares; or
- on or subsequent to such time, the business combination is approved by
the board of directors of the corporation and by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder.
Section 203 of the DGCL generally defines an "interested stockholder" to
include:
- any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior
to the relevant date; and
- the affiliates and associates of any such person.
Section 203 of the DGCL generally defines a "business combination" to
include:
- mergers and sales or other dispositions of 10% or more of the assets of
the corporation with or to an interested stockholder;
- certain transactions resulting in the issuance or transfer to the
interested stockholder of any stock of the corporation or its
subsidiaries;
- certain transactions which would result in increasing the proportionate
share of the stock of the corporation or its subsidiaries owned by the
interested stockholder; and
- receipt by the interested stockholder of the benefit, except
proportionately as a stockholder, of any loans, advances, guarantees,
pledges, or other financial benefits.
Under certain circumstances, Section 203 of the DGCL makes it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period,
although the certificate of incorporation or shareowner-adopted by-laws may
exclude a corporation from the restrictions imposed thereunder. Neither the
Certificate nor the Bylaws exclude Packaging from the restrictions imposed under
Section 203 of the DGCL. It is anticipated that the provisions of Section 203 of
the DGCL may encourage companies interested in acquiring Packaging to negotiate
in advance with the Packaging Board since the stockholder approval requirement
would be avoided if the Packaging Board approves, prior to the time the
shareowner becomes an interested stockholder, either the business combination or
the transaction which results in the shareowner becoming an interested
stockholder.
87
<PAGE> 98
ADDITIONAL INFORMATION
Tenneco is, and, following the spin-off, Automotive and Packaging will be,
subject to the informational requirements of the Exchange Act. Under the
Exchange Act, Tenneco files, and Automotive and Packaging will file, reports,
proxy statements and other information with the Securities and Exchange
Commission. You may inspect and copy the reports, proxy statements and other
information filed by Tenneco and to be filed by Automotive and Packaging with
the SEC at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the
Commission's Regional Offices, including the following: Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. You may obtain copies of
such information by mail at prescribed rates from the Public Reference Section
of the SEC at 450 Fifth Street, N.W. Street, N.W., Washington, D.C. 20549 or
accessed electronically on the SEC's Web site at http://www.sec.gov. Packaging
common stock is expected to be approved for listing on the New York Stock
Exchange and reports and other information concerning Packaging may then be
inspected at the New York Stock Exchange offices, 20 Broad Street, New York, New
York, 10005.
We intend to furnish holders of Packaging common stock with annual reports
containing consolidated financial statements prepared in accordance with United
States generally accepted accounting principles and audited and reported on,
with an opinion expressed, by an independent public accounting firm, as well as
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
We have filed with the SEC a Registration Statement on Form 10 under the
Exchange Act covering Packaging common stock and the associated Rights.
THIS INFORMATION STATEMENT DOES NOT CONTAIN ALL OF THE INFORMATION IN THE
REGISTRATION STATEMENT AND THE RELATED EXHIBITS AND SCHEDULES. THIS INFORMATION
STATEMENT SUMMARIZES THE PROVISIONS OF THE CONTRACTS, AGREEMENTS OR OTHER
DOCUMENTS THAT IT REFERS YOU TO. FOR MORE INFORMATION AS TO THESE MATTERS, YOU
SHOULD READ THE APPLICABLE EXHIBIT OR SCHEDULE TO THE REGISTRATION STATEMENT.
YOU MAY INSPECT THE REGISTRATION STATEMENT AND THE RELATED EXHIBITS FILED BY
PACKAGING WITH THE SEC AT THE PUBLIC REFERENCE FACILITIES OF THE SEC LISTED
ABOVE.
No person is authorized to give any information or to make any
representations with respect to the matters described in this Information
Statement other than those contained herein or in the documents incorporated by
reference herein and, if given or made, such information or representation must
not be relied upon as having been authorized by Packaging or Tenneco. Neither
the delivery of this Information Statement nor consummation of the spin-off
contemplated hereby shall, under any circumstances, create any implication that
there has been no change in the affairs of Packaging or Tenneco since the date
hereof, or that the information herein is correct as of any time subsequent to
its date.
88
<PAGE> 99
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE OF
THE BUSINESSES OF TENNECO PACKAGING
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent public accountants.................... F-2
Combined statements of income for each of the three years in
the period ended December 31, 1998, and the six months
ended June 30, 1999 (unaudited) and 1998 (unaudited)...... F-3
Combined balance sheets -- December 31, 1998 and 1997, and
June 30, 1999 (unaudited)................................. F-4
Combined statements of cash flows for each of the three
years in the period ended December 31, 1998, and the six
months ended June 30, 1999 (unaudited) and 1998
(unaudited)............................................... F-5
Statements of changes in combined equity for each of the
three years in the period ended December 31, 1998, and six
months ended June 30, 1999 (unaudited).................... F-6
Statements of comprehensive income for each of the three
years in the period ended December 31, 1998, and the six
months ended June 30, 1999 (unaudited) and 1998
(unaudited)............................................... F-7
Notes to combined financial statements...................... F-8
Financial statement schedule -- Valuation and Qualifying
Accounts.................................................. S-1
</TABLE>
F-1
<PAGE> 100
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tenneco Inc.:
We have audited the accompanying combined balance sheets of the Businesses
of Tenneco Packaging (see Note 1) as of December 31, 1998 and 1997, and the
related combined statements of income, cash flows, changes in combined equity
and comprehensive income for each of the three years in the period ended
December 31, 1998. These combined 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 combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Businesses of Tenneco Packaging as of December 31, 1998 and 1997, and the
results of their combined operations and cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the combined financial statements, in the fourth
quarter of 1997, the Businesses of Tenneco Packaging changed their 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
combined financial statements taken as a whole. The supplemental schedule listed
in the index to the combined financial statements and schedule is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic combined financial statements. The supplemental schedule
has been subjected to the auditing procedures applied in the audits of the basic
combined 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 combined financial statements of the Businesses of Tenneco Packaging taken
as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
July 2, 1999
F-2
<PAGE> 101
THE BUSINESSES OF TENNECO PACKAGING
COMBINED STATEMENTS OF INCOME
(MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- --------------------------
1998 1997 1996 1999 1998
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues --
Specialty................................. $2,785 $2,553 $1,987 $1,404 $1,361
Other..................................... 6 10 -- -- 10
------ ------ ------ ------ ------
2,791 2,563 1,987 1,404 1,371
Gain (loss) on sale of businesses and assets,
net....................................... (9) -- 15 (21) (1)
Other income, net............................ 6 6 34 3 9
------ ------ ------ ------ ------
2,788 2,569 2,036 1,386 1,379
------ ------ ------ ------ ------
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation
shown below).............................. 1,870 1,796 1,417 924 931
Engineering, research, and development....... 33 34 22 18 13
Selling, general, and administrative......... 427 270 232 206 174
Depreciation and amortization................ 175 163 131 94 88
------ ------ ------ ------ ------
2,505 2,263 1,802 1,242 1,206
------ ------ ------ ------ ------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES,
AND MINORITY INTEREST........................ 283 306 234 144 173
Interest expense (net of interest
capitalized)............................ 133 124 102 68 67
Income tax expense........................ 67 75 67 24 37
Minority interest......................... 1 1 -- -- --
------ ------ ------ ------ ------
INCOME FROM CONTINUING OPERATIONS.............. 82 106 65 52 69
Income (loss) from discontinued operations, net
of income tax................................ 57 21 71 (163) 37
------ ------ ------ ------ ------
Income (loss) before extraordinary loss........ 139 127 136 (111) 106
Extraordinary loss, net of income tax.......... -- -- (2) (7) --
------ ------ ------ ------ ------
Income (loss) before cumulative effect of
change in accounting principle............... 139 127 134 (118) 106
Cumulative effect of change in accounting
principle, net of income tax................. -- (38) -- (32) --
------ ------ ------ ------ ------
NET INCOME (LOSS).............................. $ 139 $ 89 $ 134 $ (150) $ 106
====== ====== ====== ====== ======
EARNINGS (LOSS) PER SHARE
Basic earnings per share of common stock --
Continuing operations........................ $ .49 $ .63 $ .38 $ .31 $ .41
Discontinued operations...................... .34 .12 .42 (.98) .22
Extraordinary loss........................... -- -- (.01) (.04) --
Cumulative effect of change in accounting
principle................................. -- (.23) -- (.19) --
------ ------ ------ ------ ------
$ .83 $ .52 $ .79 $ (.90) $ .63
====== ====== ====== ====== ======
Diluted earnings per share of common stock --
Continuing operations........................ $ .49 $ .63 $ .38 $ .31 $ .41
Discontinued operations...................... .34 .12 .42 (.98) .22
Extraordinary loss........................... -- -- (.01) (.04) --
Cumulative effect of change in accounting
principle................................. -- (.23) -- (.19) --
------ ------ ------ ------ ------
$ .83 $ .52 $ .79 $ (.90) $ .63
====== ====== ====== ====== ======
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these combined statements of income.
F-3
<PAGE> 102
THE BUSINESSES OF TENNECO PACKAGING
COMBINED BALANCE SHEETS
(MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1998 1997 1999
---- ---- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments....................... $ 7 $ 11 $ 18
Receivables --
Customer notes and accounts, net....................... 336 301 320
Affiliated companies................................... 44 74 20
Income taxes........................................... 15 36 7
Other.................................................. 52 10 28
Inventories............................................... 412 404 447
Deferred income taxes..................................... 6 41 46
Prepayments and other..................................... 45 47 26
------ ------ ------
917 924 912
------ ------ ------
Other assets:
Long-term notes receivable, net........................... 22 21 16
Goodwill and intangibles, net............................. 1,052 1,009 1,028
Pension assets............................................ 742 654 795
Other..................................................... 143 129 107
------ ------ ------
1,959 1,813 1,946
------ ------ ------
Plant, property, and equipment, at cost..................... 2,057 1,856 2,025
Less -- Reserves for depreciation and amortization........ 501 398 530
------ ------ ------
1,556 1,458 1,495
------ ------ ------
Net assets of discontinued operations....................... 366 423 133
------ ------ ------
$4,798 $4,618 $4,486
====== ====== ======
LIABILITIES AND COMBINED EQUITY
Current liabilities:
Short-term debt (including current maturities on long-term
debt).................................................. $ 595 $ 158 $ 367
Payables --
Trade.................................................. 255 252 257
Affiliated companies................................... 6 6 100
Taxes accrued............................................. 13 12 14
Accrued liabilities....................................... 188 192 215
Other..................................................... 85 124 107
------ ------ ------
1,142 744 1,060
------ ------ ------
Long-term debt.............................................. 1,312 1,492 1,494
------ ------ ------
Deferred income taxes....................................... 291 270 380
------ ------ ------
Postretirement benefits..................................... 163 114 149
------ ------ ------
Deferred credits and other liabilities...................... 100 144 49
------ ------ ------
Commitments and contingencies
Minority interest........................................... 14 15 14
------ ------ ------
Combined equity............................................. 1,776 1,839 1,340
------ ------ ------
$4,798 $4,618 $4,486
====== ====== ======
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these combined balance sheets.
F-4
<PAGE> 103
THE BUSINESSES OF TENNECO PACKAGING
COMBINED STATEMENTS OF CASH FLOWS
(MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- ---------------
1998 1997 1996 1999 1998
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations........................... $ 82 $ 106 $ 65 $ 52 $ 69
Adjustments to reconcile income from continuing operations
to cash provided (used) by continuing operations --
Depreciation and amortization........................... 175 163 131 94 88
Deferred income taxes................................... 77 118 4 89 27
(Gain) loss on sale of businesses and assets, net....... 9 -- (15) 21 1
Allocated interest, net of tax.......................... 85 78 63 44 44
Changes in components of working capital --
(Increase) decrease in receivables................... 28 (1) (59) (103) 37
(Increase) decrease in inventories................... 8 (12) (5) (45) (5)
(Increase) decrease in prepayments and other current
assets............................................. (1) (30) 8 1 (5)
Increase (decrease) in payables...................... (13) (44) 13 (44) (21)
Increase (decrease) in taxes accrued................. (23) (36) 40 1 (6)
Increase (decrease) in interest accrued.............. -- (1) (1) (1) --
Increase (decrease) in other current liabilities..... 35 (5) (8) (2) 9
Other................................................... (90) (38) 30 (90) (58)
----- ----- ----- ------- -----
Cash provided (used) by continuing operations............... 372 298 266 17 180
Cash provided (used) by discontinued operations............. 205 107 (3) (62) 108
----- ----- ----- ------- -----
Net cash provided (used) by operating activities............ 577 405 263 (45) 288
----- ----- ----- ------- -----
INVESTING ACTIVITIES
Net proceeds related to the sale of discontinued
operations................................................ -- 10 123 306 --
Net proceeds from sale of businesses and assets............. 22 14 23 28 12
Expenditures for plant, property, and equipment............. (194) (229) (216) (75) (101)
Acquisitions of businesses and assets....................... (101) (285) (323) (2) (58)
Expenditures for plant, property, and equipment and business
acquisitions -- discontinued operations................... (203) (108) (169) (1,129) (51)
Investments and other....................................... (38) (56) (107) 6 (23)
----- ----- ----- ------- -----
Net cash provided (used) by investing activities............ (514) (654) (669) (866) (221)
----- ----- ----- ------- -----
FINANCING ACTIVITIES
Issuance of long-term debt.................................. 3 4 -- 1,760 2
Retirement of long-term debt................................ (18) (18) (7) (29) (14)
Net increase (decrease) in short-term debt excluding current
maturities on long-term debt.............................. 4 (78) (16) (1) 5
Cash contributions from (distributions to) Tenneco.......... (56) 331 422 (810) (59)
----- ----- ----- ------- -----
Net cash provided (used) by financing activities............ (67) 239 399 920 (66)
----- ----- ----- ------- -----
Effect of foreign exchange rate changes on cash and
temporary cash investments................................ -- (1) (1) 2 --
----- ----- ----- ------- -----
Increase (decrease) in cash and temporary cash
investments............................................... (4) (11) (8) 11 1
Cash and temporary cash investments, beginning of period.... 11 22 30 7 11
----- ----- ----- ------- -----
Cash and temporary cash investments, end of
period.................................................... $ 7 $ 11 $ 22 $ 18 $ 12
===== ===== ===== ======= =====
Cash paid during the period for interest.................... $ 6 $ 9 $ 8 $ 2 $ 4
Cash paid during the period for income taxes (net of
refunds).................................................. $ 21 $ (68) $ 60 $ 17 $ 10
NON-CASH INVESTING AND FINANCING ACTIVITIES
Common equity interest received related to the sale of
containerboard operations................................. $ -- $ -- $ -- $ 194 $ --
Principal amount of long-term debt assumed by buyers of
containerboard operations................................. $ -- $ -- $ -- $(1,760) $ --
</TABLE>
- -------------------------
Note: Cash and temporary cash investments include highly liquid investments with
a maturity of three months or less at the date of purchase.
The accompanying notes to combined financial statements are an integral part
of these combined statements of cash flows.
F-5
<PAGE> 104
THE BUSINESSES OF TENNECO PACKAGING
STATEMENTS OF CHANGES IN COMBINED EQUITY
(MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------- SIX MONTHS ENDED
1998 1997 1996 JUNE 30, 1999
---- ---- ---- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, January 1................................. $1,839 $1,843 $1,531 $1,776
Net income (loss)................................ 139 89 134 (150)
Accumulated other comprehensive income (loss).... 22 (24) (7) (29)
Allocated interest, net of tax................... 111 102 86 49
Change in allocated corporate debt............... (333) (549) (137) 573
Cash contributions from (distributions to)
Tenneco....................................... (56) 331 422 (810)
Noncash contributions from (distributions to)
Tenneco....................................... 54 47 (186) (69)
------ ------ ------ ------
Balance, end of period............................. $1,776 $1,839 $1,843 $1,340
====== ====== ====== ======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these
statements of changes in combined equity.
F-6
<PAGE> 105
THE BUSINESSES OF TENNECO PACKAGING
COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
ACCUMULATED ACCUMULATED ACCUMULATED
OTHER OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME INCOME INCOME
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME (LOSS)................. $139 $ 89 $134
---- ---- ----
ACCUMULATED OTHER COMPREHENSIVE
INCOME:
CUMULATIVE TRANSLATION
ADJUSTMENT
Balance, January 1.............. $(21) $ 3 $10
Translation of foreign
currency statements......... 24 24 (25) (25) (6) (6)
Hedges of net investment in
foreign subsidiaries........ -- -- 2 2 (2) (2)
Income tax benefit
(expense)................... -- -- (1) (1) 1 1
---- ---- ---
Balance, end of period.......... 3 (21) 3
---- ---- ---
ADDITIONAL MINIMUM PENSION
LIABILITY ADJUSTMENT
Balance, January 1.............. -- -- --
Additional minimum pension
liability adjustment........ (4) (4) -- -- -- --
Income tax benefit
(expense)................... 2 2 -- -- -- --
---- ---- ---
Balance, end of period.......... (2) -- --
---- ---- ---
Balance, end of period............ $ 1 $(21) $ 3
==== ---- ==== ---- === ----
Other comprehensive income
(loss).......................... 22 (24) (7)
---- ---- ----
COMPREHENSIVE INCOME (LOSS)....... $161 $ 65 $127
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
ACCUMULATED ACCUMULATED
OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET INCOME (LOSS)........................................... $(150) $106
----- ----
ACCUMULATED OTHER COMPREHENSIVE INCOME:
CUMULATIVE TRANSLATION ADJUSTMENT
Balance, January 1........................................ $ 3 $(21)
Translation of foreign currency statements.............. (29) (29) (5) (5)
Hedges of net investment in foreign subsidiaries........ -- -- -- --
Income tax benefit (expense)............................ -- -- -- --
---- ----
Balance, end of period.................................... (26) (26)
---- ----
ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT
Balance, January 1........................................ (2) --
Additional minimum pension liability adjustment......... -- -- -- --
Income tax benefit (expense)............................ -- -- -- --
---- ----
Balance, end of period.................................... (2) --
---- ----
Balance, end of period...................................... $(28) $(26)
==== ----- ==== ----
Other comprehensive income (loss)........................... (29) (5)
----- ----
COMPREHENSIVE INCOME (LOSS)................................. $(179) $101
===== ====
</TABLE>
The accompanying notes to combined financial statements are an integral part
of these combined statements of comprehensive income (loss).
F-7
<PAGE> 106
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying combined financial statements represent the financial
position, results of operations, and cash flows for all of the Businesses of
Tenneco Packaging ("Packaging") owned directly or indirectly by Tenneco Inc.
("Tenneco") and its subsidiaries (see "Control" below). Packaging includes the
assets, liabilities, and operations of Tenneco's specialty packaging and
paperboard packaging businesses as well as Tenneco's corporate and
administrative service operations.
Unless the context otherwise requires, the term "Tenneco" refers to: (i)
for periods prior to the spin-off, as defined below, Tenneco's automotive and
packaging businesses, and administrative service operations and (ii) for periods
after the spin-off, Tenneco's automotive business.
2. STRATEGIC ALTERNATIVES ANALYSIS
In July 1998, Tenneco's Board of Directors authorized management to develop
a broad range of strategic alternatives which could result in the separation of
the automotive, paperboard packaging, and specialty packaging businesses. As
part of that strategic alternatives analysis, Tenneco has taken the following
actions:
- In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging segment to a new joint
venture with an affiliate of Madison Dearborn Partners, Inc. The
contribution to the joint venture was completed in April 1999. Tenneco
received consideration of cash and debt assumption totaling
approximately $2 billion and a 45 percent common equity interest in the
joint venture (now 43 percent due to subsequent management equity
issuances) valued at approximately $200 million.
- In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operation, to
Caraustar Industries. This transaction closed in June 1999.
- Also in April 1999, Tenneco announced that its Board of Directors had
approved the separation of its automotive and packaging businesses into
two separate, independent companies.
- In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture.
Packaging expects the sale to be completed before the spin-off discussed
below.
As a result of the decision to sell Packaging's remaining interest in the
containerboard joint venture, Packaging's paperboard packaging segment is
presented as a discontinued operation in the accompanying combined financial
statements. Reference is made to Note 7 for information related to discontinued
operations.
The separation of Tenneco's automotive and packaging businesses will be
accomplished by the spin-off of the common stock of Packaging to Tenneco
shareowners (the "Spin-off"). At the time of the Spin-off, Packaging will
include Tenneco's specialty packaging business, Tenneco's administrative
services operations, and the remaining interest in the containerboard joint
venture if the sale has not been completed. Tenneco and Packaging are, however,
currently analyzing the alternatives with regard to the administrative services
operations.
Before the Spin-off, Tenneco will realign substantially all of its existing
debt through some combination of tender offers, exchange offers, prepayments and
other refinancings. The debt realignment will be financed by internally
generated cash, borrowings by Tenneco under a new credit facility, the issuance
by Tenneco of subordinated debt, and borrowings by Packaging under new credit
facilities.
The Spin-off is subject to conditions, including formal declaration of the
Spin-off by the Tenneco Board of Directors, Tenneco's receipt, and the continued
effectiveness of a determination that the Spin-off
F-8
<PAGE> 107
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
will be tax-free for U.S. federal income tax purposes and the successful
completion of the debt realignment and corporate restructuring transactions. In
August 1999, Tenneco received a letter ruling from the Internal Revenue Service
that the Spin-off will be tax-free for U.S. federal income tax purposes to
Tenneco and its shareowners (unaudited).
Packaging will modify or enter into certain contractual agreements with
Tenneco related to becoming a separate publicly held company. These agreements
include a distribution agreement, a tax sharing agreement, a human resources
agreement, an insurance agreement, and a transition services agreement.
These agreements will provide, among other things, that (i) Packaging will
become the sponsor of the Tenneco Retirement Plan, the Tenneco Supplemental
Executive Retirement Plan, and the Tenneco Thrift Plan; and (ii) Packaging will
provide certain administrative services, including payroll, accounts payable,
benefits administration, accounting, and travel-related services to Tenneco for
a specified period of time.
3. SUMMARY OF ACCOUNTING POLICIES
Control
All of the outstanding common stock of Packaging is owned directly or
indirectly by Tenneco. Thus, Packaging is under the control of Tenneco.
Unaudited Interim Information
The unaudited interim combined financial statements as of June 30, 1999,
and for the six month periods ended June 30, 1999 and 1998, included herein,
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 for complete
financial statements. In the opinion of Packaging's management, the unaudited
interim combined financial statements contain all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation. The
interim financial results are not necessarily indicative of operating results
for an entire year.
Income Taxes
Packaging utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the combined financial statements.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period. The estimates
utilized in the recognition of deferred tax assets are subject to revision in
future periods based on new facts or circumstances.
Packaging and Tenneco, together with certain of their respective
subsidiaries which are owned 80% or more, have entered into an agreement to file
a consolidated U.S. federal income tax return. This agreement provides, among
other things, that (1) each company in a taxable income position will be
currently charged with an amount equivalent to its U.S. federal income tax
computed on a separate return basis and (2) each company in a tax loss position
will be reimbursed currently. The income tax amounts reflected in the combined
financial statements of Packaging under the provisions of the tax sharing
arrangement are not materially different from the income taxes which would have
been provided had Packaging filed a separate tax return. Under the tax sharing
agreement, Tenneco pays all U.S. federal taxes directly and bills or refunds, as
applicable, its subsidiaries for the applicable portion of the total tax
payments. Cash taxes paid in the combined statements of cash flows include
payments to Tenneco for U.S. federal income taxes.
F-9
<PAGE> 108
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Packaging 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 the unremitted earnings in its foreign operations. Unremitted earnings
of foreign subsidiaries are approximately $95 million at December 31, 1998. It
is not practicable to determine the amount of U.S. federal income taxes that
would be payable upon remittance of the assets that represent those earnings.
In connection with the Spin-off, the current tax sharing agreement will be
cancelled, and Packaging will enter into a new tax sharing agreement with
Tenneco. The tax sharing agreement will provide, among other things, for the
allocation of taxes among the parties of tax liabilities arising prior to, as a
result of, and subsequent to the Spin-off. Generally, Packaging will be liable
for taxes imposed on it and its affiliates engaged in the packaging business. In
the case of U.S. federal income taxes imposed on the combined activities of the
consolidated group, Packaging will generally be liable to Tenneco for U.S.
federal income taxes attributable to its activities.
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 certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting treatment. This
statement cannot be applied retroactively and is effective for all fiscal years
beginning after June 15, 2000. Packaging is currently evaluating the new
standard but has not yet determined the impact 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 costs of start-up activities to be expensed
as incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires previously capitalized costs related
to start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. Packaging previously
capitalized certain costs in connection with the start-up of certain new foreign
operations and its shared administrative service operations. Packaging adopted
SOP 98-5 on January 1, 1999, and recorded an after-tax charge for the cumulative
effect of this change in accounting principle upon adoption of $32 million (net
of a $9 million tax benefit), or $.19 per diluted common share. The change in
accounting principle decreased the loss before cumulative effect of change in
accounting principle by $4 million (net of $2 million in income tax expense), or
$.02 per diluted common share for the six months ended June 30, 1999. If the new
accounting method had been applied retroactively, net income for the six months
ended June 30, 1998, and the years ended December 31, 1998, 1997, and 1996,
would have been lower by $7 million (net of a $5 million tax benefit), or $.04
per diluted common share, $14 million (net of a $8 million tax benefit), or $.08
per diluted common share, $7 million (net of a $3 million tax benefit), or $.04
per diluted common share, and $7 million (net of a $4 million tax benefit), or
$.04 per diluted common share.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use. This statement requires prospective application
for fiscal years beginning after December 15, 1998. Packaging adopted SOP 98-1
on January 1,
F-10
<PAGE> 109
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1999. The impact of this new standard did not have a significant effect on
Packaging's financial position or results of operations.
As required by the FASB's Emerging Issues Task Force ("EITF") Issue 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation," Packaging recorded an after-tax charge of $38 million (net of a
tax benefit of $24 million), or $.23 per diluted common share in the fourth
quarter of 1997. EITF Issue 97-13 establishes the accounting treatment and an
allocation methodology for certain consulting and other costs incurred in
connection with information technology transformation efforts. This charge was
reported as a cumulative effect of change in accounting principle.
General and Administrative Expenses
Included in the "Selling, general and administrative" caption in the
Combined Statements of Income for 1998, 1997, and 1996, is $70 million, $49
million, and $51 million, respectively, which represents Packaging's share of
Tenneco's corporate general and administrative costs for legal, financial,
communication, and other administrative services. The allocation of Tenneco's
corporate general and administrative expenses is based on estimated levels of
effort devoted to Tenneco's various operations and the relative size of these
operations based on revenues, gross property, and payroll. Packaging's
management believes the method for allocating corporate general and
administrative expenses is reasonable. Also included in the "Selling, general
and administrative" caption is $55 million, $22 million, and $7 million, for
1998, 1997, and 1996, respectively, related to administrative service operations
which has not been allocated among Tenneco's various operations. Packaging
estimates that, had it operated as a separate, stand-alone entity and had the
administrative service operations costs been allocated based on a usage charge,
its annual costs for these services would have been lower by approximately $40
million (unaudited) for the year ended December 31, 1998, $27 million
(unaudited) for the year ended December 31, 1997, and $18 million (unaudited)
for the year ended December 31, 1996.
Sales of Receivables
Packaging sells trade receivables to a third party in the ordinary course
of business. At December 31, 1998 and 1997, $140 million and $130 million,
respectively, and $119 million at June 30, 1999, of its outstanding trade
receivables had been sold. Sales of trade receivables are reflected as a
reduction of customer notes and accounts receivable in the accompanying combined
balance sheets and the proceeds received are included in cash flows from
operating activities in the accompanying combined statements of cash flows.
Inventories
At December 31, 1998 and 1997, inventory by major classification was as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Finished goods.............................................. $246 $265
Work in process............................................. 51 22
Raw materials............................................... 63 85
Materials and supplies...................................... 52 32
---- ----
$412 $404
==== ====
</TABLE>
Inventories are stated at the lower of cost or market. A portion of total
inventories (61% and 43% at December 31, 1998 and 1997, respectively) is valued
using the "last-in, first-out" method. All other
F-11
<PAGE> 110
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
inventories are valued on the "first-in, first-out" ("FIFO") or "average"
methods. If the FIFO or average method of inventory accounting had been used by
Packaging for all inventories, inventories would have been approximately $30
million lower and $2 million higher at December 31, 1998 and 1997, respectively.
Goodwill and Intangibles, Net
At December 31, 1998 and 1997, goodwill and intangibles, net of
amortization, by major category were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Goodwill.................................................... $ 695 $ 662
Trademarks.................................................. 177 182
Patents..................................................... 149 157
Other....................................................... 31 8
------ ------
$1,052 $1,009
====== ======
</TABLE>
Goodwill is being amortized on a straight-line basis over 40 years. Such
amortization amounted to $17 million, $21 million, and $12 million for 1998,
1997, and 1996, respectively, and is included in the combined statements of
income caption, "Depreciation and amortization."
Packaging has capitalized certain intangible assets, primarily trademarks
and patents, based on their estimated fair value at date of acquisition.
Amortization is provided on these intangible assets on a straight-line basis
over periods ranging from 5 to 40 years. Such amortization amounted to $18
million, $17 million, and $17 million in 1998, 1997, and 1996, respectively, and
is included in the combined statements of income caption, "Depreciation and
amortization."
Plant, Property, and Equipment, at Cost
At December 31, 1998 and 1997, plant, property, and equipment, at cost, by
major category was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Land, buildings, and improvements........................... $ 446 $ 389
Machinery and equipment..................................... 1,481 1,339
Other, including construction in progress................... 130 128
------ ------
$2,057 $1,856
====== ======
</TABLE>
Depreciation of Packaging's properties is provided on a straight-line basis
over the estimated useful lives of the assets. Useful lives range from 10 to 40
years for buildings and improvements and from 3 to 25 years for machinery and
equipment.
Other Long-Term Assets
Packaging previously capitalized certain costs in connection with the
start-up of certain new foreign operations and its shared administrative service
operations. The start-up costs are amortized over the periods benefited,
generally three to five years. Start-up costs capitalized, net of amortization,
at December 31, 1998 and 1997, were $41 million and $20 million, respectively.
Packaging adopted a new accounting standard in the first quarter of 1999, which
requires these costs to be expensed. Refer to "Changes in Accounting Principles"
discussed previously in this footnote.
F-12
<PAGE> 111
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Packaging capitalizes certain costs related to the purchase and development
of software which is used in its business operations. The costs attributable to
these software systems are amortized over their estimated useful lives, ranging
from 3 to 12 years, based on various factors such as the effects of
obsolescence, technology, and other economic factors. Capitalized software
development costs, net of amortization, were $140 million and $104 million at
December 31, 1998 and 1997, respectively. As described previously in this
footnote, Packaging adopted a new accounting standard related to accounting for
the costs of computer software developed for internal use. The impact of this
new standard did not have a significant effect on Packaging's financial position
or results of operations.
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 and
that do not contribute to current or future revenue generation are expensed.
Liabilities are recorded when environmental assessments indicate that remedial
efforts are probable and the costs can be reasonably estimated. Estimates of the
liability are based upon currently available facts, existing technology, and
presently enacted laws and regulations taking into consideration the likely
effects of inflation and other societal and economic 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. These estimated
liabilities are subject to revision in future periods based on actual costs or
new information. These liabilities are included in the balance sheet at their
undiscounted amounts. Recoveries are evaluated separately from the liability
and, when assured, are recorded and reported separately from the associated
liability in the combined financial statements. For further information on this
subject, refer to Note 15, "Commitments and Contingencies."
Earnings Per Share
In connection with the Spin-off, Tenneco shareowners will receive one share
of Packaging common stock for each share of Tenneco common stock outstanding.
Accordingly, basic and diluted earnings per share for Packaging have been
calculated using Tenneco's historical weighted average shares outstanding and
weighted average shares outstanding adjusted to include estimates of additional
shares that would be issued if potentially dilutive common shares had been
issued, respectively. Potentially dilutive securities include stock options,
restricted stock and performance shares.
Tenneco's basic and diluted average common shares outstanding are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- -------------------------
1998 1997 1996 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Basic......................... 168,505,573 170,264,731 169,609,373 166,937,362 169,341,555
Diluted....................... 168,834,531 170,801,636 170,526,112 167,319,412 169,936,676
</TABLE>
Research and Development
Research and development costs are expensed as incurred. Research and
development expenses were $25 million, $29 million, and $19 million for 1998,
1997, and 1996, respectively, and are included in the combined statements of
income caption "Engineering, research, and development."
F-13
<PAGE> 112
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency Translation
Financial statements of international operations are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and the weighted average exchange rate for each applicable period
for revenues, expenses, and gains and losses. Translation adjustments are
reflected in the combined balance sheet caption "Combined equity."
Risk Management Activities
Packaging from time to time uses derivative financial instruments,
principally foreign currency forward 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 these foreign currency exchange contracts
that are designated as hedges are recognized in the combined statements of
income to offset the foreign currency gain or loss on the underlying
transaction. Packaging has from time to time also entered into forward contracts
to hedge its net investment in foreign subsidiaries. The after-tax net gains or
losses on these contracts are recognized on the accrual basis in the combined
balance sheet caption "Combined equity." In the statement of cash flows, cash
receipts or payments related to these exchange contracts are classified
consistent with the cash flows from the transaction being hedged.
Packaging does not currently enter into derivative financial instruments
for speculative purposes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of Packaging's assets,
liabilities, revenues, and expenses. Reference is made to the "Income Taxes" and
"Environmental Liabilities" sections of this footnote and Notes 13 and 15 for
additional information on significant estimates included in Packaging's combined
financial statements.
4. RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1998, Tenneco's Board of Directors approved an
extensive restructuring plan designed to reduce administrative and operational
overhead costs in every part of Tenneco's business. As a result, Packaging
recorded a pre-tax charge to income from continuing operations of $32 million,
$20 million after-tax or $.12 per diluted common share. Of the pre-tax charge,
$10 million relates to operational restructuring actions and $22 million relates
to a staff and cost reduction plan, which covers employees in both the operating
unit and corporate operations.
The operational restructuring plans for Packaging involve the elimination
of production lines at two plants resulting in the elimination of 104 positions.
Additionally, Packaging intends to exit four joint ventures. The staff and cost
reduction plan involves the elimination of 184 administrative positions in
Packaging's business unit and in Packaging's corporate operations.
The fixed assets for the production lines to be eliminated, as well as the
joint venture investments, were written down to their fair value, less costs to
sell, in the fourth quarter of 1998. Fair value for the production lines was
estimated at scrap value less removal costs. Fair value for the joint ventures
were determined to be zero as Packaging is relinquishing their interest. No
significant net cash proceeds are expected to be received from the ultimate
disposal of these assets which should be complete by the fourth quarter of 1999.
The effect of suspending depreciation for the production lines is approximately
$1 million on an annual basis.
F-14
<PAGE> 113
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, and June 30, 1999, approximately 158 and 233
employees, respectively, have been terminated. This restructuring is being
executed according to Packaging's initial plan and Packaging expects to complete
all restructuring actions by the fourth quarter of 1999.
In the first quarter of 1999, in connection with Packaging's contribution
of its containerboard assets to a new joint venture, Tenneco adopted a plan to
realign its headquarters functions. This plan involves the severance of
approximately 40 employees, and the closing of the Greenwich, Connecticut
headquarters facility. Tenneco reached an agreement to sell its headquarters
facility in Greenwich and recorded an impairment charge based on the selling
price, less costs to sell. The carrying value of the facility before the
impairment was $43 million. Annual depreciation expense was reduced by
approximately $3 million as a result of the sale. The charge for this plan was
recorded in Packaging's corporate operations in the amount of $29 million
pre-tax, $17 million after-tax, or $.10 per diluted common share. Packaging
collected approximately $30 million in the second quarter of 1999 related to the
sale of these assets.
Amounts related to the restructuring plans described above are shown in the
following table:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
-----------------------------------
1998 CHARGED BALANCE AT CHARGED BALANCE AT
RESTRUCTURING CASH TO ASSET DECEMBER 31, RESTRUCTURING CASH TO ASSET JUNE 30,
CHARGE PAYMENTS ACCOUNTS 1998 CHARGE PAYMENTS ACCOUNTS 1999
------------- -------- -------- ------------ ------------- -------- -------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Severance............... $20 $ 5 $-- $15 $16 $12 $-- $19
Asset impairments....... 12 -- 12 -- 13 -- 13 --
--- --- --- --- --- --- --- ---
$32 $ 5 $12 $15 $29 $12 $13 $19
=== === === === === === === ===
</TABLE>
5. TRANSACTIONS WITH TENNECO
Combined Equity
The "Combined equity" caption in the accompanying combined financial
statements represents Tenneco's cumulative net investment in the combined
businesses of Packaging. Changes in the "Combined equity" caption represent the
net income (loss) of Packaging, net cash and noncash contributions from
(distributions to) Tenneco, accumulated other comprehensive income, changes in
allocated corporate debt, and allocated corporate interest, net of tax.
Reference is made to the statements of changes in combined equity for an
analysis of the activity in the "Combined equity" caption for the three years
ended December 31, 1998, and six months ended June 30, 1999.
Corporate Debt and Interest Allocation
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense have been allocated to Packaging based on the portion
of Tenneco's investment in Packaging which is deemed to be debt, generally based
upon the ratio of Packaging's net assets to Tenneco consolidated net assets plus
debt. Interest expense was allocated at a rate equivalent to the weighted-
average cost of all corporate debt, which was 7.0%, 7.4%, and 8.3% for 1998,
1997, and 1996, respectively. Total pre-tax interest expense allocated to
Packaging in 1998, 1997, and 1996 was $130 million, $120 million, and $99
million, respectively. Packaging has also been allocated tax benefits
approximating 35% of the allocated pre-tax interest expense. Although interest
expense, and the related tax effects, have been allocated to Packaging for
financial reporting on a historical basis, Packaging has not been billed for
these amounts. The changes in allocated corporate debt and the after-tax
allocated interest have been included as a component of Packaging's combined
equity. Although management believes that the
F-15
<PAGE> 114
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
historical allocation of corporate debt and interest is reasonable, it is not
necessarily indicative of Packaging's debt upon completion of the realignment of
Tenneco's debt nor debt and interest that will be incurred by Packaging as a
separate public entity.
A portion of the corporate debt of Tenneco and its related interest expense
allocated to Packaging has also been allocated to discontinued operations based
on the ratio of the discontinued operations' net assets to Packaging's combined
net assets plus debt.
Notes and Advances Receivable from Tenneco
"Cash contributions from (distributions to) Tenneco" in the Statements of
Changes in Combined Equity consist of net cash changes in notes and advances
receivable with Tenneco which have been included in combined equity.
Historically, Tenneco has utilized notes and advances to centrally manage cash
funding requirements for its consolidated group.
Noncash contributions from (distributions to) Tenneco result primarily from
transfers of assets and liabilities to or from Tenneco, such as transfers of
acquired net assets and tax assets and liabilities.
At December 31, 1998 and 1997, Packaging had a note receivable from Tenneco
totaling $476 million and $496 million, respectively, which is payable on demand
and is included as a component of Packaging's combined equity.
Accounts Receivable and Accounts Payable -- Affiliated Companies
Receivables -- Affiliated companies relates to general and administrative
costs incurred by Packaging and allocated to affiliates. Payables -- Affiliated
companies relates to billings for costs incurred by affiliates and allocated to
Packaging. Reference is made to Note 3 for a discussion of the types of such
costs allocated to Packaging.
Employee Benefits
Certain employees of Packaging participate in the Tenneco employee stock
option and employee stock purchase plans. The Tenneco employee stock option plan
provides for the grant of Tenneco common stock options and other stock awards at
a price not less than market value at the date of grant. The Tenneco employee
stock purchase plan allows employees to purchase Tenneco common stock at a 15%
discount subject to certain thresholds. Packaging expects to establish similar
plans for its employees after the Spin-off. In connection with the Spin-off,
outstanding options to Tenneco common stock held by Packaging employees will be
replaced by options of Packaging so as to preserve the aggregate value of the
options held prior to the Spin-off. Employees of Packaging also participate in
certain Tenneco postretirement and pension plans. Reference is made to Notes 11
and 13 for a further discussion of these plans.
6. ACQUISITIONS
During 1998, Packaging made three acquisitions for approximately $101
million.
In March 1997, Packaging entered into an agreement to acquire the
protective and flexible packaging division of N.V. Koninklijke KNP BT ("KNP"), a
Dutch distribution, paper, and packaging firm, for approximately $380 million
including debt assumed and preferred stock of a subsidiary issued to the seller.
The KNP acquisition was completed in late April 1997.
In June 1996, Packaging entered into an agreement to acquire Amoco Foam
Products for $310 million. Amoco Foam Products manufactures expanded polystyrene
tableware, hinged-lid food containers, packaging trays, and industrial products
for residential and commercial construction applications. Packaging closed the
acquisition of Amoco Foam Products in August 1996.
F-16
<PAGE> 115
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
All of the acquisitions discussed above have been accounted for as
purchases; accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based on their fair values. The excess of
the purchase price over the fair value of the net assets acquired is included in
the combined balance sheet caption "Goodwill and intangibles, net."
7. DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS
Discontinued Operations
In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging segment to a new joint venture
with an affiliate of Madison Dearborn Partners, Inc. The contribution to the
joint venture was completed in April 1999. Tenneco received consideration of
cash and debt assumption totaling approximately $2 billion plus a 45 percent
common equity interest in the joint venture (now 43 percent due to subsequent
management equity issuances) valued at approximately $200 million. The
containerboard assets contributed to the joint venture represented substantially
all of the assets of Packaging's paperboard packaging segment and included four
mills, 67 corrugated products plants, and an ownership or leasehold interest in
approximately 950,000 acres of timberland. Prior to the transaction, Packaging
borrowed approximately $1.8 billion and used approximately $1.2 billion of those
borrowings to acquire assets used by the containerboard business under operating
leases and timber cutting rights and to purchase containerboard business
accounts receivable that had previously been sold to a third party. The
remainder of the borrowings was remitted to Tenneco and used to repay a portion
of Tenneco's short-term debt. Packaging then contributed the containerboard
business assets (subject to the new indebtedness and the containerboard business
liabilities) to the joint venture in exchange for $247 million in cash and the
45 percent interest in the joint venture. As a result of the transaction,
Packaging recognized a pre-tax loss of $293 million, $178 million after-tax or
$1.07 per diluted common share, in the first quarter of 1999, based on the
amount by which the carrying amount of the containerboard assets exceeded the
fair value of those assets, less cost to sell. The estimate of fair value of the
containerboard assets was based on the fair value of the consideration received
by Tenneco from the joint venture.
In June 1999, Tenneco's Board of Directors approved a plan to sell
Packaging's remaining interest in its containerboard joint venture. Packaging
expects the sale to be completed before the Spin-off. As a result of the
decision to sell the remaining interest in the containerboard joint venture,
Packaging's paperboard packaging segment is presented as a discontinued
operation in the accompanying combined financial statements.
In April 1999, Tenneco reached an agreement to sell the paperboard
packaging segment's other assets, its folding carton operations, to Caraustar
Industries. Packaging received cash proceeds of $73 million from this
transaction which closed in June 1999. As a result of the sale transaction,
Packaging recognized a pre-tax gain of $14 million, $9 million after-tax or $.05
per diluted share and is included in discontinued operations in the second
quarter of 1999.
F-17
<PAGE> 116
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Net assets as of December 31, 1998, 1997, and 1996, and results of
operations for the years then ended for the paperboard packaging segment were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Net assets at the end of the period (Note).................. $ 366 $ 423 $ 459
====== ====== ======
Net sales and operating revenues............................ $1,570 $1,431 $1,605
====== ====== ======
Income before income taxes and interest allocation.......... $ 131 $ 63 $ 152
Income tax (expense) benefit................................ (48) (19) (60)
------ ------ ------
Income before interest allocation........................... 83 44 92
Allocated interest expense, net of income tax (Note)........ (26) (23) (21)
------ ------ ------
Income from discontinued operations......................... $ 57 $ 21 $ 71
====== ====== ======
</TABLE>
- -------------------------
Note: Net assets of discontinued operations includes allocated corporate debt of
$548 million, $473 million and $394 million as of December 31, 1998, 1997 and
1996, respectively. Reference is made to Note 5, "Transactions with
Tenneco -- Corporate Debt and Interest Allocation," for a discussion of the
allocation of corporate debt and interest expense to discontinued operations.
Extraordinary Loss
In the first quarter of 1999, Packaging recorded an extraordinary loss for
extinguishment of debt of $7 million (net of a $3 million income tax benefit) or
$.04 per diluted common share. The loss related to early retirement of debt in
connection with the sale of the containerboard assets.
8. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS
Long-Term Debt
A summary of long-term debt outstanding and allocated long-term corporate
debt obligations at December 31, 1998 and 1997, is set forth in the following
table:
<TABLE>
<CAPTION>
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Notes due 1999 through 2016, average effective interest rate
9.5% in 1998 and 10% in 1997.............................. $ 22 $ 20
Less -- current maturities.................................. 1 1
------ ------
21 19
Allocated corporate debt obligations, average effective
interest rate 7.0% in 1998 and 7.4% in 1997............... 1,291 1,473
------ ------
Total long-term debt........................................ $1,312 $1,492
====== ======
</TABLE>
The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 1998, are $1 million, $3 million, $4 million,
$5 million, and $2 million for 1999, 2000, 2001, 2002, and 2003, respectively.
Reference is made to Note 5 for a discussion of allocated corporate debt
obligations.
F-18
<PAGE> 117
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Short-Term Debt
Packaging uses lines of credit and overnight borrowings to finance certain
of its short-term capital requirements. Information regarding short-term debt as
of and for the years ended December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
CREDIT CREDIT
AGREEMENTS* AGREEMENTS*
----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Outstanding borrowings at end of year....................... $11 $ 1
Weighted average interest rate on outstanding borrowings at
end of year............................................... 18.7% 7.1%
Approximate maximum month-end outstanding borrowings during
year...................................................... $37 $26
Approximate average month-end outstanding borrowings during
year...................................................... $18 $9
Weighted average interest rate on approximate average
month-end outstanding borrowings during year.............. 18.4% 17.5%
</TABLE>
- -------------------------
* Includes borrowings under both committed credit facilities and uncommitted
lines of credit and similar arrangements.
Packaging was allocated short-term corporate debt obligations of $583
million at December 31, 1998, and $156 million at December 31,1997. Reference is
made to Note 5 for a discussion of allocated corporate debt obligations.
9. FINANCIAL INSTRUMENTS
Asset and Liability Instruments
The fair value of cash and temporary cash investments, short and long-term
receivables, and accounts payable, and short-term debt (before allocation of
corporate debt to Packaging from Tenneco) was considered to be the same as or
was not determined to be materially different from the carrying amount.
The long-term debt reflected in the Combined Balance Sheets primarily
represents corporate debt allocated to Packaging from Tenneco. As such, an
estimate of fair value has not been provided. The fair value of other long-term
debt is not materially different from the carrying amount.
Instruments With Off-Balance-Sheet Risk
Foreign Currency Contracts -- Note 3, "Summary of Accounting
Policies -- Risk Management Activities" describes Tenneco's use of and
accounting for foreign currency exchange contracts. Packaging currently manages
its exposure to changes in foreign currency rates by making loans with a Tenneco
affiliate in the functional currency of the operating company concerned. The
Tenneco affiliate then integrates all of Tenneco's foreign currency denominated
loans and enters into foreign currency forward purchase and sale contracts to
mitigate its net exposure to changes in foreign exchange rates. For most
operating companies third party trade receivables and payables are maintained in
the functional currency. From time to time Packaging may enter into foreign
currency forward purchase and sale contracts with terms of less than one year to
mitigate its exposure to changes in exchange rates on foreign currency third
party trade receivables and payables. At December 31, 1998, Packaging had
purchase contracts of approximately $1 million, primarily in U.S. dollars, and
sell contracts of approximately $1 million, primarily in British pounds. At
December 31, 1997, Packaging had purchase contracts of approximately $2 million,
primarily in Belgian francs and German marks, and sell contracts of
approximately $2 million, primarily in British pounds and French francs. At June
30, 1999, Packaging's purchase and sell contracts were not significant.
F-19
<PAGE> 118
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The domestic and foreign components of income from continuing operations
before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
U.S. income before income taxes............................. $108 $139 $108
Foreign income before income taxes.......................... 42 43 24
---- ---- ----
Income before income taxes.................................. $150 $182 $132
==== ==== ====
</TABLE>
Following is a comparative analysis of the components of income tax expense
applicable to continuing operations:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Current --
U.S....................................................... $(11) $(57) $45
State and local........................................... (2) 9 15
Foreign................................................... 3 5 3
---- ---- ---
(10) (43) 63
---- ---- ---
Deferred --
U.S....................................................... 59 101 3
Foreign, state and other.................................. 18 17 1
---- ---- ---
77 118 4
---- ---- ---
Income tax expense.......................................... $ 67 $ 75 $67
==== ==== ===
</TABLE>
Current income tax expense for the years ended December 31, 1998, 1997, and
1996, include tax benefits of $45 million, $41 million, and $34 million,
respectively, related to the allocation of corporate interest expense to
Packaging from Tenneco. See Note 5.
Following is a reconciliation of income taxes computed at the statutory
U.S. federal income tax rate (35% for all years presented) to the income tax
expense reflected in the combined statements of income:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. federal income
tax rate.................................................. $ 53 $ 64 $46
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates and foreign losses
with no tax benefit.................................... 1 (8) (1)
State and local taxes on income, net of U.S. federal
income tax benefit..................................... 3 18 10
Amortization of nondeductible goodwill.................... 5 4 4
Other..................................................... 5 (3) 8
---- ---- ---
Income tax expense.......................................... $ 67 $ 75 $67
==== ==== ===
</TABLE>
F-20
<PAGE> 119
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The components of Packaging's net deferred tax liability were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Deferred tax assets --
Tax loss carryforwards:
U.S. .................................................. $ 95 $ 46
State and local........................................ 7 --
Foreign................................................ 13 4
Postretirement benefits other than pensions............... 13 23
Other..................................................... 26 24
Valuation allowance....................................... (8) (4)
---- ----
Net deferred tax asset............................... 146 93
---- ----
Deferred tax liabilities --
Tax over book depreciation................................ 95 61
Pensions.................................................. 213 206
Other..................................................... 123 55
---- ----
Total deferred tax liability......................... 431 322
---- ----
Net deferred tax liability................................ $285 $229
==== ====
</TABLE>
As reflected by the valuation allowance in the table above, Packaging had
potential tax benefits of $8 million and $4 million at December 31, 1998 and
1997, respectively, which were not recognized in the combined statements of
income when generated. These unrecognized tax benefits resulted primarily from
foreign tax loss carryforwards which are available to reduce future foreign tax
liabilities.
Of the $270 million of U.S. tax loss carryforwards which exist at December
31, 1998, $215 million expire in 2012 and $55 million expire in 2018. The $110
million of state tax loss carryforwards which exist at December 31, 1998, will
expire in varying amounts over the period from 2000 to 2012. Of the $43 million
of foreign tax loss carryforwards which exist at December 31, 1998, $18 million
do not expire and the remainder expires in varying amounts over the period from
1999 to 2005.
Packaging and Tenneco, together with certain of their respective
subsidiaries which are owned 80% or more, have entered into an agreement to file
a consolidated U.S. federal income tax return. This agreement provides, among
other things, that (1) each company in a taxable income position will be
currently charged with an amount equivalent to its U.S. federal income tax
computed on a separate return basis and (2) each company in a tax loss position
will be reimbursed currently. The income tax amounts reflected in the combined
financial statements of Packaging under the provisions of the tax sharing
arrangement are not materially different from the income taxes which would have
been provided had Packaging filed a separate tax return. Under the tax sharing
agreement, Tenneco pays all federal taxes directly and bills or refunds, as
applicable, its subsidiaries for the applicable portion of the total tax
payments. Cash taxes paid in the combined statements of cash flows include
payments to Tenneco for income taxes.
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,
Packaging is liable for its tax in states where returns are filed for separate
entities. In states where returns are filed in a combined basis, liability is
allocated in a manner similar to federal income tax.
F-21
<PAGE> 120
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. EMPLOYEE STOCK PLANS
In June 1992, Tenneco initiated an Employee Stock Purchase Plan ("ESPP").
The ESPP was terminated in 1996. Tenneco adopted a new employee stock purchase
plan effective April 1, 1997 with provisions similar to the 1992 ESPP. Under the
new ESPP, Tenneco sold 311,586 shares, 216,665 shares, and 185,179 shares to
Packaging employees in 1998, 1997, and 1996, respectively. The plan allows U.S.
and Canadian employees of Packaging to purchase Tenneco Inc. common stock
through payroll deductions at a 15% discount. Each year, an employee in the plan
may purchase shares with a discounted value not to exceed $21,250. The weighted
average fair value of the employee purchase right, which was estimated using the
Black-Scholes option pricing model and the assumptions described below except
that the average life of each purchase right was assumed to be 90 days, was
$6.31, $11.14, and $10.77 in 1998, 1997, and 1996, respectively. After the
Spin-off, Packaging employees will no longer participate in the Tenneco ESPP.
In December 1996, Tenneco adopted the 1996 Stock Ownership Plan which
permits the granting of a variety of awards, including common stock, restricted
stock, performance units, stock appreciation rights, and stock options, to
officers and employees of Tenneco. Tenneco can issue up to 17 million shares of
common stock under this plan, which will terminate December 31, 2001. Certain
key Packaging employees have been granted restricted stock and restricted units
under the 1996 Stock Ownership Plan. These awards generally require, among other
things, that the employee remain an employee of Tenneco during the restriction
period. Certain key Packaging employees have also been granted performance
shares which will vest based upon the attainment of specified performance goals
within four years from the date of grant. In connection with the Spin-off,
outstanding restricted stock, restricted units and performance shares will
generally become fully vested. After the Spin-off, Packaging employees will no
longer participate in Tenneco's 1996 Stock Ownership Plan.
The fair value of each stock option issued by Tenneco to Packaging
employees during 1998, 1997, and 1996 is estimated on the date of grant using
the Black-Scholes option pricing model using the following weighted average
assumptions for grants in 1998, 1997, and 1996, respectively: (a) risk-free
interest rate of 5.7%, 6.5%, and 6.0%; (b) expected lives of 10 years, 6 years,
and 5 years; (c) expected volatility of 25.6%, 24.1%, and 24.9%; and (d)
dividend yield of 3.2%, 2.8%, and 3.3%. The weighted average fair value of
options granted during the year is $10.83, $12.03, and $11.42 for 1998, 1997,
and 1996, respectively.
Packaging applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," to its stock-based compensation plans. Packaging
recognized after-tax stock-based compensation expense of $3 million, $4 million,
and $15 million in 1998, 1997, and 1996, respectively. Had compensation costs
for Packaging's stock-based compensation plans been determined in accordance
with FAS No. 123, "Accounting for Stock-Based Compensation," based on the fair
value at the grant dates for awards under those plans, Packaging's pro forma net
income for the years ended December 31, 1998, 1997, and 1996, would have been
lower by $14 million or $.08 per both basic and diluted common share, $13
million or $.08 per both basic and diluted common share, and $5 million or $.03
per both basic and diluted common share, respectively.
12. MINORITY INTEREST
At December 31, 1998 and 1997, Packaging reported minority interest in the
combined balance sheet of $14 million and $15 million, respectively. This
primarily relates to preferred stock of a subsidiary issued in connection with
the KNP acquisition.
13. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Packaging has pension plans that cover substantially all of its employees.
Benefits are based on years of service and, for most salaried employees, on
final average compensation. Packaging's funding policies
F-22
<PAGE> 121
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
are to contribute to the plans amounts necessary to satisfy the funding
requirement of federal laws and regulations. Plan assets consist principally of
listed equity and fixed income securities. After the Spin-off, Packaging will
become the sponsor of the Tenneco Retirement Plan (the "TRP"). Benefits accrued
under the TRP by employees of Tenneco's automotive business will be frozen as of
the last day of the calendar month in which the Spin-off occurs, and all related
pension obligations and assets will be retained by Packaging. In addition, all
TRP pension obligations and assets associated with participating employees from
former subsidiaries and affiliates of Tenneco will be retained by Packaging and
have been reflected in the historical combined financial statements. These
pension obligations and assets that Packaging will retain under all of these
arrangements are included in the table below.
Packaging has postretirement health care and life insurance plans that
cover all of its salaried and certain of its hourly domestic employees. For
salaried employees, the plans cover employees retiring from Packaging on or
after attaining age 55 who have had a least 10 years service with Packaging
after attaining age 45. For hourly employees, the postretirement benefit plans
generally cover employees who retire according to one of Packaging's hourly
employee retirement plans. All of these benefits may be subject to deductibles,
copayment provisions, and other limitations, and Packaging has reserved the
right to change these benefits. Packaging's postretirement benefit plans are not
funded.
F-23
<PAGE> 122
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the change in benefit obligation, the change in plan assets,
the development of net amount recognized, and the amounts recognized in the
combined statement of financial position for the pension plans and
postretirement benefit plans follows:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
--------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at September 30 of the previous year... $2,654 $2,361 $ 70 $ 64
Currency rate conversion.................................. 1 -- -- --
Service cost.............................................. 28 23 1 1
Interest cost............................................. 199 178 5 5
Plan amendments........................................... 44 8 -- --
Actuarial loss (gain)..................................... 293 254 1 5
Acquisitions.............................................. -- 13 -- --
Benefits paid............................................. (194) (183) (8) (6)
Participants' contributions............................... -- -- 1 1
------ ------ ---- ----
Benefit obligation at September 30........................ $3,025 $2,654 $ 70 $ 70
====== ====== ==== ====
Change in plan assets:
Fair value at September 30 of the previous year........... $3,516 $2,966 $ -- $ --
Currency rate conversion.................................. -- 4 -- --
Actual return on plan assets.............................. 102 714 -- --
Employer contributions.................................... 5 3 7 5
Participants' contributions............................... 1 -- 1 1
Acquisitions.............................................. -- 12 -- --
Benefits paid............................................. (194) (183) (8) (6)
------ ------ ---- ----
Fair value at September 30................................ $3,430 $3,516 $ -- $ --
====== ====== ==== ====
Development of net amount recognized:
Funded status at September 30............................. $ 405 $ 862 $(70) $(70)
Contributions during the fourth quarter................... 1 1 2 1
Unrecognized cost:
Actuarial loss (gain).................................. 200 (273) 11 11
Prior service cost..................................... 71 57 (4) (5)
Transition liability (asset)........................... (43) (62) -- --
------ ------ ---- ----
Net amount recognized at December 31...................... $ 634 $ 585 $(61) $(63)
====== ====== ==== ====
Amounts recognized in the combined balance sheet:
Prepaid benefit cost...................................... $ 664 $ 594 $ -- $ --
Accrued benefit cost...................................... (56) (9) (61) (63)
Intangible asset.......................................... 22 -- -- --
Accumulated other comprehensive income.................... 4 -- -- --
------ ------ ---- ----
Net amount recognized..................................... $ 634 $ 585 $(61) $(63)
====== ====== ==== ====
</TABLE>
- -------------------------
Note: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid (accrued) benefit cost has been recorded based
upon certain actuarial estimates as described below. Those estimates are
subject to revision in future periods given new facts or circumstances.
F-24
<PAGE> 123
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension costs (income) from continuing operations for the
years 1998, 1997, and 1996, consist of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 28 $ 23 $ 20
Interest on prior year's projected benefit obligation....... 199 178 126
Expected return on plan assets.............................. (285) (265) (178)
Net amortization:
Actuarial loss (gain)..................................... 1 -- 3
Prior service cost........................................ 11 11 11
Transition liability (asset).............................. (19) (19) (13)
----- ----- -----
Net pension costs (income).................................. $ (65) $ (72) $ (31)
===== ===== =====
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for all pension plans with accumulated benefit obligations
in excess of plan assets were $89 million, $83 million, and $27 million,
respectively, as of September 30, 1998, and $12 million, $11 million, and $1
million, respectively, as of September 30, 1997.
The weighted average discount rates (which are based on long-term market
rates) used in determining the 1998, 1997, and 1996 actuarial present value of
the benefit obligations were 7.0%, 7.75%, and 7.75%, respectively. The rate of
increase in future compensation was 4.8%, 4.9%, and 4.8%, for 1998, 1997, and
1996, respectively. The weighted average expected long-term rate of return on
plan assets for 1998, 1997, and 1996 was 10.0% for each year.
Net periodic postretirement benefit cost from continuing operations for the
years 1998, 1997, and 1996 consist of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 2 $ 1 $1
Interest on accumulated postretirement benefit obligation... 5 5 5
Net amortization:
Prior service cost........................................ (2) (2) (2)
Actuarial loss (gain)..................................... 1 1 --
--- --- --
Net periodic postretirement benefit cost.................... $ 6 $ 5 $4
=== === ==
</TABLE>
The initial weighted average assumed health care cost trend rate used in
determining the 1998, 1997, and 1996 accumulated postretirement benefit
obligation was 5%, 5%, and 6%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage point
in each year would increase the 1998, 1997, and 1996 accumulated postretirement
benefit obligations by approximately $2 million for each year. There would be no
change in the aggregate of the service cost and interest cost components of the
net periodic postretirement benefit cost for any of these years.
Decreasing the assumed health care cost trend rate by one percentage point
in each year would decrease the 1998 accumulated postretirement benefit
obligation by approximately $2 million and would not change the aggregate of
service cost and interest cost components of the net periodic postretirement
benefit cost.
F-25
<PAGE> 124
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The discount rates (which are based on long-term market rates) used in
determining the 1998, 1997, and 1996 accumulated postretirement benefit
obligations were 7.00%, 7.75%, and 7.75%, respectively.
14. SEGMENT AND GEOGRAPHIC AREA INFORMATION
Packaging is a global manufacturer with a single operating segment:
Specialty Packaging -- Manufacture and sale of specialty packaging and
consumer products for foodservice, consumer, protective, flexible and
institutional/industrial markets.
The accounting policies of the segment are the same as those described in
Note 3, "Summary of Accounting Policies." Packaging evaluates operating
performance based primarily on income before interest expense, income taxes, and
minority interest. Individual operating segments have not been aggregated within
this reportable segment.
Products are transferred between geographic areas on a basis intended to
reflect as nearly as possible the "market value" of the products.
The following table sets forth information relating to Packaging's external
customer revenues for each product or each group of similar products:
<TABLE>
<CAPTION>
NET SALES AND
OPERATING REVENUES
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
---- ---- ----
(MILLIONS)
<S> <C> <C> <C>
SPECIALTY
Disposable plastic, fiber, and aluminum packaging
products............................................... $2,126 $2,105 $1,862
Plastic and fiber protective and flexible packaging
products............................................... 607 399 78
Other..................................................... 52 49 47
------ ------ ------
Total Specialty Packaging............................ 2,785 2,553 1,987
------ ------ ------
OTHER....................................................... 6 10 --
------ ------ ------
COMBINED.................................................... $2,791 $2,563 $1,987
====== ====== ======
</TABLE>
F-26
<PAGE> 125
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize certain segment and geographic information
of Packaging:
<TABLE>
<CAPTION>
SEGMENT RECLASS
------------------ &
SPECIALTY OTHER ELIMS COMBINED
--------- ------ ------- --------
(MILLIONS)
<S> <C> <C> <C> <C>
AT JUNE 30, 1999, AND FOR THE SIX MONTHS THEN ENDED
Revenues from external customers........................ $1,404 $ -- $ -- $1,404
Depreciation and amortization........................... 84 10 -- 94
Income before interest, income taxes, and minority
interest.............................................. 190 (46)(b) -- 144
Extraordinary loss...................................... -- (7) -- (7)
Cumulative effect of change in accounting principle..... (17) (15) -- (32)
Total assets............................................ 3,296 1,309(a) (119) 4,486
Net assets of discontinued operations................... -- 133 -- 133
AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED
Revenues from external customers........................ $2,785 $ 6 $ -- $2,791
Depreciation and amortization........................... 152 23 -- 175
Income before interest, income taxes, and minority
interest.............................................. 328 (45)(c) -- 283
Total assets............................................ 3,260 1,580(a) (42) 4,798
Net assets of discontinued operations................... -- 366 -- 366
Investment in affiliated companies...................... 17 -- -- 17
Capital expenditures.................................... 190 4 -- 194
Noncash items other than depreciation and
amortization.......................................... 22 (84) -- (62)
AT JUNE 30, 1998, AND FOR THE SIX MONTHS THEN ENDED
Revenues from external customers........................ $1,361 $ 10 $ -- $1,371
Depreciation and amortization........................... 77 11 -- 88
Income before interest, income taxes, and minority
interest.............................................. 175 (2) -- 173
Total assets............................................ 3,373 1,468(a) (53) 4,788
Net assets of discontinued operations................... -- 382 -- 382
AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED
Revenues from external customers........................ $2,553 $ 10 $ -- $2,563
Depreciation and amortization........................... 143 20 -- 163
Income before interest, income taxes, and minority
interest.............................................. 308 (2) -- 306
Cumulative effect of change in accounting principle..... (11) (27) -- (38)
Total assets............................................ 3,244 1,412(a) (38) 4,618
Net assets of discontinued operations................... -- 423 -- 423
Investment in affiliated companies...................... 9 -- -- 9
Capital expenditures.................................... 227 2 -- 229
Noncash items other than depreciation and
amortization.......................................... 10 (86) -- (76)
AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED
Revenues from external customers........................ $1,987 $ -- $ -- $1,987
Depreciation and amortization........................... 123 8 -- 131
Income before interest, income taxes, and minority
interest.............................................. 249 (15) -- 234
Extraordinary loss...................................... -- (2) -- (2)
Total assets............................................ 2,655 1,421(a) (48) 4,028
Net assets of discontinued operations................... -- 459 -- 459
Investment in affiliated companies...................... 9 1 -- 10
Capital expenditures.................................... 172 44 -- 216
Noncash items other than depreciation and
amortization.......................................... (2) (44) -- (46)
</TABLE>
F-27
<PAGE> 126
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- -------------------------
Notes: (a) The Other segment's total assets includes pension assets retained by
Packaging related to certain employees of Tenneco's and Packaging's
discontinued operations, Packaging's administrative service
operations assets and net assets of the discontinued paperboard
packaging segment.
(b) The Other segment's income before interest expense, income taxes and
minority interest for the six months ended June 30, 1999 includes a
$29 million charge relating to the severance of corporate employees
and the closing of the Greenwich, Connecticut headquarters facility
(see Note 4).
(c) The Other segment's income before interest expense, income taxes and
minority interest for the year ended December 31, 1998 includes
restructuring charges of $10 million relating to severance of
corporate employees (see Note 4) and approximately $50 million of
operating costs relating to Packaging's information technology
service center that began operation in 1998.
<TABLE>
<CAPTION>
GEOGRAPHIC AREA
--------------------
UNITED RECLASS &
STATES FOREIGN(A) ELIMS COMBINED
------ ---------- --------- --------
(MILLIONS)
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED
Revenues 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
Revenues 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
AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED
Revenues from external customers(b).................... $1,759 $228 $ -- $1,987
Long-lived assets(c)................................... 1,957 94 -- 2,051
Total assets........................................... 3,755 281 (8) 4,028
</TABLE>
- -------------------------
Notes: (a) Revenues from external customers and long-lived assets for individual
foreign countries are not material.
(b) Revenues are attributed to countries based on location of the seller.
(c) Long-lived assets include all long-term assets except net assets from
discontinued operations, goodwill, intangibles, and deferred tax
assets.
15. COMMITMENTS AND CONTINGENCIES
Capital Commitments
Packaging estimates that expenditures aggregating approximately $110
million will be required after December 31, 1998, to complete facilities and
projects authorized at such date, and substantial commitments have been made in
connection therewith.
F-28
<PAGE> 127
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Lease Commitments
Packaging 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 $44 million, $31
million, $22 million, $15 million, and $56 million for the years 1999, 2000,
2001, 2002, and 2003, respectively, and $53 million for subsequent years.
Commitments under capital leases were not significant to the accompanying
combined financial statements. Total rental expense for continuing operations
for the years 1998, 1997, and 1996, was $35 million, $37 million, and $24
million, respectively, including minimum rentals under non-cancelable operating
leases of $45 million, $42 million, and $18 million for the corresponding
periods.
Litigation
In May 1999, Tenneco Inc., Tenneco Packaging Inc. 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. Tenneco Packaging Inc. 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, respectively, 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. Packaging believes that the
allegations have no merit, is vigorously defending the claims, and believes the
outcome of this litigation will not have a material adverse effect on
Packaging's financial position or results of operations. Under and in accordance
with the distribution agreement that will be entered into in connection with the
spin-off, as between Tenneco and Packaging, Packaging will be responsible for
defending the claims and for any liability resulting from these actions.
Packaging and its combined subsidiaries are parties to various other legal
proceedings arising from their operations. Packaging believes that the outcome
of these proceedings, individually and in the aggregate, will have no material
effect on the financial position or results of operations of Packaging and its
combined subsidiaries.
Environmental Matters
Packaging and its combined subsidiaries are subject to a variety of
environmental and pollution control laws and regulations in all jurisdictions in
which they operate. Packaging has provided reserves for compliance with these
laws and regulations where it is probable that a liability exists and where
Packaging can make a reasonable estimate of the liability. The estimated
liabilities recorded are subject to change as more information becomes available
regarding the magnitude of possible clean-up costs and the timing, varying
costs, and effectiveness of alternative clean-up technologies. However,
Packaging believes that any additional costs which arise as more information
becomes available will not have a material effect on the combined financial
condition or results of operations of Packaging.
F-29
<PAGE> 128
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN MILLIONS EXCEPT PER SHARE)
<TABLE>
<CAPTION>
INCOME (LOSS)
INCOME BEFORE BEFORE
INTEREST CUMULATIVE
NET SALES EXPENSE, INCOME (LOSS) INCOME (LOSS) INCOME (LOSS) EFFECT OF
AND INCOME TAXES, FROM FROM BEFORE CHANGE IN
OPERATING AND MINORITY CONTINUING DISCONTINUED EXTRAORDINARY EXTRAORDINARY ACCOUNTING
QUARTER REVENUES INTEREST OPERATIONS OPERATIONS LOSS LOSS PRINCIPLE
- ------- --------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
1st................. $ 666 $ 45 $ 6 $(172) $(166) $ (7) $(173)
2nd................. 738 99 46 9 55 -- 55
------ ---- ---- ----- ----- ---- -----
$1,404 $144 $ 52 $(163) $(111) $ (7) $(118)
====== ==== ==== ===== ===== ==== =====
1998
1st................. $ 633 $ 69 $ 18 $ 14 $ 32 $ -- $ 32
2nd................. 738 104 51 23 74 -- 74
3rd................. 696 74 15 25 40 -- 40
4th................. 724 36 (2) (5) (7) -- (7)
------ ---- ---- ----- ----- ---- -----
$2,791 $283 $ 82 $ 57 $ 139 $ -- $ 139
====== ==== ==== ===== ===== ==== =====
1997
1st................. $ 510 $ 48 $ 9 $ 13 $ 22 $ -- $ 22
2nd................. 675 87 31 (11) 20 -- 20
3rd................. 682 89 32 11 43 -- 43
4th................. 696 82 34 8 42 -- 42
------ ---- ---- ----- ----- ---- -----
$2,563 $306 $106 $ 21 $ 127 $ -- $ 127
====== ==== ==== ===== ===== ==== =====
<CAPTION>
CUMULATIVE
EFFECT OF
CHANGE IN NET
ACCOUNTING INCOME
QUARTER PRINCIPLE (LOSS)
- ------- ---------- ------
<S> <C> <C>
1999
1st................. $(32) $(205)
2nd................. -- 55
---- -----
$(32) $(150)
==== =====
1998
1st................. $ -- $ 32
2nd................. -- 74
3rd................. -- 40
4th................. -- (7)
---- -----
$ -- $ 139
==== =====
1997
1st................. $ -- $ 22
2nd................. -- 20
3rd................. -- 43
4th................. (38) 4
---- -----
$(38) $ 89
==== =====
</TABLE>
<TABLE>
<CAPTION>
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
---------------------------------------------------------------------------------------------------------
BEFORE CUMULATIVE
CUMULATIVE EFFECT OF
FROM FROM BEFORE EFFECT OF CHANGE CHANGE IN
CONTINUING DISCONTINUED EXTRAORDINARY EXTRAORDINARY IN ACCOUNTING ACCOUNTING NET INCOME
QUARTER OPERATIONS OPERATIONS LOSS LOSS PRINCIPLE PRINCIPLE (LOSS)
- ------- ---------- ------------ ---------------- ------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
1st................ $ .03 $(1.03) $(1.00) $(.04) $(1.04) $(.19) $(1.23)
2nd................ .28 .05 .33 -- .33 -- .33
----- ------ ------ ----- ------ ----- ------
$ .31 $ (.98) $ (.67) $(.04) $ (.71) $(.19) $ (.90)
===== ====== ====== ===== ====== ===== ======
1998
1st................ $ .11 $ .08 $ .19 $ -- $ .19 $ -- $ .19
2nd................ .30 .14 .44 -- .44 -- .44
3rd................ .09 .15 .24 -- .24 -- .24
4th................ (.01) (.04) (.05) -- (.05) -- (.05)
----- ------ ------ ----- ------ ----- ------
$ .49 $ .34 $ .83 $ -- $ .83 $ -- $ .83
===== ====== ====== ===== ====== ===== ======
1997
1st................ $ .06 $ .07 $ .13 $ -- $ .13 $ -- $ .13
2nd................ .19 (.07) .12 -- .12 -- .12
3rd................ .18 .07 .25 -- .25 -- .25
4th................ .20 .05 .25 -- .25 (.23) .02
----- ------ ------ ----- ------ ----- ------
$ .63 $ .12 $ .75 $ -- $ .75 $(.23) $ .52
===== ====== ====== ===== ====== ===== ======
</TABLE>
F-30
<PAGE> 129
THE BUSINESSES OF TENNECO PACKAGING
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
---------------------------------------------------------------------------------------------------------
BEFORE CUMULATIVE
CUMULATIVE EFFECT OF
FROM FROM BEFORE EFFECT OF CHANGE CHANGE IN
CONTINUING DISCONTINUED EXTRAORDINARY EXTRAORDINARY IN ACCOUNTING ACCOUNTING NET INCOME
QUARTER OPERATIONS OPERATIONS LOSS LOSS PRINCIPLE PRINCIPLE (LOSS)
------- ---------- ------------ ---------------- ------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
1st................ $ .03 $(1.03) $(1.00) $(.04) $(1.04) $(.19) $(1.23)
2nd................ .28 .05 .33 -- .33 -- .33
----- ------ ------ ----- ------ ----- ------
$ .31 $ (.98) $ (.67) $(.04) $ (.71) $(.19) $ (.90)
===== ====== ====== ===== ====== ===== ======
1998
1st................ $ .11 $ .08 $ .19 $ -- $ .19 $ -- $ .19
2nd................ .30 .14 .44 -- .44 -- .44
3rd................ .09 .15 .24 -- .24 -- .24
4th................ (.01) (.04) (.05) -- (.05) -- (.05)
----- ------ ------ ----- ------ ----- ------
$ .49 $ .34 $ .83 $ -- $ .83 $ -- $ .83
===== ====== ====== ===== ====== ===== ======
1997
1st................ $ .06 $ .07 $ .13 $ -- $ .13 $ -- $ .13
2nd................ .19 (.07) .12 -- .12 -- .12
3rd................ .18 .07 .25 -- .25 -- .25
4th................ .20 .05 .25 -- .25 (.23) .02
----- ------ ------ ----- ------ ----- ------
$ .63 $ .12 $ .75 $ -- $ .75 $(.23) $ .52
===== ====== ====== ===== ====== ===== ======
</TABLE>
- -------------------------
Notes: Reference is made to Notes 3, 4, 6, and 7 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for items
affecting quarterly results. The sum of the quarters may not equal the
total of the respective year's earnings per share on either a basic or
diluted basis due to changes in the weighted average shares outstanding
throughout the year.
(The preceding notes are an integral part of the foregoing combined financial
statements.)
F-31
<PAGE> 130
SCHEDULE II
THE BUSINESSES OF TENNECO PACKAGING
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS)
<TABLE>
<CAPTION>
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
----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts Deducted from
Assets to Which it Applies:
Year Ended December 31, 1998............ $11 $ 5 $-- $ 5 $11
=== === === === ===
Year Ended December 31, 1997............ $18 $ 2 $ 2 $11 $11
=== === === === ===
Year Ended December 31, 1996............ $ 9 $11 $-- $ 2 $18
=== === === === ===
</TABLE>
S-1
<PAGE> 1
EXHIBIT 3.4
FORM OF
AMENDED AND RESTATED BYLAWS
OF
TENNECO PACKAGING INC.
ARTICLE I
PLACE OF STOCKHOLDER MEETINGS
Section 1. All meetings of the stockholders of the corporation shall be
held at such place or places, within or without the State of Delaware, as may
from time to time be fixed by the Board of Directors of the corporation (the
"Board"), or as shall be specified or fixed in the respective notices or waivers
of notice thereof.
ANNUAL MEETING
Section 2. The Annual Meeting of Stockholders shall be held on such
date and at such time as may be fixed by the Board and stated in the notice
thereof, for the purpose of electing directors and for the transaction of only
such other business as is properly brought before the meeting in accordance with
these Bylaws.
SPECIAL MEETING
Section 3. Subject to the rights of the holders of any series of
preferred stock, par value $.01 per share, of the corporation (the "Preferred
Stock") to elect additional directors under specified circumstances, special
meetings of the stockholders shall be called by the Board. Special meetings
shall be held at such date and at such time as the Board may designate.
NOTICE OF MEETING
Section 4. Written notice of each meeting of stockholders, stating the
place, date and hour of the meeting, and the purpose or purposes thereof, shall
be given not less than ten nor more than sixty days before the date of such
meeting to each stockholder entitled to vote thereat.
QUORUM
Section 5. Unless otherwise provided by statute, the holders of shares
of stock entitled to cast a majority of votes at a meeting, present either in
person or by proxy, shall constitute a quorum at such meeting. The Secretary of
the corporation or in his absence an Assistant Secretary or an appointee of the
presiding officer of the meeting, shall act as the Secretary of the meeting.
VOTING
Section 6. Except as otherwise provided by law or the Restated
Certificate of Incorporation, each stockholder entitled to vote at any meeting
shall be entitled to one vote, in person or by proxy, for each share held of
record on the record date fixed as provided in Section 4 of Article V of these
<PAGE> 2
Bylaws for determining the stockholders entitled to vote at such meeting. At all
meetings of stockholders for the election of directors a plurality of the votes
cast shall be sufficient to elect. All other elections and questions shall,
unless otherwise provided by the Restated Certificate of Incorporation, these
Bylaws, the rules or regulations of any stock exchange applicable to the
corporation, or applicable law or pursuant to any regulation applicable to the
corporation or its securities, be decided by the affirmative vote of the holders
of a majority in voting power of the shares of stock of the corporation which
are present in person or by proxy and entitled to vote thereon.
Elections of directors need not be by written ballot; provided,
however, that by resolution duly adopted, a vote by written ballot may be
required.
PROXIES
Section 7. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. A proxy shall be
irrevocable if it states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power. A
stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an instrument revoking the proxy or by
delivering a proxy in accordance with applicable law bearing a later date to the
Secretary of the corporation. In order to be exercised at a meeting of
stockholders, proxies shall be delivered to the Secretary of the corporation or
his representative at or before the time of such meeting.
INSPECTORS
Section 8. At each meeting of the stockholders the polls shall be
opened and closed, the proxies and ballots shall be received and be taken in
charge and all questions touching the qualification of voters and the validity
of proxies and the acceptance or rejection of votes shall be decided by three
Inspectors, two of whom shall have power to make a decision. Such Inspectors
shall be appointed by the Board before the meeting, or in default thereof by the
presiding officer at the meeting, and shall be sworn to the faithful performance
of their duties. If any of the Inspectors previously appointed shall fail to
attend or refuse or be unable to serve, substitutes shall be appointed by the
presiding officer.
CONDUCT OF MEETINGS
Section 9. The date and time of the opening and the closing of the
polls for each matter upon which the stockholders will vote at a meeting shall
be announced at the meeting by the chairman of the meeting. The Board may adopt
by resolution such rules and regulations for the conduct of the meeting of
stockholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the Board, the chairman of any
meeting of stockholders shall have the right and authority to prescribe such
rules, regulations and procedures and to do all such acts as, in the judgment of
such chairman, are appropriate for the proper conduct of the meeting. Such
rules, regulations or procedures, whether adopted by the Board or prescribed by
the chairman
<PAGE> 3
of the meeting, may include, without limitation, the following: (i)
the establishment of an agenda or order of business for the meeting; (ii) rules
and procedures for maintaining order at the meeting and the safety of those
present; (iii) limitations on attendance at or participation in the meeting to
stockholders of record of the corporation, their duly authorized and constituted
proxies or such other persons as the chairman of the meeting shall determine;
(iv) restrictions on entry to the meeting after the time fixed for the
commencement thereof; and (v) limitations on the time allotted to questions or
comments by participants. Unless and to the extent determined by the Board or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with the rules of parliamentary procedure.
ADVANCE NOTICE
SECTION 10. (A)(1) Nominations of persons for election to the Board of
Directors of the corporation and the proposal of business to be considered by
the stockholders may be made at an annual meeting of stockholders only (a)
pursuant to the corporation's notice of meeting (or any supplement thereto), (b)
by or at the direction of the Board of Directors or (c) by any stockholder of
the corporation who was a stockholder of record of the corporation at the time
the notice provided for in this Section 10 is delivered to the Secretary of the
corporation, who is entitled to vote at the meeting and who complies with the
notice procedures set forth in this Section 10.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this Section 10, the stockholder must have given timely notice thereof in
writing to the Secretary of the corporation and any such proposed business other
than the nominations of persons for election to the Board of Directors must
constitute a proper matter for stockholders action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the corporation not later than the close of business on the
ninetieth day nor earlier than the close of business on the one hundred
twentieth day prior to the first anniversary of the preceding year's annual
meeting (provided, however, that in the event that the date of the annual
meeting is more than thirty days before or more than seventy days after such
anniversary date, notice by the stockholder must be so delivered not earlier
than the close of business on the one hundred twentieth day prior to such annual
meeting and not later than the close of business on the later of the ninetieth
day prior to such annual meeting or the tenth day following the day on which
public announcement of the date of such meeting is first made by the
corporation). For purposes of the first annual meeting of stockholders of the
corporation held after 1999, the anniversary date shall be deemed to be May 11,
1999. In no event shall the public announcement of an adjournment or
postponement of an annual meeting commence a new time period (or extend any time
period) for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth: (a) as to each person whom the stockholder
proposes to nominate for election as a director all information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and Rule 14a-11 thereunder (and such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the text of the proposal or business (including the
text of any resolutions proposed for consideration and in the event that such
business includes a proposal to amend the By-laws of the corporation, the
language of the proposed amendment), the reasons for conducting such business at
<PAGE> 4
the meeting and any material interest in such business of such stockholder and
the beneficial owner, if any, on whose behalf the proposal is made; and (c) as
to the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the corporation's books, and of such beneficial
owner, (ii) the class and number of shares of capital stock of the corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner, (iii) a representation that the stockholder is a holder of
record of stock of the corporation entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting to propose such business or
nomination, and (iv) a representation whether the stockholder or the beneficial
owner, if any, intends or is part of a group which intends (a) to deliver a
proxy statement and/or form of proxy to holders of at least the percentage of
the corporation's outstanding capital stock required to approve or adopt the
proposal or elect the nominee and/or (b) otherwise to solicit proxies from
stockholders in support of such proposal or nomination. The corporation may
require any proposed nominee to furnish such other information as it may
reasonably require to determine the eligibility of such proposed nominee to
serve as a director of the corporation.
(3) Notwithstanding anything in the second sentence of paragraph (A)
(2) of this Section 10 to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the corporation at an
annual meeting is increased and there is no public announcement by the
corporation naming the nominees for the additional directorships at least one
hundred days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this Section 10 shall also be
considered timely, but only with respect to nominees for the additional
directorships, if it shall be delivered to the Secretary at the principal
executive offices of the corporation not later than the close of business on the
tenth day following the day on which such public announcement is first made by
the corporation.
(B) Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
corporation's notice of meeting. Nominations of persons for election to the
Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the corporation's notice of meeting (1)
by or at the direction of the Board of Directors or (2) provided that the Board
of Directors has determined that directors shall be elected at such meeting, by
any stockholder of the corporation who is a stockholder of record at the time
the notice provided for in this Section 10 is delivered to the Secretary of the
corporation, who is entitled to vote at the meeting and upon such election and
who complies with the notice procedures set forth in this Section 10. In the
event the corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
entitled to vote in such election of directors may nominate a person or persons
(as the case may be) for election to such position(s) as specified in the
corporation's notice of meeting, if the stockholder's notice required by
paragraph (A)(2) of this Section 10 shall be delivered to the Secretary at the
principal executive offices of the corporation not earlier than the close of
business on the one hundred twentieth day prior to such special meeting and not
later than the close of business on the later of the ninetieth day prior to such
special meeting or the tenth day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting. In no event shall the
public announcement of an adjournment or postponement of a special meeting
commence a new time period (or extend any time period) for the giving of a
stockholder's notice as described above.
<PAGE> 5
(C) (1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 10 shall be eligible to be elected at an
annual or special meeting of stockholders of the corporation to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 10. Except as otherwise provided by law, the chairman
of the meeting shall have the power and duty (a) to determine whether a
nomination or any business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set forth in
this Section 10 (including whether the stockholder or beneficial owner, if any,
on whose behalf the nomination or proposal is made solicited (or is part of a
group which solicited) or did not so solicit, as the case may be, proxies in
support of such stockholder's nominee or proposal in compliance with such
stockholder's representation as required by clause (A)(2)(c)(iv) of this Section
10) and (b) if any proposed nomination or business was not made or proposed in
compliance with this Section 10, to declare that such nomination shall be
disregarded or that such proposed business shall not be transacted.
(2) For purposes of this Section 10, "public announcement"
shall include disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a document
publicly filed by the corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section
10, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 10. Nothing in this Section 10 shall be
deemed to affect any rights (a) of stockholders to request inclusion of
proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act or (b) of the holders of any series of Preferred Stock to elect
directors pursuant to any applicable provisions of the certificate of
incorporation.
ARTICLE II
BOARD OF DIRECTORS
NUMBER; METHOD OF ELECTION;
TERMS OF OFFICE AND QUALIFICATION
Section 1. The business and affairs of the corporation shall be managed
under the direction of the Board. The number of directors which shall constitute
the entire Board shall not be less than five nor more than sixteen and shall be
determined by resolution adopted by a majority of the entire Board. Any director
may resign his office at any time by delivering his resignation in writing to
the corporation, and the acceptance of such resignation unless required by the
terms thereof shall not be necessary to make such resignation effective. No
person who shall have attained the age of 73 shall be eligible for election or
reelection, as the case may be, as a director of the corporation.
<PAGE> 6
MEETINGS
Section 2. The Board may hold its meetings and have an office in such
place or places within or without the State of Delaware as the Board by
resolution from time to time may determine. The Board may in its discretion
provide for regular or stated meetings of the Board. Notice of regular or stated
meetings need not be given. Special meetings of the Board shall be held whenever
called by direction of the Chief Executive Officer, the President or any two of
the directors. Notice of any special meeting shall be given by the Secretary to
each director either by mail or by telegram, facsimile, telephone or other
electronic communication or transmission. If mailed, such notice shall be deemed
adequately delivered when deposited in the United States mails so addressed,
with postage thereon prepaid, at least three days before such meeting. If by
telegram, such notice shall be deemed adequately delivered when the telegram is
delivered to the telegraph corporation at least twenty-four hours before such
meeting. If by facsimile, telephone or other electronic communication or
transmission, such notice shall be transmitted at least twenty-four hours before
such meeting. Unless otherwise indicated in the notice thereof, any and all
business may be transacted at a special meeting. Except as otherwise provided by
applicable law, at any meeting at which every director shall be present, even
though without notice, any business may be transacted. No notice of any
adjourned meeting need be given. The Board shall meet immediately after
election, following the Annual Meeting of Stockholders, for the purpose of
organizing, for the election of corporate officers as hereinafter specified, and
for the transaction of any other business which may come before it. No notice of
such meeting shall be necessary.
QUORUM
Section 3. Except as otherwise expressly required by these Bylaws or by
statute, a majority of the directors then in office (but not less than one-third
of the total number of directors constituting the entire Board) shall be present
at any meeting of the Board in order to constitute a quorum for the transaction
of business at such meeting, and the vote of a majority of the directors present
at any such meeting at which quorum is present shall be necessary for the
passage of any resolution or for an act to be the act of the Board. In the
absence of a quorum, a majority of the directors present may adjourn such
meeting from time to time until a quorum shall be present. Notice of any
adjourned meeting need not be given.
COMPENSATION OF BOARD OF DIRECTORS
Section 4. Each director (other than a director who is a salaried
officer of the corporation or of any subsidiary of the corporation), in
consideration of his serving as such, shall be entitled to receive from the
corporation such amount per annum and such fees for attendance at meetings of
the Board or of any committee of the Board (a "Committee"), or both, as the
Board shall from time to time determine. The Board may likewise provide that the
corporation shall reimburse each director or member of a Committee for any
expenses incurred by him on account of his attendance at any such meeting.
Nothing contained in this Section shall be construed to preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
<PAGE> 7
ARTICLE III
COMMITTEES OF THE BOARD
COMMITTEES
Section 1. The Board shall elect from the directors an Executive
Committee, an Audit Committee and any other Committee which the Board may by
resolution prescribe. Any such other Committee shall be comprised of such
persons and shall possess such authority as shall be set forth in such
resolution.
PROCEDURE
Section 2. (1) Each Committee shall fix its own rules of procedure and
shall meet where and as provided by such rules. Unless otherwise stated in these
Bylaws, a majority of a Committee shall constitute a quorum.
(2) In the absence or disqualification of a member of any Committee,
the members of such Committee present at any meeting, and not disqualified from
voting, whether or not they constitute a quorum, may unanimously appoint another
member of the Board to act at the meeting in the place of any such absent or
disqualified member. Fees in connection with such appointments shall be
established by the Board.
REPORTS TO THE BOARD
Section 3. All completed actions by the Executive and Audit Committees
shall be reported to the Board at the next succeeding Board meeting and shall be
subject to revision or alteration by the Board, provided, that no acts or rights
of third parties shall be affected by any such revision or alteration.
EXECUTIVE COMMITTEE
Section 4. The Board shall elect an Executive Committee comprised of
the Chief Executive Officer and not less than four additional members of the
Board. During the interval between the meetings of the Board, the Executive
Committee shall possess and may exercise all the powers of the Board in the
management and direction of all the business and affairs of the corporation
including, without limitation, the power and authority to declare dividends and
to authorize the issuance of stock, in such manner as the Executive Committee
shall deem best for the interests of the corporation in all cases in which
specific directions shall not have been given by the Board.
<PAGE> 8
AUDIT COMMITTEE
Section 5. The Board shall elect from among its members an Audit
Committee consisting of at least three members. The Board shall appoint a
chairman of said Committee who shall be one of its members. The Audit Committee
shall have such authority and duties as the Board by resolution shall prescribe.
In no event shall a director who is also an officer or employee of the
corporation or any of its subsidiary companies serve as a member of such
Committee. The Chief Executive Officer shall have the right to attend (but not
vote at) each meeting of such Committee.
ARTICLE IV
OFFICERS
GENERAL PROVISIONS
Section 1. The corporate officers of the corporation shall consist of
the following: a Chairman and/or a President, one of whom shall be designated
Chief Executive Officer and each of whom shall be chosen from the Board; one or
more Vice Chairman, Executive Vice Presidents, Senior Vice Presidents, Vice
Presidents and Assistant Vice Presidents; a General Counsel, a Secretary, one or
more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers, a
Controller, and such other officers as the Board may from time to time
designate. Insofar as permitted by statute, the same person may hold two or more
offices. All officers chosen by the Board shall each have such powers and duties
as generally pertain to their respective offices, subject to the specific
provisions of this Article IV.
The Chairman and/or President, each Vice Chairman, Executive Vice
President, Senior Vice President and Vice President, the General Counsel, the
Secretary and any Assistant Secretary, the Treasurer and any Assistant
Treasurer, and the Controller shall be elected by the Board. Each such officer
shall hold office until his successor is elected or appointed and qualified or
until his earlier death, resignation or removal. Any officer may be removed,
with or without cause, at any time by the Board. A vacancy in any office may be
filled for the unexpired portion of the term in the same manner as provided in
these Bylaws for election or appointment to such office.
<PAGE> 9
POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER
Section 2. The Chief Executive Officer shall have general charge and
management of the affairs, property and business of the corporation, subject to
the Board, the Executive Committee and the provisions of these Bylaws. The Chief
Executive Officer or in his absence such other individual as the Board may
select, shall preside at all meetings of the stockholders. He shall also preside
at meetings of the Board and the Executive Committee, and in his absence the
Board or the Executive Committee, as the case may be, shall appoint one of their
number to preside. The Chief Executive Officer shall perform all duties assigned
to him in these Bylaws and such other duties as may from time to time be
assigned to him by the Board. He shall have the power to appoint and remove,
with or without cause, such officers, other than those elected by the Board as
provided for in these Bylaws, as in his judgment may be necessary or proper for
the transaction of the business of the corporation, and shall determine their
duties, all subject to ratification by the Board.
POWERS AND DUTIES OF OTHER OFFICERS
Section 3. The Chairman shall perform such duties as may from time to
time be assigned to him by the Board, the Executive Committee or the Chief
Executive Officer.
Section 4. Each Vice Chairman shall perform such duties as may from
time to time be assigned to him by the Board, the Executive Committee or the
Chief Executive Officer.
Section 5. The President shall perform such duties as may from time to
time be assigned to him by the Board, the Executive Committee or the Chief
Executive Officer.
Section 6. Each Executive Vice President shall perform such duties as
may from time to time be assigned to him by the Board, the Executive Committee
or the Chief Executive Officer.
Section 7. Each Senior Vice President shall perform such duties as may
from time to time be assigned to him by the Board, the Executive Committee or
the Chief Executive Officer.
Section 8. Each Vice President and Assistant Vice President shall
perform such duties as may from time to time be assigned to him by the Board,
the Executive Committee, the Chief Executive Officer or an Executive Vice
President.
Section 9. The General Counsel shall have general supervision and
control of all of the corporation's legal business. He shall perform such other
duties as may be assigned to him by the Board, the Executive Committee or the
Chief Executive Officer.
Section 10. The Secretary or an Assistant Secretary shall record the
proceedings of all meetings of the Board, the Executive Committee of the Board
and the stockholders, in books kept for that purpose. The Secretary shall be the
custodian of the corporate seal, and he or an Assistant Secretary shall affix
the same to and countersign papers requiring such acts; and he and the Assistant
Secretaries shall perform such other duties as may be required by the Board, the
Executive Committee or the Chief Executive Officer.
<PAGE> 10
Section 11. The Treasurer and Assistant Treasurers shall have care and
custody of all funds of the corporation and disburse and administer the same
under the direction of the Board, the Executive Committee or the Chief Executive
Officer and shall perform such other duties as the Board, the Executive
Committee or the Chief Executive Officer shall assign to them.
Section 12. The Controller shall maintain adequate records of all
assets, liabilities and transactions of the corporation and see that audits
thereof are currently and regularly made; and he shall perform such other duties
as may be required by the Board, the Executive Committee or the Chief Executive
Officer.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 13. (1) The corporation shall indemnify and hold harmless, to
the fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person (a "Covered Person") who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, including
appeals (a "proceeding"), by reason of the fact that he, or a person for whom he
is the legal representative, is or was a director or officer of the corporation
or, while a director or officer of the corporation, is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust, enterprise or nonprofit
entity, including service with respect to employee benefit plans, against all
liability and loss suffered and expenses (including attorneys' fees) reasonably
incurred by such Covered Person. Notwithstanding the preceding sentence, except
as otherwise provided in paragraph (3) of this Section 13, the corporation shall
be required to indemnify a Covered Person in connection with a proceeding (or
part thereof) commenced by such Covered Person only if the commencement of such
proceeding (or part thereof) by the Covered Person was authorized by the Board.
(2) The corporation shall pay the expenses (including attorneys' fees)
incurred by a Covered Person in defending any proceeding in advance of its final
disposition, provided, however, that, to the extent required by law, such
payment of expenses in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the Covered Person to repay all
amounts advanced if it should be ultimately determined that the Covered Person
is not entitled to be indemnified under this Section 13 or otherwise.
(3) If a claim for indemnification or payment of expenses under this
Section 14 is not paid in full within thirty days after a written claim therefor
by the Covered Person has been received by the corporation, the Covered Person
may file suit to recover the unpaid amount of such claim and, if successful in
whole or in part, shall be entitled to be paid the expense of prosecuting such
claim. In any such action the corporation shall have the burden of proving that
the Covered Person is not
<PAGE> 11
entitled to the requested indemnification or payment of expenses under
applicable law.
(4) The rights conferred on any Covered Person by this Section 13 shall
not be exclusive of any other rights which such Covered Person may have or
hereafter acquire under any statute, provision of the Restated Certificate of
Incorporation, these Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise.
(5) The corporation's obligation, if any, to indemnify or to advance
expenses to any Covered Person who was or is serving at its request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, enterprise or nonprofit entity shall be reduced by any amount
such Covered Person may collect as indemnification or advancement of expenses
from such other corporation, partnership, joint venture, trust, enterprise or
nonprofit enterprise.
(6) Any repeal or modification of the foregoing provisions of this
Section 13 shall not adversely affect any right or protection hereunder of any
Covered Person in respect of any act or omission occurring prior to the time of
such repeal or modification.
(7) This Section 13 shall not limit the right of the corporation, to
the extent and in the manner permitted by law, to indemnify and to advance
expenses to persons other than Covered Persons when and as authorized by
appropriate corporate action.
ARTICLE V
CAPITAL STOCK
CERTIFICATES OF STOCK
Section 1. Certificates of stock certifying the number of shares owned
shall be issued to each stockholder in such form not inconsistent with the
Restated Certificate of Incorporation as shall be approved by the Board. Such
certificates of stock shall be numbered and registered in the order in which
they are issued and shall be signed by the Chairman, the President or a Vice
President, and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary. Any and all of the signatures on the certificates may be a
facsimile.
TRANSFER OF SHARES
Section 2. Transfers of shares shall be made only upon the books of the
corporation by the holder, in person, or by power of attorney duly executed and
filed with the Secretary of the corporation, and on the surrender of the
certificate or certificates of such shares, properly assigned. The corporation
may, if and whenever the Board shall so determine, maintain one or more offices
or agencies, each in charge of an agent designated by the Board, where the
shares of the capital stock of the corporation shall be transferred and/or
registered. The Board may also make such additional rules and regulations as it
may deem expedient concerning the issue, transfer and registration of
certificates for shares of the capital stock of the corporation.
<PAGE> 12
LOST, STOLEN OR DESTROYED CERTIFICATES
Section 3. The corporation may issue a new certificate of capital stock
of the corporation in place of any certificate theretofore issued by the
corporation, alleged to have been lost, stolen or destroyed, and the corporation
may, but shall not be obligated to, require the owner of the alleged lost,
stolen or destroyed certificate, or his legal representatives, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate, as the officers of the
corporation may, in their discretion, require.
FIXING OF RECORD DATE
Section 4. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board, and which record date: (1) in the case of determination of
stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than sixty nor
less than ten days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to corporate action in
writing without a meeting, shall not be more than ten days from the date upon
which the resolution fixing the record date is adopted by the Board; and (3) in
the case of any other action, shall not be more than sixty days prior to such
other action. If no record date is fixed by the Board: (1) the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; (2) the record date
for determining stockholders entitled to express consent to corporate action in
writing without a meeting shall be determined in accordance with Article VI of
these Bylaws; and (3) the record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board adopts
the resolution relating thereto. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
ARTICLE VI
CONSENTS TO CORPORATE ACTION
RECORD DATE
Section 1. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting shall be as
fixed by the Board or as otherwise established under this Section. Any person
seeking to have the stockholders authorize or take corporate action by written
consent without a meeting shall by written notice addressed to the Secretary and
delivered to the corporation, request that a record date be fixed for such
purpose. The
<PAGE> 13
Board may fix a record date for such purpose which shall be no more than 10 days
after the date upon which the resolution fixing the record date is adopted by
the Board and shall not precede the date such resolution is adopted. If the
Board fails within 10 days after the corporation receives such notice to fix a
record date for such purpose, the record date shall be the day on which the
first written consent is delivered to the corporation in the manner described in
Section 2 below unless prior action by the Board is required under the General
Corporation Law of the State of Delaware, in which event the record date shall
be at the close of business on the day on which the Board adopts the resolution
taking such prior action.
PROCEDURES
Section 2. Every written consent purporting to take or authorizing the
taking of corporate action and/or related revocations (each such written consent
and related revocation is referred to in this Article VI as a "Consent") shall
bear the date of signature of each stockholder who signs the Consent, and no
Consent shall be effective to take the corporate action referred to therein
unless, within 60 days of the earliest dated Consent delivered in the manner
required by this Section 2, Consents signed by a sufficient number of
stockholders to take such action are delivered to the corporation.
A Consent shall be delivered to the corporation by delivery to its
registered office in the State of Delaware, its principal place of business or
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery to the
corporation's registered office shall be made by hand or by certified or
registered mail, return receipt requested.
In the event of the delivery to the corporation of a Consent, the
Secretary of the corporation shall provide for the safe-keeping of such Consent
and shall promptly conduct such ministerial review of the sufficiency of the
Consents and of the validity of the action to be taken by stockholder consent as
he deems necessary or appropriate, including, without limitation, whether the
holders of a number of shares having the requisite voting power to authorize or
take the action specified in the Consent have given consent; provided, however,
that if the corporate action to which the Consent relates is the removal or
replacement of one or more members of the Board, the Secretary of the
corporation shall promptly designate two persons, who shall not be members of
the Board, to serve as Inspectors with respect to such Consent and such
Inspectors shall discharge the functions of the Secretary of the corporation
under this Section 2. If after such investigation the Secretary or the
Inspectors (as the case may be) shall determine that the Consent is valid and
that the action therein specified has been validly authorized, that fact shall
forthwith be certified on the records of the corporation kept for the purpose of
recording the proceedings of meetings of stockholders, and the Consent shall be
filed in such records, at which time the Consent shall become effective as
stockholder action. In conducting the investigation required by this Section 2,
the Secretary or the Inspectors (as the case may be) may, at the expense of the
corporation, retain special legal counsel and any other necessary or appropriate
professional advisors, and such other personnel as they may deem necessary or
appropriate to assist them, and shall be fully protected in relying in good
faith upon the opinion of such counsel or advisors.
<PAGE> 14
ARTICLE VII
MISCELLANEOUS
DIVIDENDS AND RESERVES
Section 1. Dividends upon the capital stock of the corporation may be
declared as permitted by law by the Board or the Executive Committee at any
regular or special meeting. Before payment of any dividend or making any
distribution of profits, there may be set aside out of the surplus or net
profits of the corporation such sum or sums as the Board or the Executive
Committee, from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for such other purposes as the Board or
Executive Committee shall think conducive to the interests of the corporation,
and any reserve so established may be abolished and restored to the surplus
account by like action of the Board or the Executive Committee.
SEAL
Section 2. The seal of the corporation shall bear the corporate name of
the corporation, the year of its incorporation and the words "Corporate Seal,
Delaware".
WAIVER
Section 3. Whenever any notice whatever is required to be given by
statute or under the provisions of the Restated Certificate of Incorporation or
these Bylaws, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. Neither the business to be transacted at, nor the
purpose of, any annual or special meeting of the stockholders or the Board, as
the case may be, need be specified in any waiver of notice of such meeting.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall begin with January
first and end with December thirty-first.
CONTRACTS
Section 5. Except as otherwise required by law, the Restated
Certificate of Incorporation or these Bylaws, any contracts or other instruments
may be executed and delivered in the name and on the behalf of the corporation
by such officer or officers of the corporation as the Board may from time to
time direct. Such authority may be general or confined to specific instances as
the Board may determine. The Chairman of the Board, the President or any Vice
President may execute bonds, contracts, deeds, leases and other instruments to
be made or executed for or on behalf of the corporation. Subject to any
restrictions imposed by the Board, the Chairman of the Board, the President or
any Vice President of the corporation may delegate contractual powers to others
under his jurisdiction, it being understood, however, that any such delegation
of power shall not relieve such officer of responsibility with respect to the
exercise of such delegated power.
<PAGE> 15
PROXIES
Section 6. Unless otherwise provided by resolution adopted by the
Board, the Chairman of the Board, the President or any Vice President may from
time to time appoint an attorney or attorneys or agent or agents of the
corporation, in the name and on behalf of the corporation, to cast the votes
which the corporation may be entitled to cast as the holder of stock or other
securities in any other corporation or other entity, any of whose stock or other
securities may be held by the corporation, at meetings of the holders of the
stock or other securities of such other corporation or other entity, or to
consent in writing, in the name of the corporation as such holder, to any action
by such other corporation or other entity, and may instruct the person or
persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed in the name and on behalf of
the corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the premises.
AMENDMENTS
Section 7. The Board from time to time shall have the power to make,
alter, amend or repeal any and all of these Bylaws, but any Bylaws so made,
altered or repealed by the Board may be amended, altered or repealed by the
stockholders.
<PAGE> 16
CERTIFICATION
The undersigned hereby certifies that he is the duly elected and acting
Secretary of Tenneco Packaging Inc., a Delaware corporation, and the keeper of
its corporate records and minutes. The undersigned further hereby certifies that
the above and foregoing is a true and correct copy of the Bylaws of said
corporation, as in force at the date hereof.
WITNESS the hand of the undersigned and the seal of said corporation,
this _________ day of _____________.
--------------------
Secretary
<PAGE> 1
EXHIBIT 4.1
NUMBER SHARES
- ------------------------------- ------------------------------------
- ------------------------------- ------------------------------------
COMMON STOCK [GRAPHIC] COMMON STOCK
PAR VALUE $.01 PAR VALUE $.01
THIS CERTIFICATE IS TRANSFERABLE IN CUSIP 000000 00 0
NEW YORK, NEW YORK SEE REVERSE FOR CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
TENNECO PACKAGING INC.
- --------------------------------------------------------------------------------
This Certifies that
is the owner of
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Tenneco Packaging Inc. transferable on the books of the Corporation in person or
by duty authorized attorney upon surrender of this certificate properly
endorsed. This certificate and the shares represented hereby are issued and
shall be held subject to all of the provisions of the Certificate of
Incorporation (copies of which are on file with the Transfer Agent), to all of
which the holder by acceptance hereof assents. This certificate is not valid
unless countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED:
COUNTERSIGNED AND REGISTERED:
FIRST CHICAGO TRUST COMPANY OF
NEW YORK
(NEW YORK, NY) TRANSFER AGENT
AND REGISTRAR
BY:/s/ JOSEPH F. GRADIFERD
[TENNECO SEAL] AUTHORIZED SIGNATURE
/s/RICHARD L. WAMBOLD /s/KARL A. STEWART
CHIEF EXECUTIVE OFFICER SECRETARY
<PAGE> 2
TENNECO PACKAGING INC.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -as tenant in common UNIF GIFT MIN ACT- Custodian
TEN ENT -as tenants by the entireties ------ -------
JT TEN -as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
----------------
(State)
Additional abbreviations may also be used though not in the above list.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS, THE DESIGNATIONS, POWERS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF
THE CORPORATION, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO THE CORPORATION OR THE
TRANSFER AGENT.
For value received, hereby sell, assign and transfer unto
-----------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
----------------------------------------------
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated
-----------------------------
. ---------------------------------------------
This certificate also evidences and entitles the holder hereof to certain rights
as set forth in a Qualified Offer Plan Rights Agreement between Tenneco
Packaging Inc. (the "Company") and First Chicago Trust Company of New York, as
Rights Agent, dated as of November 4, 1999, and as amended from time to time
(the "Rights Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal executive offices of
the Company. Under certain circumstances, as set forth in the Rights Agreement,
such Rights will be evidenced by separate certificates and will no longer be
evidenced by this certificate The Company will mail to the holder of this
certificate a copy of the Rights Agreement without charge after receipt of a
written request therefor. Under certain circumstances, as set forth in the
Rights Agreement, Rights owned by or transferred to any Person who is or becomes
an Acquiring Person (as defined in the Rights Agreement) and certain transferees
thereof will become null and void and will no longer be transferable.
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 10.1
FORM OF
HUMAN RESOURCES AGREEMENT
THIS HUMAN RESOURCES AGREEMENT is made and entered into as of this
day of , 19 , by, between and among TENNECO INC., a Delaware
corporation to be renamed Tenneco Automotive Inc. ("Tenneco" or "Automotive
Company"), and Tenneco Packaging Inc. (to be renamed), a Delaware corporation
("Packaging Company").
WHEREAS, pursuant to the terms of that certain Distribution Agreement by
and between Tenneco and Packaging Company and dated as of (the
"Distribution Agreement"), the parties have entered into this Agreement
regarding certain labor, employment, compensation and benefit matters occasioned
by the Distribution.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement and the Distribution Agreement, each of
the parties hereto, on behalf of itself and each other entity over which it has
direct or indirect legal or effective control, hereby agrees as follows:
SECTION 1. DEFINITIONS. The following terms, when capitalized herein, shall
have the meanings set forth below in this Section 1. All other capitalized terms
which are used but are not otherwise defined herein shall have the meanings
ascribed to them in the Distribution Agreement.
"ACTIVE EMPLOYEES" means, with respect to each Group, all employees
regularly engaged in the performance of services to, for or on behalf of
any member of such Group as of the close of business on the Distribution
Date; provided, that all such employees of Tenneco Management Company
("TMC") who are employed by a member of the Automotive Group immediately
after the Distribution shall, for all purposes hereunder, be treated as
Active Employees of the Automotive Group and; provided further that for
purposes of allocation of liabilities, non-employee officers of Tenneco
Inc. shall be treated as Active Employees of TMC.
"COMMON STOCK" means Tenneco Common Stock or Packaging Common Stock,
as applicable.
"FORMER EMPLOYEES" means, with respect to each Group, all former
employees of Tenneco and/or its Subsidiaries (including, but not limited
to, such employees who, as of the close of business on the Distribution
Date, are on leave of absence, long-term disability or layoff with recall
rights) who, if they were regularly engaged in the performance of services
to, for or on behalf of Tenneco or any of its Subsidiaries at the close of
business on the Distribution Date, would be an Active Employee of such
Group, determined on a basis consistent with the determination of the
Active Employees of such Group.
<PAGE> 2
"Tenneco Salaried Welfare Plans" means, collectively, the Tenneco Inc.
------------------------------
Health Care Plan, the Tenneco Inc. Group Life Insurance Plan, the Tenneco
Inc. Long Term Disability Plan, the Tenneco Inc. Travel Accident Insurance
Plan, the Tenneco Inc. Health Care Flexible Spending Account Program and
the Tenneco Inc. Dependent Day Care Flexible Spending Account Plan.
SECTION 2. General Employment Matters.
--------------------------
2.01 General Obligations. From and after the Distribution Date, each of
------------------- Automotive Company and Packaging Company shall
(and shall, as applicable, cause each of the other members of its respective
Group over which it has direct or indirect legal or effective control to) (a)
continue the employment of all of the Active Employees of its respective Group,
subject, however to the terms of Section 2.03 below and (b) except as otherwise
specifically provided herein, pay, perform and discharge any and all labor,
employment, compensation and benefit liabilities, whether arising prior to, on
or after the Distribution Date, with respect to all such Active Employees and
all Former Employees of its respective Group. Notwithstanding the foregoing, all
payments to be made to Active Employees and Former Employees of TMC who are not
employed by the Automotive Group or the Packaging Group (excluding TMC)
immediately after the Distribution out of general corporate assets shall be
made, processed and administered by Tenneco Business Services Inc. ("TBS") or
such other person or entity as shall be designated by the trustees of the
Tenneco Rabbi Trust in their sole discretion (rather than by Packaging Company
or another member of the Packaging Group). Packaging Group shall maintain one or
more rabbi trusts to facilitate such payments.
2.02 Initial Compensation of Active Employees. The initial compensation
----------------------------------------
(base salary or wage level) of each Active Employee of each such Group as of the
Distribution Date shall be the same as the compensation (base salary or wage
level) of such Active Employee immediately prior to the Distribution Date.
2.03 No Additional Employment Rights Created. Nothing in this Agreement
---------------------------------------
shall give any Active Employee of any Group any right to continued employment by
any member of that Group or the other Group beyond the Distribution Date, which
is in addition to or supplemental to any such right he or she may have arising
under contract or otherwise.
SECTION 3. Collective Bargaining.
---------------------
3.01 Continuation of Existing Collective Bargaining Agreements. Each of
---------------------------------------------------------
Automotive Company and Packaging Company shall (and shall cause, as applicable,
each other member of its Group over which it has direct or indirect legal or
effective control to) continue to honor all collective bargaining agreements
covering the Active Employees of its respective Group which are in effect as of
the close of business on the Distribution Date, in accordance with and subject
to the terms of each such collective bargaining agreement.
3.02 Recognition of Incumbent Labor Organizations. Each of Automotive
--------------------------------------------
Company and Packaging Company shall (and shall cause, as applicable, each other
member of its Group over which it has direct or indirect legal or effective
control to) continue to recognize all
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<PAGE> 3
incumbent labor organizations which, as of the close of business on the
Distribution Date, have established collective bargaining relationships in
respect of the Active Employees of its respective Group.
3.03 Continued Sponsorship of Hourly Employee Benefit Plans. Except as
------------------------------------------------------
otherwise specifically provided herein, each of Automotive Company and Packaging
Company shall continue (and shall, as applicable, cause each other member of its
respective Group over which it has direct or indirect legal or effective control
to continue) to sponsor all employee benefit plans for hourly employees which,
as of the close of business on the Distribution Date, are in existence and
relate to the Active Employees and/or Former Employees of its respective Group,
subject to its rights under such plans to amend or terminate such plans.
3.04 Provisions of Wages, Rights and Other Employment Benefits Required
------------------------------------------------------------------
Under Existing Collective Bargaining Agreements. Without limiting the generality
- -----------------------------------------------
of the foregoing, each of Automotive Company and Packaging Company shall (and
shall cause each other member of its respective Group over which it has direct
or indirect legal or effective control to) provide those of its Active Employees
whose employment is subject to collective bargaining agreements and/or
established collective bargaining relationships as of the close of business on
the Distribution Date with the wages, benefits, and terms and conditions of
employment required by such agreements or relationships, except that (i)
participation in the Tenneco Inc. Employee Stock Purchase Plan will be suspended
as provided in Section 4.06 hereof, and (ii) the provisions of any defined
contribution plan calling for contributions or investment in the common stock of
Tenneco Inc. shall be amended in accordance with Section 4.05 hereof.
3.05 Limitation on Obligations. Each of the parties hereto hereby agrees
-------------------------
and acknowledges that nothing contained in this Agreement, including its
obligation to continue its applicable collective bargaining agreements or
relationships, shall be construed to restrict any right it, or any other member
of its respective Group, may have to terminate, renegotiate, reopen or otherwise
seek changes in any of its collective bargaining agreements or relationships.
SECTION 4. United States Salaried Pension and Thrift Benefits and Stock
------------------------------------------------------------
Purchase Plan.
- -------------
4.01 Tenneco Retirement Plan. Effective as of the Impact Date (as defined
-----------------------
below), Automotive Company and all other members of that Group shall cease to be
sponsors of the Tenneco Retirement Plan (the "TRP"), and Packaging Company shall
become the sponsor of the TRP; provided that Packaging's sponsorship shall be
subject to the terms and conditions of the TRP. The TRP shall retain liability
for all pension benefits accrued by the Active Employees and Former Employees of
the Automotive Group who are or were formerly participants in the TRP through
the last day of the calendar month in which the Distribution Date occurs (the
"Impact Date"). Following the Distribution Date, Automotive Group will have no
liability, contingent or otherwise, with respect to the TRP, including without
limitation any liability for benefits accrued through the Impact Date (including
early retirement benefits and related subsidies, as to which all age, service
and participation requirements were satisfied on or before
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<PAGE> 4
the Impact Date) for Active Employees or Former Employees of the Automotive
Group, and Packaging Company shall assume or retain, as the case may be, all
such liabilities.
Packaging Company shall succeed Tenneco Inc. under and with respect to
the Tenneco General Employee Benefit Trust (the "GEBT"). As soon as practicable
after the Distribution Date, Packaging Company shall cause the GEBT to transfer
to a trustee designated by Automotive Company the assets of the GEBT
attributable to the Automotive Group's hourly defined benefit pension plans.
Such transfer shall be in cash, except that Tenneco Common Stock may be
transferred, subject to the limitations of applicable law, and the assets
managed by one or more managers may be transferred.
Packaging Company shall create an investment committee (the "New
Committee") to manage the assets of the GEBT, equivalent to the committee which
performed those functions as of the Distribution Date (the "Old Committee"), and
the New Committee shall have as members, the members of the Old Committee as of
the Distribution Date until the earlier of March 31, 2000 or the date such
persons die, resign or are removed in accordance with rules equivalent to the
rules applicable to the Old Committee.
4.02 Amendment of TRP. The sponsor of the TRP shall amend the TRP to (a)
----------------
"freeze" the benefit accruals of the Active Employees of the Automotive Group as
of the Impact Date, and (b) provide that all benefits accrued as of the Impact
Date by the Active Employees of the Automotive Group shall be fully vested and
non-forfeitable (as will the benefits to Former Employees of the Automotive
Group to the extent required by applicable laws) and the sponsor shall inform,
in writing, as soon as practicable following the Impact Date, each such Employee
of his or her accrued benefits under the TRP as of the Impact Date.
4.03 No Credit for Post-Impact Date Service. Except as may be required by
--------------------------------------
law, the TRP shall not be required to count service with any entity other than a
member of the Packaging Group after the Impact Date for any purpose, nor shall
there be any requirement that Active Employees of the Automotive Group be
permitted to "grow into" normal or early retirement benefits under the TRP based
upon events occurring after the Impact Date.
4.04 Tenneco Thrift Plan. The active participation in the Tenneco Thrift
-------------------
Plan and the Tenneco Thrift Plan for Hourly Employees (collectively the "Tenneco
DC Plan") by persons other than the Active Employees of the Packaging Group
shall cease effective as of January 31, 2000 (the "Transition Date"). In
addition, Automotive Company and all other members of that Group shall cease to
be sponsors of the Tenneco DC Plan as of the Transition Date, and Packaging
Company shall become the sponsor of the Tenneco DC Plan from and after the
Transition Date. Automotive Group shall bear the costs of employer matching
contributions attributable to the participation of its employees in the Tenneco
DC Plan for the period commencing with the Distribution Date.
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<PAGE> 5
4.05 Establishment of DC Plans.
-------------------------
(a) Automotive Thrift Plan. Automotive Company shall (and/or cause its
----------------------
respective Group members to) establish or make available on or with effect from
the Transition Date, one or more defined contribution plans for the benefit of
its Active Employees (collectively, the "Automotive Thrift Plan") which may,
subject to Section 4.05(d) hereof, be subject to amendment or termination by
Automotive Company or the applicable member of the Automotive Group.
(b) Transfer of Account Balances to Automotive Thrift Plan. As soon as
------------------------------------------------------
practicable following the Transition Date, Packaging Company shall cause the
Tenneco DC Plan to transfer to the Automotive Thrift Plan, the account balances
of each Active Employee of the Automotive Group and each Former Employee of the
Automotive Group with respect to whom the Tenneco DC Plan maintains an account
as of the close of business on the Transition Date. Such transfers shall be in
cash, except that the Automotive Thrift Plan will accept the following: (i)
Tenneco Common Stock, Packaging Common Stock received in the Distribution, stock
of Newport News Shipbuilding Inc. (if any remains in such account balances) and
stock of El Paso Energy Corporation (if any remains in such account balances)
for the Tenneco Common Stock fund portion of such account balances; (ii) amounts
credited to the Tenneco DC Plan which are held in mutual funds which are also
investment media in the Automotive Thrift Plan; and (iii) participant loans.
(c) Investment Options. Tenneco Common Stock shall not be offered as
------------------
an investment option with respect to contributions made after the Distribution
Date by the Packaging Group employees to the thrift plans of the Packaging
Group. The sponsor of each of the Tenneco DC Plan and the Automotive Thrift Plan
shall cause the plan to afford each participant therein, for a period of at
least 90 days following the Distribution Date, an election to sell the Common
Stock of the entities held in the plan's stock fund which does not directly or
indirectly employ him or her immediately following the Distribution Date. From
and after the Distribution Date employer stock contributions with respect to
Packaging Group employees shall be in Packaging Common Stock and employer stock
contributions with respect to the Automotive Group employees shall be in Tenneco
Common Stock.
-5-
<PAGE> 6
(d) Certain Automotive Obligations. The Automotive Company shall (and
------------------------------
shall cause each member of its Group over which it has legal or effective
direct or indirect control to) sponsor, establish, administer, maintain,
amend and otherwise deal with one or more defined contribution pension
plans (including the Automotive Thrift Plan) in a manner consistent with
any and all representations which Tenneco or its affiliates at the time
makes or has made to the Internal Revenue Service, including without
limitation, any actions that may be required to increase and/or maintain
the amount of Tenneco Common Stock held by such plans.
4.06 Tenneco Stock Purchase Plan. Participation in the Tenneco Inc.
---------------------------
Employee Stock Purchase Plan will be suspended effective June 30, 1999 and will
not resume prior to the Distribution Date.
SECTION 5. Pension Matters Outside the United States. With respect to the
-----------------------------------------
business and operations of each Group in jurisdictions outside the United
States, each of the parties hereto shall (and, as applicable, shall cause each
other member of its Group over which it has direct or indirect legal or
effective control to) assume and retain any and all pension liabilities and
attendant plans and their assets related to its Active Employees and Former
Employees.
SECTION 6. Executive and Directors' Compensation.
-------------------------------------
6.01 Tenneco Supplemental Executive Retirement Plan. Effective upon the
----------------------------------------------
Distribution Date, Tenneco and Packaging Company shall cause the Tenneco Inc.
Supplemental Executive Retirement Plan and the Tenneco Inc. Pilots' Supplemental
Retirement Plan (collectively, the "SERP") to be amended to cause the separation
of participation in, and liabilities under, the SERP as follows: (1) Packaging
Company shall (a) become the sponsor of the SERP with respect to all Active
Employees and Former Employees of its respective Group and, subject to the terms
of the 1996 Benefits Agreement (as defined below), all active and former
employees of the Shipbuilding Group and Energy Group (each as defined below),
and all other participants in the SERP not specifically allocated to Automotive
Company below and (b) assume and agree to pay, perform and discharge all
liabilities under the SERP with respect to such employees, whether accrued
before, on or after the Distribution Date; and (2) Automotive Company shall
continue sponsorship of the SERP with respect to all Active Employees and Former
Employees of its respective Group and shall assume and agree to pay, perform and
discharge all liabilities under the SERP with respect to such employees, whether
accrued before, on or after the Distribution Date. All accrued benefits under
the SERP as of the close of business on the Distribution Date shall be fully
vested and nonforfeitable; provided, that this rule shall not be applied to
grant an employee an amount equal to the benefit he or she has accrued under the
Tenneco Retirement Plan but only the amount provided by the SERP, nor shall it
be applied to alter or diminish any service requirement contained in any special
appendix or other document providing benefits in addition to those called for by
the SERP generally.
6.01A Pullman Supplemental Pension Benefits. Notwithstanding any other
-------------------------------------
provision hereof, the Automotive Company shall retain and succeed to any and all
liabilities for non-qualified defined benefit pension benefits for Active
Employees and Former Employees of its
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<PAGE> 7
respective Group who were formerly employed by The Pullman Company, Peabody
International Corporation or any predecessor of either, including without
limitation, benefits under the Peabody Special Benefits Plan, the Peabody
Supplemental Plan and the Pullman Supplemental Plan (the "Pullman Plans").
Automotive Company shall retain sponsorship of the rabbi trust created in
connection with the Pullman Plans.
6.02 Tenneco Inc. Deferred Compensation Plan. The participation of the
Active Employees and Former Employees of the Automotive Group in the Tenneco
Inc. Deferred Compensation Plan (the "DC Plan") shall cease as of the
Distribution Date. As of the Distribution Date, (i) Automotive Company shall
assume the liability for the accounts of its Active Employees and Former
Employees in the DC Plan, (ii) Packaging Company shall assume the liability for
the accounts of the Active Employees and Former Employees of the Packaging Group
in the DC Plan, and (iii) Packaging Company shall succeed to sponsorship of the
DC Plan. The Automotive Group Active Employee's or Former Employee's account in
the DC Plan as of the Distribution Date shall become the opening balance of such
Active Employee's or Former Employee's account in a nonqualified deferred
compensation plan created, as of the Distribution Date by the Automotive Group.
Such opening balances shall become fully vested as of the close of business on
the Distribution Date.
6.03 Tenneco Benefits Protection Program and Rabbi Trust. The Tenneco Inc.
Benefits Protection Trust (the "BPT") and the Tenneco Inc. Rabbi Trust
(collectively the "Trusts") shall be terminated prior to the Distribution, and
neither Packaging Company nor Automotive Company shall have any liability with
respect to either of the Trusts or any of the terms of either.
6.04 [RESERVED]
6.05 Stock Options. Effective as of the Distribution Date, Tenneco shall
cause all outstanding options to purchase Tenneco Common Stock held by employees
and officers other than (i) Active Employees and Former Employees of Automotive
Group, (ii) employees of Packaging Corporation of America and (iii) employees of
the folding carton division (or persons who have succeeded to the rights of any
persons described in (i), (ii) or (iii) with respect to options to purchase
Tenneco Common Stock) to be replaced by options to purchase Packaging Common
Stock. Subject to the requirements of applicable law and generally accepted
accounting principles, the number, exercise price and other terms of such
replacement options shall be determined in a manner consistent with that
described in Exhibit A attached hereto. Options held by persons described in
clause (ii) or (iii) above, not exercised prior to the Distribution Date shall
be canceled effective as of the Distribution Date.
Options held by Active Employees and Former Employees of Automotive
Group (or persons who have succeeded to the rights of such persons) shall,
unless exercised prior to the Distribution Date, remain outstanding as adjusted
as provided herein after the Distribution Date, subject to the requirements of
applicable law and generally accepted accounting principles. The parties
recognize that in some jurisdictions, Automotive employees were granted rights
other than stock options in lieu of the Special Stock Option Award of 100
options per grantee, and in
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<PAGE> 8
those jurisdictions, the outstanding rights will be adjusted comparably. The
Automotive Company options and rights shall have the same terms and conditions
as prior to the Distribution Date except that the number of options and the
option exercise price shall be adjusted as described in Exhibit A attached
hereto.
To the extent that the exercisability of options to purchase Tenneco
Common Stock currently is subject to the attainment of share price hurdles,
those hurdles will also be adjusted with respect to both options to purchase
Packaging Common Stock and Tenneco Common Stock.
Tenneco may grant special pre-Distribution Date exercisability with
respect to some or all options which are not otherwise exercisable.
6.06 Directors. Except for stock options which will expire at the
Distribution in accordance with their terms, stock options held by directors of
Tenneco and/or Packaging Company shall be treated as provided in Section 6.05
hereof as if the director in question were an employee. Notwithstanding the
foregoing, stock options held by directors who do not continue on the board of
Packaging Company or Automotive Company will be replaced by Packaging Company
options in accordance with Section 6.05 hereof. The 1997 Tenneco Inc. Board of
Directors Deferred Compensation Plan shall be treated as provided in Section
6.02 hereof, and the directors' accounts shall be treated as if the directors
were employees; however, the accounts of directors who do not continue on the
board of Packaging Company or Automotive Company shall be the obligation of
Packaging Company. If an individual becomes a director of both Packaging Company
and Automotive Company immediately after the Distribution Date, his or her
options, unless they expire at the Distribution, shall be split and maintained
one-half by Packaging Company and one-half by Automotive Company; and with
respect to individuals who were outside directors prior to the Distribution
Date, their deferred compensation accounts shall be split similarly.
Any continuing liabilities under the terminated Outside Directors'
Retirement Plan including the obligation to grant restricted stock in lieu of
such plan shall be retained and performed by Automotive Company.
SECTION 7. Welfare Plans.
7.01 Tenneco Salaried Welfare Plans. Effective on December 31, 1999, each
member of the Automotive Group shall cease to be a sponsor of the Tenneco
Salaried Welfare Plans, Active Employees and Former Employees of Automotive
Group shall cease to participate in the Tenneco Salaried Welfare Plans as of
that date, and Packaging Company shall serve as the sponsor of the Tenneco
Salaried Welfare Plans from and after that date. Automotive Company shall
reimburse Packaging Company for all claims paid with respect to the
participation of its employees in such plans.
SECTION 8. General.
8.01 Post-Distribution Administration of Plans. The parties hereto agree to
administer all plans consistently herewith, and to the extent necessary to amend
plans accordingly.
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<PAGE> 9
8.02 Cost and Expenses. Except as otherwise expressly provided herein, each
-----------------
party shall bear all costs and expenses, including but not limited to legal,
administrative and actuarial fees, incurred in the design, drafting,
administration and implementation of any and all plans and compensation
structures which it enables or creates and the amendment of its existing plans
or compensation structures.
8.03 RESERVED
--------
8.04 Human Resources Support Services. Subject to the rules set forth
--------------------------------
below, Packaging Company shall provide (or have provided by TBS or otherwise to)
Automotive Company or its Affiliates the following corporate-wide human resource
support services that are currently being provided to the Automotive Company
and/or members of the Automotive Group:
a. Benefits administration by Hewitt & Associates LLC
and other outside administrators. Packaging Company
will provide management of the services that are
outsourced and continue benefits administration
services currently being provided by TBS.
b. Assistance in executive compensation plans, including
stock options, restricted stock, performance shares,
deferred compensation, director's stock options, and
director's restricted stock.
c. Generation of EEO reports.
d. Packaging Company will prepare, process and disburse
invoices and check requests for Prudential
relocations or cause such services to be provided.
Packaging Company shall provide the services described in this Section 8.04
for the period from the Distribution Date through the earlier of (i) December
31, 2000 and (ii) the date as of which Automotive Company no longer desires such
services, provided that Automotive Company shall have given Packaging Company at
least 60 days' advance written notice of such date.
In consideration for such services, other than third party fees as
described in the next sentence, Automotive Company shall pay Packaging Company
per . Any third party fees for such services for outsourced
providers utilized with respect to the Automotive Group as of the date hereof,
or for new outsourced providers selected with prior consent of Automotive
Company (which consent shall not be unreasonably withheld or delayed), will be
billed directly by the third party to Automotive Company; provided, that if the
third party refuses to bill Automotive Company directly, Automotive Company
shall reimburse Packaging Group for all amounts which it pays such third party
on behalf of Automotive Company. Reference is made to the Transition Services
Agreement between Tenneco and Packaging Company of even date herewith (the
"Transition Services Agreement"). The services described in this Section 8.04
shall be considered Packaging Services (as such term is defined in the
Transition Services Agreement) for purposes of Sections 2.3, 3, 4, 5 and 7 of
the Transition
-9-
<PAGE> 10
Services Agreement and shall be provided in accordance with and subject to the
terms and conditions thereof. The provisions of Sections 4.2, 4.3, 4.4 and 7 of
the Transition Services Agreement shall survive termination of the provision of
services hereunder.
SECTION 9. Miscellaneous.
-------------
9.01 1996 Benefits Agreement. Effective on the Distribution Date, Tenneco
-----------------------
shall assign to Packaging Company all of its rights under, and Packaging Company
shall assume and agree to pay, perform and discharge when due (and will
thereafter indemnify each member of the Automotive Group against) all
obligations, liabilities and responsibilities of Industrial Company under, the
certain Benefits Agreement (the "1996 Benefits Agreement"), dated as of December
11, 1996, by and among New Tenneco Inc., Newport News Shipbuilding Inc. and the
company then known as Tenneco Inc. The rights Tenneco shall assign to Packaging
Company under the 1996 Benefits Agreement shall include, without limitation, the
right to receive and retain all reimbursements for the payment of SERP benefits
to employees and former employees of the Shipbuilding Group and Energy Group
(capitalized terms used in this Section 9.01 and in Section 6.01 and not
otherwise defined in this Agreement shall have the meanings ascribed to such
terms in the 1996 Benefits Agreement).
9.02 Complete Agreement; Construction. This Agreement and the Distribution
--------------------------------
Agreement shall constitute the entire agreement between the parties with respect
to the subject matter hereof and shall supersede all previous negotiations,
commitments and writings with respect to such subject matter. Notwithstanding
any other provisions in this Agreement or the Distribution Agreement to the
contrary, in the event and to the extent that there shall be a conflict between
the provisions of this Agreement and the provisions of the Distribution
Agreement or any other Ancillary Agreement, this Agreement shall
control.
9.03 Other Ancillary Agreements. This Agreement is not intended to address,
--------------------------
and should not be interpreted to address, the matters specifically and expressly
covered by any of the other Ancillary Agreements.
9.04 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other parties.
9.05 Survival of Agreements. Except as otherwise expressly provided herein,
----------------------
all covenants and agreements of the parties contained in this Agreement shall
survive the Distribution Date.
9.06 Notices. All notices and other communications to a party hereunder
-------
shall be in writing and hand delivered or mailed by registered or certified mail
(return receipt requested) or sent by any means of electronic message
transmission with delivery confirmed (by voice or otherwise) to such party (and
will be deemed given on the date on which the notice is received by such party)
at the address for such party set forth in the Distribution Agreement (or at
such other
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<PAGE> 11
address for the party as the party shall, from time to time, specify by like
notice to the other parties).
9.07 Waivers. The failure of any party hereto to require strict performance
-------
by any other party of any provision in this Agreement will not waive or diminish
the party's right to demand strict performance thereafter of that or any other
provision hereof.
9.08 Amendments. This Agreement may not be modified or amended except by an
----------
agreement in writing signed by the parties hereto.
9.09 Assignment. This Agreement shall be assignable in whole in connection
----------
with a merger or consolidation or the sale of all or substantially all the
assets of a party hereto so long as the resulting, surviving or transferee
entity assumes all the obligations of the relevant party hereto by operation of
law or pursuant to an agreement in form and substance reasonably satisfactory to
the other parties to this Agreement. Otherwise this Agreement shall not be
assignable, in whole or in part, directly or indirectly, by any party hereto
without the prior written consent of the other (which consent shall not be
unreasonably withheld or delayed), and any attempt to assign any rights or
obligations arising under this Agreement without such consent shall be void.
9.10 Successors and Assigns. The provisions of this Agreement shall be
----------------------
binding upon, inure to the benefit of and be enforceable by the parties and
their respective permitted successors and permitted assigns.
9.11 No Third Party Beneficiaries. This Agreement is solely for the benefit
----------------------------
of the parties hereto and the members of their respective Groups, after giving
effect to the Distribution, and should not be deemed to confer upon other third
parties any remedy, claim, liability, right of reimbursement, claim of action or
other right in excess of those existing without reference to this
Agreement.
9.12 Attorney Fees. A party determined to be in breach of this Agreement
-------------
shall, on demand, indemnify and hold harmless the other party hereto for and
against all out-of-pocket expenses, including, without limitation, reasonable
legal fees, incurred by such other party by reason of the enforcement and
protection of its rights under this Agreement; provided, that such determination
shall be effective only when made by the court having final jurisdiction of the
matter and the period for appeal from that court, if any, shall have expired.
The payment of such expenses is in addition to any other relief to which such
other party may be entitled hereunder or otherwise.
9.13 Title and Headings. Titles and headings to sections herein are
------------------
inserted for the convenience of reference only and are not intended to be a part
of or to affect the meaning or interpretation of this Agreement.
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<PAGE> 12
9.14 Governing Law. ALL QUESTIONS AND/OR DISPUTES CONCERNING THE
-------------
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS
HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND NOT THE LAW OF CONFLICTS, OF
THE STATE OF DELAWARE. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY
AND UNCONDITIONALLY (i) AGREES TO BE SUBJECT TO, AND HEREBY CONSENTS AND SUBMITS
TO, THE JURISDICTION OF THE COURTS OF THE STATE OF DELAWARE AND THE FEDERAL
COURTS SITTING IN THE STATE OF DELAWARE, (ii) TO THE EXTENT SUCH PARTY IS NOT
OTHERWISE SUBJECT TO SERVICE OF PROCESS IN THE STATE OF DELAWARE, HEREBY
APPOINTS THE CORPORATION TRUST COMPANY, AS SUCH PARTY'S AGENT IN THE STATE OF
DELAWARE FOR ACCEPTANCE OF LEGAL PROCESS AND (iii) AGREES THAT SERVICE MADE ON
ANY SUCH AGENT SET FORTH IN (ii) ABOVE SHALL HAVE THE SAME LEGAL FORCE AND
EFFECT AS IF SERVED UPON SUCH PARTY PERSONALLY WITHIN THE STATE OF DELAWARE.
9.15 Severability. In the event any one or more of the provisions contained
------------
in this Agreement should be held invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein and therein shall not in any way be affected or impaired
thereby. The parties shall endeavor in good-faith negotiations to replace the
invalid, illegal or unenforceable provisions with valid provisions, the economic
effect of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
9.16 Subsidiaries. Each of the parties hereto shall cause to be performed,
------------
and hereby guarantees the performance of, all actions, agreements and
obligations set forth herein to be performed by any Subsidiary of such party
which is contemplated to be a Subsidiary of such party on and after the
Distribution Date.
-12-
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
TENNECO INC.
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
----------------------------------------
TENNECO PACKAGING INC. (to be renamed)
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
-13-
<PAGE> 14
EXHIBIT A
OPTION CONVERSION FORMULA*/
<TABLE>
<CAPTION>
Formula
- -------
<S> <C> <C>
Original option exercise price x New market price of Tenneco = New option exercise price
- ------------------------------ Common Stock or Packaging ("New Option Price")
Original market price of Tenneco Common Stock, as applicable***/
Common Stock**/
No. of shares underlying original option x original option exercise price = Number of shares
- -------------------------------------------------------------------------
New Option Price underlying new option
</TABLE>
Assume
- ------
1,000 No. of shares Tenneco Common Stock underlying original option
$ 45.31 Original option exercise price
$ 25.00 Original market price of Tenneco Common Stock
$ 7.00 New market price for Tenneco Common Stock
$ 18.00 New market price for Packaging Common Stock
Adjusted Tenneco Options (for Automotive Group employees)
- ------------------------
$45.31 x $7.00 = $12.69 New Option Price
------
$25.00
1,000 x $45.31 = 3,571 shares Tenneco Common Stock
-------------- underlying new option
$12.69
- ----------------------------
*/ May be adjusted, as necessary, to reflect a reverse stock split by Tenneco
which becomes effective after the Distribution.
**/ Based on the closing sale price of the "full value" Tenneco Common Stock
(i.e. not giving effect to the declaration of any dividend) on the New York
Stock Exchange ("NYSE") on the day immediately prior to the Distribution Date.
***/ For the new market price of Tenneco Common Stock: Based on the closing sale
price of Tenneco Common Stock "without due bills" on the day immediately prior
to the Distribution Date, unless "when issued" trading for Tenneco Automotive
Inc. Common Stock exists on such date, in which case the new market price of the
Tenneco Common Stock would be based on the closing "when issued" market sale
price of Tenneco Automotive Inc. Common Stock on such date. For the new market
price of Packaging Common Stock: Based on the closing "when issued" market sale
price of Packaging Common Stock on the day immediately prior to the Distribution
Date, as applicable.
-14-
<PAGE> 15
New Packaging Company Options (for Packaging Group employees)
- -----------------------------
$45.31 x $18.00 = $32.62 New Option Price
------
$25.00
1,000 x $45.31 = 1,389 shares Packaging Common Stock
-------------- underlying new option
$32.62
-15-
<PAGE> 1
Exhibit 10.5
FORM OF
TENNECO PACKAGING INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(The "Plan")
PURPOSE
The Plan is maintained by Tenneco Packaging Inc. (the "Company") as an
unfunded plan for the purpose of providing retirement benefits with respect to
certain employees that are equal to retirement benefits lost under its qualified
defined benefit pension plan for salaried employees (the "Retirement Plan") as a
result of the imposition of the limitations contained in the Internal Revenue
Code of 1986, as amended (the "Code"). The portion of the Plan that provides for
benefits limited by Code Section 415 is maintained as an "excess benefit plan"
as described in Section 3(36) of the Employee Retirement Income Security Act of
1974 as amended ("ERISA"). The other benefits provided for under the Plan are
only available to a "select group of management or highly compensated employees"
as determined by the Compensation / Nominating / Governance Committee of the
Board of Directors of the Company (the "Committee"), and the portion of the Plan
providing such benefits is intended to satisfy the ERISA exemption requirements
for a plan limited to such a group. Capitalized terms not defined herein shall
have the meaning ascribed to such terms in the Retirement Plan.
THE PLAN
1. Effective Date
The Plan as set forth herein is an amendment and restatement of the
Tenneco Inc. Supplemental Executive Retirement Plan (the "Former Plan") as
provided in the Human Resources Agreement (the "HR Agreement") between the
Company and Tenneco Inc. and is effective on the date on which the Company's
stock is distributed to the shareholders of Tenneco Inc. (the "Distribution
Date"). The benefit entitlement, if any, under the Former Plan of any person who
separated from service prior to that date shall be governed by the provisions of
the Former Plan as it was in effect from time to time prior to that date, and
liability for such benefit has been allocated under the HR Agreement.
2. Eligibility
An employee shall be a "Participant" in this Plan if the employee is a
participant in the Retirement Plan or is provided a benefit under Section 11
hereof.
Participation by active and former employees of the Automotive Group
(as that term is defined in the Distribution Agreement between and among Tenneco
Inc. and the Company) shall cease as of the close of business on the
Distribution Date and all liability for benefits accrued under the Plan by such
employees shall be retained and assumed by Tenneco Inc.
<PAGE> 2
3. Amount of Benefit
The benefit payable under this Plan to a Participant, or to the
Participant's Eligible Spouse, Eligible Child(ren), joint annuitant or other
beneficiary(ies), all as determined under the provisions of the Retirement Plan,
shall equal the excess, if any, of (a) over (b) where:
(a) is the benefit that would be paid under the Retirement
Plan if the provisions of the Retirement Plan were administered without
regard to the limitations imposed by the Code and, only with respect to
Participants who, at any time, were participants in the Company's
Executive Incentive Compensation Plan or the Tenneco Inc. Executive
Incentive Compensation Plan (collectively, the "EICP"), if Final
Average Compensation, as computed under the Retirement Plan, were
determined on the basis of compensation paid during the three calendar
years (of the five calendar year period ending no later than the
calendar year immediately preceding his or her termination or
retirement) for which such compensation is the highest, and increased
by the quotient of (i) the total of the cash bonuses, as defined below,
paid to the Participant in the three calendar years (during the same
five calendar year period ending no later than the calendar year
immediately preceding his or her termination or retirement) for which
such total is the highest, divided by (ii) three or such lesser number
of calendar years (included in such period) in which such bonuses were
paid to the Participant; provided, that the calendar year including his
or her termination or retirement shall be included if such event
follows the payment of regular bonuses for that year; and provided,
that bonuses and salary, respectively, deferred at the election of the
Participant shall be counted only in the year that they would have been
paid absent such election, and provided further, that the foregoing
language shall be applied to count bonuses which relate to a calendar
year as paid in that year, for example, 2000 bonuses will be counted in
2000 notwithstanding the fact that they are actually paid in 2001; and
(b) is the benefit that is payable under the Retirement Plan.
Notwithstanding the foregoing, if, except as otherwise provided in
writing, an employee is granted credit for purposes of benefit accrual under the
Retirement Plan for service rendered prior to the time that the employee became
a participant in the Retirement Plan, such employee shall be credited with such
service under this Plan only if and to the extent determined by the Committee.
Unless otherwise provided in writing, no benefit shall be payable under the Plan
unless a benefit also is payable under the Retirement Plan, except that benefits
accrued hereunder as of the effective date are treated as fully vested and
nonforfeitable to the extent provided in the HR Agreement.
Cash bonus means only cash bonuses paid under the EICP and other cash
bonuses as the Committee determines.
4. Form of Benefit
Any benefit under this Plan shall be paid in the same form and manner
as the benefit payments made to, or with respect to, the Participant under the
TRP. Notwithstanding the preceding sentence, no benefit is payable hereunder
prior to 60 days after the Participant has
-2-
<PAGE> 3
separated from service, unless the Committee so determines. Prior to the
commencement of benefits but, in no event later than 24 months after the
Participant has separated from service, and only with respect to a Participant
who at any time was a participant in the EICP (or a beneficiary of such a
Participant), such Participant or beneficiary may elect, but only with the
approval of the Committee, to receive payment of such benefit in the form of a
lump sum or annuity, provided that in cases where a Participant has chosen a
lump sum and the exact amount of a Participant's benefit cannot be determined by
the date elected for payment, a preliminary lump sum shall be paid with respect
to amounts that can be clearly ascertained then, with the remainder to be issued
in a subsequent lump sum when that amount is exactly determined by the Committee
or its delegee. In addition, with respect to all Plan Participants, if the
benefit payable from this Plan (expressed as an age 65 life annuity) would be
less than $50 per month, the benefit payable from this Plan automatically shall
be paid as a lump sum.
The actuarial factors set forth in the Retirement Plan shall be used to
compute benefits hereunder, provided that, for purposes of any lump sum payment
that may be payable under the Plan, the interest rate used shall be the annual
rate of interest on 30-year Treasury securities as specified by the IRS for the
second calendar month preceding the first day of the Plan Year during which the
annuity starting date occurs, and the applicable mortality table described in
Rev. Rul. 95-6, 1995-1 C.B. (page 80), or in such other formal guidance as may
be issued from time to time by the IRS.
5. Unfunded Plan
This Plan shall be maintained as an unfunded non-qualified deferred
compensation plan. All benefits under this Plan shall be payable from the
general assets of the Company. No person shall be entitled to receive any
benefits under this Plan from the funds of the Retirement Plan.
6. No Assignment
No benefit under this Plan shall be assignable or alienable or
subjected, by attachment or otherwise, to the claims of creditors of any person.
7. No Guarantee of Employment
This Plan shall not be construed to give any Participant the right to
be retained in the employment of the Company or any of its affiliates.
8. Operation and Administration
This Plan shall be operated under the direction of and administered by
the Committee and in accordance with its administrative rules.
The Committee's decision in all matters involving the interpretation
and application of this Plan shall be final and binding. The Committee shall
establish a claims procedure which is consistent with the claims procedure
employed under the Retirement Plan.
-3-
<PAGE> 4
9. Governing Law
To the extent not preempted by federal law, this Plan shall be
construed, administered and enforced in accordance with the laws of the State of
Illinois.
10. Amendment and Discontinuance
The Company reserves the right, by action of the Committee, to amend or
discontinue the Plan. However, no such amendment or discontinuance shall impair
or adversely affect any benefits accrued under this Plan as of the date of such
action.
11. Special Appendix
The Company may from time to time determine to provide certain persons
additional supplemental pension benefits, which may be reflected in a Special
Appendix hereto or in such other document as the Company shall determine.
References in a Special Appendix or such other document to the "Plan" are to
this Plan.
12. Employees Transferred to Newco
This Section effects the terms of the Human Resources Agreement between
and among Tenneco Inc., Tenneco Packaging Inc.("TPI") and Packaging Corporation
of America ("Newco"). Active employees of Tenneco Packaging Inc. ("TPI") who
become employees of Newco or one of its subsidiaries and other persons who have
vested benefits in the Retirement Plan and become employees of Newco or one of
its subsidiaries ("Newco Employees") prior to the earliest of: (i) five years
from April 12, 1999; or (ii) the date specified in the notice provided to
Tenneco by Newco that such arrangement will terminate (the "Salaried Plan
Transition Date") will continue to be covered under the Plan until the earliest
of: (i) the Salaried Plan Transition Date; (ii) his or her separation from
service with Newco; or (iii) payment of his or her benefits under the Plan
pursuant to mutual agreement. Newco Employees will cease participation in future
benefit accruals under the Plan as of the date specified in the preceding
sentence. Until that date, any service or compensation, if applicable, will be
used to determine whether Newco Employees attain eligibility for benefits under
the Plan, including eligibility for subsidized early retirement benefits. All
benefits accrued by Newco Employees will be fully vested and nonforfeitable on
April 12, 1999, and all subsequent benefits accrued until the Salaried Plan
Transition Date will be fully vested and nonforfeitable upon accrual. In
addition, service with Newco after the Salaried Plan Transition Date will be
recognized as service under the Plan for purposes of determining additional
retirement benefit accruals beyond those accrued as of the Salaried Plan
Transition Date.
Subject to (iii) above, Newco Employees will not be treated as persons
who separated from service, unless they actually do separate from service with
Newco or an affiliate of Newco, for purposes of entitling them to commence
receiving benefits under the Plan.
Any and all enhancements to which a Newco Employee is entitled under
Section 11 hereof shall be preserved through the Salaried Plan Transition Date.
13. Special Rules Applicable to TMC Personnel
Notwithstanding any other provision hereof, the following rules shall
apply to the benefits hereunder of the personnel (active employees and persons
treated as active employees) of Tenneco Management Company who are covered by
the Tenneco Rabbi Trust: (i) the lump sum benefit of any such person shall in no
event be less than his/her lump sum computed using an interest rate no greater
than the interest rate in effect for benefits paid in 1999; (ii) any such person
shall be permitted to elect prior to his or her separation from service, a lump
sum distribution; and (iii) such a person who separates from service in 1999,
shall be eligible to receive benefits in 1999 regardless of the fact that 60
days have not elapsed. The provisions of this Section and the provisions of any
document described in Section 11 of the Former Plan are not subject to amendment
except with the written consent of the person affected.
-4-
<PAGE> 5
R. WAMBOLD BENEFITS
UNDER THE
COMPANY'S SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("PLAN")
The benefits of Richard L. Wambold ("Wambold") under the Plan
will be adjusted as follows:
The annual pension benefits to which Wambold shall be entitled
under all the Company's defined benefit plans (qualified and
non-qualified) commencing at age 55 or his separation from service, if
later, will, at a minimum, be equal to the product of (x) and (y),
where (x) is the average of his total base compensation plus bonus for
the three calendar years immediately preceding his separation from
service and (y) is the total of 25% plus 2.5% for each full year of
service with Tenneco Inc. and the Company earned in the period
commencing January 1, 1997, for a maximum total of 50%. Notwithstanding
the foregoing, the provisions set forth herein shall be applicable only
if Wambold completes five years of service with Tenneco Inc. and the
Company during the period commencing January 1, 1997.
<PAGE> 6
J. FAULKNER BENEFITS
UNDER THE
COMPANY'S SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("PLAN")
The benefits of James V. Faulkner, Jr. ("Faulkner") under the Plan will be
adjusted as follows:
The monthly pension benefits to which Faulkner shall be
entitled under the Plan and herein shall be equal to the normal
retirement pension benefits to which Faulkner would be entitled under
the Plan if Faulkner had commenced participation in the Tenneco Inc.
Retirement Plan ("TRP") on his employment commencement date. If
Faulkner reaches age 55 while performing services for Tenneco Inc. or
the Company as an officer, he will be eligible for an early retirement
benefit under the Plan as though he then met the participation and
service requirements of the TRP, with subsidized reduction factors no
less favorable than those in effect under the TRP on January 1, 1997.
If Faulkner dies before commencing to receive the benefits described
hereunder, his beneficiary will receive a death benefit which is the
present value of the benefits he has accrued hereunder as of the date
of his death.
If Faulkner remains employed by the Company through December
31, 2002 his benefit hereunder will be determined by counting an
additional three years of service and participation and an additional
three years of age beyond actual service, participation and age at the
time of separation from service. If he resigns or is discharged for
cause prior to December 31, 2002, he will be ineligible for the
supplemental pension plan enhancement described in this paragraph. In
all other circumstances, including without limitation his death,
disability or discharge without cause, Faulkner or his beneficiary in
the case of death will be eligible for this supplemental pension plan
enhancement.
<PAGE> 7
MEAD SPECIAL APPENDIX
TO THE
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("PLAN")
This Special Appendix sets forth certain special provisions of
the Plan with respect to the benefits of Dana G. Mead ("Mead").
1. Mead shall be entitled to monthly pension benefits in the
amount determined under Section 2 hereof commencing on the first day of
the calendar month immediately following the termination of his
employment with the Tenneco Management Company (the "Company").
2. The monthly pension benefits to which Mead shall be entitled
shall be equal to the greater of (a) or (b) where
(a) equals the benefits to which Mead would be entitled under
the Tenneco Inc. Retirement Plan (the "TRP") and this
Plan, computed using the Final Average Earnings, as
defined in Section 3 hereof, and Years of Credited
Service, as defined in Section 4 hereof, and substituting
the rules of Sections 1, 5 and 6 hereof for the generally
applicable rules of such plans; and
(b) equals 2.48% of Mead's Final Average Earnings, as defined
in Section 3 hereof, times his Years of Credited Service,
as defined in Section 4 hereof, and substituting the
rules of Sections 1, 5 and 6 hereof for the generally
applicable rules of such plans.
3. "Final Average Earnings" means the quotient of (i) Mead's
Earnings, as defined below, divided by (ii) 36. "Earnings" means the
greater of (a) Mead's regular base salary for the 3 calendar years in
which such regular base salary was the highest in the 5 consecutive
calendar year period ending prior to his termination of employment plus
the total cash bonus earned by Mead for the 3 calendar years in which
such total was the highest in the 5 consecutive calendar year period
ending prior to his termination of employment; or (b) Mead's regular
base salary (annualized for the year of termination of employment) for
the 3 calendar years in which such regular base salary was highest in
the 5 consecutive calendar year period ending in the year of his
termination of employment plus the total cash bonus earned by Mead for
the 3 calendar years in which such total was the highest in the 5
consecutive calendar year period ending in the year of his termination
of employment.
4. "Years of Credited Service" means the total of (i) 14 2/3 plus
(ii) Mead's Actual Tenneco Service, as defined below. "Actual Tenneco
Service" means the period, in whole years and fractions thereof with
each month or portion thereof counting as one-twelfth of one year, from
March 16, 1992 through the date that Mead attains age 65.
<PAGE> 8
5. The benefits provided hereunder shall be paid in the joint and
50% survivor form of annuity if Mead is married at the time benefits
are to commence -- i.e., to Mead for life and, after his death, 50% of
the monthly amount payable during Mead's life continuing to the spouse,
if any, to whom he was legally married at the date of the commencement
of payment of benefits hereunder and to whom he was so married on the
date of his death. There shall be no reduction in the amount of the
benefits payable during Mead's life on account of payment in the joint
and 50% survivor form. The benefits provided hereunder shall be paid in
the life only form of annuity if Mead is not married at the time that
benefit payments are to commence. Subject to the rules stated in the
immediately following paragraph, Mead may elect to receive such
benefits in another form which is the actuarial equivalent of the
normal form of benefit specified above for his marital status at the
time in question. At Mead's election, the Company will purchase and
distribute to him an annuity contract issued by an insurance company
acceptable to Mead to provide such benefits.
If his termination of employment is effective after he attains
age 62 or earlier with the consent of the Company, Mead may elect to
receive such benefits in the form of a lump sum distribution. If a lump
sum distribution is elected, it shall be computed under the assumptions
then in use with respect to the TRP, or its successor; provided, that
in no event shall the interest assumption be greater than the Pension
Benefit Guaranty Corporation immediate annuity interest rate in effect
as of January 1 of the year in which the payment is to be made, and
provided further that the mortality table shall be no less favorable to
Mead or his Beneficiary than the 1983 group annuity table, 50% male,
50% female mix.
Mead may elect that the lump sum benefit be paid at some date
certain which is later than the date specified for benefit commencement
in Section 1 hereof. Any such election shall be irrevocable and must be
filed prior to the date benefits would otherwise commence hereunder. If
he makes such an election, the lump sum amount computed above shall be
credited with interest at the prime rate prevailing from time to time
from the date specified in Section 1 above until the date of actual
payment.
6. If Mead dies before commencing to receive the benefits
described hereunder, his Beneficiary will receive a death benefit in a
lump sum distribution which is the present value of the benefits which
he has accrued hereunder as of the date of his death computed in
accordance with the rules set forth herein, including the interest
assumption specified in Section 5 hereof. Without limiting the
generality of the foregoing, it is specifically provided that the
special alternative death benefit called for by the TRP as in effect on
December 31, 1994, shall apply if that produces a higher benefit.
7. The benefits provided hereunder are in lieu of any benefits to
which Mead might otherwise be entitled under the TRP, Tenneco Inc.
Benefit Equalization Plan or this Plan, but shall not adversely affect
his entitlement to benefits under any other plan, fund or program
maintained by the Company, nor shall benefits provided under any other
such
-2-
<PAGE> 9
plan fund or program be offset against or otherwise reduce the benefits
provided for hereunder.
8. For the purpose of calculating Mead's Earnings, the Company
shall determine an amount that shall be used as a cash bonus number
(the "Hypothetical Bonus") for any year in which Mead has received
something in lieu of a cash bonus. Notwithstanding the foregoing, a
Hypothetical Bonus shall be counted only in circumstances in which it
would yield larger monthly pension benefits.
-3-
<PAGE> 1
EXHIBIT 10.10
FORM OF
TENNECO PACKAGING INC. RABBI TRUST
The Tenneco Packaging Inc. Rabbi Trust (the "Trust") is hereby
adopted by Tenneco Packaging Inc., (the "Company") and shall be maintained by
and between the Company and certain individuals as trustee (collectively the
"Trustee").
Effective on the date on which the stock of the Company is
distributed to the shareholders of Tenneco Inc. (the "Effective Date"), the
following rules shall govern:
WHEREAS, the Company has adopted the nonqualified compensation
plan(s) and supplemental pension arrangements as listed in Appendix A
(collectively the "Plans" and each a "Plan.") covering the benefit obligations
allocated to it under the Human Resources Agreement between and among Tenneco
Inc. and the Company (the "HR Agreement"), and
WHEREAS, the Company wishes to maintain the Trust and to
contribute to the Trust assets that shall be held therein, subject to the claims
of the Company's creditors in the event of the Company's Insolvency, as herein
defined, until paid to Plan participants and their beneficiaries in such manner
and at such times as specified in the Plan(s); and
WHEREAS, it is the intention of the parties that this Trust
shall not affect the status of the Plan(s) as an unfunded plan maintained for
the purpose of providing deferred compensation for a select group of management
or highly compensated employees for purposes of Title I of the Employee
Retirement Income Security Act of 1974; and
WHEREAS, it is the intention of the Company to make
contributions to the Trust to provide itself with a source of funds to assist it
in the meeting of its liabilities under the Plan(s).
NOW, THEREFORE, the parties do hereby adopt the Trust and
agree that the Trust shall be comprised, held and disposed of as follows:
1. Establishment of Trust.
(a) Subject to the rules explicitly set forth herein, the Trust hereby
established is irrevocable.
(b) The Trust is intended to be a grantor trust, of which the Company
is the grantor, within the meaning of subpart E, part I, subchapter J, chapter
1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(c) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of the Company and shall be used exclusively
for the uses and purposes of Plan participants and general creditors as herein
set forth. Plan participants and their beneficiaries shall have no preferred
claim on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plan(s) and this Trust Agreement shall be mere
-1-
<PAGE> 2
unsecured contractual rights of Plan participants and their beneficiaries
against the Company. Any assets held by the Trust will be subject to the claims
of the general creditors of the Company and any of the Company's domestic
subsidiaries.
(d) The Company, in its sole discretion, may at any time, or from time
to time, make deposits of common stock of the Company or other property in trust
with the Trustee to augment the principal to be held, administered and disposed
of by the Trustee as provided in this Trust Agreement. Except as provided
herein, neither the Trustee nor any Plan participant or beneficiary shall have
any right to compel additional deposits.
2. Payments to Plan Participants and their Beneficiaries.
(a) At least annually, the Company shall deliver to the Trustee a
schedule (the "Payment Schedule") that indicates the amounts payable in respect
of each Plan participant (and his or her beneficiaries), that provides a formula
or other instructions acceptable to the Trustee for determining the amounts so
payable, the form in which such amount is to be paid (as provided for or
available under the Plan(s)), and the time of commencement for payment of such
amounts. To the extent that any amounts are due to an employee (or beneficiary
of an employee) of a subsidiary of the Company, and the subsidiary fails to make
such payment, the Company shall do so. Except as otherwise provided herein, if
the Company has failed to make payments to the Plan participants and their
beneficiaries in accordance with such Payment Schedule the Trustee shall do so.
The Company shall make provision for the reporting and withholding of any
federal, state or local taxes that may be required to be withheld with respect
to the payment of benefits pursuant to the terms of the Plan(s) and shall pay
amounts withheld to the appropriate taxing authorities.
(b) The entitlement of a Plan participant or his or her beneficiaries
to benefits under the Plan(s) shall be determined by the Company or such party
as it shall designate under the Plan(s), and any claim for such benefits shall
be considered and reviewed under the procedures set out in the Plan(s).
Notwithstanding the foregoing, the Trustee may, without direction from the
Company, make payments to participants and beneficiaries in such manner and in
such amounts as the Trustee shall determine they are entitled to be paid under
the Plans (to the extent funded through the Trust) based on the most recent
information furnished to the Trustee by the Company and any supplemental
information furnished to the Trustee by a participant or beneficiary upon which
the Trustee may reasonably rely in making such determination. Notwithstanding
any other provision hereof, persons (other than persons covered by the Tenneco
Inc. Pilots' Supplemental Retirement Plan) who were employees of Tenneco
Management Company ("TMC") immediately prior to the Effective Date or who are
treated as such under the HR Agreement, except such persons who are employed by
the Company or a subsidiary of the Company other than TMC immediately after the
effective date though they may be participants in the plans listed in Appendix
A, shall not be entitled to payments under the Trust, and payments shall be
available for their benefit obligations through a separate rabbi trust.
(c) The Company may make payment of benefits directly to Plan
participants or their beneficiaries as they become due under the terms of the
Plan(s). The Company shall notify the Trustee of its decision to make payment of
benefits directly prior to the time amounts are payable
-2-
<PAGE> 3
to participants or their beneficiaries. In addition, if the principal of the
Trust, and any earnings thereon, are not sufficient to make payment of benefits
in accordance with the terms of the Plan(s), the Company shall make the balance
of each such payment as it falls due. The Trustee shall notify the Company where
principal and earnings are not sufficient.
(d) The Company shall cause its actuary to determine the projected
benefit obligation ("PBO") under all of the Plans as of each January 1,
commencing with January 1, 2000. To the extent that the value of the assets of
the Trust as of the January 1 in question is less than the total PBO under all
of the Plans as so determined, the Company shall contribute additional assets to
the Trust with a value equal to the difference. To the extent that the assets of
the Trust exceed 110% of the PBO, the Company may withdraw assets with a value
equal to the excess of the value of the Trust's assets over 110% of such PBO.
(e) Notwithstanding any other provision hereof, the Trustee may sell
Company common stock or other assets in order to provide cash to pay benefits
hereunder.
3. Trustee Responsibility Regarding Payments to Trust Beneficiary when the
Company is Insolvent.
(a) The Trustee shall cease payment of benefits to Plan participants
and their beneficiaries if the Company is Insolvent. The Company shall be
considered "Insolvent" for purposes of this Trust Agreement if (i) the Company
is unable to pay its debts as they become due, or (ii) the Company is subject to
a pending proceeding as a debtor under the United States Bankruptcy Code.
(b) In the event of Insolvency of the Company the following rules shall
apply.
(1) The Company shall inform the Trustee in writing of the
Company's Insolvency. If a person claiming to be a creditor of the Company
alleges in writing to the Trustee that the Company has become Insolvent, the
Trustee shall determine whether the Company is Insolvent and, pending such
determination, the Trustee shall discontinue payment of benefits to Plan
participants or their beneficiaries.
(2) Unless the Trustee has actual knowledge of the Company's
Insolvency, or has received notice from the Company or a person claiming to be a
creditor alleging that the Company is Insolvent, the Trustee shall have no duty
to inquire whether the Company is Insolvent. The Trustee may in all events rely
on such evidence concerning the Company's solvency as may be furnished to the
Trustee and that provides the Trustee with a reasonable basis for making a
determination concerning the Company's solvency.
(3) If at any time the Trustee has determined that the Company
is Insolvent, the Trustee shall discontinue payments to Plan participants or
their beneficiaries and shall hold the assets of the Trust for the benefit of
the Company's general creditors. Nothing in this Trust Agreement shall in any
way diminish any rights of Plan participants or their beneficiaries to
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pursue their rights as general creditors of the Company with respect to benefits
due under the Plan(s) or otherwise.
(4) The Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of this Trust
Agreement only after the Trustee has determined that the Company is not
Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan(s) for the
period of such discontinuance, less the aggregate amount of any payments made to
Plan participants or their beneficiaries by the Company in lieu of the payments
provided for hereunder during any such period of discontinuance.
4. Payments to the Company.
Except as provided in Section 1(d), 2 or 3 hereof, the Company shall
have no right or power to direct the Trustee to return to the Company or to
divert to others any of the Trust assets before all payment of benefits have
been made to Plan participants and their beneficiaries pursuant to the terms of
the Plan(s).
5. The Trustee's Powers of Investment and Management.
The Trustee shall have the following powers with respect to any and all
assets at any time held by it and constituting part of the Trust Fund:
(a) The Trust shall hold the assets of the Trust exclusively in shares
of the common stock of the Company, and any assets distributed with respect
thereto.
(b) All rights associated with any stock held in the Trust, including
voting rights, shall be exercised by the Trustee or the person designated by the
Trustee, and shall in no event be exercisable by or rest with Plan participants.
Voting rights are exercisable by the Trustee in a nonfiduciary capacity without
the approval or consent of any person in a fiduciary capacity.
6. Disposition of Income.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested in Company common stock.
7. Accounting by the Trustee.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between the
Company and the Trustee. Within 60 days following
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the close of each calendar year and within 60 days after the removal or
resignation of the Trustee, the Trustee shall deliver to the Company a written
account of its administration of the Trust during such year or during the period
from the close of the last preceding year to the date of such removal or
resignation, setting forth all investments, receipts, disbursements and other
transactions effected by it, including a description of all securities and
investments purchased and sold with the cost or net proceeds of such purchases
or sales (accrued interest paid or receivable being shown separately), and
showing all cash and securities held in the Trust at the end of such year or as
of the date of such removal or resignation as the case may be.
8. Responsibility of the Trustee.
(a) The Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that the
Trustee shall incur no liability to any person for any action taken pursuant to
a direction, request or approval given by the Company which is contemplated by,
and in conformity with, the terms of this Trust and is given in writing by the
Company. In the event of a dispute between the Company and a party, the Trustee
may apply to a court of competent jurisdiction to resolve the dispute.
(b) If the Trustee undertakes or defends any litigation arising in
connection with this Trust, the Company agrees to indemnify the Trustee against
the Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If the Company does not pay such costs, expenses and liabilities
in a reasonably timely manner, the Trustee may obtain payment from the Trust.
(c) The Trustee may consult with legal counsel (who may also be counsel
for the Company generally) with respect to any of its duties or obligations
hereunder.
(d) The Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers conferred on
the Trustees by applicable law, unless expressly provided otherwise herein.
(f) Notwithstanding any powers granted to the Trustee pursuant to this
Trust Agreement or to applicable law, the Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
(g) Any action required to be taken by the Company, or direction given
by the Company, shall be by resolution of the Compensation / Nominating /
Governance Committee of its board of directors or by written direction of one or
more of its president, any vice president or
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treasurer. The Trustee may rely upon a resolution or direction filed with the
Trustee and shall have no responsibility for any action taken by the Trustee in
accordance with any such resolution or direction.
9. Compensation and Expenses of the Trustee.
The Company shall pay all reasonable administrative and the Trustee's
fees and expenses. If not so paid, the fees and expenses shall be paid from the
Trust. Notwithstanding the foregoing, individuals shall serve without fee but
shall be entitled to reimbursement of expenses.
10. Trustee Resignation or Removal.
(a) The Trustee or any individual who is one of a group of individuals
serving as Trustee may resign at any time by written notice to the Company,
which shall be effective 30 days after receipt of such notice unless the Company
and the Trustee (or individual as the case may be) agree otherwise.
(b) The Trustee or any individual who is one of a group of individuals
serving as Trustee may be removed by the Company on 30 days notice or upon
shorter notice acceptable by the Trustee (or individual as the case may be).
(c) Upon a Change in Control, as defined herein, the Trustee may not be
removed by the Company for two years.
(d) If the Trustee or any individual who is one of a group of
individuals serving as Trustee resigns within two years of a Change in Control,
as defined herein, the Trustee shall select a successor Trustee in accordance
with the provisions of Section 11 hereof prior to the effective date of the
Trustee's resignation; provided that if an individual who is one of a group of
individuals serving as Trustee resigns in such circumstances, the remaining
individuals serving as Trustee may but are not required to name a successor to
replace him.
(e) Upon resignation or removal of the Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the successor
Trustee.
(f) For purposes hereof, death or incapacity shall be deemed an
immediately effective resignation.
11. Appointment of Successor.
(a) If the Trustee (or individual) resigns or is removed in accordance
with Section 10 hereof, the Trustee may appoint any third party as a successor
to replace the Trustee (or individual) upon resignation or removal. The
appointment shall be effective when accepted in writing by the new Trustee, who
shall have all of the rights and powers of the former Trustee, including
ownership rights in the Trust assets. The former Trustee (or individual) shall
execute
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any instrument necessary or reasonably requested by the Company or the successor
Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to the
rules hereof. The successor Trustee shall not be responsible for and the Company
shall indemnify and defend the successor Trustee from any claim or liability
resulting from any action or inaction of any prior Trustee or from any other
past event or any condition existing at the time it becomes successor Trustee.
12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument
executed by the Trustee and the Company. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Plan(s) or shall make the Trust
revocable.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plan(s). Upon termination of the Trust any assets remaining
in the Trust shall be returned to the Company.
(c) Upon written approval of Participants or beneficiaries entitled to
payment of benefits pursuant to the terms of the Plan(s), the Company may
terminate this Trust prior to the time all benefit payments under the Plan(s)
have been made. All assets in the Trust at termination shall be returned to the
Company.
(d) This Trust Agreement may not be amended by the Company for two
years following a Change in Control, as defined herein.
13. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois.
(d) "Change in Control" shall mean the first to occur of the following
events (but no event other than the following events), except as otherwise
provided below:
(i) any person and any of their affiliates or associates
becomes the beneficial owner, directly or indirectly, of securities of the
Company representing twenty-five percent
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(25%) or more of the combined voting power of the Company's then outstanding
securities having general voting rights, and a majority of the Incumbent Board
(as hereinafter defined) does not approve the acquisition before the acquisition
occurs. Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur under this section (i) solely because twenty-five percent (25%) or more
of the combined voting power of the Company's then outstanding securities having
general voting rights is acquired by one or more employee benefit plans
maintained by the Company; or
(ii) members of the Incumbent Board cease to constitute a
majority of the board of Tenneco Packaging Inc. (as hereinafter defined); or
(iii) the consummation of any plan of merger, consolidation or
combination between the Company and any person including becoming a subsidiary
of any other person without members of the incumbent Board, as constituted
immediately prior to the merger, consolidation or combination constituting a
majority of the board of directors of (A) the successor corporation, or (B) if
the surviving or successor corporation is a majority-owned subsidiary of another
corporation or corporations, the ultimate parent company of the surviving or
successor corporation; or
(iv) the consummation of any sale, exchange or other
disposition of all or substantially all of the Company's assets without members
of the Incumbent Board immediately prior to any sale, exchange or disposition of
all or substantially all of the Company's assets constituting a majority of the
board of directors of (A) the corporation which holds such assets after such
disposition, or, (B) if such corporation is a majority-owned subsidiary of
another corporation or corporations, the ultimate parent company of the
successor corporation provided, that the Company Board may determine
conclusively that any transaction does not constitute a sale, exchange or other
disposition of substantially all of the Company's assets; or
(v) if any person and any of their affiliates and
associates, shall elect or have elected, during any period not exceeding 24
months, at least 25% of the members of the Tenneco Packaging Inc. board of
directors, without the approval of the Incumbent Board and such members are
comprised of persons not serving as members of the Tenneco Inc. board of
directors immediately prior to the formation of such group or the first
solicitation of proxies by such shareholder.
For purposes of this definition, the terms "person" and "beneficial
owner" shall have the meaning set forth in Sections 3(a) and 13(d) of the
Securities Exchange Act of 1934, as amended, in the regulations promulgated
thereunder. If the Trustee requests in writing that the Company determine or
furnish evidence to enable the Trustee to determine whether a Change in Control
has occurred, the Company shall do so in writing as soon as practicable
following receipt of such request.
(e) "Incumbent Board" shall mean (i) the members of the Company's board
of directors on Effective Date, to the extent that they continue to serve, and
(ii) any individual who becomes a member of the Company's board of directors
after Effective Date, if his election or
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nomination for election as a director is approved by a vote of at least
three-quarters of the then Incumbent Board.
14. Corporate Restructuring.
In the event of any merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend, extraordinary
dividend, spin-off, rights offering, share combination, or other change in the
corporate structure of the Company affecting its common stock, the Trustee may,
in its sole discretion, cause the transfer of all or a portion of the Trust's
assets to a comparable trust maintained by one or more of the resulting
corporate entities or otherwise cause such changes in the Trust or its assets as
it shall deem appropriate.
IN WITNESS WHEREOF, the Company and the Trustee have caused this
Agreement to be executed on their behalf by their respective officers thereunto
duly authorized, on the day and year set forth below.
TENNECO PACKAGING INC.
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APPENDIX A
Tenneco Packaging Inc. Deferred Compensation Plan
Tenneco Inc. Pilots' Supplemental Retirement Plan
Tenneco Packaging Inc. Supplemental Executive Retirement Plan
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EXHIBIT 10.11
FORM OF
TENNECO RABBI TRUST AGREEMENT
This Tenneco Rabbi Trust Agreement (the "Trust Agreement") is made and
entered into as of this day of , 1999.
WHEREAS, the Tenneco Rabbi Trust (the "Trust") is being adopted as set
forth below by Tenneco Inc. ("Tenneco") and Tenneco Packaging Inc. ("Packaging")
and shall be maintained by and between Packaging and one or more individuals as
trustees (each a "Trustee" and collectively, the "Trustees") (and in the case of
Fund B described below, by and among Tenneco, Packaging and the Trustees) to
effect certain terms of the Human Resources Agreement between Tenneco and
Packaging (the "HR Agreement") and to provide for the payment of certain
transaction expenses as described below. Terms not defined herein shall have the
meaning set forth in or incorporated by reference into the HR Agreement;
WHEREAS, effective on the date (the "Effective Date") on which the common
stock of Packaging is distributed to the stockholders of Tenneco (the
"Spin-off"), Tenneco Management Company ("TMC") shall be obligated to make the
payments described on Appendix A related to certain benefit plans (collectively
the "Plans" and each a "Plan") to satisfy certain obligations allocated to the
Packaging Group under the HR Agreement;
WHEREAS, Packaging and Tenneco wish to maintain the Trust assets, until
paid as specified herein;
WHEREAS, it is the intention of the parties that this Trust shall not
affect the status of the Plan(s) as either a structure not subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or as an
unfunded plan maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of ERISA; and
WHEREAS, among the purposes for which the Trust is maintained is to assure
the payment of certain professional fees and expenses incurred in connection
with the Spin-off and attendant and resulting matters.
NOW, THEREFORE, the parties do hereby agree as follows:
1. ESTABLISHMENT OF TRUST.
(a) The Trust is hereby adopted and shall be comprised, held and disposed
of as set forth in this Trust Agreement. Tenneco has contributed certain assets
to the Trust. Subject to the terms and conditions explicitly set forth herein,
the Trust hereby established is irrevocable.
(b) The Trust is intended to be a grantor trust, within the meaning of
subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue
Code of 1986, as amended, (the "Code") and shall be construed accordingly.
(c) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Tenneco and Packaging. The assets of the
Trust shall be divided between two funds, Fund A and Fund B, and the earnings of
each Fund shall be allocated only to that Fund. Except as required by law, Fund
A shall be used exclusively for the uses and purposes of Plan participants.
Except as required by law, Fund B shall be used exclusively for making payments
to entities to whom amounts are owed as contemplated by Section 14 hereof (the
"Professionals"). (Plan participants and their beneficiaries and the
Professionals are referred to collectively herein as the "Beneficiaries.") The
Beneficiaries shall have no beneficial ownership interest in any assets of the
Trust. Any rights of the Beneficiaries created under the Plan(s) or this Trust
Agreement shall be unsecured contractual rights of the Beneficiaries against the
Trust, Packaging or Tenneco as the case may be. Notwithstanding any term or
provision of this Trust Agreement, this Trust Agreement shall not, and shall not
be deemed to, in any way amend, supercede or otherwise modify any term or
provision of any agreement between any Beneficiary and the Trust. Any
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rights or remedies of any Beneficiary with respect to Packaging or Tenneco shall
be cumulative and in addition to any rights or remedies under this Trust
Agreement.
(d) Any assets held by the Trust will be subject to the claims of the
general creditors of Packaging and any of Packaging's domestic subsidiaries. To
the extent Tenneco has any interest in the assets of Fund B pursuant to Section
12(b) below, such assets shall be held by the Trust subject to the claims of the
general creditors of Tenneco and any of Tenneco's domestic subsidiaries.
(e) Packaging and/or Tenneco, in its sole discretion, may at any time, or
from time to time, make additional deposits of cash in trust with the Trustees
to augment the principal to be held, administered and disposed of by the
Trustees as provided in this Trust Agreement. Deposits shall be credited to the
Fund designated by the party making the deposit.
2. PAYMENTS TO BENEFICIARIES.
(a) Each month, Tenneco Business Services Inc. or such other person or
entity as shall be designated by the Trustees in their sole discretion ("TBS")
shall deliver to the Trustees and Packaging (and Tenneco in the case of Fund B)
a schedule (the "Payment Schedule") that indicates the amounts payable in
respect of each Beneficiary, that provides a formula or other instructions
acceptable to the Trustees for determining the amounts so payable, the form in
which such amount is to be paid, and the time of commencement for payment of
such amounts. Except as otherwise provided herein, the Trustees shall cause the
Trust to make payments to the Beneficiaries in accordance with such Payment
Schedule, as approved or revised by the Trustees. TBS shall make provision for
the reporting and withholding of any federal, state or local taxes that may be
required to be withheld with respect to payments made hereunder and shall advise
the Trustees of the amounts to be withheld and paid to the appropriate taxing
authorities.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan(s) shall be determined by TBS or such party as it shall
designate under the Plan(s). Any claim for such benefits shall be considered and
reviewed under the procedures set forth in the Plan(s). Notwithstanding the
foregoing, the Trustees may, without direction, make payments to Beneficiaries
in such manner and in such amounts as the Trustees shall determine they are
entitled to be paid (to the extent funded through Fund A) based on the most
recent information furnished to the Trustees upon which the Trustees may
reasonably rely in making such determination. Notwithstanding any other
provision hereof (i) payments shall be available from Fund A hereunder only to
persons with respect to whom liabilities are allocated to the Packaging Group
under the HR Agreement but who are excluded from coverage by the last sentence
of Section 2.b. of the Tenneco Packaging Inc. Rabbi Trust and to persons who
were directors of Tenneco Inc., but do not continue on the board of Tenneco or
Packaging after the Spin-off, and (ii) payments shall be available from Fund B
hereunder only to the Professionals.
(c) Packaging may make payment of benefits directly to Plan participants or
their beneficiaries as they become due under the terms of the Plan(s) and to the
Professionals. Packaging or Tenneco may make payments directly to the
Professionals. Packaging and/or Tenneco shall notify the Trustees of any
decision to make a payment directly to a Beneficiary prior to the time the
amount is due. In addition, if the principal of Fund A of the Trust, and any
earnings thereon, are not sufficient to make payment of benefits in accordance
with the terms of the Plan(s), Packaging shall make the balance of each such
payment as it falls due. If the principal of Fund B of the Trust, and any
earnings thereon, are not sufficient to pay the Professionals, Packaging and
Tenneco shall make the balance of each such payment as it falls due in
accordance with the Distribution Agreement. The Trustees shall notify Packaging
and Tenneco at any time the principal and earnings in either Fund are not
sufficient. Neither the existence of the Trust nor its termination shall relieve
Packaging or Tenneco of any obligation, including any obligation allocated to
Packaging Group under the HR Agreement, except to the extent that the obligation
has been discharged.
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3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN PACKAGING
IS INSOLVENT.
(a) Packaging shall be "insolvent" for purposes of this Trust Agreement if
(i) it is unable to pay its debts as they become due, or (ii) it is subject to a
pending proceeding as a debtor under the United States Bankruptcy Code.
(b) If Packaging determines that it has become insolvent, it shall
immediately notify the Trustees in writing of the insolvency. If a person
claiming to be a creditor of Packaging alleges in writing to any Trustee that
Packaging has become insolvent, the Trustees shall determine whether Packaging
is insolvent and, pending such determination, the Trustees shall discontinue
payments to Beneficiaries from the Trust.
(c) Unless any Trustee has actual knowledge of Packaging's insolvency, or
has received notice from Packaging or a person claiming to be a creditor
alleging that it is insolvent, no Trustee shall have a duty to inquire whether
Packaging is insolvent. The Trustees may in all events rely on such evidence
concerning the company's solvency as may be furnished to the Trustees and that
provides the Trustees with a reasonable basis for making a determination
concerning the company's solvency.
(d) If at any time the Trustees have determined that Packaging is
insolvent, the Trustees shall discontinue payments to Beneficiaries from the
Trust and shall hold the assets of the Trust for the benefit of Packaging's
general creditors. Nothing in this Trust Agreement shall in any way diminish any
rights of Beneficiaries to pursue their rights as general creditors.
(e) The Trustees shall resume the payments to Beneficiaries in accordance
with Section 2 of this Trust Agreement only after the Trustees have determined
that Packaging is not insolvent (or is no longer insolvent).
(f) Provided that there are sufficient assets, if the Trustees discontinue
payments pursuant to Section 3(d) hereof and subsequently resume such payments,
the first payment following such discontinuance shall include the aggregate
amount of all payments due to Beneficiaries for the period of such
discontinuance, less the aggregate amount of any payments made to Beneficiaries
by Packaging in lieu of the payments provided for hereunder during any such
period of discontinuance.
4. PAYMENTS TO PACKAGING AND TENNECO.
Except as specifically provided herein, neither Packaging nor Tenneco shall
have the right or power to direct the Trustees to return to such company or to
divert to any other company any of the Trust assets of Fund A or Fund B before
all payments of benefits have been made to the Beneficiaries with respect to
such Fund.
5. THE TRUSTEES' POWERS OF INVESTMENT AND MANAGEMENT.
The Trustees shall have the power to hold any and all assets constituting
part of the Trust exclusively in cash and cash equivalents.
6. DISPOSITION OF INCOME.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and held in cash and cash equivalents.
7. ACCOUNTING BY THE TRUSTEES.
The Trustees shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made. Within
15 days following the end of each month and within 60 days after the resignation
of a majority of the Trustees, the Trustees shall deliver to Packaging and to
Tenneco a written account of the administration of the Trust during such month
or during the period from the close of the last month to the date of such
resignation, setting forth all investments, receipts, disbursements and other
transactions effected by it, including a description of all securities and
investments purchased and sold with the cost or net proceeds of such purchases
or sales (accrued interest paid or
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receivable being shown separately), and showing all cash and securities held in
the Trust at the end of such month or as of the date of such resignation as the
case may be. Such accounting shall reflect all such matters separately for Fund
A and Fund B. The Trustees may cause TBS or Packaging to perform the duties
described in this Section 7 on behalf of the Trustees and at no charge to the
Trustees.
8. RESPONSIBILITY OF THE TRUSTEES.
(a) Except as provided herein, the Trustees shall act by action of the
majority of individuals then serving as Trustees. No Trustee shall be liable for
any action or inaction with respect to the Trust except for gross negligence or
willful misconduct.
(b) If the Trustees undertake or defend any litigation arising in
connection with this Trust, Packaging shall pay the cost thereof.
(c) The Trustees may consult with legal counsel (who may also be counsel
for Packaging or Tenneco generally) with respect to any of their duties or
obligations hereunder.
(d) The Trustees may hire agents, accountants, actuaries, investment
advisors, financial consultants, custodians or other professionals to assist it
in performing any of its duties or obligations hereunder. Such expense shall be
borne by Packaging.
(e) The Trustees shall have, without exclusion, all powers conferred on the
Trustees by applicable law, unless expressly provided otherwise herein.
(f) Notwithstanding any powers granted to the Trustees pursuant to this
Trust Agreement or to applicable law, the Trustees shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Code.
(g) Any action required to be taken by Packaging or Tenneco, or direction
given by Packaging or Tenneco, shall be by resolution of its board of directors
or by written direction of one or more of its president, any vice president or
treasurer. The Trustees may rely upon a resolution or direction filed with the
Trustees and shall have no responsibility for any action taken by the Trustees
in accordance with any such resolution or direction.
9. COMPENSATION AND EXPENSES OF THE TRUSTEES.
Packaging shall be responsible for all reasonable administrative expenses
including without limitation the costs incurred by Trustees with respect to any
matter included in Section 8 hereof and the Trustees' fees and expenses. If not
so paid, the fees and expenses shall be paid from the Trust. The Trustees shall
be entitled to reimbursement of expenses and fees of $ .
10. TRUSTEE RESIGNATION.
(a) Any individual who is serving as a Trustee may resign at any time by
written notice to Packaging, which shall be effective 30 days after receipt of
such notice unless Packaging, Tenneco and the individual agree otherwise.
(b) Any individual who is serving as a Trustee may not be removed by
Packaging or Tenneco.
(c) For purposes hereof, the death or incapacity of a Trustee shall be
deemed an immediately effective resignation.
11. APPOINTMENT OF SUCCESSOR.
(a) If an individual resigns in accordance with Section 10 hereof, that
individual may appoint any other individual as successor to replace him or her
provided, that in default of such appointment the remaining individuals acting
as Trustees may appoint any other individual as successor to replace him or her.
The appointment shall be effective when accepted in writing by the successor,
who shall have all of
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the rights and powers of the predecessor. The predecessor shall execute any
instrument necessary or reasonably requested by Packaging or the successor to
evidence the transfer.
(b) The successor need not examine records and acts of any predecessor and
may retain or dispose of existing Trust assets, subject to the rules hereof. The
successor shall not be responsible for and Packaging shall indemnify and defend
the successor from any claim or liability resulting from any action or inaction
of any predecessor from any other past event or any condition existing at the
time he or she becomes a successor.
12. AMENDMENT OR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument executed by
each individual then serving as a Trustee, and Packaging. Notwithstanding the
foregoing, no such amendment shall conflict with the terms of the Plan(s) or
shall make the Trust revocable.
(b) The Trust shall terminate on the date on which Beneficiaries are no
longer entitled to payments hereunder or on the date determined by a unanimous
vote of the Trustees then serving; provided, however, that in no event shall the
Trust terminate prior to December 31, 2001. Upon termination of the Trust any
assets remaining in Fund A shall be paid to Packaging and any assets remaining
in Fund B shall be paid in equal amounts to Packaging and Tenneco. From and
after the date of such termination, the Trustees shall forever be released from
any liability under or arising with respect to such Funds.
13. MISCELLANEOUS.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Beneficiaries under this Trust Agreement may not be
anticipated, assigned (either at law or in equity), alienated, pledged,
encumbered or subjected to attachment, garnishment, levy, execution or other
legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance
with the internal laws of the State of Illinois, without reference to its choice
of law rules.
(d) The preamble and preliminary recitals set forth above are hereby
incorporated in and made part of this Trust Agreement.
14. TRANSACTIONAL FEES AND COSTS.
Notwithstanding any other provision hereof, the Trustees shall pay and
discharge any and all fees and expenses of attorneys and investment bankers for
services performed after the Spin-off for Tenneco, Packaging or any of their
subsidiaries, in connection with, attendant upon or resulting from the Spin-off
or any and all related transactions, including, without limitation, matters
related to the initial public offering of stock of Packaging Corporation of
America (excluding underwriting discounts and commissions), the exchange offer
of Tenneco's public debt following the Spin-off and other matters relating to
the debt realignment, corporate restructuring transactions and Spin-off provided
that such services are provided by entities that provided services in connection
with or attendant to the Spin-off that were retained by or whose retention was
approved by Tenneco Inc. headquarters personnel in Greenwich, Connecticut.
15. INDEMNIFICATION.
Packaging and Tenneco shall, to the fullest extent permitted by law,
indemnify, defend and save harmless the Trustees from and against any and all
liability (including any judgments, losses, damages, civil penalties, excise
taxes, interest and any other form of liability or expense of any kind) or claim
of liability (as defined above and including any investigatory action) to which
they may be subjected by reason of any act alleged to have been done or omitted
to be done in connection with their service as Trustees of the Trust, including
all expenses reasonably incurred in their defense if Packaging and Tenneco fail
to provide such defense after having been requested to do so in writing.
Regardless of whether
5
<PAGE> 6
Packaging or Tenneco assumes such defense, counsel for such defense shall be
selected by the indemnified Trustee. Defense costs shall be indemnified as
incurred in the course of the defense or investigation. The remedies provided by
this Section 15 shall be cumulative and without prejudice to the assertion of
any other rights. To the extent that a Trustee receives payment under any
liability insurance or other indemnification arrangement with respect to a
matter covered by this Section 15, that Trustee shall reimburse the party which
has made payments to him or her hereunder, but no reimbursement shall be
required except to the extent that the total which he or she has received from
all sources is greater than the aggregate amount of his or her liability and
expense with respect to that matter. The liability of Tenneco and Packaging with
respect to the indemnification provided in this Section 15 shall be joint and
several as to the Trustees. As between Tenneco and Packaging, such liability
shall be shared equally, and Tenneco and Packaging shall each reimburse the
other party for any amounts paid by the other party in excess of 50 percent of
such liability.
IN WITNESS WHEREOF, Tenneco and Packaging have caused this Trust Agreement
to be executed on their behalf by their respective officers thereunto duly
authorized and each of the Trustees has duly executed this Trust Agreement, on
the day and year first above written.
<TABLE>
<S> <C>
TENNECO INC. TRUSTEES:
By: ---------------------------------------------
- --------------------------------------------- Dana G. Mead
Title: ---------------------------------------------
- --------------------------------------------- Theodore R. Tetzlaff
TENNECO PACKAGING INC. ---------------------------------------------
Robert T. Blakely
By:
- --------------------------------------------- ---------------------------------------------
Karl A. Stewart
Title:
- --------------------------------------------- ---------------------------------------------
Stephen J. Smith
</TABLE>
6
<PAGE> 7
APPENDIX A
Tenneco Packaging Inc. Deferred Compensation Plan
Tenneco Packaging Inc. Supplemental Executive Retirement Plan
Obligations under severance packages.
Corporate charitable commitments
7
<PAGE> 1
EXHIBIT 10.15
FORM OF
RELEASE AGREEMENT
[TENNECO LETTERHEAD]
Dana G. Mead
c/o Tenneco Inc.
1275 King Street
Greenwich, CT 06831
Re: Release Agreement
Dear Dana:
This Release Agreement ("Agreement") entered into as of the date at the end
hereof is by and between Dana G. Mead ("Employee") and the employer, Tenneco
Management Company ("Employer" or "Company"), (collectively, "the Parties").
The Parties named above agree as follows:
1. Your employment with Employer will terminate contemporaneously with the
distribution of Tenneco Packaging Inc. stock to the shareholders of
Tenneco Inc. (the "Termination Date").
Effective as of the Termination Date, you will resign all positions
which you hold with Tenneco Inc. and its subsidiaries and affiliates
except your position as a member of the Pension Investment Committee
from which you will resign in March of 2000. Notwithstanding the
foregoing, you will continue as the non-employee Chairman of the Board
of Directors of each of Tenneco Inc. and Tenneco Packaging Inc. and as
a trustee of the Tenneco Rabbi Trust. You will be entitled to receive
director's fees from both companies.
On your resignation and for five years thereafter, you will be provided
with an office in Greenwich, Connecticut or such other location in the
continental U.S. as you shall choose, together with secretarial and
administrative services and support.
2. You will be entitled to the following consideration upon the later of
the Termination Date or the end of the seven-day revocation period
defined in Paragraph 28, assuming you execute this Agreement, fail to
revoke it during the seven-day period
<PAGE> 2
Dana G. Mead
Page 2
referred to in Paragraph 28 and remain in compliance with all of the
terms and conditions of this Agreement, and further assuming that your
spouse executes a separate spousal waiver agreement to be tendered to
your spouse ("Effective Date"):
- PAYMENT - You will receive a lump sum payment equal to three times
the total of your annual salary and target bonus, less applicable
tax withholdings and any amounts due the Employer, as soon as
administratively feasible after the Effective Date but no later
than April 1, 2000. This payment shall be in lieu of any other
payments, wages and benefits including without limitation any
severance-type payment, except as expressly provided in this
Agreement. If you fail to execute this Agreement by December 3,
1999, or revoke or cancel this Agreement during the seven-day
period referred to in Paragraph 28, Employer shall not be
obligated to make lump sum payment to you. If you revoke or cancel
the Agreement after Employer has made the lump sum payment, you
shall be obligated to return to Employer all benefits and payments
provided to you under this Agreement, including but not limited to
the lump sum payment.
- RELOCATION LOAN MODIFICATION - The Employer and you and your
spouse are parties to a note (the "Note"), which Note has a
current outstanding principal balance. The Employer hereby
forgives the full principal balance of the Note, and all accrued
interest under the Note. Accordingly, the Note is hereby canceled.
The Employer shall deliver to you a release of the mortgage, given
by you to the Employer securing the Note.
- EXECUTIVE INCENTIVE COMPENSATION PLAN - Should the Company achieve
the performance goals for Executive Incentive Compensation Plan
("EICP") payouts for the calendar year 1999, you will receive an
adjusted target EICP Award prorated through the Termination Date.
No future payments will be made under this Plan.
- DEFERRED COMPENSATION - The balance of your Deferred Compensation
Account will be distributed, as soon as administratively feasible
after the Effective Date, in accordance with your election under
the terms of the Plan.
- SERP - You are eligible for retirement and survivor benefits under
your Special Appendix to the Tenneco Inc. Supplemental Executive
Retirement
<PAGE> 3
Dana G. Mead
Page 3
Plan provided, that you will be treated as though you had remained
an employee and been a participant in the Tenneco Retirement Plan
until you had attained age 65. Your special SERP will be revised
to count compensation earned in 1999 if that would increase your
benefit and it will be further revised to compute compensation as
provided in the general SERP document if that would increase your
benefit.
- TENNECO INC. STOCK OPTION PLAN - You can exercise all currently
exercisable options during the remainder of your employment in
accordance with provisions of the Plan. Remaining options will
become exercisable as of the Effective Date. Since you are
eligible for retirement, your options will remain active for a
period of ten (10) years following the termination of your
employment (or the remaining term of the option, if less.) You
will not be awarded any reload stock options upon the exercise of
any such options. Except as modified herein, your stock options
will continue to be subject to the rules of the 1996 Tenneco Inc.
Stock Ownership Plan as amended from time to time, including
without limitation, the provisions regarding adjustment and
amendment of outstanding options. This will result in the
replacement of one-half of these options with options on the stock
of Tenneco Packaging Inc. Both the Tenneco Packaging Inc. options
and the remaining Tenneco Inc. options shall be adjusted to
reflect the economic status of the options which existed prior to
the spin-off of Tenneco Packaging in accordance with the
procedures applied generally.
- NEW OPTIONS - In addition to the options described above, you will
be granted 50,000 options on the common stock of Tenneco Packaging
Inc. and 50,000 options on the common stock of Tenneco Inc. Such
options shall be granted at the fair market value of the stock of
the company to which they relate and shall have a term of not
less than 10 years.
- TENNECO INC. PERFORMANCE SHARES - Subject to any generally
applicable earlier earn-out, at the Effective Date, all
outstanding performance shares awarded under the Stock Ownership
Plan shall be deemed to have been earned at target and shall be
paid out in Tenneco Inc. common stock.
- TENNECO INC. RESTRICTED STOCK - Subject to any generally
applicable earlier vesting, your restricted shares awarded under
the Stock Ownership Plan will vest on the Effective Date and all
applicable restrictions will lapse. A stock
<PAGE> 4
Dana G. Mead
Page 4
certificate for the appropriate number of shares will be delivered
to you as soon as administratively feasible.
- THRIFT PLAN - You are a participant in the Tenneco Inc. Thrift
Plan and contributions to the Tenneco Thrift Plan cease upon the
termination of your employment. You may then elect to receive a
final settlement of your account balance, usually within four to
six weeks following the receipt of your properly completed
election forms. You are 100% vested in the account. You should
contact the Benefits Center for information about your Thrift Plan
account, including any outstanding Thrift Plan loans, and the tax
consequences of the distribution.
- MEDICAL AND DENTAL COVERAGE - You and your surviving spouse are
entitled to retiree medical and dental coverage. For information
regarding your Medical Benefits, call the Benefits Center at
1-800-444-5578. You will also be eligible for the Medical Select
Provider Program, as long as that program continues to exist.
- LIFE INSURANCE - You are entitled to retiree life insurance
coverage in accordance with generally applicable rules.
- DISABILITY AND ACCIDENT INSURANCE - Your participation in the
Tenneco Inc. Long Term Disability and Travel Accident Insurance
Plans ceases upon your termination of employment.
- BENEFIT PLANS - Except as set out in this Agreement, the
provisions of the policies or plan documents will control.
3. You acknowledge that the aggregate of all benefits set forth in
Paragraph 2 of this Agreement is greater than the aggregate to which
you are already entitled. IN ADDITION TO THE OTHER RESTRICTIONS AND
CONDITIONS SET FORTH IN THIS AGREEMENT AND IN NO WAY IN LIMIT OF THOSE
OTHER RESTRICTIONS AND CONDITIONS, YOU SHALL NOT BE ENTITLED TO ANY
RETENTION, SEVERANCE, OR OTHER NON-VESTED BENEFITS SET FORTH IN THIS
AGREEMENT IN THE EVENT YOU RESIGN YOUR EMPLOYMENT PRIOR TO THE
TERMINATION DATE. FURTHERMORE, IN THE EVENT THAT YOU TRANSFER TO
ANOTHER TENNECO COMPANY OR ONE OF ITS AFFILIATES OR SUCCESSORS AS
<PAGE> 5
Dana G. Mead
Page 5
DEFINED IN PARAGRAPH 4, YOU SHALL FORFEIT ALL RIGHTS TO ANY RETENTION,
SEVERANCE OR OTHER NON-VESTED BENEFITS SET FORTH IN THIS AGREEMENT.
4. Except as specifically provided herein, you acknowledge that your
employment shall terminate with Employer, its direct or indirect
subsidiaries, affiliates, parents, and related companies or entities,
regardless of its or their form of business organization, including
without limitation the plans described in Paragraph 7 (all collectively
the "Employer Entities"), on the Termination Date.
5. In exchange for the compensation and benefits described in Paragraph 2,
you release and discharge any and all Employer Entities as defined in
Paragraph 4 and any and all of their past and present subsidiaries,
affiliates, parents, related companies, persons and entities,
directors, employees, officers, agents, partners, insurers, attorneys,
trustees, administrators and fiduciaries (all collectively the
"Released Parties") from any and all claims, demands, and causes of
action, whether arising in contract, tort or any other theory of
action, whether arising in law or equity, whether known or unknown,
accrued or unaccrued, asserted or unasserted, from the beginning of
time up to the effective date of this Agreement, except for those
obligations created by or arising out of this Agreement. You expressly
waive the benefit of any statute or rule of law which, if applied to
this Agreement, would otherwise exclude from its binding effect any
claim against any Released Party not now known by you to exist. Except
as necessary for you to enforce this Agreement, this Agreement is
intended to be a general release that extinguishes all claims by you
against any Employer Entity. Without limiting the generality of this
Paragraph, if you commence or continue any claim in violation of this
Agreement, the Released Party shall be entitled to assert this
Agreement as a bar to such action or proceeding.
6. Without in any way limiting the generality of the foregoing, this
Agreement constitutes a full release and disclaimer of any and all
claims arising or accruing up to the effective date of this Agreement,
including but not limited to any claims arising out of or in any way
connected with or relating to the termination of your employment and
any claims arising out of or in any way connected with or related to
your employment with Employer or any other Employer Entity up to the
effective date of this Agreement. The scope of this waiver includes but
is not limited to claims arising under 29 U.S.C.ss.1981, the Age
Discrimination in Employment Act of 1967 as amended (29 U.S.C.ss.621),
Title VII of the Civil Rights Act of 1964 as amended, (42
U.S.C.ss.2000e), the Americans With
<PAGE> 6
Dana G. Mead
Page 6
Disabilities Act (42 U.S.C. ss. 12101), the Worker Adjustment
Retraining and Notification Act (29 U.S.C. ss. 2101), the Family and
Medical Leave Act of 1993 (29 U.S.C. ss. 2601), the Connecticut Human
Rights and Opportunities Act, the Connecticut Family and Medical Leave
laws (Conn. Gen. Stat. 31-51cc to 31-51gg and Ct. Legis. 96-140,
effective January 1, 1997), the Texas Human Rights Act, (Tex. Rev. Civ.
Stat. Art. 5221k), the Illinois Human Rights Act, the Wisconsin Fair
Employment Act, the New York Human Rights Law, the New York Equal Pay
Law, the New York Rights of Persons with a Disability Law, the New York
Equal Rights Law, the National Labor Relations Act, any claims for
breach of contract, wrongful or retaliatory discharge, tortious action,
inaction or interference of any sort, and any claim under any other
state, local or federal statute, regulation or ordinance, or common
law cause of action.
7. It is expressly agreed that the payments described in Paragraph 2 of
this Agreement are in full and complete satisfaction of any and all
liabilities or obligations which any Employer Entity, including any
plan, fund or program sponsored, maintained or contributed to by any
Employer Entity, has or may have to you under or with respect to any
employee benefit plan described in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), any
payment or other item excluded from the definition of "employee welfare
benefit plan", "employee pension benefit plan" or "employee benefit
plan" under the rules of 29 C.F.R. Section 2510.3-1, 2510.3-2 or
2510.3-3, as the case may be, and any employee benefit plan described
in Section 4 of ERISA. It is further agreed that the payments
described in this Agreement exceed in value anything to which you may
be already entitled.
8. You represent that you have not assigned or transferred, or purported
to assign or transfer, to any person or entity, any claim or any
portion thereof or interest therein against a Released Party.
9. You represent that as of the Termination Date, you will have turned
over to Employer all originals and copies of expense reports, notes,
memoranda, records, documents, Employer manuals, credit cards, pass
keys, computers, computer diskettes, office equipment, sales records
and data, and all other information or property, no matter how
produced, reproduced or maintained, which you have in your possession
and pertain to the business of any Employer Entity, including but not
limited to lists of customers, prices, marketing plans, strategies,
documents relating to the legal rights and obligations of any Employer
Entity, the work product
<PAGE> 7
Dana G. Mead
Page 7
of any attorney employed or retained by any Employer Entity, and other
confidential materials or information obtained by you in the course of
your employment; except for those such memoranda and other documents
referred to herein, as are necessary and appropriate for your conduct
of your duties as non-executive Chairman of Tenneco Inc. and Tenneco
Packaging Inc.
10. You acknowledge that the business and services of all Employer Entities
are highly specialized and that the following information is not
generally known, is highly confidential and constitutes trade secrets:
proprietary technical and business information relating to any Employer
Entity's plans, analysis or strategies concerning international or
domestic acquisitions, possible acquisitions or new ventures;
development plans or introduction plans for products or services;
unannounced products or services; operation costs; pricing of products
or services; research and development; personnel information;
manufacturing processes; installation, service and distribution
procedures and processes; customer lists; any know-how relating to the
design, manufacture, and marketing of any Employer Entity's services
and products, including components and parts thereof; non-public
information acquired by you concerning the requirements and
specifications of any Employer Entity's agents, vendors, contractors,
customers and potential customers; non-public financial information,
business and marketing plans, pricing and price lists; non-public
matters relating to employee benefit plans; quotations or proposals
given to agents or customers or received from suppliers; documents
relating to any Employer Entity's legal rights and obligations; the
work product of any attorney employed by or retained by any Employer
Entity; and any other information which is sufficiently secret to
derive economic value from not being generally known.
11. You shall maintain in the strictest confidence and will not, directly
or indirectly, use, intentionally or inadvertently, publish or
otherwise disclose to any person or entity whatever, any trade secrets,
or any confidential, proprietary or other non-public information of or
belonging to any Employer Entity or any agent, joint venturer,
contractor, customer, vendor or supplier of any Employer Entity
(collectively, the "Confidential Information"), regardless of its form
without the prior written explicit consent of Employer. You shall take
reasonable precautions to protect the inadvertent disclosure of
Confidential Information. Your obligations under this Agreement with
respect to Confidential Information shall extend for the period that
such information is not generally known outside of the relevant
Employer Entity for reasons other than disclosure or disclosures made
by you or on your behalf. All duties and obligations set forth in this
Agreement shall be in
<PAGE> 8
Dana G. Mead
Page 8
addition to those which exist under statute and at common law and shall
not negate but shall be in addition to or coextensive with those
obligations arising under any agreements or documents executed by you
during your employment with Employer. Should you be served with legal
process seeking to compel disclosure of any such information, you shall
notify the General Counsel of Employer immediately.
12. Paragraphs 10 - 11 hereof shall be deemed to consist of a series of
separate covenants. Should a determination be made by a court of
competent jurisdiction that the character, duration, or geographical
scope of those provisions are unreasonable in light of the
circumstances as they then exist, then it is the intention and the
agreement of the Parties that these shall be construed by the court in
such a manner as to impose only those restrictions on your conduct
which are reasonable in light of the circumstances as they then exist
and as are necessary to assure the relevant Employer Entity of their
intended benefit. If, in any judicial proceeding, a court shall refuse
to enforce all of the separate covenants because, taken together, they
are more extensive than necessary to assure the relevant Employer
Entity of the intended benefit, then it is expressly understood and
agreed that those of such covenants which, if modified or eliminated,
would permit the remaining separate covenants to be enforced in such
proceeding, shall, for the purpose of such proceeding, be deemed
modified or eliminated in order to enforce the remaining provisions.
13. In expansion and not in limitation of Paragraphs 9, 10, and 11, hereof,
it is specifically provided that among the communications, publications
and disclosures forbidden or restricted by such Paragraphs, are any
such communications, publications or disclosures by means of
electronic, computer, print or other media, including without
limitation, any use of the Internet, chat rooms, bulletin boards, web
sites, etc.
You hereby agree that Employer would suffer significant damages, which
would be difficult to completely quantify in the event you or any
Affiliate breached the provisions of Paragraphs 9, 10, or 11 of this
Agreement. You acknowledge that any violation of any such Paragraphs by
you or by any Affiliate shall be treated as a material breach and that
you shall pay to Employer either $50,000 in total liquidated damages,
or, alternatively, the actual damages suffered by Employer as a result
of the breach if Employer is able to adequately establish that its
actual total damages exceeded $50,000. You hereby acknowledge and agree
that as of the date
<PAGE> 9
Dana G. Mead
Page 9
of this Agreement $50,000 represents a reasonable estimate of the
minimum damages that Employer can be expected to incur as a result of
any such breach.
14. Nothing in this Agreement shall be construed as an admission of any
wrongdoing by any person or entity.
15. The Parties agree to cooperate fully and to execute any and all
supplementary documents and to take all additional actions that may be
necessary or appropriate to give full force to the terms and intent of
this Agreement that are not inconsistent with its terms.
16. You shall provide thorough and accurate information and testimony
voluntarily to or on behalf of any Employer Entity, regarding any
investigation or court case initiated by or against any Employer Entity
or by any government agency, but you agree not to disclose or to
discuss with anyone who is not directing or assisting in any Employer
Entity investigation or case, other than your attorney, the fact of or
the subject matter of any investigation, except as required by law. You
will cooperate with the Employer Entity and promptly provide such
information. If the Employer Entity requests information, it will
attempt to work with you to arrange times that reasonably accommodate
you, and will reimburse you for commuting, parking or other similar
expenses and, to the extent permitted by law, will reasonably
compensate you for any significant imposition on your time by the
request.
17. You acknowledge that any employment or contractual relationship between
you and any and all Employer Entities, including but not limited to the
Employer, will terminate by virtue of this Agreement on the Termination
Date. In consideration of this Agreement, you waive any and all
employment rights that you now have with any Employer Entity, except as
otherwise expressly provided in this Agreement. You agree not to seek
reinstatement, reemployment, or future employment as a new employee,
and no Employer Entity has an obligation, contractual or otherwise, to
employ or reemploy, hire or rehire, or recall or reinstate you in the
future.
18. You agree to keep confidential the terms, conditions, and amounts set
forth in this Agreement and not to disclose any information relating to
this Agreement to any employee or former employee of any Employer
Entity except as required by law or a court of competent jurisdiction.
<PAGE> 10
Dana G. Mead
Page 10
19. It is further agreed that if any provision of this Agreement
contravenes the law of any state or jurisdiction where this Agreement
is to be performed or enforced, such provision shall be deemed not to
be a part of this Agreement, and the other provisions of this
Agreement, shall remain in full force and effect.
20. The failure of the Employer to exercise any rights under this Agreement
upon any breach or threatened breach by you shall not constitute a
waiver of any rights arising by reason of other or similar breaches.
21. You shall have no right of assignment or transfer of any rights herein
or any sums that may accrue to you hereunder, nor shall any creditor or
other claimant have any right to assert any interest in or right to
receive such sums either by voluntary or involuntary act on their part,
by any writ or garnishment or attachment or otherwise.
22. The rights and obligations of the Parties shall be construed and
enforced in accordance with, and governed by, the laws of the State of
Connecticut without regard to that or any other state's rules regarding
conflict of laws. The language of all parts of this Agreement shall in
all cases be construed as a whole, according to its fair meaning and
not strictly for or against any of the Parties.
23. This Agreement shall be binding upon and inure to the benefit of the
respective successors, heirs, assigns, administrators, executors and
legal representatives of the Parties and other entities described in
this Agreement.
24. You warrant that no promise or inducement to enter into this Agreement
has been offered or made except as set forth in this Agreement, that
you are entering into this Agreement without any threat or coercion and
without reliance on any statement or representation made on behalf of
any Employer Entity or by any person employed by or representing any
Employer Entity, except for the written provisions and promises
contained in this Agreement.
25. This Agreement constitutes the entire agreement and understanding
between the Parties with regard to all matters, including but not
limited to your employment, the cessation of your employment from
Employer, payments owed to you, and the other subject matters addressed
in this Agreement. This Agreement supersedes and replaces all prior
commitments, negotiations and all agreements proposed or otherwise,
whether written or oral, concerning the subject matters contained in
this
<PAGE> 11
Dana G. Mead
Page 11
Agreement. This Agreement is an integrated document and the
consideration stated herein is the sole consideration for this
Agreement.
26. This Agreement is being delivered to you on ________________. You shall
have forty-seven days, or until ________________ to decide whether to
sign the Agreement and be bound by its terms.
27. Employer informs you of the following:
a) In order to be eligible for the benefits contained in this
Release Agreement, you must: (i) have worked in the
Administrative Department on January 1, 1999 and, (ii)
terminate your employment on your Termination Date, and (iii)
agree on or before December 3, 1999 to terminate your
employment under the terms of a valid separation agreement,
by executing this Agreement.
b) The decision that you would no longer be the CEO of Tenneco
Inc. was a mutual decision made by and between you and the
Board of Directors. No other employees were considered.
Accordingly, this was not made as part of any group
termination decision.
c) Nevertheless, the Company has decided to provide you with
information that you may consider relevant in assessing the
waiver of age discrimination claims. Certain other employees
are separating from service in connection with Tenneco's
corporate restructuring and as a result, are eligible for
Tenneco's severance program.
28. In addition, the Parties agree that even after signing the Agreement,
you shall have the right to revoke or cancel it only within seven days
after signing it. This cancellation or revocation can be accomplished
by delivery of a written notification if you wish to revoke the
Agreement to the Vice President of Human Resources. In the event that
this Agreement is canceled or revoked by you, Employer shall have no
obligation to meet any of the commitments described in this Agreement.
29. You acknowledge that you have been advised and encouraged by Employer
to consult your own attorney prior to signing this Agreement, and that
you execute this Agreement voluntarily.
<PAGE> 12
Dana G. Mead
Page 12
30. You acknowledge that you have read this Agreement and that you
understand that the Agreement will have the effect of waiving any
action or recovery you might pursue, including breach of contract,
personal injury, discrimination on the basis of race, age, sex,
national origin, citizenship, religion, veteran status, handicap, or
disability and any other claims arising prior to the date of the
Agreement.
Please return the executed original of this letter to Stephen J. Smith, Vice
President Human Resources, 1275 King Street, Greenwich, Connecticut 06831.
Sincerely,
Larry D. Brady
Director and Chairman of the Compensation and Benefits Committee
Tenneco Inc. Board of Directors
AGREED AND ACCEPTED:
Dated as of:
- ------------------------------------- ------------------------
Dana G. Mead
<PAGE> 13
MODIFICATION OF RELEASE AGREEMENT
The parties hereto have entered into the Release Agreement, dated _______,
1999 (the "Release Agreement").
This Modification supersedes and amends the Release Agreement as and to
the extent set forth herein.
Notwithstanding any provision of the Release Agreement to the contrary,
_________________ ("Officer") shall not be deemed to have waived any rights to
indemnification, contribution or reimbursement to which Officer is or would
otherwise be entitled by contract, operation of law or otherwise, including
without limitation, under and pursuant to the Delaware General Corporation Law,
the certificate of incorporation of Tenneco Inc., the By-Laws of Tenneco Inc.,
any contract, the Tenneco Rabbi Trust or any insurance policy or other similar
arrangement at any time maintained by Tenneco Inc. or any of its subsidiaries
or any right in respect or resulting from any legal, accounting, financial or
other advice provided to Tenneco Inc. or any of its subsidiaries or Officer by
any legal counsel, accountant, financial advisor, engineer, consultant or other
similar person, firm or corporation in the discharge of such Officer's
employment as an officer, director or employee of Tenneco Inc. or any of its
subsidiaries or as a representative of Tenneco Inc. or any of its subsidiaries.
Neither Tenneco Inc. nor any of its subsidiaries will, for a period of six
years from the date of the spin-off described below, amend or modify or
terminate any such certificate of incorporation, by-law, contract, insurance
policy or other arrangement if the effect thereof could be to eliminate or
diminish the protection afforded the Officer thereby in any material respect.
Officer shall also retain, without cost to Officer, the benefit of all the
liability insurance coverage maintained by Tenneco Inc., Tenneco Packaging
Inc., Tenneco Automotive Inc. or otherwise, including, without limitation, the
Tenneco Inc. Director and Officer and Fiduciary "run-off" insurance policies to
be purchased in connection with the Tenneco Packaging Inc. spin-off. Tenneco
Inc. and Tenneco Management Company each further agrees jointly and severally
to purchase and keep in force, at their sole expense, such coverage for its
full term and to deliver proof of such coverage to Officer.
Nothing contained herein or in the Release Agreement shall be deemed to be
a waiver or discharge of any right which the Officer has or may have if the
effect of any such waiver or discharge would be to abrogate or diminish any
right the Officer or Tenneco Inc. or any of its subsidiaries has or may have
under any insurance policy or other similar arrangement.
Dated:
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- -------------------------------------
[Name of Officer]
TENNECO INC.
By:
--------------------------------
Name:
Title:
TENNECO MANAGEMENT COMPANY
By:
--------------------------------
Name:
Title:
