<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
(mark one)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-15157
----------------------------
PACTIV CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-2552989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 WEST FIELD COURT
LAKE FOREST, ILLINOIS 60045
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 482-2000
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past ninety days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common stock, par value $0.01 per share: 158,016,323 shares as of October
31, 2000. (See Notes to Financial Statements.)
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<PAGE> 2
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, the prospects and developments of the company (as defined),
business strategies for its operations, and cost savings from its restructuring
efforts, all of which are subject to risks and uncertainties. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." These
forward-looking statements are identified as "forward-looking statements" or by
their use of terms (and variations thereof) and phrases such as "will,"
"anticipate," "intend," "estimate," "expect," and similar terms (and variations
thereof) and phrases.
When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, the company cautions that, while
it believes such assumptions or bases to be reasonable and makes them in good
faith, assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, the
company or its management expresses an expectation or belief as to future
results, such expectation or belief is expressed in good faith and believed to
have a reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or will be achieved or accomplished.
The company's actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include the following: (i) changes in consumer demand and prices;
(ii) material substitutions and changes in prices of raw materials; (iii) risks
associated with international operations; (iv) the general economic, political
and competitive conditions in markets and countries where the company operates;
(v) governmental actions; (vi) changes in capital availability or costs; (vii)
the cost of compliance with changes in regulations, including environmental
regulations; (viii) workforce factors such as strikes or labor interruptions;
(ix) the company's ability to identify and make appropriate acquisitions and to
integrate operations of acquired businesses quickly and in a cost-effective
manner; (x) changes by the Financial Accounting Standards Board or other
accounting regulatory bodies of authoritative generally accepted accounting
principles or policies; (xi) the timing and occurrence (or non-occurrence) of
transactions and events which may be subject to circumstances beyond the
company's control; and (xii) the company's ability to recognize forecasted
savings from its restructuring programs on a timely basis.
1
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial statements (Unaudited)
Statement of Income (Loss)............................. 3
Condensed Statement of Financial Position.............. 4
Condensed Statement of Cash Flows...................... 5
Notes to Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................ 18
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings*................................ 19
Item 2. Changes in Securities*............................ 19
Item 3. Defaults Upon Senior Securities*.................. 19
Item 4. Submission of Matters to a Vote of Security
Holders*............................................... 19
Item 5. Other Information*................................ 19
Item 6. Exhibits and Reports on Form 8-K.................. 19
</TABLE>
------------------------
* No response to this item is included herein either because it is inapplicable
or there is nothing to report.
2
<PAGE> 4
STATEMENT OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
--------------- ------------- --------------- -------------
(IN MILLIONS, EXCEPT SHARE AND PER-SHARE DATA) (CONSOLIDATED) (COMBINED) (CONSOLIDATED) (COMBINED)
<S> <C> <C> <C> <C>
SALES..................................... $ 730 $ 754 $ 2,185 $ 2,158
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales (excluding depreciation and
amortization shown below)............ 511 526 1,551 1,450
Depreciation and amortization........... 45 47 136 141
Selling, general, and administration.... 74 113 221 321
Other (income) expense, net............. -- (1) (9) 4
Restructuring........................... -- -- -- 29
------------ ------------ ------------ ------------
630 685 1,899 1,945
------------ ------------ ------------ ------------
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES,
AND MINORITY INTEREST................... 100 69 286 213
Interest expense, net of interest
capitalized.......................... 34 38 101 106
Income tax expense...................... 28 27 78 51
Minority interest....................... -- -- 1 --
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS......... 38 4 106 56
Income (loss) from discontinued operations,
net of income tax....................... -- 8 134 (155)
------------ ------------ ------------ ------------
Income (loss) before extraordinary loss... 38 12 240 (99)
Extraordinary loss, net of income tax..... -- -- -- (7)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle.......... 38 12 240 (106)
Cumulative effect of change in accounting
principle, net of income tax............ -- -- -- (32)
------------ ------------ ------------ ------------
NET INCOME (LOSS)......................... $ 38 $ 12 $ 240 $ (138)
============ ============ ============ ============
Average shares of common stock outstanding
Basic................................... 158,205,758 167,459,483 162,819,193 167,115,070
Diluted................................. 158,256,470 167,725,321 162,867,794 167,458,449
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share of common
stock
Continuing operations................... $ 0.24 $ 0.01 $ 0.65 $ 0.33
Discontinued operations................. -- 0.05 0.82 (0.93)
Extraordinary loss...................... -- -- -- (0.04)
Cumulative effect of change in accounting
principle............................ -- -- -- (0.19)
------------ ------------ ------------ ------------
$ 0.24 $ 0.06 $ 1.47 $ (0.83)
============ ============ ============ ============
Diluted earnings (loss) per share of common
stock
Continuing operations................... $ 0.24 $ 0.01 $ 0.65 $ 0.33
Discontinued operations................. -- 0.05 0.82 (0.93)
Extraordinary loss...................... -- -- -- (0.04)
Cumulative effect of change in accounting
principle............................ -- -- -- (0.19)
------------ ------------ ------------ ------------
$ 0.24 $ 0.06 $ 1.47 $ (0.83)
============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
3
<PAGE> 5
CONDENSED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(IN MILLIONS, EXCEPT SHARE DATA) (CONSOLIDATED) (CONSOLIDATED)
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments....................... $ 23 $ 12
Accounts and notes receivable
Trade, less allowances of $12 and $11 in the
respective periods................................. 301 279
Income taxes.......................................... 55 30
Other................................................. 10 42
Inventories
Finished goods........................................ 295 260
Work in process....................................... 56 45
Raw materials......................................... 54 71
Other materials and supplies.......................... 27 53
Other..................................................... 74 74
------ ------
Total current assets...................................... 895 866
------ ------
Property, plant, and equipment, net......................... 1,341 1,396
------ ------
Other non-current assets
Goodwill and intangibles, net............................. 941 981
Pension assets............................................ 1,039 941
Other..................................................... 168 209
------ ------
Total other non-current assets............................ 2,148 2,131
Net assets of discontinued operations....................... 53 195
------ ------
TOTAL ASSETS.............................................. $4,437 $4,588
====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Short-term debt, including current maturities of long-term
debt.................................................... $ 14 $ 325
Accounts payable, trade................................... 224 265
Interest accrued.......................................... 38 17
Other..................................................... 321 313
------ ------
Total current liabilities................................. 597 920
------ ------
Long-term debt.............................................. 1,657 1,741
Deferred income taxes....................................... 447 321
Deferred credits and other liabilities...................... 210 236
Minority interest........................................... 21 20
------ ------
Total liabilities......................................... 2,932 3,238
------ ------
Shareowners' equity
Common stock (158,166,171 and 168,372,798 shares issued
and outstanding, after deducting 11,401,043 and 0 shares
held in treasury, in the respective periods)............ 2 2
Premium on common stock and other capital surplus......... 1,383 1,468
Accumulated other comprehensive loss...................... (24) (24)
Retained earnings (deficit)............................... 144 (96)
------ ------
Total shareowners' equity................................. 1,505 1,350
------ ------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................. $4,437 $4,588
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
4
<PAGE> 6
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
-------------- ----------
(IN MILLIONS) (CONSOLIDATED) (COMBINED)
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations........................... $ 106 $ 56
Adjustments to reconcile income from continuing operations
to cash provided (used) by continuing operations:
Depreciation and amortization............................. 136 141
Deferred income taxes..................................... 52 78
Restructuring............................................. -- 29
Pension income............................................ (81) (64)
Allocated interest, net of tax............................ -- 68
Increase in net working capital............................. (59) (203)
Other....................................................... (1) (22)
----- -------
Cash provided by continuing operations...................... 153 83
Cash used by discontinued operations........................ -- (76)
----- -------
Cash provided by operating activities....................... 153 7
----- -------
INVESTING ACTIVITIES
Net proceeds related to sale of discontinued operations..... 394 312
Net proceeds from sale of businesses and assets............. 47 30
Expenditures for property, plant, and equipment............. (102) (114)
Acquisitions of businesses and assets....................... (1) (7)
Expenditures for property, plant, and equipment and business
acquisitions -- discontinued operations................... -- (1,129)
Other....................................................... (1) 3
----- -------
Cash provided (used) by investing activities................ 337 (905)
----- -------
FINANCING ACTIVITIES
Issuance of common stock.................................... 11 --
Purchase of common stock.................................... (96) --
Issuance of long-term debt.................................. -- 1,760
Retirement of long-term debt................................ (87) (29)
Net decrease in short-term debt, excluding current
maturities of long-term debt.............................. (307) (8)
Cash distribution to former parent.......................... -- (810)
----- -------
Cash (used) provided by financing activities................ (479) 913
----- -------
Effect of foreign-exchange rate changes on cash and
temporary cash investments................................ -- 2
----- -------
Increase in cash and temporary cash investments............. 11 17
Cash and temporary cash investments, January 1.............. 12 7
----- -------
Cash and temporary cash investments, September 30........... $ 23 $ 24
===== =======
NON-CASH FINANCING ACTIVITIES
Equity interest received in connection with the sale of
containerboard operations................................. $ -- $ 194
Long-term debt assumed by buyers of containerboard
operations................................................ $ -- $(1,760)
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
5
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) On November 4, 1999, in connection with a corporate reorganization,
Pactiv Corporation's former parent company, Tenneco Inc. (Tenneco), and its
subsidiaries completed various intercompany transfers and distributions designed
to restructure and separate their then-existing businesses, assets, liabilities,
and operations so that, among other things, the packaging businesses and certain
corporate and administrative service operations of Tenneco would be owned by
Pactiv Corporation (Pactiv). Tenneco subsequently distributed pro rata to
holders of its common stock all of the outstanding common stock of Pactiv (the
spin-off). Prior to the spin-off, Pactiv was named Tenneco Packaging Inc. (TPI).
As used herein, the term "company" or "Pactiv" refers, for periods prior to
the spin-off, to TPI and certain other packaging subsidiaries of Tenneco and,
for periods after the spin-off, to Pactiv and its consolidated subsidiaries.
Prior to the spin-off, all of the outstanding common stock of the company
was owned directly or indirectly by Tenneco. The financial statements present
the results of operations, financial position, and cash flows of the company as
if it were a separate entity for all periods. The former parent's historical
basis in the assets and liabilities of the company has been carried over to
Pactiv. All per-share information is presented on a diluted basis, unless
otherwise noted.
The financial statements at September 30, 2000, and for the three and nine
months then ended are presented on a consolidated basis. The December 31, 1999,
statement of financial position is presented on a consolidated basis, while the
financial statements for the three and nine months ended September 30, 1999, are
presented on a combined basis. Certain amounts in prior years' financial
statements have been reclassified to conform with the presentation used in 2000.
In the company's opinion, the accompanying unaudited financial statements
contain all normal recurring adjustments necessary to present fairly the
financial position, results of operations, and cash flows for the periods
indicated. These statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles. It is presumed that users of the accompanying interim
financial information for 2000 have read or have access to Pactiv's audited
financial statements for the preceding year. Accordingly, these statements
should be read in conjunction with the company's Form 10-K for the year ended
December 31, 1999.
(2) In April 1999, the company contributed the containerboard assets of its
paperboard packaging operation to a newly formed joint venture called Packaging
Corporation of America (PCA). For the contribution, Pactiv received
approximately $2 billion, comprised of cash and the assumption of debt, and
retained a 45% equity interest in PCA, which was subsequently reduced to 43%
upon the issuance of equity to PCA's management. The equity interest was valued
at approximately $200 million.
The assets contributed to the joint venture represented substantially all
of the assets of the company's paperboard packaging operation, and included four
mills, sixty-seven corrugated plants, and an ownership or leasehold interest in
approximately 950,000 acres of timberland. Prior to the formation of the joint
venture, the company borrowed $1.8 billion and used $1.2 billion of the proceeds
to acquire assets used by the containerboard business under operating leases and
timber-cutting rights and to purchase accounts receivable previously sold by
this business to a third party. The remainder of the borrowings ($600 million)
was remitted to Tenneco to repay a portion of its short-term debt. As a result
of the joint-venture transaction, the company recorded an estimated loss of $293
million ($178 million after tax, or $1.07 per share) in the first quarter of
1999 based on the amount by which the carrying value of the contributed
containerboard assets exceeded their fair value, less selling costs.
In June 1999, the company sold its remaining paperboard packaging
operation, its folding carton business, to Caraustar Industries for $73 million.
The company recorded a related gain of $14 million ($9 million after tax, or
$0.05 per share), which was included in discontinued operations.
6
<PAGE> 8
In the fourth quarter of 1999, the company recorded an additional $53
million loss ($37 million after tax, or $0.21 per share) in connection with the
disposition of the paperboard packaging operation as a result of events that
occurred subsequent to the PCA and Caraustar transactions, including
determination of final working-capital settlement amounts, revisions to
actuarially determined estimates of pension-plan curtailment costs, and changes
in estimates regarding retained liabilities.
In February 2000, the company sold 85% of its interest in PCA and used the
net proceeds of $398 million primarily to repay debt. The company recorded a
related gain of $224 million ($134 million after tax, or $0.82 per share). As a
result, the company's equity interest in PCA was reduced to 6%.
Financial data for the paperboard packaging operation appears below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS) ------------------------ ------------------
2000 1999 2000 1999
---- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period................................ $53 $118 $ 53 $ 118
--- ---- ---- -----
Sales...................................................... $-- $ -- $ -- $ 445
--- ---- ---- -----
Income from operations before income taxes and interest
allocation............................................... $-- $ 8 $ -- $ 30
Gain on folding carton business sale....................... -- -- -- 14
Gain (loss) on containerboard business sale................ -- -- 224 (293)
--- ---- ---- -----
Income (loss) before income taxes and interest
allocation............................................... -- 8 224 (249)
Income tax expense (benefit)............................... -- -- 90 (99)
--- ---- ---- -----
Income (loss) before interest allocation................... -- 8 134 (150)
Allocated interest expense, net............................ -- -- -- 5
--- ---- ---- -----
Income (loss) from discontinued operations................. $-- $ 8 $134 $(155)
--- ---- ---- -----
</TABLE>
(3) In December 1999, the company entered into an agreement to sell its
aluminum foil reroll facility in Clayton, New Jersey, and its aluminum packer
processor facility in Shelbyville, Kentucky, for $44 million. The company
recorded a related gain of $6 million ($4 million after tax, or $0.02 per share)
during the first quarter of 2000 and used the proceeds from the transaction
primarily to repay debt.
(4) In the first quarter of 1999, the company recorded an extraordinary
charge of $10 million, ($7 million after tax, or $0.04 per share) related to the
retirement of debt incurred in connection with the contribution of assets to the
PCA joint venture.
(5) In the first quarter of 1999, a plan was adopted to realign company
functions and to close Tenneco's headquarters facility in Greenwich,
Connecticut. This plan, for which a $29 million restructuring charge ($17
million after tax, or $0.10 per share) was recorded, included the elimination of
forty positions. In the second quarter of 1999, $30 million was received in
connection with the sale of the Greenwich facility. These restructuring actions
were completed in 1999 and were executed in accordance with the company's
initial plan.
In the fourth quarter of 1999, the company recorded a $154 million
restructuring charge ($91 million after tax, or $0.54 per share) to exit
non-core businesses and to reduce overhead costs. The restructuring covered (1)
the sale of the company's forest products and aluminum foil container businesses
in Europe ($68 million), for which cash proceeds of $20 million were received in
the fourth quarter of 1999; (2) the sale of certain assets of the company's
administrative-service and corporate aircraft operations ($10 million); (3)
impairment of long-lived assets of the company's packaging polyethylene business
($68 million); and (4) severance costs associated with the elimination of 161
positions, primarily in the company's international operations ($8 million). The
impairment charge for the packaging polyethylene business' assets was deemed
necessary following completion of an evaluation of strategic alternatives for
the business, and represented the difference between the carrying value of the
assets and the forecasted future cash flows from the business, computed on a
discounted basis.
7
<PAGE> 9
Activity related to the 1999 restructuring plans is shown in the following
table.
<TABLE>
<CAPTION>
(IN MILLIONS) NINE MONTHS ENDED
SEPTEMBER 30,
2000
BALANCE AT ----------------- BALANCE AT
DECEMBER 31, CASH SEPTEMBER 30,
1999 PAYMENTS 2000
------------ ----------------- -------------
<S> <C> <C> <C>
Severance....................................... $8 $5 $3
Other........................................... 1 -- 1
-- -- --
$9 $5 $4
-- -- --
</TABLE>
(6) In May 1999, Tenneco, Pactiv, and a number of containerboard
manufacturers were named as defendants in a civil class-action antitrust lawsuit
pending in the United States district court for the Eastern District of
Pennsylvania. The company also was named as a defendant in a related
class-action antitrust lawsuit. These lawsuits allege that the defendants
conspired to raise linerboard prices for corrugated containers and corrugated
sheets from October 1, 1993, through November 30, 1995, in violation of Section
1 of the Sherman Act. The lawsuits seek treble damages in an unspecified amount,
plus attorney fees. Pactiv's management believes that the allegations have no
merit, is vigorously defending the claims, and believes that the outcome will
not have a material adverse effect on the company's financial position or
results of operations. In connection with the spin-off, the company agreed that,
as between it and Tenneco, the company would be responsible for defending the
claims against Tenneco and for any liability of Tenneco resulting therefrom.
The company is party to various legal proceedings arising from its
operations. Management believes that the outcome of these proceedings,
individually and in the aggregate, will not have a material effect on the
company's financial position or results of operations.
(7) The company is subject to a variety of environmental and
pollution-control laws and regulations in the jurisdictions in which it
operates. The company provides related reserves where it is probable that
liabilities exist and where reasonable estimates of the liabilities can be made.
Estimated liabilities are subject to change as more information becomes
available regarding the magnitude of possible clean-up costs and the
effectiveness and expense of alternative clean-up technologies. However,
management believes that any additional costs that may be incurred as more
information becomes available will not have a material effect on the financial
condition or results of operations of the company.
(8) 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 required that start-up activity costs be expensed as
incurred. SOP 98-5 also required that previously capitalized costs related to
start-up activities be expensed as a cumulative effect of change in accounting
principle upon adoption. The company adopted SOP 98-5 on January 1, 1999, and
recorded a related after-tax charge of $32 million (net of a $9 million tax
benefit), or $0.19 per share, pertaining to previously capitalized start-up
costs of its foreign and administrative-service operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133. In June 2000, the FASB issued
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment to SFAS No. 133. SFAS No. 133, as amended, establishes
accounting and reporting standards which require that derivative instruments,
including certain derivative instruments embedded in other contracts, be
recorded on the balance sheet as either assets or liabilities measured at their
fair value and that changes in the derivative instruments' fair value be
recognized currently in earnings unless specific hedge-accounting criteria are
met. The company plans to adopt SFAS No. 133 on January 1, 2001. The company 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 May 2000, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-14, Accounting for Certain Sales Incentives. This
issue addresses the recognition, measurement, and income
8
<PAGE> 10
statement classification of various types of sales incentives, including
discounts, coupons, rebates, and free products. The company is required to adopt
EITF No. 00-14 in the fourth quarter of 2000 and is currently analyzing the
impact of the pronouncement on its consolidated financial statements.
In July 2000, the EITF reached a consensus on Issue 1 of No. 00-10,
Accounting for Shipping and Handling Fees and Costs, which requires that any
amounts billed to customers for shipping and handling be classified as revenues.
In September 2000, the EITF also reached a consensus on Issue 2 of No. 00-10,
which requires that shipping and handling costs be included in cost of sales and
precludes the recording of such costs as a deduction against revenues. The
company is required to implement EITF No. 00-10 in the fourth quarter of 2000
and is currently analyzing the effect of the pronouncement on its consolidated
financial statements.
(9) At the time of the spin-off, the company exercised its right to make a
one-time draw under a $1.5 billion term-loan facility in the amount of $300
million at a floating-interest rate based on LIBOR, adjusted for reserve
requirements, plus a specified margin. All amounts borrowed under this facility
were repaid in the first quarter of 2000 following the company's sale of the
majority of its interest in PCA.
In conjunction with the spin-off, the company entered into a five-year,
$750 million revolving-credit agreement and a 364-day, $250 million
revolving-credit agreement. Effective September 27, 2000, the 364-day
revolving-credit agreement has been extended for an additional 364-day period
and the total availability has been increased to $300 million, of which $265
million has been committed.
(10) Prior to the spin-off, Tenneco's historical practice had been to incur
indebtedness for the consolidated group at the parent-company level, or at a
limited number of subsidiaries, rather than at the operating-company level.
Consequently, prior to the spin-off, corporate debt and related interest expense
were allocated to the company on the basis of the ratio of the company's net
assets to Tenneco's consolidated net assets plus debt. Similarly, interest
expense ($106 million for the nine months ended September 30, 1999) was
allocated using the weighted-average cost of all corporate debt. Although
interest costs and the related tax effect were allocated to the company for
financial-reporting purposes, the company was not billed for these amounts.
Changes in allocated corporate debt and allocated after-tax interest expense
were included in combined equity. Although management believes that the
historical allocation of corporate debt and interest was reasonable, it is not
necessarily indicative of debt requirements and related interest costs of Pactiv
as a separate public company.
(11) In November 1999, the company established a grantor ("rabbi") trust to
assure the payment of deferred compensation and supplemental pension benefits
and reserved 3,200,000 shares of Pactiv common stock for the trust. In January
2000, the shares were issued to the trust, which is included in Pactiv's
financial statements. Consequently, these shares are not considered to be
outstanding.
(12) In connection with the spin-off, one share of Pactiv common stock was
issued for each share of Tenneco common stock then owned. Basic earnings per
share for 1999 and 2000 was calculated using the weighted-average number of
shares outstanding for the parent and for Pactiv. Diluted earnings per share was
calculated in the same manner, adjusting for the potential issuance of
additional shares related to stock options, restricted stock, and performance
shares.
9
<PAGE> 11
Earnings from continuing operations per share of common stock outstanding
was computed as follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS, EXCEPT SHARE AND SEPTEMBER 30, SEPTEMBER 30,
PER-SHARE DATA) ------------------------------ ------------------------------
2000 1999 2000 1999
-------------- ------------ -------------- ------------
(CONSOLIDATED) (COMBINED) (CONSOLIDATED) (COMBINED)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income from continuing operations....... $ 38 $ 4 $ 106 $ 56
------------ ------------ ------------ ------------
Average shares of common stock
outstanding........................... 158,205,758 167,459,483 162,819,193 167,115,070
------------ ------------ ------------ ------------
Earnings from continuing operations per
average share of common stock......... $ 0.24 $ 0.01 $ 0.65 $ 0.33
------------ ------------ ------------ ------------
DILUTED EARNINGS PER SHARE
Income from continuing operations....... $ 38 $ 4 $ 106 $ 56
------------ ------------ ------------ ------------
Average shares of common stock
outstanding........................... 158,205,758 162,819,193
Effect of dilutive securities
Restricted stock...................... 593 --
Stock options......................... 1,361 454
Performance shares.................... 48,758 48,147
------------ ------------
Average shares of common stock
outstanding including dilutive
securities............................ 158,256,470 167,725,321 162,867,794 167,458,449
------------ ------------ ------------ ------------
Earnings from continuing operations per
average share of common stock......... $ 0.24 $ 0.01 $ 0.65 $ 0.33
------------ ------------ ------------ ------------
</TABLE>
In February 2000, the company announced its intention to repurchase
approximately $100 million of its common stock. During the first nine months of
2000, the company repurchased 11,382,900 shares of its common stock for $96
million.
(13) The company's operating segments are as follows:
(a) Consumer and foodservice/food packaging, which relates to the
manufacture and sale of disposable plastic, molded-fiber, pressed-paperboard,
and aluminum packaging products for the consumer, foodservice, and food
packaging markets.
(b) Protective and flexible packaging, which relates to the manufacture and
sale of plastic, paperboard, and molded-fiber protective and flexible packaging
products. Major markets served by protective packaging products include
electronics, automotive, furniture, and e-commerce, whereas flexible packaging
products are used mainly in food, medical, pharmaceutical, chemical, and
hygienic applications.
(c) Other, which relates to corporate and administrative-service operations
and pension-plan income and expense.
Prior to the spin-off, the combined results of the consumer and
foodservice/food packaging and protective and flexible businesses were reported
by Tenneco under the specialty packaging segment. During the fourth quarter of
1999, the company modified the composition of its operating segments because of
changes made to its management reporting structure in connection with the
spin-off. Segment information for the three and nine months ended September 30,
1999, has been restated to conform with current segment presentation. Products
are transferred between segments and geographic areas on a basis intended to
reflect, as nearly as possible, market values.
10
<PAGE> 12
The following table sets forth certain segment information.
<TABLE>
<CAPTION>
SEGMENT
(IN MILLIONS) ----------------------------------------
CONSUMER AND
FOODSERVICE/ PROTECTIVE AND RECLASSIFICATIONS
FOOD FLEXIBLE AND
PACKAGING PACKAGING OTHER ELIMINATIONS TOTAL
------------ -------------- ------ ----------------- ------
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
Sales to external
customers.................. $ 532 $ 198 $ -- $ -- $ 730
Income before interest,
income taxes, and minority
interest................... 72 12 16(a) -- 100
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Sales to external
customers.................. 534 220 -- -- 754
Income (loss) before
interest, income taxes, and
minority interest.......... 54 19 (4)(a) -- 69
Income from discontinued
operations, net............ -- -- 8 -- 8
AT SEPTEMBER 30, 2000, AND
FOR THE NINE MONTHS THEN
ENDED
Sales to external
customers.................. 1,580 605 -- -- 2,185
Income before interest,
income taxes, and minority
interest................... 207 32 47(a) -- 286
Income from discontinued
operations, net............ -- -- 134 -- 134
Total assets................. 2,211 853 1,448(b) (75) 4,437
Net assets of discontinued
operations................. -- -- 53 -- 53
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
Sales to external
customers.................. 1,528 630 -- -- 2,158
Income (loss) before
interest, income taxes, and
minority interest.......... 206 61 (54)(a)(c) -- 213
Loss from discontinued
operations, net............ -- -- (155) -- (155)
Extraordinary loss, net...... -- -- (7) -- (7)
Cumulative effect of change
in accounting principle,
net........................ (1) (16) (15) -- (32)
</TABLE>
(a) Includes pension-plan income and unallocated corporate expenses.
(b) Includes assets related to pension plans (net), administrative-service
operations, and the discontinued paperboard packaging operation.
(c) Includes restructuring and other charges.
The above notes are an integral part of the foregoing financial statements.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STRATEGIC REALIGNMENT
In July 1998, Tenneco's board of directors authorized management to develop
a broad range of strategic alternatives to separate its automotive, paperboard
packaging, and specialty packaging businesses. Subsequently, Tenneco completed
the following actions:
- In April 1999, the company contributed the containerboard assets of
its paperboard packaging operation to a newly formed joint venture
called Packaging Corporation of America (PCA). For the contribution,
the company received approximately $2 billion, comprised of cash and
the assumption of debt, and retained a 45% equity interest in PCA,
which was subsequently reduced to 43% upon the issuance of equity to
PCA's management. The equity interest was valued at approximately
$200 million.
- In June 1999, the company sold its paperboard packaging's folding
carton business, to Caraustar Industries for $73 million.
- On November 4, 1999, Tenneco completed the spin-off by issuing a
dividend of the common stock of Pactiv to Tenneco shareowners.
The paperboard packaging segment is classified as a discontinued operation
in the financial statements. See the notes to financial statements included in
this document for further information.
Before the spin-off, Tenneco realigned substantially all of its existing
debt through a combination of tender offers, exchange offers, and other
refinancings. The realignment was financed through borrowings by Tenneco
Automotive (formerly Tenneco, which changed its name to Tenneco Automotive, Inc.
in connection with the spin-off) under a new credit facility, Tenneco
Automotive's issuance of subordinated debt, the company's issuance of public
debt, and borrowings by the company under new credit facilities.
RESTRUCTURING AND OTHER CHARGES
In the first quarter of 1999, a plan was adopted to realign company
functions and to close Tenneco's headquarters facility in Greenwich,
Connecticut. This plan, for which a $29 million restructuring charge ($17
million after tax, or $0.10 per share) was recorded, included the elimination of
forty positions. In the second quarter of 1999, $30 million was received in
connection with the sale of the Greenwich facility. These restructuring actions
were completed in 1999 and were executed in accordance with the company's
initial plan.
In the fourth quarter of 1999, the company recorded a $154 million
restructuring charge ($91 million after tax, or $0.54 per share) to exit
non-core businesses and to reduce overhead costs. The restructuring covered (1)
the sale of the company's forest products and aluminum foil container businesses
in Europe ($68 million), for which cash proceeds of $20 million were received in
the fourth quarter of 1999; (2) the sale of certain assets of the company's
administrative-service and corporate aircraft operations ($10 million); (3)
impairment of long-lived assets of the company's packaging polyethylene business
($68 million); and (4) severance costs associated with the elimination of 161
positions, primarily in the company's international operations ($8 million). The
impairment charge for the packaging polyethylene business' assets was deemed
necessary following completion of an evaluation of strategic alternatives for
the business, and represented the difference between the carrying value of the
assets and the forecasted future cash flows from the business, computed on a
discounted basis.
In total, the company expects to realize annual savings of $75 million from
the restructuring actions. Of this, approximately $30 million was realized in
1999, and an additional $45 million is expected to be realized in 2000 ($40
million) and 2001 ($5 million).
12
<PAGE> 14
THIRD QUARTER ENDED SEPTEMBER 30, 2000 AND 1999
RESULTS OF CONTINUING OPERATIONS
Sales
Details of sales were as follows.
<TABLE>
<CAPTION>
THIRD QUARTER
(IN MILLIONS) ----------------------
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Consumer and foodservice/food packaging..................... $532 $534 $ (2)
Protective and flexible packaging........................... 198 220 (22)
---- ---- -----
$730 $754 $ (24)
---- ---- -----
</TABLE>
Sales in the third quarter of 2000 were $24 million, or 3.2%, lower than in
the same period of 1999. Excluding the negative impact of foreign-currency
exchange rates, divestitures, and discontinued product lines, sales increased
4.5% in the current period versus the same period last year. The increase was
driven primarily by core product growth in the consumer and foodservice/food
packaging segment.
Sales for the consumer and foodservice/food packaging segment were down $2
million from 1999's third quarter. Excluding the effects of divestitures and
discontinued product lines, sales in this segment were 5.4% higher than last
year primarily because of volume growth in Hefty(R) consumer products and foam
foodservice items and increases in selling prices. Sales of protective and
flexible products declined $22 million, or 10%, compared with the third quarter
of 1999. Excluding the negative impact of foreign-currency exchange rates and
businesses divested in late 1999, sales in this segment were 2.2% higher than
last year principally as a result of selling price increases.
Operating Income (Income before Interest Expense, Income Taxes, and
Minority Interest)
Operating income (loss) by segment appears below.
<TABLE>
<CAPTION>
THIRD QUARTER
(IN MILLIONS) -------------
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Consumer and foodservice/food packaging..................... $ 72 $54 $ 18
Protective and flexible packaging........................... 12 19 (7)
Other....................................................... 16 (4) 20
---- --- -----
$100 $69 $ 31
---- --- -----
</TABLE>
Operating income in the third quarter of 2000 rose 44.9% from last year's
level. Despite significantly higher raw material costs, third-quarter operating
margin increased to 13.8% of sales, up significantly from 1999's level of 9.1%
as a result actions taken to increase selling prices and cost improvements
implemented since the company's spin-off.
Operating income for the consumer and foodservice/food packaging segment
increased 33.3% from last year's third quarter. Operating margin in the third
quarter advanced to 13.5% of sales from 10.2% in the second quarter of 2000
primarily as a result of pricing actions taken to offset higher resin costs and
the continued elimination of low-margin business.
Operating income for the protective and flexible packaging segment was $12
million in the third quarter of 2000, down $7 million, or 36.8%, from the
comparable period last year. The decrease was driven mainly by higher raw
material costs and unfavorable foreign-currency exchange rates, offset in part
by higher selling prices.
Operating income for the other segment was $16 million in the third quarter
of 2000, compared with a loss of $4 million in 1999's third quarter. The
improvement was driven by reductions in corporate overhead costs, higher pension
income, and the impact of billing Tenneco Automotive for the full cost of
administrative services provided to it by the company.
13
<PAGE> 15
Interest Expense, Net of Interest Capitalized
Interest expense was $34 million in the third quarter of 2000, down 10.5%
from 1999's third quarter principally because of a decline in borrowings.
Income Taxes
The company's effective tax rate for the third quarter of 2000 was 42%,
compared with 87% for the same period in 1999. The abnormally high tax rate in
1999 reflected the repatriation of overseas earnings in connection with Pactiv's
spin-off from Tenneco, Inc.
Income from Continuing Operations
The company recorded net income from continuing operations of $38 million
($0.24 per share) in the third quarter of 2000, compared with net income of $4
million ($0.01 per share) in the third quarter of 1999.
DISCONTINUED OPERATIONS
In the third quarter of 1999, the company recorded income from discontinued
operations, net of income tax, of $8 million ($0.05 per share), which was
comprised principally of an after-tax gain on the sale of the company's folding
carton business.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
RESULTS OF CONTINUING OPERATIONS
Sales
Details of sales were as follows.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS) ---------------------------------
2000 1999 CHANGE
------- ------- -------
<S> <C> <C> <C>
Consumer and foodservice/food packaging..................... $1,580 $1,528 $ 52
Protective and flexible packaging........................... 605 630 (25)
------ ------ ----
$2,185 $2,158 $ 27
------ ------ ----
</TABLE>
Sales for the nine months ended September 30, 2000, grew $27 million, or
1.3%, from the same period in 1999. Excluding the negative impact of
foreign-currency exchange rates, divestitures, and discontinued product lines,
sales increased 7.9% in the first nine months of 2000, driven primarily by
increases in selling prices and volume.
Sales for the consumer and foodservice/food packaging segment increased $52
million, or 3.4%, versus the first nine months of 1999. Excluding the effects of
divestitures and discontinued product lines, sales for this segment were 8.6%
higher than last year primarily because of higher selling prices and volume
gains. Sales of protective and flexible products declined $25 million, or 4%,
from the first nine months of 1999. Excluding the negative impacts of
foreign-currency exchange rates and businesses divested in late 1999, sales for
this segment were 6.4% higher than last year, mainly driven by selling-price and
volume increases.
Operating Income (Income before Interest Expense, Income Taxes, and
Minority Interest)
Operating income (loss) by segment appears below.
<TABLE>
<CAPTION>
(IN MILLIONS) NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Consumer and foodservice/food packaging..................... $207 $206 $ 1
Protective and flexible packing............................. 32 61 (29)
Other....................................................... 47 (54) 101
---- ---- -----
$286 $213 $ 73
---- ---- -----
</TABLE>
14
<PAGE> 16
Excluding the effect of restructuring and other charges ($29 million) on
1999's results, operating income by segment was as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Consumer and foodservice/food packaging..................... $207 $206 $ 1
Protective and flexible packaging........................... 32 61 (29)
Other....................................................... 47 (25) 72
---- ---- -----
$286 $242 $ 44
---- ---- -----
</TABLE>
Operating income before restructuring and other charges was $286 million
for the nine months ended September 30, 2000, an increase of $44 million, or
18.2%, over the same period in 1999. The increase was driven principally by
higher volume and selling prices, significant reductions in overhead costs, and
higher pension income, offset partially by higher resin costs.
Operating income for the consumer and foodservice/food packaging segment
was $207 million for the first nine months of 2000, versus $206 million for the
comparable period in 1999, as selling-price and volume increases were largely
offset by higher raw material and transportation costs and start-up costs
associated with the company's Mexican molded-fiber operation.
Operating income for the protective and flexible segment was $32 million
for the first nine months of 2000, compared with $61 million for the same period
in 1999. The decline in operating income was caused primarily by higher resin
costs, inefficiencies associated with plant consolidations and start-ups, and
the negative impact of foreign-currency exchange rates, offset partially by
selling-price increases and volume gains.
Operating income for the other segment was $47 million for the nine months
ended September 30, 2000, compared with a loss of $25 million before
restructuring and other charges for the same period in 1999. The $72 million
improvement in operating income was driven principally by reductions in
corporate overhead costs, higher pension income, and the impact of billing
Tenneco Automotive for the full cost of administrative services provided to it
by the company.
Interest Expense, Net of Interest Capitalized
Interest expense was $101 million for the first nine months of 2000, down
$5 million, or 4.7%, from the same period last year. Prior to the spin-off,
corporate debt of Tenneco and related interest expense were allocated to the
company, and related changes in allocated debt and after-tax interest costs were
recorded as a component of the company's combined equity.
Income Taxes
The company's effective tax rate for the nine months ended September 30,
2000, was 42% compared with 48% for the comparable period in 1999. The higher
effective tax rate in 1999 reflected the effects of the reorganization and
separation of the company as company and the impact of nondeductible goodwill
amortization.
Income from Continuing Operations
The company recorded net income from continuing operations of $106 million
($0.65 per share) for the nine months ended September 30, 2000, versus net
income of $56 million ($0.33 per share) for the same period in 1999.
DISCONTINUED OPERATIONS AND EXTRAORDINARY CHARGE
For the first nine months of 2000, income from discontinued operations, net
of income tax, was $134 million ($0.82 per share), which represented the gain on
the February 2000 sale of the majority of the company's interest in PCA. In the
first nine months of 1999, the company recorded a loss from discontinued
15
<PAGE> 17
operations of $155 million ($0.93 per share), which was comprised principally of
an after-tax loss of $178 million ($1.07 per share) on the contribution of the
company's containerboard assets to the PCA joint venture. Also during the first
nine months of 1999, an extraordinary after-tax charge of $7 million ($0.04 per
share) was recorded as a result of the early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
Details of the company's capital structure appear below.
<TABLE>
<CAPTION>
(IN MILLIONS) SEPTEMBER 30, DECEMBER 31,
2000 1999 CHANGE
------------- ------------ ------
<S> <C> <C> <C>
Short-term debt, including current maturities of long-term
debt...................................................... $ 14 $ 325 $(311)
Long-term debt.............................................. 1,657 1,741 (84)
------ ------ -----
Total debt................................................ 1,671 2,066 (395)
Minority interest........................................... 21 20 1
Shareowners' equity......................................... 1,505 1,350 155
------ ------ -----
$3,197 $3,436 $(239)
------ ------ -----
</TABLE>
The company's ratio of debt to total capitalization was 52% and 60% at
September 30, 2000, and December 31, 1999, respectively. Total borrowings
declined $395 million during the first nine months of 2000, as proceeds from the
sale of PCA stock and free cash flow were used to repay debt.
Shareowners' equity increased $155 million in the first nine months of 2000
primarily as a result of the recording of income from continuing and
discontinued operations of $106 million and $134 million, respectively, offset
partially by the impact of repurchasing $96 million of common stock.
Cash Flow
A summary of cash flow appears below.
<TABLE>
<CAPTION>
(IN MILLIONS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
-------------- ----------
(CONSOLIDATED) (COMBINED)
<S> <C> <C>
Cash provided (used) by:
Operating activities...................................... $ 153 $ 7
Investing activities...................................... 337 (905)
Financing activities...................................... (479) 913
</TABLE>
Cash provided by operating activities was $153 million in the first nine
months of 2000, versus $7 million in the same period last year. The $146 million
increase in operating cash flow was comprised of a $76 million decrease in cash
used by discontinued operations and a $70 million increase in cash provided by
continuing operations, driven mainly by improvements in working capital
management.
Investing activities generated $337 million in cash in the first nine
months of 2000, but used $905 million in cash in the same period of 1999. The
year-over-year difference was attributable principally to transactions related
to the discontinued paperboard packaging operation.
Cash used by financing activities was $479 million for the nine months
ended September 30, 2000. During the same period in 1999, financing activities
provided $913 million in cash. The use of cash during the first nine months of
2000 was driven primarily by the retirement of debt and the company's
share-repurchase program. During the second quarter of 1999, the company
borrowed approximately $1.8 billion in connection with the formation of the PCA
joint venture and used approximately $1.2 billion of the proceeds to purchase
assets used by the former containerboard business under operating leases and
timber-cutting rights and to purchase previously sold accounts receivable of the
business. The remaining amounts from these borrowings were distributed to the
company's parent, Tenneco, to fund the retirement of Tenneco's debt.
16
<PAGE> 18
Capital Commitments
Open commitments for authorized expenditures totaled approximately $140
million at September 30, 2000. It is anticipated that the majority of these
expenditures will be funded over the next twelve months from existing cash and
short-term investments, internally generated cash, and borrowings.
Liquidity
The company's management believes that cash flow from operations, along
with available borrowing capacity under its credit facilities, will generally be
sufficient to meet capital requirements.
At the time of the spin-off, the company exercised its right to make a
one-time draw under a $1.5 billion term-loan facility in the amount of $300
million at a floating-interest rate based on LIBOR, adjusted for reserve
requirements, plus a specified margin. All amounts borrowed under this facility
were repaid in the first quarter of 2000 following the sale by the company of
the majority of its interest in PCA.
In conjunction with the spin-off, the company entered into a five-year,
$750 million revolving-credit agreement and a 364-day, $250 million
revolving-credit agreement. Effective September 27, 2000, the 364-day revolving
credit agreement has been extended for an additional 364-day period, and the
total availability under the agreement has been increased to $300 million, of
which $265 million has been committed. As of September 30, 2000, the company was
in full compliance with financial and other customary covenants under these
agreements.
CHANGES IN ACCOUNTING PRINCIPLES
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 required that start-up activity costs be expensed as
incurred. SOP 98-5 also required that previously capitalized costs related to
start-up activities be expensed as a cumulative effect of change in accounting
principle upon adoption. The company adopted SOP 98-5 on January 1, 1999, and
recorded a related after-tax charge of $32 million (net of a $9 million tax
benefit), or $0.19 per share, pertaining to previously capitalized start-up
costs of its foreign and administrative-service operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. In June 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS No. 133. In June 2000, the
FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment to SFAS No. 133. SFAS No. 133, as
amended, establishes accounting and reporting standards which require that
derivative instruments, including certain derivative instruments embedded in
other contracts, be recorded on the balance sheet as either assets or
liabilities measured at their fair value and that changes in the derivative
instruments' fair value be recognized currently in earnings unless specific
hedge-accounting criteria are met. The company plans to adopt SFAS No. 133 on
January 1, 2001. The company is currently evaluating the new standard, but has
not yet determined the impact it will have on its financial position or results
of operations.
17
<PAGE> 19
In May 2000, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-14, Accounting for Certain Sales Incentives. This
issue addresses the recognition, measurement, and income statement
classification of various types of sales incentives, including discounts,
coupons, rebates, and free products. The company is required to adopt EITF No.
00-14 in the fourth quarter of 2000 and is currently analyzing the impact of the
pronouncement on its consolidated financial statements.
In July 2000, the EITF reached a consensus on Issue 1 of No. 00-10,
Accounting for Shipping and Handling Fees and Costs, which requires that any
amounts billed to customers for shipping and handling be classified as revenues.
In September 2000, the EITF also reached a consensus on Issue 2 of No. 00-10,
which requires that shipping and handling costs be included in cost of sales and
precludes the recording of such costs as a deduction against revenues. The
company is required to implement EITF No. 00-10 in the fourth quarter of 2000
and is currently analyzing the effect of the pronouncement on its consolidated
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risks related to changes in
foreign-currency exchange rates, interest rates, and commodity prices. To manage
these risks, the company, from time to time, enters into various hedging
contracts in accordance with the company's policies and procedures. The company
does not use hedging instruments for trading purposes and is not a party to any
transactions involving leveraged derivatives. There have been no material
changes in hedging activity since December 31, 1999.
18
<PAGE> 20
PART II -- OTHER INFORMATION
ITEMS 1-5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
The exhibits filed herewith are designated by an asterisk in the following
index; all other exhibits are incorporated by reference:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2 Distribution Agreement by and between Tenneco Inc. and the
registrant (incorporated herein by reference to Exhibit 2 to
Pactiv Corporation's Current Report on Form 8-K dated
November 11, 1999, File No. 1-15157).
3 Restated Certificate of Incorporation of the registrant
(incorporated herein by reference to Exhibit 3.1 to Pactiv
Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-15157).
3.1 Amended and Restated By-laws of the registrant (incorporated
herein by reference to Exhibit 3.2 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
4.1 Specimen Stock Certificate of Pactiv Corporation Common
Stock (incorporated herein by reference to Exhibit to Pactiv
Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-15157).
4.2 Qualified Offer Plan Rights Agreement, dated as of November
4, 1999, by and between the registrant and First Chicago
Trust Company of New York, as Rights Agent (incorporated
herein by reference to Exhibit 4.2 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
4.3(a) Indenture, dated September 29, 1999, by and between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.1 to Tenneco
Packaging Inc.'s Registration Statement on Form S-4, File
No. 333-82923).
4.3(b) First Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(b) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(c) Second Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(c) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(d) Third Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(d) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(e) Fourth Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(e) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.3(f) Fifth Supplemental Indenture, dated as of November 4, 1999,
to Indenture dated as of September 29, 1999, between the
registrant and The Chase Manhattan Bank, as Trustee
(incorporated herein by reference to Exhibit 4.3(f) to
Pactiv Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, File No. 1-15157).
4.4 Registration Rights Agreement, dated as of November 4, 1999,
by and between the registrant and the trustees under the
Pactiv Corporation Rabbi Trust (incorporated herein by
reference to Exhibit 4.4 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.1 Human Resources Agreement, dated as of November 4, 1999, by
and between Tenneco Inc. and the registrant (incorporated
herein by reference to Exhibit 16.1 to Tenneco Inc.'s
Current Report on Form 8-K dated November 4, 1999, File No.
1-12387).
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.2 Tax Sharing Agreement, dated as of November 3, 1999, by and
between Tenneco Inc. and the registrant (incorporated herein
by reference to Exhibit 16.2 to Tenneco Inc.'s Current
Report on Form 8-K dated November 4, 1999, File No. 12387).
10.3 Amended and Restated Transition Services Agreement, dated as
of November 4, 1999, by and between Tenneco Inc. and the
registrant (incorporated herein by reference to Exhibit 10.3
to Tenneco Automotive Inc.'s Quarterly Report on Form 10-Q
for quarterly period ended September 30, 1999, File No.
1-12387).
10.4 Trademark Transition License Agreement, dated as of November
4, 1999, by and between Tenneco Inc. and the registrant
(incorporated herein by reference to Exhibit 10.4 to Pactiv
Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-15157).
10.5 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Executive Incentive Compensation Plan (incorporated
herein by reference to Exhibit 10.5 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
10.6 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Supplemental Executive Retirement Plan (incorporated
herein by reference to Exhibit 10.6 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
10.7 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Change in Control Severance Benefit Plan for Key
Executives (incorporated herein by reference to Exhibit 10.7
to Pactiv Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, File No. 1-15157).
10.8 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Deferred Compensation Plan (incorporated herein by
reference to Exhibit 10.8 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.9 Pactiv Corporation (formerly known as Tenneco Packaging
Inc.) Stock Ownership Plan (incorporated herein by reference
to Exhibit 10.9 to Pactiv Corporation's Quarterly Report
Form 10-Q for the quarter ended September 30, 1999, File No.
1-15157).
10.10 Professional Services Agreement, dated August 22, 1996, by
and between Tenneco Business Services Inc. and Newport News
Shipbuilding Inc. (incorporated herein by reference to
Exhibit 10.28 of Tenneco Inc.'s Form 10, File No. 1-12387).
10.11 Pactiv Corporation Rabbi Trust (incorporated herein by
reference to Exhibit 10.11 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.12 Tenneco Rabbi Trust Agreement (incorporated herein by
reference to Exhibit 10.12 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 3, 1999,
File No. 1-15157).
10.13(a) Contribution Agreement, dated as of January 25, 1999, by and
among the registrant, PCA Holdings LLC and Packaging
Corporation of America (the "Contribution
Agreement")(incorporated herein by reference to Exhibit
10.30 to Tenneco Inc.'s Current Report on Form 8-K dated
April 12, 1999, File No. 1-12387).
10.13(b) Letter Agreement, dated as of April 12, 1999, by and among
the registrant, PCA Holdings LLC and Packaging Corporation
of America, amending the Contribution Agreement
(incorporated herein by reference to Exhibit 10.31 to
Tenneco Inc.'s Current Report on Form 8-K dated April 12,
1999, File No. 1-12387).
10.14 Stockholders Agreement, as amended, dated as of April 12,
1999, by and among the registrant, PCA Holdings LLC and
Packaging Corporation of America (incorporated herein by
reference to Exhibit 10.32 to Tenneco Inc.'s Current Report
on Form 8-K dated April 12, 1999, File No. 1-12387).
10.15 Registration Rights Agreement, as amended, dated as of April
12, 1999, by and among the registrant, PCA Holdings LLC and
Packaging Corporation of America (incorporated herein by
reference to Exhibit 10.33 to Tenneco Inc.'s Current Report
on Form 8-K dated April 12, 1999, File No. 1-12387).
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.16 Release Agreement dated as of October 18, 1999, by and
between Dana G. Mead and Tenneco Management Company, and
Modification of Release Agreement dated as of October
18,1999, by and among Dana G. Mead, Tenneco Inc. and Tenneco
Management Company (incorporated herein by reference to
Exhibit 10.18 to Tenneco Automotive Inc.'s Quarterly Report
on Form 10-Q for quarterly period ended September 30, 1999,
File No. 1-12387).
10.17 Employment Agreement, dated as of March 11, 1997, by and
between Richard L. Wambold and Tenneco Inc. (incorporated
herein by reference to Exhibit 10.17 to Pactiv Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-15157).
10.18 Short Term Credit Agreement, dated as of September 29, 1999,
among the registrant, Bank of America, N.A., as
Administrative Agent, Credit Suisse First Boston, as
Syndication Agent, Bank One, NA and Banque Nationale de
Paris, as Co-Documentation Agents, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 4.4 to Tenneco Packaging Inc.'s Registration
Statement on Form S-4, File No. 333-82923).
*10.18(a) First Amendment, dated as of September 27, 2000, among the
registrant, various financial institutions, and Bank of
America, N.A., as Administrative Agent, amending the Short
Term Credit Agreement.
10.19 Long Term Credit Agreement, dated as of September 29, 1999,
among the registrant, Bank of America, N.A., as
Administrative Agent, Credit Suisse First Boston, as
Syndication Agent, Bank One, NA and Banque Nationale de
Paris, as Co-Documentation Agents, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 4.3 to Tenneco Packaging Inc.'s Registration
Statement on Form S-4, File No. 333-82923)
10.20 Term Loan Agreement, dated as of November 3, 1999, between
the registrant and Bank of America (incorporated herein by
reference to Exhibit 10.21 to Pactiv Corporation's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, File No. 1-15157).
10.21 Letter of Agreement dated September 10, 1999, by and among
Tenneco Inc., Bank of America, N.A., and Bank of America
Securities LLC, related to Term Loan Agreement, dated as of
November 3, 1999, by and between the registrant and Bank of
America (incorporated herein by reference to Exhibit 10.22
to Pactiv Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, File No. 1-15157).
10.22 Participation Agreement, dated as of October 28, 1999, among
the registrant, First Security Bank, N.A., Bank of America,
as Administrative Agent, and the other financial
institutions party thereto (incorporated herein by reference
to Exhibit 10.23 to Pactiv Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999, File No.
1-15157).
10.23 Agreement and General Release dated January 28, 2000,
between the registrant and Paul J. Griswold (incorporated by
reference to Exhibit 10.23 to Pactiv Corporation's Annual
Report on Form 10-K for the year ended December 31, 1999,
File No. 1-15157).
11 None.
*12 Computation of Ratio of Earnings to Fixed Charges.
15 None
18 None.
19 None.
22 None.
23 None.
*27 Financial Data Schedule.
99 None.
</TABLE>
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 2000.
21
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACTIV CORPORATION
By: /s/ ANDREW A. CAMPBELL
------------------------------------
Andrew A. Campbell
Vice President, Finance and
Chief Financial Officer
Date: November 14, 2000
22
