Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-15157
PACTIV CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 36-2552989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 WEST FIELD COURT 60045
LAKE FOREST, IL (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 482-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
ON WHICH REGISTERED
TITLE OF EACH CLASS --------------------------------------------------------
- --------------------------------------------------------
Common Stock ($.01 par value) and associated Preferred New York Stock Exchange
Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
CLASS OF VOTING STOCK AND NUMBER OF SHARES MARKET VALUE OF COMMON STOCK HELD BY
HELD BY NON-AFFILIATES AT JANUARY 31, 2000 NON-AFFILIATES
- -------------------------------------------------------- --------------------------------------------------------
COMMON STOCK 167,760,834 SHARES $1,551,787,715*
* Based upon the closing sale price on the Composite Tape for the Common Stock
on January 31, 2000.
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock ($.01
par value), 171,524,417 shares outstanding as of January 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
PART OF THE FORM 10-K
DOCUMENT into which incorporated
- -------------------------------------------------------- --------------------------------------------------------
Pactiv Corporation's Definitive Proxy Statement for Part III
the Annual Meeting of Shareowners to be held May 10,
2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning, among other
things, the prospects and developments of the company (as defined) and business
strategies for its operations, all of which are subject to risks and
uncertainties. These forward-looking statements are identified as
"forward-looking statements" or by their use of terms (and variations thereof)
and phrases such as "will," "may," "anticipate," "intend," "goal," "continued,"
"estimate," "expect," "project," "potential," "forecast," "plans," "should,"
"designed to," "foreseeable future," "outlook," "believe," and "scheduled" and
similar terms (and variations thereof) and phrases.
When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, the company cautions that, while
it believes such assumptions or bases to be reasonable and makes them in good
faith, assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, the
company or its management expresses an expectation or belief as to future
results, such expectation or belief is expressed in good faith and believed to
have a reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or will be achieved or accomplished.
The company's actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include the following:
Changes in Consumer Demand and Prices. Demand for certain of the company's
products is cyclical. For example, demand for protective packaging is driven by
trends in the building, construction, automotive and durable goods markets.
Demand for certain packaging products is also subject to changes in consumer
preferences. Demand for, and pricing of, the company's products are subject to
economic conditions and other factors present in the various domestic and
international markets where the products are sold. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 1999
compared with 1998" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 1998 compared with 1997."
Changes in Prices of Raw Materials. Significant increases in the cost of
certain raw materials used in the company's products, to the extent they are not
timely reflected in the company's prices or mitigated through long-term supply
contracts, could adversely impact the company's results. For example, the cost
of plastic resin and paper materials in certain of the company's products can be
volatile.
Risks Associated with International Operations. The company operates
facilities and sells products in several countries throughout the world. As a
result, the company is subject to risks associated with selling and operating in
foreign countries, including devaluations and fluctuations in currency exchange
rates, imposition of limitations on conversion of foreign currencies into U.S.
dollars, remittance of dividends and other payments by foreign subsidiaries,
imposition or increase of withholding and other taxes on remittances and other
payments by foreign subsidiaries, hyperinflation in foreign countries, and
imposition or increase of investment and other restrictions by foreign
governments.
Other Factors. In addition to the factors described above, the company may
be impacted by a number of other matters and uncertainties, including: (i) the
general economic, political and competitive conditions in markets and countries
where the company operates; (ii) governmental actions; (iii) changes in capital
availability or costs; (iv) the cost of compliance with changes in regulations,
including environmental regulations; (v) workforce factors such as strikes or
labor interruptions; (vi) the company's ability to identify and make appropriate
acquisitions and to integrate operations of acquired businesses quickly and in a
cost-effective manner; (vii) changes by the Financial Accounting Standards Board
or other accounting regulatory bodies of authoritative generally accepted
accounting principles or policies; (viii) the timing and occurrence (or
non-occurrence) of transactions and events which may be subject to circumstances
beyond the company's control; (ix) the company's ability to recognize forecasted
savings from its restructuring programs on a timely basis; and (x) the company's
ability to function as a "stand-alone" independent entity following its spin-off
from Tenneco Inc.
i
3
TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
Item 4.1 Executive Officers of the Registrant........................ 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 8
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................... 10
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 19
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure.................................................. 54
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 54
Item 11. Executive Compensation...................................... 54
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 54
Item 13. Certain Relationships and Related Transactions.............. 54
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
Item 14. 8-K......................................................... 54
ii
4
PART I
ITEM 1. BUSINESS.
OVERVIEW
Pactiv Corporation (Pactiv), previously known as Tenneco Packaging Inc.
(TPI), was formerly a wholly-owned subsidiary of Tenneco Inc. (Tenneco) that was
spun-off to shareowners of Tenneco on November 4, 1999 (the spin-off). Pactiv
includes the assets, liabilities, and operations of Tenneco's former specialty
packaging business as well as certain of Tenneco's former corporate and
administrative service operations. As used herein, the terms "Pactiv" and "the
company" refer to the packaging businesses and corporate and administrative
service operations of Tenneco for periods prior to the spin-off, and to Pactiv
for periods after the spin-off.
The company was incorporated in the state of Delaware in 1965 under the
name Packaging Corporation of America. In November 1995 the company changed its
name to Tenneco Packaging Inc., and concurrent with the spin-off changed its
name to Pactiv Corporation.
Pactiv is a global supplier of specialty packaging and consumer products
with 1999 revenues of $2.9 billion. As of December 31, 1999, the company
operated 85 manufacturing facilities in 17 countries around the world and
employed approximately 15,000 people. Pactiv's main operating segments are (a)
consumer and foodservice/food packaging and (b) protective and flexible
packaging. The company's consumer products include plastic, aluminum, and
paper-based products, such as disposable tableware, food storage bags, waste
bags and aluminum cookware. The company's foodservice/food packaging products
include foam, clear plastic, aluminum, pressed paperboard, and molded fiber
packaging for customers in the food distribution channel, including wholesalers
and supermarkets, and customers who process and prepare food for consumption,
known as food packers and processors. Protective packaging is used to protect
and cushion various commercial and industrial products from the point of
manufacture to the point of delivery or pick-up, and principally serves the
electronics, automotive, furniture, and e-commerce markets. Flexible packaging
products are mainly used in food, medical, pharmaceutical, chemical, and hygiene
applications, and often involve custom design.
PRODUCTS AND MARKETS
Consumer and Foodservice/Food Packaging
The company manufactures, markets, and sells consumer products, such as
plastic storage bags for food and household items, plastic waste bags, foam and
molded fiber tableware, and aluminum cookware. Many of these products are sold
under such recognized brand names as Hefty(R), Baggies(R), Hefty OneZip(R),
Kordite(R), and E-Z Foil(R). These products, which are typically used by
consumers in their homes, are sold through a variety of retailers, including
supermarkets, mass merchandisers, and other stores where consumers purchase
household goods. In addition to consumer products, the company manufactures
plastic zipper closures for a variety of other packaging applications.
For foodservice customers, the company offers products to merchandize and
serve both on-premises and takeout meals. These items include tableware
products, such as plates, bowls, and cups, and a broad line of takeout service
containers made from clear plastic, microwaveable plastic, molded fiber,
paperboard, foam, and aluminum.
The company's food packaging products are designed to protect food during
distribution, aid retailers in merchandising food products, and help customers
prepare and serve meals in their homes. Food packaging products for supermarkets
include clear rigid display packaging for produce, deli, and bakery
applications, microwaveable containers for prepared, ready-to-eat meals, plastic
foam trays for meat and produce, and plastic bags for produce and bakery
applications.
For food processors, the company's products include dual-ovenable
paperboard containers, molded fiber egg cartons, foam meat trays, aluminum
containers, and modified atmosphere packaging, which extends the shelf life of
meat products.
1
5
Protective and Flexible Packaging
The company manufactures, markets, and sells protective packaging for use
in the automotive, computer, electronic, furniture, durable goods, building, and
construction industries. Pactiv's sheet foams and air encapsulated bubble
products, for example, are used for cushioning and surface protection, and
paperboard honeycomb and engineered foam plank products provide protection
against shock, vibration, and thermal damage. Pactiv also offers padded mailers,
a variety of laminated protective coverings, and customized packaging systems.
The Company's flexible packaging products are used in consumer, medical,
pharmaceutical, chemical, hygiene, and industrial applications. These products
include liners for disposable diapers, wrap-around sleeves for glass and plastic
bottles, polypropylene medical bags for sterile intravenous fluid delivery,
modified atmosphere films, stand-up pouches, food and hygiene packaging, and
surgical kits.
The company also offers polyethylene stretch film and film and foam
products for use in the construction industry.
GROWTH STRATEGY
Pactiv has grown, and expects to continue to grow, by expanding existing
businesses and through strategic acquisitions. In this connection, the company's
revenues have grown from approximately $600 million in 1994 to $2.9 billion in
1999.
The company's growth strategy is to focus on markets that have strong
expansion characteristics and attractive margins. Through the company's custom
design centers and broad product lines, customers are offered "material-neutral"
solutions, tailored to their specific packaging needs. With this approach and
the availability of worldwide geographic coverage, the company has become a
primary supplier to national and international manufacturers and distributors,
and has developed long-term relationships with key players in the consolidating
packaging and foodservice distribution industries. These relationships are
critical in identifying and penetrating new growth markets with attractive
margins.
Market Presence
Many of the company's products have strong market positions. For example,
in foodservice packaging, Pactiv has the number one market share position in the
United States and Canada in four of five main product categories based on unit
volume. In addition, management estimates that products representing 80% of
sales of the protective packaging business hold the number one or number two
market share position in North America based on sales. In the United States, the
company also has the leading market share position in disposable tableware,
aided by the Hefty(R) brand, and Pactiv's E-Z Foil(R) brand of disposable
aluminum cookware leads competition by a wide margin in both sales and market
share. The breadth of the company's product lines, its ability to offer
"one-stop shopping" to customers and its long-term relationships with key
distributors have contributed to the attainment of these leadership positions.
New Products/Design Services
The company further fuels growth by developing proprietary new products and
value-added product line extensions, spending $40 million on research and
development activities in 1999. The consumer products and foodservice/food
packaging business introduced approximately sixty new products and product line
extensions during the year, which included expanding the use of its patented
OneZip(R) closure system into other zipper closure applications, such as Slide
Rite(R) retail packaging for baby wipes and supermarket produce and deli
products; adding jumbo two-gallon and sandwich bags to the Hefty(R) OneZip(R)
storage and freezer bag line; and introducing proprietary modified atmosphere
packaging called ActiveTech(TM), which is used by food processors to extend the
shelf life of case-ready red meat.
In the protective and flexible packaging business, where custom design
services drive revenues, approximately twenty-five custom product applications
were developed in 1999. Examples of recent protective and flexible packaging
introductions include engineered foams; Profiles(R) products, which are
2
6
foam-based materials used in various markets, such as building products and
furniture, to provide custom-designed insulation, cushioning, and surface
protection; high-end stand-up pouches for soups and detergents; and Propyflex(R)
medical bags for fluids.
State-of-the-Art Service Capabilities
Building on the business' broad product lines and strong relationships with
national distributors, Pactiv is implementing a customer linked manufacturing
(CLM) system. CLM is a state-of-the-art production planning and order
fulfillment system which reduces supply chain costs, enhances customer service,
and improves productivity, providing a competitive advantage to both the company
and its customers.
Productivity/Cost Reduction
Pactiv's strong focus on improving productivity and reducing manufacturing
and logistics costs is key to improving the business' profitability. For
example, unit manufacturing costs have continued to decline for many products,
such as rigid display packaging, foam products, and performance films.
Strategic Acquisitions
Strategic acquisitions have been, and will continue to be, an important
element of the company's growth strategy. In 1999 the company made three
acquisitions and additional equity contributions to existing joint ventures
totaling $24 million. Management has a successful track record of acquiring
businesses and rapidly integrating them into the company. Acquisitions are
pursued that strengthen brand presence; expand product offerings and markets;
and offer synergies related to rationalizing product lines, reconfiguring and
upgrading manufacturing capabilities, and reducing operating, selling,
distribution, purchasing, and administrative costs.
MARKETING, DISTRIBUTION, AND CUSTOMERS
Pactiv's two operating segments have a combined sales and marketing staff
of approximately 500 people.
Consumer products are sold through a direct salesforce and a national
network of brokers and manufacturers' representatives.
Foodservice and supermarket customers are primarily served through a
network of independent distributors, while food packaging and processor
customers are principally served through a direct salesforce, with some sales
going through distributors.
The protective and flexible packaging business sells to distributors,
fabricators, and directly to end-users worldwide.
No one customer accounted for more than 10% of the company's 1999 sales. In
general, the company's backlog of orders is not material.
3
7
ANALYSIS OF SALES
The following table sets forth information relating to sales from
continuing operations. Prior to the spin-off, the combined results of the
consumer and foodservice/food packaging and protective and flexible businesses
were reported under the specialty packaging segment by Tenneco. During the
fourth quarter of 1999 the company modified the composition of its operating
segments because of changes in its management-reporting structure triggered by
the spin-off. Segment information for 1998 and 1997 has been restated to conform
with current segment presentation.
SALES
1999 1998 1997
------------- ------------- -------------
($ IN MILLIONS)
Consumer and foodservice/food packaging...... $2,074 71% $1,985 71% $1,966 77%
Protective and flexible packaging............ 847 29% 800 29% 587 23%
Other........................................ -- -- 6 -- 10 --
------ --- ------ --- ------ ---
Total.............................. $2,921 100% $2,791 100% $2,563 100%
------ --- ------ --- ------ ---
See note 19 to the financial statements for additional segment and
geographic information.
COMPETITION
Pactiv conducts business in markets that are highly competitive and faces
substantial competition in all of its product lines from numerous global,
national, and regional companies, ranging from the largest packaging companies
to small, emerging enterprises. Some competitors have greater financial and
other resources than Pactiv, while others are significantly smaller with lower
fixed costs and more operating flexibility. In general, success in acquiring
business is dependent on price, quality, service, response time, and order
fulfillment. In addition, competitors use a variety of packaging materials and
structures, and serve different geographic regions through various distribution
channels.
INTERNATIONAL
Pactiv has facilities and sells products in countries throughout the world.
As a result, it is subject to various risks, such as fluctuations in foreign
currency exchange rates, limitations on conversion of foreign currencies into
U.S. dollars, restrictions on remittance of dividends and other payments by
foreign subsidiaries, withholding and other taxes on remittances by foreign
subsidiaries, hyperinflation in foreign countries, and restrictions on
investments in foreign countries. See note 19 to the financial statements for
additional information regarding the company's international operations.
RAW MATERIALS
Plastic resins, such as polystyrene, polyethylene, polypropylene and
polyvinyl chloride, aluminum, paperboard, and recycled fiber are the principal
raw materials used by the company. Approximately 80% of Pactiv's revenues comes
from products made from different types of plastics. In general, these raw
materials are readily available from a wide variety of suppliers. Raw material
prices can be volatile, and are a function of, among other things, the
availability of production capacity and oil and other material costs. The supply
of raw materials was adequate in 1999, and is expected to remain that way in
2000.
ENVIRONMENTAL REGULATION
Pactiv is subject to existing and potential federal, state, local, and
foreign legislation controlling air emissions. In addition, various consumer and
special interest groups have lobbied from time to time for the implementation of
a variety of environmental and pollution control measures. Although management
believes that laws and regulations promulgated to date have not had a material
adverse effect on the company there can be no assurance that future legislative
or regulatory efforts or initiatives would not have a material adverse effect on
the company.
4
8
OTHER
As of December 31, 1999, Pactiv employed approximately 15,000 people, 14%
of whom were covered by collective bargaining agreements. One of those
agreements, covering a total of 273 employees, is scheduled for renegotiation in
2000. In Europe and the Middle East, approximately 2,350 employees are governed
by works councils. Management believes that employee relations are generally
satisfactory.
The company owns a number of U.S. and foreign patents and trademarks and
other intellectual property relating to its products which are important to
their manufacture, marketing, and distribution.
Pactiv's administrative service operations utilize numerous software
licenses and operate computer equipment. These operations provide the following
services: financial accounting, employee benefits administration, payroll
processing, accounts payable, information systems support, telecommunications,
and disaster recovery support. The company continues to provide some of these
services to certain former affiliates of Tenneco through contractual
arrangements.
In December 1999 Pactiv sold certain assets of its administrative service
operations to Exult Inc. (Exult), and entered into an agreement under which
Exult will provide certain administrative services to the company. Exult also
entered into an agreement to provide certain services to Tenneco Automotive
Inc., a former affiliate, which previously were provided by Pactiv.
In April 1999 the company contributed its containerboard packaging business
to a new joint venture, called Packaging Corporation of America (PCA), in which
the company retained a 45% common equity interest (which was subsequently
reduced to approximately 43% as a result of equity issued to its management). In
June 1999 the company sold its folding carton business, which represented the
balance of its paperboard packaging segment, for $73 million. In February 2000
Pactiv sold most of its interest in PCA for $398 million, which was primarily
used to reduce debt, retaining a 6% equity interest in PCA. See note 2 to the
financial statements for additional information.
In December 1999 the company entered into an agreement to sell its aluminum
foil reroll facility in Clayton, New Jersey, and its aluminum packer processer
facility in Shelbyville, Kentucky. This sale closed in January 2000.
ITEM 2. PROPERTIES.
HEADQUARTERS LOCATION
Pactiv leases its executive offices which are located at 1900 West Field
Court, Lake Forest, Illinois 60045. Its telephone number at that address is
(847) 482-2000.
MANUFACTURING AND ENGINEERING FACILITIES
In North America, Pactiv operates sixty-three facilities in twenty-one
states, Canada, and Mexico. Plastic and aluminum foodservice and consumer
products, stretch films, and building products are manufactured at twenty-five
plants. The protective packaging business converts paperboard into honeycomb
products at twelve plants. Sixteen plants apply extrusion, foaming, and
converting technologies to produce clear, foamed, flexible, or rigid plastic
protective packaging from polystyrene, polyethylene and polypropylene, and kraft
papers. Molded fiber packaging is produced at seven locations, and tooling for
molded fiber plants is manufactured at one location. Ovenable paperboard
products are manufactured at two facilities. A research and development center
for food packaging and process development is located in Canandaigua, New York.
Design centers and process development operations for protective and flexible
packaging are located in Buffalo Grove, Illinois, Grand Rapids and Troy,
Michigan, Atlanta, Georgia and Santa Fe Springs, California. In addition, the
company participates in two North American joint ventures, Sentinel Polyolefin
LLC and Pactiv de Mexico, S.A. de CV.
Pactiv owns twenty-two international manufacturing facilities. Eleven
protective packaging plants in Belgium, England, France, Germany, Italy, The
Netherlands, Poland, Spain, and Hungary make plastic air encapsulated bubble and
foam sheet products, including mailers. Five flexible packaging plants in Egypt
5
9
and Germany make flexible films, bags, labels, pouches, printed and converted
paper bags, and disposable medical packaging. Omni-Pac, a European subsidiary,
produces cushioning and molded fiber packaging in Elsfleth, Germany, and Great
Yarmouth, England. Single-use thermoformed plastic food containers and films are
manufactured at four facilities in England, Scotland, and Wales. In addition,
Pactiv operates or participates in several international joint ventures,
including a folding carton operation in Dongguan, China, a recycling venture in
Budapest, Hungary, and a corrugated converting operation in Shaoxing, China.
Management believes that substantially all of its plants and equipment
generally are well maintained and in good operating condition.
The company is of the opinion that it generally has satisfactory title to
properties owned and used in its businesses, subject to certain liens which do
not materially detract from the value or use of the properties.
ITEM 3. LEGAL PROCEEDINGS.
In May 1999 Tenneco, the company, and a number of containerboard
manufacturers were named as defendants in a civil class-action antitrust lawsuit
pending in the United States district court for the Eastern District of
Pennsylvania. Pactiv also was named as a defendant in a related class-action
antitrust lawsuit. The lawsuits allege that the defendants conspired to raise
linerboard prices for corrugated containers and corrugated sheets from October
1, 1993, through November 30, 1995, in violation of Section 1 of the Sherman
Act. The lawsuits seek treble damages in an unspecified amount, plus attorney
fees. The company's management believes that the allegations have no merit, is
vigorously defending the claims, and believes that the outcome will not have a
material adverse effect on the company's financial position or results of
operations. As between Tenneco and Pactiv, Pactiv is responsible for defending
the claims and for any liability resulting therefrom.
See note 3 to the financial statements for information about potential
environmental liabilities.
The company and its subsidiaries are parties to various other legal
proceedings arising from their operations. The company believes that the outcome
of these proceedings, individually and in the aggregate, will not have a
material adverse effect on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
6
10
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the company at April 1, 2000,
the positions held by such officers, and the date appointed to such positions:
NAME (AGE) POSITION DATE APPOINTED
---------- ---------------------------------------- --------------
Richard L. Wambold (48)................... Chairman March 2000
President June 1999
Chief Executive Officer November 1999
Andrew A. Campbell (54)................... Vice President, Finance and Chief October 1999
Financial Officer
James V. Faulkner, Jr. (56)............... Vice President and January 1995
General Counsel
Peter J. Lazaredes (49)................... Vice President and General February 2000
Manager, Foodservice, Supermarket and
Institutional Packaging
James D. Morris (46)...................... Vice President and General February 2000
Manager, Protective and
Flexible Packaging
During the past five years each of the executive officers has been
continuously engaged in the business of the company in the positions indicated,
except as follows:
(1) Mr. Wambold was Executive Vice President and General Manager of the
company's specialty packaging and consumer products business units from June
1997 to May 1999, and prior to that was Vice President and General Manager of
such units.
(2) Prior to joining the company, Mr. Campbell served as Acting Chief
Financial Officer and Financial Consultant of Foamex International Inc. from May
to September 1999. From December 1998 until May 1999, Mr. Campbell pursued
personal interests. Prior to that, he was Executive Vice President, Finance and
Administration and Chief Financial Officer of Dominick's Supermarkets Inc. from
July to November 1998 and Senior Vice President, Finance and Chief Financial
Officer of Safety Kleen Corporation from April 1997 to June 1998. From June 1996
to March 1997, he managed his own investments. Prior to that, Mr. Campbell was
President and Director of Duplex Products, Inc. from June 1995 to May 1996, and
Vice President, Finance and Chief Financial Officer of that company from
November 1994 to May 1995.
(3) From 1996, when he joined the company, until being appointed to his
current position, Mr. Lazaredes held various senior management positions in the
company's specialty packaging unit, with responsibility for marketing and sales
of rigid and flexible containers for the foodservice and institutional markets,
and, from 1992 to 1996, served as General Manager of Amoco Foam Products
Company's tableware business.
(4) From 1995 until assuming his current responsibilities, Mr. Morris held
various senior management positions in the company's specialty packaging unit,
with responsibility for manufacturing, engineering, and product development, as
well as sales, marketing, and business planning for the food packaging/processor
operations.
7
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS.
The outstanding shares of common stock ($0.01 par value) of Pactiv are
listed on the New York Stock Exchange (NYSE).
The stock began "regular way" trading on the NYSE on November 5, 1999 (the
business day immediately following the spin-off). The high and low stock price
and dividends paid per share of stock were as follows:
SALE PRICE
--------------- DIVIDENDS
HIGH LOW PAID
------ ------ ---------
Fourth quarter 1999.......................... $14.50 $ 9.31 $ --
As of January 31, 2000, there were approximately 73,689 holders of record
of the company's common stock, including brokers and other nominees.
Dividend declarations are at the discretion of the company's board of
directors. The company does not intend to declare a dividend in the foreseeable
future.
8
12
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(AMOUNTS IN MILLIONS, EXCEPT PER-SHARE DATA) 1999 1998 1997 1996 1995
FOR THE YEARS ENDED DECEMBER 31(A) ------------ ------------ ------------ ------------ ------------
STATEMENT OF INCOME (LOSS)
Sales
Consumer and foodservice/food packaging... $ 2,074 $ 1,985 $ 1,966 $ 1,713 $ 676
Protective and flexible packaging......... 847 800 587 274 169
Other..................................... -- 6 10 -- --
------------ ------------ ------------ ------------ ------------
Total................................. $ 2,921 $ 2,791 $ 2,563 $ 1,987 $ 845
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations
before interest expense, income taxes, and
minority interest......................... (13) 283 306 234 33
Interest expense............................ 146 133 124 102 91
Income tax expense (benefit)................ (47) 67 75 67 (3)
Minority interest........................... -- 1 1 -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing operations.... (112) 82 106 65 (55)
Income (loss) from discontinued operations,
net of income tax......................... (193) 57 21 71 224
Extraordinary loss, net of income tax....... (7) -- -- (2) --
Cumulative effect of changes in accounting
principles, net of income tax............. (32) -- (38) -- --
------------ ------------ ------------ ------------ ------------
Net income (loss)........................... $ (344) $ 139 $ 89 $ 134 $ 169
------------ ------------ ------------ ------------ ------------
Average number of shares outstanding
Basic....................................... 167.405 168.506 170.265 169.609 172.764
Diluted..................................... 167.663 168.835 170.802 170.526 173.512
Earnings (loss) per share
Basic
Continuing operations..................... $ (0.67) $ 0.49 $ 0.63 $ 0.38 $ (0.32)
Discontinued operations................... (1.15) 0.34 0.12 0.42 1.30
Extraordinary loss........................ (0.04) -- -- (0.01) --
Cumulative effect of changes in accounting
principles.............................. (0.19) -- (0.23) -- --
------------ ------------ ------------ ------------ ------------
$ (2.05) $ 0.83 $ 0.52 $ 0.79 $ 0.98
------------ ------------ ------------ ------------ ------------
Diluted
Continuing operations..................... $ (0.67) $ 0.49 $ 0.63 $ 0.38 $ (0.32)
Discontinued operations................... (1.15) 0.34 0.12 0.42 1.29
Extraordinary loss........................ (0.04) -- -- (0.01) --
Cumulative effect of changes in accounting
principles.............................. (0.19) -- (0.23) -- --
------------ ------------ ------------ ------------ ------------
$ (2.05) $ 0.83 $ 0.52 $ 0.79 $ 0.97
------------ ------------ ------------ ------------ ------------
STATEMENT OF FINANCIAL POSITION
Net assets of discontinued operations....... $ 195 $ 366 $ 423 $ 459 $ 393
Total assets................................ 4,588 4,798 4,618 4,028 3,358
Short-term debt............................. 325 595 158 123 205
Long-term debt.............................. 1,741 1,312 1,492 1,073 880
Debt allocated to discontinued operations... -- 548 473 394 369
Minority interest........................... 20 14 15 -- --
Shareowners' equity......................... 1,350 1,776 1,839 1,843 1,531
STATEMENT OF CASH FLOWS
Cash provided (used) by operating
activities................................ $ (31) $ 577 $ 405 $ 263 $ 479
Cash used by investing activities........... (994) (514) (654) (669) (1,791)
Cash provided (used) by financing
activities................................ 1,030 (67) 239 399 1,327
Capital expenditures for continuing
operations................................ (173) (194) (229) (216) (265)
(a) During the periods presented, the company completed numerous acquisitions,
the most significant of which were the acquisitions of Mobil Plastics for
$1.3 billion in November 1995, Amoco Foam Products for $310 million in
August 1996, and the protective and flexible packaging businesses of N.V.
Koninklijke KNP BT for $380 million in April 1997.
9
13
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION
On November 4, 1999, in connection with a corporate reorganization, Pactiv
Corporation's former parent company, Tenneco Inc., (Tenneco) and its
subsidiaries completed various intercompany transfers and distributions designed
to restructure and separate their then-existing businesses, assets, liabilities,
and operations so that, among other things, the packaging businesses and certain
corporate and administrative service operations of Tenneco would be owned by
Pactiv Corporation (Pactiv). Tenneco subsequently distributed pro rata to
holders of its common stock all of the outstanding common stock of Pactiv (the
spin-off). Prior to the spin-off, Pactiv was named Tenneco Packaging Inc. (TPI).
As used herein, the term "company" or "Pactiv" refers, for periods prior to
the spin-off, to TPI and certain other subsidiaries through which Tenneco
conducted its packaging businesses, and, for periods after the spin-off, to
Pactiv and its consolidated subsidiaries.
Prior to the spin-off, all of the outstanding common stock of the company
was owned directly or indirectly by Tenneco. The financial statements in this
report present the results of operations, financial position, and cash flows of
the company as if it were a separate entity for all periods. The former parent's
historical basis in the assets and liabilities of the company has been carried
over to Pactiv. All per-share information is presented on a diluted basis,
unless otherwise noted.
The company's operating segments include:
Consumer and foodservice/food packaging, which relates to the manufacture
and sale of disposable plastic, molded fiber, pressed paperboard, and aluminum
packaging products for the consumer, foodservice, and food packaging markets.
Protective and flexible packaging, which relates to the manufacture and
sale of plastic, paperboard, and molded fiber protective and flexible packaging
products. Major markets served by protective packaging products include
electronics, automotive, furniture, and e-commerce, whereas flexible packaging
products are used mainly in food, medical, pharmaceutical, chemical, and
hygienic applications.
Other, which primarily relates to corporate and administrative service
operations and pension plan income and expense.
STRATEGIC REALIGNMENT
In July 1998, Tenneco's board of directors authorized management to develop
a broad range of strategic alternatives to separate its automotive, paperboard
packaging, and specialty packaging businesses. Subsequently, Tenneco completed
the following actions:
- In January 1999, Tenneco reached an agreement to contribute the
containerboard assets of its paperboard packaging operation to a new
joint venture with Madison Dearborn Partners, Inc. called Packaging
Corporation of America (PCA). For the contribution, which was completed
in April 1999, Pactiv received approximately $2 billion in the form of
cash and the assumption of debt, and retained a 45% equity interest in
PCA (subsequently reduced to 43% as a result of equity issued to
management) which was valued at approximately $200 million.
- In April 1999, Tenneco reached an agreement to sell the paperboard
packaging operation's remaining business, its folding carton operation,
to Caraustar Industries for $73 million. This transaction closed in June
1999.
- Also in April 1999, Tenneco's board of directors approved the spin-off.
- In June 1999, Tenneco's board of directors authorized the specialty
packaging business to sell its remaining interest in PCA. Approximately
85% of this interest was sold by Pactiv in February 2000 for net proceeds
of $398 million through a registered public offering.
10
14
- In August 1999, Tenneco received a letter ruling from the Internal
Revenue Service that the spin-off would be considered to be a tax-free
event for U.S. federal income tax purposes.
- On November 4, 1999, Tenneco completed the spin-off by issuing a dividend
of the common stock of Pactiv to Tenneco shareowners.
The paperboard packaging segment is classified as a discontinued operation
in the financial statements included in this report. See note 7 to the financial
statements for further information.
Before the spin-off, Tenneco realigned substantially all of its existing
debt through a combination of tender offers, exchange offers, and other
refinancings. The realignment was financed through borrowings by Tenneco
Automotive (formerly Tenneco, which changed its name to Tenneco Automotive Inc.
in connection with the spin-off) under a new credit facility, the issuance by
Tenneco Automotive of subordinated debt, Pactiv's issuance of public debt, and
borrowings by Pactiv under new credit facilities.
At the spin-off date, Pactiv had total funded debt of $2.1 billion,
comprised of new public-debt securities and drawings under its credit
facilities. Pactiv's debt is rated as investment grade by both Standard & Poor's
and Moody's. The debt is described in more detail in note 8 to the financial
statements.
In connection with the spin-off, Pactiv entered into certain contractual
arrangements with Tenneco Automotive, including separate distribution,
tax-sharing, human-resource, insurance, and transition-service agreements. These
agreements specify, among other things, that the company will provide
administrative services relating to information systems, payroll, accounts
payable, benefits administration, accounting, cash management, and employee
travel to Tenneco Automotive for a specified period of time based on contractual
fee arrangements.
UNUSUAL ITEMS
Restructuring and Other
In the fourth quarter of 1998, a restructuring plan was approved to reduce
administrative and operating costs. As a result, Pactiv recorded a pre-tax
charge against income from continuing operations of $32 million ($20 million
after tax, or $0.12 per share). The restructuring plan involved the elimination
of production lines at two plants, which was expected to result in the reduction
of 104 positions; exiting four joint ventures; and the elimination of 184
administrative positions in business units and at corporate headquarters. All
related actions have been substantially completed and were executed in
accordance with the company's initial plan. As a result of this restructuring, a
total of 252 positions were eliminated as of December 31, 1999.
In the first quarter of 1999, a plan was adopted to realign company
functions in connection with the contribution of the containerboard assets to
the PCA joint venture, and to close Tenneco's headquarters facility in
Greenwich, Connecticut. This plan, for which a $29 million pre-tax charge ($17
million after tax, or $0.10 per share) was recorded, included the elimination of
approximately forty positions. Approximately $30 million was received in the
second quarter of 1999 related to the sale of the Greenwich facility. These
restructuring actions were completed in 1999 and were executed in accordance
with the company's initial plan.
In the fourth quarter of 1999, Pactiv adopted an extensive restructuring
plan to exit non-core businesses and to reduce overhead costs. As a result, the
company recorded a $154 million charge ($91 million after tax, or $0.54 per
share). This charge was related to (1) the sale of the company's forest products
and aluminum foil container businesses in Europe ($68 million), for which cash
proceeds of $20 million were received in the fourth quarter of 1999, and the
sale of certain assets of the company's administrative service operations and
corporate aircraft operations ($10 million); (2) impairment of long-lived assets
held for use in the company's packaging polyethylene business ($68 million); and
(3) severance costs ($8 million) associated with the elimination of 161
positions, primarily in the company's international operations. The impairment
of the packaging polyethylene business assets was
11
15
recorded following completion of an evaluation of strategic alternatives for
this business and represented the difference between the carrying value of the
assets and their forecasted discounted future cash flows.
In total, Pactiv expects to realize annual savings of $75 million upon
completion of the 1998 and 1999 restructuring actions. Of this, an estimated $30
million was realized in 1999, and an additional $45 million is anticipated in
2000 ($40 million) and 2001 ($5 million).
See note 4 to the financial statements for additional information on
restructuring and other actions.
Spin-off Transaction Costs
In the fourth quarter of 1999, the company recorded transaction costs
related to the spin-off which reduced income before interest expense, income
taxes, and minority interest, net income, and earnings per share by $136
million, $96 million, and $0.57, respectively. These costs were related to
special curtailment and termination benefits for former Tenneco employees ($72
million), professional services performed in connection with the spin-off ($49
million), and separation from Tenneco operations ($15 million).
YEAR 1999 COMPARED WITH 1998
RESULTS OF CONTINUING OPERATIONS
Sales
Details of sales were as follows:
1999 1998 CHANGE
------ ------ ------
(DOLLARS IN MILLIONS)
Consumer and foodservice/food packaging................... $2,074 $1,985 4.5%
Protective and flexible packaging......................... 847 800 5.9
Other..................................................... -- 6 --
------ ------
Total........................................... $2,921 $2,791 4.7%
------ ------
Sales in 1999 grew 4.7%, to $2.9 billion, reflecting unit volume growth of
7%. Excluding the negative impact of foreign-currency exchange rates, sales
increased 5.5%. Sales growth was lower than unit volume gains because of a
decline in selling prices in the first half of 1999.
Sales of the consumer and foodservice/food packaging business advanced 4.5%
in 1999, principally driven by unit volume increases of 7%. In 1999, sales of
protective and flexible products increased 5.9%, primarily as a result of unit
volume growth of 10%. Excluding the negative impact of foreign-currency
exchange, sales of the protective and flexible business grew 8.9%.
Operating Income (Income (Loss) before Interest Expense, Income Taxes, and
Minority Interest)
Operating income by segment appears below.
1999 1998 CHANGE
----- ---- ------
(DOLLARS IN MILLIONS)
Consumer and foodservice/food packaging..................... $ 192 $268 (28.4)%
Protective and flexible packaging........................... (2) 60 --
Other....................................................... (203) (45) --
----- ----
Total............................................. $ (13) $283 --%
----- ----
The $13 million operating loss in 1999 included restructuring and other
charges of $183 million and spin-off transaction expenses of $136 million.
Operating income in 1998 was $283 million, which included
12
16
restructuring charges of $32 million. Excluding the effect of these unusual
items, operating income by segment was as follows:
1999 1998 CHANGE
---- ---- ------
(DOLLARS IN MILLIONS)
Consumer and foodservice/food packaging..................... $258 $277 (6.9)%
Protective and flexible packaging........................... 75 69 8.7
Other....................................................... (27) (31) 12.9
---- ----
Total............................................. $306 $315 (2.9)%
---- ----
Excluding the impact of unusual items, operating income was $306 million in
1999, a decline of 2.9% from the prior year. The favorable impact of 7% unit
volume growth and restructuring savings in 1999 was more than offset by the
decline in the spread between selling prices and material costs (principally
polyethylene resin) which lowered gross margin as a percent of sales to 26.6%
from 28.1% in 1998. In addition, operating income in 1999 was negatively
impacted by higher operating costs for the corporate data center.
Consumer and foodservice/food packaging operating income declined 6.9% in
1999, as the favorable impact of 7% unit volume growth was more than offset by a
decline in margins because of the rapid escalation of raw material costs.
Protective and flexible packaging operating income increased 8.7% in 1999,
principally because of a 10% growth in unit volume and the positive effect of
cost-reduction initiatives. Excluding the negative impact of foreign-currency
exchange, operating income improved 13% in 1999.
The operating loss in the other segment was reduced to $27 million in 1999
from $31 million in 1998, as a result of reductions in corporate overhead costs
and higher pension income, partially offset by an increase in expenses
associated with operating the corporate data center.
Interest Expense, Net of Interest Capitalized
Prior to the spin-off, corporate debt of Tenneco and related interest
expense had been allocated to Pactiv, and changes in allocated debt and
after-tax allocated interest costs were recorded as a component of Pactiv's
combined equity.
Interest expense from continuing operations increased from $133 million in
1998 to $146 million in 1999. The $13 million increase in 1999 was driven by
higher allocated corporate debt, as well as interest costs related to the
realignment of debt in connection with the spin-off.
Income Taxes
Pactiv's effective tax rate for 1999 was 29.6% (benefit), compared with
44.7% for 1998. The company's income tax benefit in 1999 ($47 million) was
principally attributable to the previously discussed restructuring and other
charges and spin-off transaction expenses. Excluding these items, the effective
tax rate for 1999 was 43.3%, compared with 43.4% for 1998.
Income (Loss) from Continuing Operations
The company recorded a net loss from continuing operations of $112 million
($0.67 per share) in 1999, compared with net income of $82 million ($0.49 per
share) the previous year. Excluding the restructuring and other charges and
spin-off transaction costs, net income for 1999 was $93 million ($0.55 per
share), while 1998's net income was $102 million ($0.61 per share).
DISCONTINUED OPERATIONS AND EXTRAORDINARY CHARGE
For 1999, the loss from discontinued operations, net of income tax, was
$193 million ($1.15 per share), which was comprised principally of an after-tax
loss on the sales of the paperboard packaging operations of $206 million, which
included the recording of a $53 million loss ($37 million after tax) in
13
17
the fourth quarter of the year, reflecting events which occurred after the sales
related to the final settlement of working capital, revisions to actuarially
determined estimates of pension plan curtailment costs, and changes in estimates
regarding retained liabilities.
Discontinued operations generated after-tax income of $57 million for the
year ended December 31, 1998, primarily driven by favorable containerboard
pricing in the paperboard packaging business.
In 1999, an extraordinary after-tax charge of $7 million ($0.04 per share)
was recorded as a result of the early retirement of debt in connection with the
contribution of the containerboard assets to PCA.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
Details of the company's capital structure appear below.
1999 1998
DECEMBER 31 (IN MILLIONS) ------------ ------------
Short-term debt, including current maturities of long-term
debt..................................................... $ 325 $ 595
Long-term debt............................................. 1,741 1,312
Debt allocated to discontinued operations.................. -- 548
------ ------
Total debt....................................... 2,066 2,455
Minority interest.......................................... 20 14
Shareowners' equity........................................ 1,350 1,776
------ ------
Total capitalization............................. $3,436 $4,245
------ ------
Pactiv's ratio of debt to total capitalization was 60.1% and 57.8% at
December 31, 1999 and December 31, 1998, respectively. Total debt declined in
1999 as a result of the contribution by Pactiv of its containerboard assets to
the PCA joint venture.
Equity declined in 1999 as a result of distributions made to Tenneco and
the net loss recorded for the year, which included the loss on containerboard
assets contributed to PCA, as well as the restructuring and other charges and
the spin-off transaction costs discussed previously. See the statement of
changes in shareowners' equity for additional information.
Cash Flows
A summary of cash flows appears below.
1999 1998
(IN MILLIONS) ------ -----
Cash provided (used) by:
Operating activities...................................... $ (31) $ 577
Investing activities...................................... (994) (514)
Financing activities...................................... 1,030 (67)
Cash used by operating activities was $31 million in 1999, while $577
million was generated from operations in 1998. The $608 million decrease in 1999
was comprised of $341 million from continuing operations and $267 million from
discontinued operations. The decrease in cash from continuing operations was
primarily driven by restructuring and spin-off transaction payments, as well as
increases in working capital. The decline in cash from discontinued operations
was principally attributable to the repurchase of accounts receivable of the
containerboard business previously sold to a third party in connection with the
formation of the PCA joint venture, as well as a decline in containerboard sales
because of lower linerboard and medium prices.
Investing activities used $994 million of cash in 1999, an increase of $480
million from 1998's level. This increase was driven by the purchase of assets
used by the containerboard business in contemplation of
14
18
their contribution to the PCA joint venture, partially offset by lower spending
on acquisitions and capital projects, and by proceeds from the sale of other
businesses.
Pactiv borrowed $1.8 billion in the second quarter of 1999 in connection
with the formation of the PCA joint venture, and used $1.2 billion of the
proceeds to acquire assets used by the containerboard business under operating
leases and timber cutting rights, and to purchase accounts receivable of this
business that had previously been sold to a third party. The remaining proceeds
($600 million) from this borrowing, together with $306 million in cash received
from the sale of the containerboard and folding carton businesses, were used to
retire Tenneco's short-term debt. Excluding these transactions, cash provided by
financing activities was $724 million for 1999.
Responsibility for the $1.8 billion in debt discussed in the previous
paragraph was transferred to PCA in connection with the formation of the
containerboard joint venture. This reduction of debt is shown in the statement
of cash flows as a non-cash financing activity.
Capital Commitments
The company estimates that expenditures aggregating approximately $103
million will be required after December 31, 1999, to complete projects
authorized at that date, and for which substantial commitments have been made.
Liquidity
Before the spin-off, Tenneco realigned substantially all of its debt
through a combination of tender offers, exchange offers, and other refinancings.
The realignment was financed, in part, by the exchange of Pactiv public-debt
securities for Tenneco public-debt securities, and borrowings by Pactiv under
new credit facilities, which are described below. At the date of the spin-off,
Pactiv had total funded debt of $2.1 billion, comprised of new public-debt
securities and drawings under its credit facilities.
Pactiv's management believes that cash flows from operations, combined with
available borrowing capacity under its credit facilities, will generally be
sufficient to meet capital requirements.
Former Tenneco notes and debentures with an aggregate principal amount of
$1.2 billion were exchanged, in a non-cash transaction, for new public-debt
securities of Pactiv, which were recorded based on the fair value of the debt on
the date of exchange. The terms of Pactiv's public-debt securities are similar
to the terms of the series of Tenneco's original securities for which they were
exchanged, except that interest rates are approximately 50 basis points higher.
The terms of the new securities will not restrict Pactiv's ability to declare
dividends, authorize capital expenditures, or incur additional unsecured debt.
Pactiv entered into a five-year, $750 million revolving-credit agreement
and a 364-day, $250 million revolving-credit agreement in connection with the
spin-off. Borrowings under these facilities of $644 million at the time of the
spin-off were used to fund a portion of the debt realignment. These facilities
do not impose any restriction on Pactiv's ability to declare dividends or make
capital investments. They do, however, include limitations related to liens,
subsidiary debt, disposing of all or substantially all of the company's assets,
and discontinuing Pactiv's primary businesses. These agreements require Pactiv
to comply with financial and other customary covenants, the most restrictive of
which are requirements related to the ratio of debt to earnings before interest,
taxes, depreciation, and amortization (EBITDA), and the ratio of EBITDA to
interest expense. None of these items are expected to limit the company's
ability to operate its business in the ordinary course. At Pactiv's option,
borrowings under the facilities bear interest at a floating rate based on LIBOR,
adjusted for reserve requirements, plus a specified margin, or based on a
specified prime or reference rate. Borrowings under these facilities may also
bear interest based on competitive bids.
At the time of the spin-off, Pactiv exercised its right to make a one-time
draw under a $1.5 billion term-loan agreement in the amount of $300 million at a
floating interest rate based on LIBOR, adjusted
15
19
for reserve requirements, plus a specified margin. As a result of the sale of
the majority of Pactiv's interest in PCA on February 2, 2000, all amounts
borrowed under this facility were subsequently repaid.
Pactiv entered into a $175 million syndicated-lease agreement with a
third-party lessor and various lenders, a portion of which was used to
restructure or replace certain existing operating leases and public warehouse
arrangements, with the balance to be used to facilitate additional leasing
arrangements for other operating facilities. The syndicated-lease facility
contains customary terms and conditions, including residual-value guarantees,
default provisions, and financial covenants.
YEAR 1998 COMPARED WITH 1997
RESULTS OF CONTINUING OPERATIONS
Sales
Detail of sales were as follows:
1998 1997 CHANGE
(DOLLARS IN MILLIONS) ------ ------ ------
Consumer and foodservice/food packaging.................... $1,985 $1,966 0.9%
Protective and flexible packaging.......................... 800 587 36.3
Other...................................................... 6 10 (40.0)
------ ------
Total............................................ $2,791 $2,563 8.9%
------ ------
Sales were $2.8 billion in 1998, up 8.9% from 1997. This increase was
primarily attributable to the impact ($199 million) on sales of the protective
and flexible packaging segment of the acquisition of N.V. Koninklijke KNP BT
(KNP BT) in April 1997 and Richter Manufacturing in April 1998.
Operating Income (Income (Loss) before interest expense, income taxes, and
minority interest)
Operating income by segment appears below.
1998 1997 CHANGE
(DOLLARS IN MILLIONS) ---- ---- ------
Consumer and foodservice/food packaging..................... $268 $253 5.9%
Protective and flexible packaging........................... 60 55 9.1
Other....................................................... (45) (2) --
---- ----
Total............................................. $283 $306 (7.5)%
---- ----
Excluding the impact of restructuring charges of $32 million in 1998,
segment operating income was as follows:
1998 1997 CHANGE
(DOLLARS IN MILLIONS) ---- ---- ------
Consumer and foodservice/food packaging..................... $277 $253 9.5%
Protective and flexible packaging........................... 69 55 25.5
Other....................................................... (31) (2) --
---- ----
Total............................................. $315 $306 2.9%
---- ----
Excluding the effect of restructuring charges, 1998 operating income was
$315 million, up 2.9% from the prior year. This rise was principally driven by
the impact of the previously discussed acquisitions on results of the protective
and flexible segment, as well as by higher unit volumes, primarily in Hefty
OneZip(R), foodservice foam, and consumer tableware products, and lower expenses
at Pactiv's administrative service operations. Partially offsetting these items
was the effect of one-time expenses associated with information systems projects
in the business units and increased costs related to data center consolidation
actions.
16
20
Interest Expense, Net of Interest Capitalized
Interest expense for 1998 was $133 million, 7.3% higher than in 1997,
primarily because of an increase in corporate debt allocated by Tenneco.
Income Taxes
Pactiv's effective tax rate for 1998 was 44.7%, compared with 41.2% for
1997. The tax rate was higher than the statutory rate in both periods primarily
because of the impact of state and local income taxes.
Income from Continuing Operations
Income from continuing operations for 1998 and 1997 was $82 million ($0.49
per share) and $106 million ($0.63 per share), respectively. Excluding
restructuring charges, income for 1998 was $102 million ($0.61 per share), $4
million (3.8%) lower than 1997.
DISCONTINUED OPERATIONS
Income from discontinued operations (paperboard packaging business) was $57
million ($0.34 per share) in 1998, up from $21 million ($0.12 per share) in
1997, primarily because of improved containerboard pricing.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
Details of the company's capital structure appear below.
1998 1997
DECEMBER 31 (IN MILLIONS) ------ ------
Short-term debt, including current maturities of long-term
debt...................................................... $ 595 $ 158
Long-term debt.............................................. 1,312 1,492
Debt allocated to discontinued operations................... 548 473
------ ------
Total debt........................................ 2,455 2,123
Minority interest........................................... 14 15
Shareowners' equity......................................... 1,776 1,839
------ ------
Total capitalization.............................. $4,245 $3,977
------ ------
Pactiv's debt to capitalization ratio was 57.8% at December 31, 1998,
compared with 53.4% at December 31, 1997. The increase in 1998 was principally
attributable to the increase in allocated corporate debt from Tenneco and the
decline in equity.
Cash Flows
A summary of sources and uses of cash is shown in the following table.
1998 1997
(IN MILLIONS) ----- -----
Cash provided (used) by:
Operating activities...................................... $ 577 $ 405
Investing activities...................................... (514) (654)
Financing activities...................................... (67) 239
Cash provided by operating activities increased to $577 million in 1998
from $405 million in 1997. The $172 million increase in 1998 was comprised of
$74 million from continuing operations and $98 million from discontinued
operations. The increase from continuing operations was primarily attributable
to working capital, which decreased slightly in 1998, but increased
significantly in 1997 to support the growth in sales from 1996 levels. Cash
generated by discontinued operations improved because of higher earnings in
1998, primarily resulting from higher containerboard pricing.
17
21
Investing activities used $514 million of cash in 1998, down $140 million
from 1997's level, primarily because of lower spending on acquisitions,
partially offset by higher capital expenditures related to discontinued
operations, which primarily reflected the acquisition of leased timberlands in
contemplation of the PCA joint venture formation. Acquisitions in 1998 included
Champion International's dual-ovenable paperboard tray manufacturing facility in
Belvidere, Illinois; Richter Manufacturing; and the protective-packaging assets
of Sentinel Products Corporation. The principal acquisition in 1997 was the
protective and flexible packaging businesses of KNP BT.
Financing activities used $67 million of cash in 1998, compared with
providing $239 million in 1997. The $306 million change occurred primarily
because Pactiv distributed $56 million to Tenneco in 1998, while $331 million
was contributed to Pactiv by Tenneco in 1997.
CHANGES IN ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes new
accounting and reporting standards requiring that all derivative instruments,
including such instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at fair value. FAS No.
133 will become effective for fiscal years beginning after June 15, 2000. Pactiv
is currently evaluating the new standard, but has not yet determined the impact,
if any, it will have on its financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, Reporting on the Costs of
Start-Up Activities, which requires that costs of start-up activities be
expensed as incurred. This statement became effective for fiscal years beginning
after December 15, 1998. SOP 98-5 required that previously capitalized costs
related to start-up activities be expensed as a cumulative effect of changes in
accounting principles upon adoption. The company adopted SOP 98-5 on January 1,
1999, and recorded a related after-tax charge of $32 million (net of a $9
million tax benefit), or $0.19 per share, pertaining to previously capitalized
start-up costs of its foreign operations and its administrative service
operations. If the new accounting method had been applied retroactively, net
income for the years ended December 31, 1998 and 1997 would have been lower by
$14 million (net of a $8 million tax benefit), or $0.08 per share, and $7
million (net of a $3 million tax benefit), or $0.04 per share, respectively.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use and required prospective application for fiscal
years beginning after December 15, 1998. The impact of this new standard, which
the company adopted on January 1, 1999, did not have a significant effect on
Pactiv's financial position or results of operations.
In the fourth quarter of 1997, Pactiv adopted the FASB's EITF Issue 97-13,
Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation, and recorded a related after-tax charge of $38 million (net of a
$24 million tax benefit), or $0.23 per share. This charge was reported as a
cumulative effect of changes in accounting principles. EITF Issue 97-13
establishes the accounting treatment and allocation methodology to be used for
consulting and other costs incurred in connection with information technology
transformation activities.
YEAR 2000
Pactiv initiated a Year 2000 compliance program to ensure that its
information systems and other date-sensitive equipment continue uninterrupted
into the Year 2000. All of the company's essential processes and systems were
compliant with Year 2000 requirements by the end of 1999. Pactiv did not
experience any Year 2000 consequences that affected the company's financial
position, liquidity, or results of operations, and did not experience any
disruptions as a result of Year 2000 issues at its major vendors
18
22
and customers. The company will continue to monitor Year 2000 issues during the
year as other critical dates approach. Contingency plans are in place to cover
any problems that might arise at a later date. This multi-year program was
executed in accordance with the company's initial plan, and the total cost was
approximately $22 million.
EURO CONVERSION
The formation of the European Monetary Union resulted in the adoption of a
common currency, the euro, among eleven European nations. The euro is being
adopted over a three-year transition period which commenced on January 1, 1999.
Pactiv believes it is on course to becoming fully "euro ready" on or before the
conclusion of the three-year period. The company believes that the costs
associated with transitioning to the euro will not be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
DERIVATIVE FINANCIAL INSTRUMENTS
The company is exposed to market risks related to changes in foreign
currency-exchange rates, interest rates, and commodity prices. To manage these
risks, the company, from time to time, enters into various hedging contracts in
accordance with the company's policies and procedures. The company does not use
hedging instruments for trading purposes, and is not a party to any transactions
involving leveraged derivatives.
Foreign Currency Exchange
The company uses foreign-currency forward contracts to hedge its exposure
to adverse changes in exchange rates, primarily related to the European euro,
British pound, and Canadian dollar. Hedging is accomplished through the use of
financial instruments, with related gains or losses offsetting gains or losses
on underlying assets or liabilities.
In managing foreign-currency risk, the company aggregates existing
positions and hedges residual exposures through third-party derivative
contracts. The following table summarizes foreign-currency forward contracts in
effect at December 31, 1999, all of which will mature in 2000.
(IN MILLIONS, EXCEPT SETTLEMENT RATES)
-------------------------------------- NOTIONAL AMOUNT WEIGHTED-AVERAGE NOTIONAL AMOUNT
IN FOREIGN CURRENCY SETTLEMENT RATE IN U.S. DOLLARS
------------------- ---------------- ---------------
European euros -- Purchase................... 5 1.006 $ 5
-- Sell....................... (190) 1.006 (191)
Canadian dollars -- Purchase................... 3 0.690 2
-- Sell....................... (15) 0.690 (10)
British pounds -- Purchase................... 37 1.615 59
-- Sell....................... (37) 1.615 (60)
U.S. dollars -- Purchase................... 224 1.000 224
-- Sell....................... (20) 1.000 (20)
Interest Rates
Following the realignment of debt in connection with the spin-off, the
company is exposed to interest-rate risk on certain of its debt instruments.
Pactiv utilizes revolving-credit and term-loan facilities that bear interest at
a floating rate based on LIBOR. The amount outstanding under these facilities
aggregated $861 million at December 31, 1999. In addition, the company has
issued public-debt securities with original maturity dates ranging from six to
twenty-eight years that have fixed interest rates. Should the company decide to
redeem these securities prior to their stated maturity, it would incur costs
based on the fair value of the debt at that time.
19
23
The following table provides information about Pactiv's financial
instruments that are sensitive to interest rate risks.
ESTIMATED MATURITY DATES
------------------------------------------------------
(IN MILLIONS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL
- ------------- ---- ---- ---- ---- ---- ---------- ------
FACILITIES WITH FLOATING INTEREST
RATES BASED ON LIBOR
Term-loan facility.................. $300 -- -- -- -- -- $ 300
Five-year revolving-credit
facility.......................... -- -- -- -- 561 -- 561
DEBT SECURITIES WITH FIXED INTEREST
RATES
Long-term debt securities........... 4 4 4 2 2 1,177 1,193
Inasmuch as the company's debt was issued in November 1999, its book and
fair value were considered to be approximately the same as of December 31, 1999.
Interest-rate risk management is accomplished through the use of swaps to
create synthetic-debt instruments. In conjunction with the debt realignment, the
company entered into an interest-rate swap to hedge its exposure to
interest-rate movements. The company settled this swap in November 1999,
incurring a $43 million loss, which is being recognized as additional interest
expense over the average life of the underlying debt.
Commodities
The company purchases commodities, such as resin, paper, and aluminum, at
market prices and does not currently use financial instruments to hedge
commodity prices.
In December 1999, the company entered into a five-year agreement with one
of its vendors to exclusively purchase certain materials at prices within a
specified range. The agreement does not include minimum purchase commitments.
The statements and other information (including the tables) in this section
constitute forward looking statements.
20
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO THE FINANCIAL STATEMENTS OF PACTIV CORPORATION
AND CONSOLIDATED SUBSIDIARIES
PAGE
----
Report of independent public accountants.................... 22
Statement of income (loss) for each of the three years in
the period ended December 31, 1999........................ 23
Statement of financial position at December 31, 1999 and
1998...................................................... 24
Statement of cash flows for each of the three years in the
period ended December 31, 1999............................ 25
Statement of changes in shareowners' equity for each of the
three years in the period ended December 31, 1999......... 26
Statement of comprehensive income (loss) for each of the
three years in the period ended December 31, 1999......... 27
Notes to financial statements............................... 28
21
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
and Shareowners,
Pactiv Corporation:
We have audited the accompanying statements of financial position of Pactiv
Corporation (a Delaware corporation) and consolidated subsidiaries as of
December 31, 1999 and 1998, and the related statements of income (loss), cash
flows, changes in shareowners' equity and comprehensive income (loss) for each
of the three years ended December 31, 1999. These financial statements and the
schedule referred to below are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pactiv Corporation and
consolidated subsidiaries as of December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years ended December 31,
1999, in conformity with generally accepted accounting principles.
As explained in note 3 to the financial statements, effective January 1,
1999, the company changed its method of accounting for the costs of start-up
activities, and effective December 1, 1997, it changed its method of accounting
for certain costs incurred in connection with information technology
transformation projects.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
index to financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The supplemental schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Chicago, Illinois
February 22, 2000
22
26
STATEMENT OF INCOME (LOSS)
(IN MILLIONS, EXCEPT SHARE AND PER-SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31 1999 1998 1997
- ------------------------------- ------------ ------------ ------------
(COMBINED) (COMBINED) (COMBINED)
REVENUES
Sales
Consumer and foodservice/food packaging....... $ 2,074 $ 1,985 $ 1,966
Protective and flexible packaging............. 847 800 587
Other......................................... -- 6 10
------------ ------------ ------------
2,921 2,791 2,563
Loss on sale of businesses and assets, net....... (12) (9) --
Other income, net................................ 4 6 6
------------ ------------ ------------
2,913 2,788 2,569
------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales (excluding depreciation and
amortization shown below)..................... 1,993 1,866 1,779
Engineering, research, and development........... 37 33 34
Selling, general, and administrative............. 393 399 287
Depreciation and amortization.................... 184 175 163
Restructuring and other.......................... 183 32 --
Spin-off transaction............................. 136 -- --
------------ ------------ ------------
2,926 2,505 2,263
------------ ------------ ------------
INCOME (LOSS) BEFORE INTEREST EXPENSE, INCOME
TAXES, AND MINORITY INTEREST..................... (13) 283 306
Interest expense, net of interest
capitalized................................. 146 133 124
Income tax expense (benefit).................. (47) 67 75
Minority interest............................. -- 1 1
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS........... (112) 82 106
Income (loss) from discontinued operations, net of
income tax....................................... (193) 57 21
------------ ------------ ------------
Income (loss) before extraordinary loss............ (305) 139 127
Extraordinary loss, net of income tax.............. (7) -- --
------------ ------------ ------------
Income (loss) before cumulative effect of changes
in accounting principles......................... (312) 139 127
Cumulative effect of changes in accounting
principles, net of income tax.................... (32) -- (38)
------------ ------------ ------------
NET INCOME (LOSS).................................. $ (344) $ 139 $ 89
------------ ------------ ------------
EARNINGS (LOSS) PER SHARE
Average shares of common stock outstanding
Basic............................................ 167,405,315 168,505,573 170,264,731
Diluted.......................................... 167,663,438 168,834,531 170,801,636
Basic earnings (loss) per share of common stock
Continuing operations............................ $ (0.67) $ 0.49 $ 0.63
Discontinued operations.......................... (1.15) 0.34 0.12
Extraordinary loss............................... (0.04) -- --
Cumulative effect of changes in accounting
principles.................................... (0.19) -- (0.23)
------------ ------------ ------------
$ (2.05) $ 0.83 $ 0.52
------------ ------------ ------------
Diluted earnings (loss) per share of common stock
Continuing operations............................ $ (0.67) $ 0.49 $ 0.63
Discontinued operations.......................... (1.15) 0.34 0.12
Extraordinary loss............................... (0.04) -- --
Cumulative effect of changes in accounting
principles.................................... (0.19) -- (0.23)
------------ ------------ ------------
$ (2.05) $ 0.83 $ 0.52
------------ ------------ ------------
The accompanying notes to financial statements are an integral part of this
statement.
23
27
STATEMENT OF FINANCIAL POSITION
AT DECEMBER 31 ($ IN MILLIONS) 1999 1998
- ------------------------------ -------------- ----------
(CONSOLIDATED) (COMBINED)
ASSETS
Current assets
Cash and temporary cash investments....................... $ 12 $ 7
Accounts and notes receivable
Trade, less allowances of $11 million in 1999 and
1998................................................... 279 336
Affiliated companies.................................... -- 44
Income taxes............................................ 30 15
Other................................................... 42 52
Inventories............................................... 429 412
Deferred income taxes..................................... 50 6
Prepayments and other..................................... 24 45
------ ------
Total current assets 866 917
------ ------
Property, plant, and equipment, net......................... 1,396 1,556
------ ------
Other assets
Goodwill and intangibles, net............................. 981 1,052
Deferred income taxes..................................... 40 --
Pension assets............................................ 941 742
Other..................................................... 169 165
------ ------
Total other assets 2,131 1,959
------ ------
Net assets of discontinued operations..................... 195 366
------ ------
TOTAL ASSETS $4,588 $4,798
------ ------
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Short-term debt, including current maturities of long-term
debt.................................................... $ 325 $ 595
Accounts payable
Trade................................................... 265 255
Affiliated companies.................................... -- 6
Taxes accrued............................................. 30 13
Interest accrued.......................................... 17 --
Accrued liabilities....................................... 188 188
Other..................................................... 95 85
------ ------
Total current liabilities 920 1,142
------ ------
Long-term debt.............................................. 1,741 1,312
------ ------
Deferred income taxes....................................... 321 291
------ ------
Post-retirement benefits.................................... 140 163
------ ------
Deferred credits and other liabilities...................... 96 100
------ ------
Minority interest........................................... 20 14
------ ------
Shareowners' equity
Common stock (168,372,798 shares outstanding in 1999)..... 2 --
Investment of former parent (Tenneco Inc.)................ -- 1,776
Premium on common stock and other capital surplus......... 1,468 --
Accumulated other comprehensive loss...................... (24) --
Retained deficit.......................................... (96) --
------ ------
Total shareowners' equity................................. 1,350 1,776
------ ------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $4,588 $4,798
------ ------
The accompanying notes to financial statements are an integral part of this
statement.
24
28
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS) 1999 1998 1997
- --------------------------------------------- ---------- ---------- ----------
(COMBINED) (COMBINED) (COMBINED)
OPERATING ACTIVITIES
Income (loss) from continuing operations.................... $ (112) $ 82 $ 106
Adjustments to reconcile income (loss) from continuing
operations to cash provided (used) by continuing
operations
Depreciation and amortization........................... 184 175 163
Deferred income taxes................................... -- 77 118
Loss on sale of businesses and assets, net.............. 12 9 --
Restructuring and other................................. 183 32 --
Pension income.......................................... (86) (65) (72)
Allocated interest, net of tax.......................... 72 85 78
Changes in components of working capital
(Increase) decrease in receivables................... 17 28 (1)
(Increase) decrease in inventories................... (30) 8 (12)
Increase in prepayments and other current assets..... (3) (1) (30)
Decrease in accounts payable......................... (13) (13) (44)
Decrease in taxes accrued............................ (110) (23) (36)
Increase (decrease) in interest accrued.............. 16 -- (1)
Increase (decrease) in other current liabilities..... (18) 35 (5)
Other................................................... (81) (57) 34
------- ------- -------
Cash provided by continuing operations...................... 31 372 298
Cash provided (used) by discontinued operations............. (62) 205 107
------- ------- -------
Cash provided (used) by operating activities................ (31) 577 405
------- ------- -------
INVESTING ACTIVITIES
Net proceeds related to sale of discontinued operations..... 254 -- 10
Net proceeds from sale of businesses and assets............. 81 22 14
Expenditures for property, plant, and equipment............. (173) (194) (229)
Acquisitions of businesses and assets....................... (24) (101) (285)
Expenditures for property, plant, and equipment and business
acquisitions of discontinued operations................... (1,129) (203) (108)
Investments and other....................................... (3) (38) (56)
------- ------- -------
Cash used by investing activities........................... (994) (514) (654)
------- ------- -------
FINANCING ACTIVITIES
Issuance of long-term debt.................................. 2,261 3 4
Retirement of long-term debt................................ (30) (18) (18)
Net increase (decrease) in short-term debt, excluding
current maturities of long-term debt...................... 293 4 (78)
Cash contributions from (distributions to) former parent
(Tenneco, Inc.)........................................... (1,494) (56) 331
------- ------- -------
Cash provided (used) by financing activities................ 1,030 (67) 239
------- ------- -------
Effect of foreign-exchange rate changes on cash and
temporary cash investments................................ -- -- (1)
------- ------- -------
Increase (decrease) in cash and temporary cash
investments............................................... 5 (4) (11)
Cash and temporary cash investments, January 1.............. 7 11 22
------- ------- -------
Cash and temporary cash investments, December 31............ $ 12 $ 7 $ 11
------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during year for interest.......................... $ 21 $ 6 $ 9
Cash paid during year for income taxes, net................. 53 21 (68)
NON-CASH INVESTING AND FINANCING ACTIVITIES
Equity interest received in connection with sale of
containerboard business................................... 194 -- --
Principal amount of long-term debt assumed by buyers of
containerboard business................................... 1,760 -- --
Principal amount of long-term debt issued at spin-off....... 1,174 -- --
The accompanying notes to financial statements are an integral part of this
statement.
25
29
STATEMENT OF CHANGES IN SHAREOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS) 1999 1998 1997
- --------------------------------------------- -------------- ---------- ----------
(CONSOLIDATED) (COMBINED) (COMBINED)
CONSOLIDATED SHAREOWNERS' EQUITY
COMMON STOCK
Balance, November 5......................................... $ --
Issued pursuant to spin-off (168.373 shares)................ 2
-------
Balance, December 31 (168.373 shares)....................... 2
-------
PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS
Balance, November 5......................................... --
Premium on common stock issued pursuant to spin-off......... 1,468
-------
Balance, December 31........................................ 1,468
-------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, November 5......................................... --
Reclassification of accumulated other comprehensive loss
pursuant to spin-off...................................... (22)
Other comprehensive loss.................................... (2)
-------
Balance, December 31........................................ (24)
-------
RETAINED DEFICIT
Balance, November 5......................................... --
Net loss.................................................... (96)
-------
Balance, December 31........................................ (96)
-------
TOTAL CONSOLIDATED SHAREOWNERS' EQUITY, DECEMBER 31......... $ 1,350
-------
COMBINED SHAREOWNERS' EQUITY
Balance, January 1.......................................... $ 1,776 $1,839 $1,843
Net income (loss)........................................... (248) 139 89
Other comprehensive income (loss)........................... (23) 22 (24)
Allocated interest, net of tax.............................. 86 111 102
Change in allocated debt from former parent (Tenneco
Inc.)..................................................... 15 (333) (549)
Cash contributions from (distributions to) former parent.... (1,494) (56) 331
Non-cash contributions from former parent................... 1,336 54 47
Reclassification of accumulated other comprehensive loss
pursuant to spin-off...................................... 22 -- --
Issuance of common stock in connection with spin-off........ (1,470) -- --
------- ------ ------
Total combined shareowners' equity, December 31............. $ -- $1,776 $1,839
------- ------ ------
The accompanying notes to financial statements are an integral part of this
statement.
26
30
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
1999 1998 1997
FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS) (COMBINED) (COMBINED) (COMBINED)
- --------------------------------------------- ----------------------------- ----------------------------- -------------
ACCUMULATED ACCUMULATED ACCUMULATED
OTHER OTHER OTHER
COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE
INCOME INCOME INCOME INCOME INCOME
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS)... $(344) $139
----- ----
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
CUMULATIVE TRANSLATION ADJUSTMENT
Balance, January 1... $ 3 $(21) $ 3
Translation of foreign-currency
statements... (26) (26) 24 24 (25)
Hedges of net investment in foreign
subsidiaries... -- -- -- -- 2
Income tax expense... -- -- -- -- (1)
---- ---- ----
Balance, December 31... (23) 3 (21)
---- ---- ----
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance, January 1... (2) -- --
Additional minimum pension liability
adjustment... 3 3 (4) (4) --
Income tax benefit (expense)... (2) (2) 2 2 --
---- ---- ----
Balance, December 31... (1) (2) --
---- ---- ----
BALANCE, DECEMBER 31... $(24) $ 1 $(21)
---- ----- ---- ---- ----
OTHER COMPREHENSIVE INCOME (LOSS)... (25) 22
----- ----
COMPREHENSIVE INCOME (LOSS)... $(369) $161
----- ----
1997
FOR THE YEARS ENDED DECEMBER 31 (IN MILLIONS) (COMBINED)
- --------------------------------------------- -------------
COMPREHENSIVE
INCOME
-------------
NET INCOME (LOSS)... $ 89
----
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
CUMULATIVE TRANSLATION ADJUSTMENT
Balance, January 1...
Translation of foreign-currency
statements... (25)
Hedges of net investment in foreign
subsidiaries... 2
Income tax expense... (1)
Balance, December 31...
ADDITIONAL MINIMUM PENSION LIABILITY
ADJUSTMENT
Balance, January 1...
Additional minimum pension liability
adjustment... --
Income tax benefit (expense)... --
Balance, December 31...
BALANCE, DECEMBER 31...
----
OTHER COMPREHENSIVE INCOME (LOSS)... (24)
----
COMPREHENSIVE INCOME (LOSS)... $ 65