PACTIV CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

[ ] 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, ILLINOIS (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (847) 482-2000

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:

NAME OF EACH EXCHANGE
ON WHICH REGISTERED
TITLE OF EACH CLASS --------------------------------------------------------
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Common Stock ($.01 par value) and associated Preferred New York Stock Exchange
Stock Purchase Rights

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.

CLASS OF VOTING STOCK AND NUMBER OF SHARES MARKET VALUE OF COMMON STOCK HELD BY
HELD BY NON-AFFILIATES AT FEBRUARY 28, 2002 NON-AFFILIATES
- -------------------------------------------------------- --------------------------------------------------------
COMMON STOCK 159,027,635 SHARES $3,026,295,894*

* Based upon the closing sale price on the Composite Tape for the Common Stock
on February 28, 2002.

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). 159,487,510 shares outstanding as of February 28, 2002. (See Note 15
to the Financial Statements.)

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 Shareholders to be held May 17,
2002

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TABLE OF CONTENTS

PART I

Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
Item 4.1 Executive Officers of the Registrant........................ 6

PART II

Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 7
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
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.................................... 55

PART III

Item 10. Directors and Executive Officers of the Registrant.......... 55
Item 11. Executive Compensation...................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 55
Item 13. Certain Relationships and Related Transactions.............. 55

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 55

ITEM 1. BUSINESS.

OVERVIEW

Pactiv Corporation (Pactiv or the company), previously known as Tenneco
Packaging Inc., was formerly a wholly-owned subsidiary of Tenneco Inc. (Tenneco)
that was spun-off to shareholders of Tenneco on November 4, 1999 (the
"spin-off"). Pactiv includes the assets, liabilities, and operations of
Tenneco's former specialty packaging business and certain of Tenneco's former
corporate and administrative service operations. As used herein, the terms
"Pactiv" and "the company" refer, for periods prior to the spin-off, to the
packaging businesses and corporate and administrative service operations of
Tenneco and, for periods after the spin-off, to Pactiv and its consolidated
subsidiaries.

The company was incorporated in the state of Delaware in 1965 under the
name Packaging Corporation of America. The company changed its name to Tenneco
Packaging Inc. in November 1995 and, concurrent with the spin-off, changed its
name to Pactiv Corporation.

Pactiv is a global supplier of specialty packaging and consumer products
with 2001 sales of $2.8 billion. The company operates 70 manufacturing
facilities in 13 countries around the world and employs approximately 13,000
people. Pactiv has two key operating segments: Consumer and Foodservice/ Food
Packaging and Protective and Flexible Packaging. The company's consumer products
include plastic, aluminum, and paper-based products such as waste bags,
disposable tableware, food-storage 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, supermarkets, and packer
processors, who prepare and process food for consumption. Pactiv's
protective-packaging products are used to protect and cushion various commercial
and industrial products from the point of manufacture to the point of delivery
or pick-up, principally serving the electronics, automotive, furniture, and
e-commerce markets. The company's flexible-packaging products are used mainly in
food, medical, pharmaceutical, chemical, and hygienic 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(R) OneZip(R),
Hefty(R) Cinch-Sak(R), Hefty(R) The Gripper(TM), Hefty(R) Zoo Pals(TM),
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 merchandise 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, delicatessen, and bakery
applications; microwaveable containers for prepared, ready-to-eat meals; and
foam trays for meat and produce.

For food processors, the company's products include dual-ovenable
paperboard containers, molded-fiber egg cartons, red meat and poultry trays,
aluminum containers, and modified atmosphere packaging, which extends the shelf
life of red meat products.

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The company also offers foam products for use in the construction industry.

Protective and Flexible Packaging

The company manufactures, markets, and sells protective packaging for use
in the automotive, computer, electronics, furniture, durable goods, building,
and construction industries. Pactiv's sheet foams and air-encapsulated bubble
products are used for cushioning and surface protection, and its 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, hygienic, and industrial applications. These products
include liners for disposable diapers, wrap-around sleeves for glass and plastic
bottles, polypropylene bags for sterile intravenous fluid delivery, modified
atmosphere films, stand-up pouches, food and hygienic packaging, surgical
drapes, and medical packaging.

GROWTH STRATEGY

Pactiv expects to grow by expanding existing businesses and through
strategic acquisitions. The company's sales have grown from approximately $900
million in 1995 to $2.8 billion in 2001.

The company focuses on markets that have strong expansion characteristics
and attractive margins. Through its broad product lines and custom design
capability, the company offers customers "material-neutral" packaging solutions.
With this approach and the availability of worldwide geographic coverage, the
company has become a primary supplier to several national and international
manufacturers and distributors and has developed long-term relationships with
key participants in the consolidating packaging and foodservice-distribution
industries. Fostering such relationships is critical in identifying and
penetrating new markets.

Market Presence

Many of Pactiv's products have strong market share positions, including the
number one position in key markets such as consumer waste bags and tableware,
foodservice-foam containers, clear rigid-display packaging, foam trays, and
aluminum cookware. In 2001, more than 80% of the company's sales came from
products that hold the number one or number two share position in markets
served, reflecting the strength of the company's Hefty(R) and E-Z Foil(R)
brands, the breadth of its product lines, and its ability to offer "one-stop
shopping" to customers.

New Products/Design Services

The company drives growth by developing new products and value-added
product line extensions. In 2001, the company spent $44 million on research and
development activities and introduced more than 50 new products. In the Consumer
and Foodservice/Food Packaging business segment, several major new products were
introduced in 2001: Hefty(R) The Gripper(TM) waste bags with a unique Stretch &
Grip Top(R), new containers for carry-out roasted chicken featuring unique Smart
Tote(TM) handles and a SmartVent(TM) steam-release system, a salad bowl designed
specifically for Wendy's(R), and lidded E-Z Foil(R) lasagna and oblong cake
pans.

Protective and Flexible Packaging continued its focus on new products and
line extensions, adding the Pactiv Air 2000(TM) inflatable pouch for shock or
vibration protection; prefillable, multi-chamber IV bags for improved
health-care delivery; and medical gloves and gowns for hand-surgery specialists.

In 2000 and 1999, the company spent $42 million and $40 million,
respectively, on research and development efforts.

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Service Capabilities

Building on broad product lines and strong relationships with national
distributors, Pactiv in 2001 continued implementation of its customer-linked
manufacturing system. Today, the systems and information management
infrastructure and distribution network are largely in place to support the
company's "One Face to the Customer" strategy, aimed at reducing supply-chain
costs, enhancing customer service, and improving productivity.

Productivity/Cost Reduction

Pactiv's continuing focus on enhancing productivity and reducing
manufacturing and logistics costs is key to improving the business'
profitability. In 2001, nearly 25% of the company's research and development
spending and roughly 30% of its capital spending was devoted to efforts to
reduce costs and improve manufacturing and distribution productivity.

Strategic Acquisitions

Strategic acquisitions have been, and will continue to be, an important
element of the company's growth strategy. Management has a successful track
record of acquiring businesses and rapidly integrating them into the company.

MARKETING, DISTRIBUTION, AND CUSTOMERS

The company has a combined sales and marketing staff of approximately 400
people. Consumer products are sold through a direct sales force and a national
network of brokers and manufacturers' representatives. Foodservice and
supermarket customers are served primarily through a network of independent
distributors, while food-packaging and packer-processor customers are served
principally through a direct sales force. 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 2001 sales. In
general, the company's backlog of orders is not material.

ANALYSIS OF SALES

The following table sets forth information regarding sales from continuing
operations. Prior to the spin-off, the combined results of the Consumer and
Foodservice/Food Packaging business and the Protective and Flexible Packaging
business 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 the first three quarters of
1999 have been restated to conform with current segment presentation.

SALES

See note 19 to the financial statements for additional segment and
geographic information.

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COMPETITION

Pactiv conducts business in highly competitive markets and faces
significant competition in all of its product lines from numerous global,
national, and regional companies of various sizes. Some competitors have
available to them more extensive financial and other resources than Pactiv,
while others are significantly smaller than the company with lower fixed costs
and more operating flexibility. In addition, certain competitors offer a variety
of packaging materials and concepts and serve geographic regions through various
distribution channels. In general, the company believes success in obtaining
business is driven by price, quality, product features, service, and speed of
delivery.

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

The principal raw materials used by the company are plastic resins,
including polystyrene, polyethylene, polypropylene, and polyvinyl chloride;
aluminum; paperboard; and recycled fiber. Approximately 80% of Pactiv's sales
come 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, natural gas, and other material
costs. The supply of raw materials was adequate in 2001, and the company's
management believes that such supply will remain adequate in 2002.

ENVIRONMENTAL REGULATION

Pactiv's operations are required to comply with existing and potential
federal, state, local, and foreign air emission legislation and other laws and
regulations affecting the environment. 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 current laws and regulations have not had a material adverse
effect on the company's results, there can be no assurance that future
legislative or regulatory initiatives, if any, will not have a material adverse
effect on the company.

OTHER

As of December 31, 2001, Pactiv employed approximately 13,000 people, 16%
of whom were covered by collective bargaining agreements. Five of those
agreements, covering a total of 460 employees, are scheduled for renegotiation
in 2002. In Europe and the Middle East, approximately 1,960 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, trademarks, and
other intellectual property that are important to the manufacture, marketing,
and distribution of certain products. The company also utilizes numerous
software licenses that are important to its business. The company believes that
its intellectual property rights and licensing rights are adequate for its
business.

The company continues to provide certain services to Tenneco Automotive
Inc., a former affiliate of Tenneco, on a contractual basis. In December 1999,
Pactiv sold certain assets of its former administrative service operations to
Exult, Inc. (Exult) and entered into an agreement under which Exult provides
certain administrative services to the company. Exult also entered into an
agreement to provide certain services to Tenneco Automotive that previously had
been provided by Pactiv.

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In April 1999, the company contributed the containerboard assets of its
paperboard packaging operation to a newly formed joint venture, Packaging
Corporation of America (PCA), obtaining a 43% interest in the entity. In
February 2000 and April 2001, the company sold its interest in PCA. Prior to the
formation of the joint venture, the company borrowed $1.8 billion and used $1.2
billion of the proceeds to acquire assets under lease by the containerboard
business and to purchase accounts receivable previously sold by this business to
a third party. Remaining amounts borrowed ($600 million) were remitted to
Tenneco. In the first quarter of 1999, the company recorded on estimated loss of
$293 million, $178 million after tax, or $1.07 per share, on the asset
contribution, representing the amount by which the carrying value of the assets
exceeded their fair value, less selling costs.

In June 1999, the company sold the paperboard packaging operation's folding
carton business to Caraustar Industries for $73 million and recorded a related
gain of $14 million, $9 million after tax, or $0.05 per share.

In the fourth quarter of 1999, the company recorded an additional $53
million loss, $37 million after tax, or $0.21 per share, on the disposition of
the paperboard packaging operation's business to reflect final working capital
settlement amounts, revisions to actuarially determined estimates of
pension-plan curtailment costs, and changes in estimates regarding retained
liabilities.

In December 1999, the company entered into an agreement to sell its
aluminum foil reroll facility in Clayton, New Jersey, and its aluminum
packer-processor facility in Shelbyville, Kentucky, for $44 million. The company
recorded a related gain of $6 million, $4 million after tax, or $0.02 per share,
during 2000 and used the proceeds from the transaction primarily to repay debt.

In February 2000, the company sold 85% of its equity interest in PCA and
used the net proceeds of $398 million primarily to repay debt. The company
recorded a related gain of $224 million, $134 million after tax, or $0.80 per
share. In the first half of 2001, the company sold its remaining interest in PCA
for $87 million, which was used primarily to repay debt, and recorded an
associated gain of $57 million, $28 million after tax, or $0.17 per share.

The company recorded a fourth-quarter 2000 charge of $45 million, $29
million after tax, or $0.18 per share, for the impairment of assets held for
sale, including those related to the packaging polyethylene business and the
company's interest in Sentinel Polyolefins LLC. In January 2001, the company
received cash proceeds of $72 million from the disposition of these assets. In
the third quarter of 2001, the company refunded $7 million to the purchaser of
the packaging polyethylene business as a final net asset adjustment. Also, as a
part of the company's 2000 restructuring plan, certain small, noncore European
businesses were disposed of in 2001, for which cash proceeds totaling $6 million
were received in December 2001.

ITEM 2. PROPERTIES.

HEADQUARTERS LOCATION

Pactiv leases its executive offices 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 50 facilities in 21 states, Canada, and
Mexico. Plastic and aluminum foodservice and consumer products and building
products are manufactured at 21 plants. The protective packaging business
converts paperboard into honeycomb products at nine plants. Ten plants apply
extrusion, foaming, and converting technologies to produce flexible or
rigid-plastic protective packaging from polystyrene, polyethylene, and
polypropylene resins. 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 consumer products and foodservice/food packaging and
process development is located in Canandaigua, New York. A design

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center and process-development operation for protective and flexible packaging
are located in Buffalo Grove, Illinois.

Pactiv has 20 international manufacturing facilities. Ten
protective-packaging plants in Belgium, England, France, Germany, Italy, The
Netherlands, Poland, and Spain make plastic air-encapsulated bubble and
foam-sheet products, including mailers. Five flexible-packaging plants in Egypt
and Germany make flexible-packaging 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 three facilities in England, Scotland, and Wales. In
addition, Pactiv has a joint-venture interest in a folding-carton operation in
Dongguan, China, and a corrugated converting operation in Shaoxing, China.

In general, management believes that all of the company's plant and
equipment are well maintained and in good operating condition.

The company is of the opinion that it generally has satisfactory title to
owned properties, subject to certain liens that do not detract materially from
the value or use of the properties.

ITEM 3. LEGAL PROCEEDINGS.

In May 1999, Tenneco, Pactiv, and a number of containerboard manufacturers
were named as defendants in a civil, class-action antitrust lawsuit pending in
the U.S. district court for the eastern district of Pennsylvania. The company
also was named as a defendant in a related class-action antitrust lawsuit. The
lawsuits allege that the defendants conspired to raise linerboard prices for
corrugated containers and sheets from October 1, 1993, through November 30,
1995, in violation of Section 1 of the Sherman Act. The lawsuits seek treble
damages of unspecified amounts, plus attorneys' fees. Pactiv's management
believes that the allegations have no merit and is vigorously defending the
claims. Pactiv is responsible for defending the claims against Tenneco and for
any liability resulting therefrom.

The company is party to other legal proceedings arising from its
operations.

Management believes that the outcome of all of these legal matters,
individually and in the aggregate, will not have a material adverse effect on
the company's earnings or financial position.

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 2001.

ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT.

Set forth below are the executive officers of the company at April 1, 2002
the positions held by such officers, and the date of appointment to such
positions. This description is being included in Part I of this Form 10-K
pursuant to Instruction 3 to Item 401(b) of Regulation S-K.

Richard L. Wambold, 50, Chairman of the Board of Directors, President, and
Chief Executive Officer. Mr. Wambold has served as Chairman since March 2000,
President since June 1999 and Chief Executive Officer since the spin-off in
November 1999. Prior to 1999, Mr. Wambold served as Executive Vice President and
General Manager of the company's specialty packaging and consumer products
business units.

Andrew A. Campbell, 56, Senior Vice President and Chief Financial
Officer. Mr. Campbell joined the company in October 1999 as Vice President and
Chief Financial Officer and has served as Senior Vice President and Chief
Financial Officer since January 2001. Prior to joining the company, Mr. Campbell
served as Acting Chief Financial Officer of Foamex International, Inc. from May
to September 1999; as Executive Vice President, Finance and Administration and
Chief Financial Officer of Dominick's Supermarkets, Inc. from July to November
1998; as Senior Vice President, Finance and Chief Financial Officer of Safety
Kleen Corporation from April 1997 to June 1998; as President and Director of
Duplex

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Products, Inc. from June 1995 to May 1996; and as Vice President, Finance and
Chief Financial Officer of Duplex Products, Inc. from November 1994 to May 1995.

James V. Faulkner, Jr., 58, Vice President and General Counsel. Mr.
Faulkner has been Vice President and General Counsel of the company since 1995.

Peter H. Lazaredes, 51, Senior Vice President and General Manager,
Foodservice. Mr. Lazaredes has served as Vice President and General Manager,
Foodservice since January 2001. Prior to 2001, and since he joined the company
in 1996, Mr. Lazaredes held various senior management positions in the company's
specialty packaging unit. From 1992 to 1996, Mr. Lazaredes served as General
Manager of Amoco Foam Products Company's tableware business.

James D. Morris, 48, Senior Vice President and General Manager, Protective
and Flexible Packaging. Mr. Morris has served as Vice President and General
Manager, Protective and Flexible Packaging since January 2001. Prior to 2001,
and since he joined the company in 1995, Mr. Morris held various senior
management positions in the company's specialty packaging unit.

John N. Schwab, 52, Senior Vice President and General Manager, Hefty
Consumer Products. Mr. Schwab has served as Senior Vice President and General
Manager, Hefty Consumer Products since January 2001. Prior to 2001, and since he
joined the company in 1995, Mr. Schwab held various senior management positions
in the company's specialty packaging unit.

Henry M. Wells, III, 57, Vice President and Chief Human Resources
Officer. Mr. Wells has served as Vice President and Chief Human Resources
Officer since April 2000. Prior to joining the company, Mr. Wells served as Vice
President, Human Resources for Banta Corporation from April 1996 to April 2000,
and as Senior Vice President, Human Resources for Jacobs Suchard, Inc. from
October 1988 to March 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER 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). Stock-price and dividend
information is shown below.

As of February 28, 2002, there were approximately 49,959 holders of record
of the company's common stock, including brokers and other nominees.

Dividend declarations are at the discretion of the company's board of
directors. The company does not intend to declare a dividend in the foreseeable
future.

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ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

(a) During the periods presented, the company completed numerous acquisitions,
the most significant of which was the acquisition of the protective and
flexible packaging businesses of N.V. Koninklijke KNP BT for $380 million in
April 1997.

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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

BASIS OF PRESENTATION

Financial statements at December 31, 2001, December 31, 2000, and December
31, 1999, have been prepared on a consolidated basis. Financial statements for
the 12 months ended December 31, 2001, and December 31, 2000, have been prepared
on a consolidated basis, while financial statements for the 12 months ended
December 31, 1999, have been prepared on a combined basis. All financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied. All per-share information is presented on a
diluted basis, unless otherwise noted. Certain amounts in the prior years'
financial statements have been reclassified to conform with the presentation
used in 2001.

The company has three operating segments: Consumer and Foodservice/Food
Packaging, which relates to the manufacture and sale of disposable plastic,
molded-fiber, pressed-paperboard, and aluminum packaging products for the
consumer, foodservice, and food-packaging markets; Protective and Flexible
Packaging, which relates to the manufacture and sale of plastic, paperboard, and
molded-fiber products for protective-packaging markets such as electronics,
automotive, furniture, and e-commerce, and for flexible-packaging applications
in food, medical, pharmaceutical, chemical, and hygienic markets; and Other,
which relates to corporate and administrative service operations and
retiree-benefit income and expense.

STRATEGIC REALIGNMENT

In April 1999, the company contributed the containerboard assets of its
paperboard packaging operation to a newly formed joint venture, Packaging
Corporation of America (PCA), obtaining a 43% interest in the entity. In June
1999, the company sold its paperboard packaging operation's folding carton
business to Caraustar Industries. In February 2000 and April 2001, the company
sold its interest in PCA. See note 7 to the financial statements for further
information.

On November 4, 1999, as part of a corporate reorganization, Pactiv's former
parent company, Tenneco Inc. (Tenneco), and its subsidiaries effected various
intercompany transfers and distributions 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. 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 terms "company" or "Pactiv"
refer, for periods prior to the spin-off, to TPI and certain other packaging
subsidiaries of Tenneco and, for periods after the spin-off, to Pactiv and its
consolidated subsidiaries.

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 Inc. (formerly Tenneco, which changed its name to Tenneco Automotive
Inc. in connection with the spin-off) under a new credit facility, Tenneco
Automotive's issuance of subordinated debt, 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, which
was comprised of public-debt securities and credit-facility drawings. Pactiv's
debt, which is described in more detail in note 8 to the financial statements,
is rated as investment grade by both Standard & Poor's and Moody's.

In connection with the spin-off, Pactiv entered into distribution,
tax-sharing, human resource, insurance, and transition service agreements with
Tenneco Automotive, which included contractual arrangements related to the
provision of certain administrative services for specified periods of time.

UNUSUAL ITEMS

Restructuring and Other

In the fourth quarter of 1998, a restructuring plan was adopted to reduce
administrative and operating costs. As a result, Pactiv recorded a pre-tax
charge against income from continuing operations of
9

$32 million, $20 million after tax, or $0.12 per share. The restructuring plan
involved the elimination of production lines and 104 positions at two plants,
exiting four joint ventures, and the elimination of 184 administrative positions
at business units and corporate headquarters. Related actions generally 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 and to close Tenneco's headquarters facility in Greenwich,
Connecticut. This plan, for which a $29 million restructuring charge, $17
million after tax, or $0.10 per share, was recorded, included the elimination of
40 positions. In the second quarter of 1999, $30 million was received in
connection with the sale of the Greenwich facility. These restructuring actions
were completed in 1999 and were executed in accordance with the company's
initial plan.

In the fourth quarter of 1999, the company recorded a $154 million
restructuring charge, $91 million after tax, or $0.54 per share, related to the
decision to exit noncore businesses and to reduce overhead costs. The
restructuring covered (1) the sale of the company's forest products and aluminum
foil container businesses ($68 million), for which cash proceeds of $20 million
were received in the fourth quarter of 1999; (2) the sale of certain assets of
the company's administrative service and corporate aircraft operations ($10
million); (3) the impairment of long-lived assets of the company's packaging
polyethylene business ($68 million); and (4) severance costs associated with the
elimination of 161 positions, primarily in the company's international
operations ($8 million). The impairment charge for the assets of the packaging
polyethylene business was deemed necessary following completion of an evaluation
of strategic alternatives for the business and represented the difference
between the carrying value of the assets and the forecasted future cash flows of
the business, computed on a discounted basis. These restructuring actions
generally were completed in 2000; however, $1 million of the charge was reversed
in the fourth quarter of 2000, as one planned product line consolidation was not
undertaken and, as a result, 14 positions were not eliminated.

In the fourth quarter of 2000, the company recorded a restructuring charge
of $71 million, $47 million after tax, or $0.29 per share. Of this amount, $45
million was for the impairment of assets held for sale, including those related
to the packaging polyethylene business and the company's interest in Sentinel
Polyolefins LLC, a protective-packaging joint venture. In January 2001, the
company received cash proceeds of $72 million from the disposition of these
assets. The remaining $26 million was related to the realignment of operations
and the exiting of low-margin businesses in the company's Protective and
Flexible Packaging segment. Specifically, this charge was for (1) plant closures
in North America and Europe, including the elimination of 202 positions ($6
million); (2) other workforce reductions (187 positions), mainly in Europe ($6
million); (3) impairment of European long-lived assets held for sale ($10
million); and (4) asset write-offs related to the elimination of certain
low-margin product lines ($4 million). The impairment charge for European assets
was recorded following completion of an evaluation of strategic alternatives for
the related businesses and represented the difference between the carrying value
of the assets and their fair value based on market estimates. Restructuring-plan
actions generally have been completed. Actual cash outlays for severance and
other costs were $3 million less than originally estimated, as 78 fewer
positions were eliminated, while charges for asset write-offs were $3 million
more than initially estimated. Additionally, the company recognized a benefit of
$6 million, $4 million after tax, or $0.02 per share, in the fourth quarter of
2001, largely to reflect a lower loss than was originally recorded on the sale
of the company's packaging polyethylene business.

In the fourth quarter of 2001, the company recorded a restructuring charge
of $18 million, $10 million after tax, or $0.06 per share. Of this amount, $5
million was related to higher-than-anticipated expenses associated with the exit
of small, noncore European businesses announced in the fourth quarter of 2000.
The remaining $13 million reflected adoption of a restructuring plan to
consolidate operations and reduce costs in both the Consumer and
Foodservice/Food Packaging ($5 million) and Protective and Flexible Packaging
($8 million) segments. Specifically, this charge was for (1) plant closures and
consolidations in North America and Europe, including the elimination of 283
positions ($10 million); (2) other workforce reductions (99 positions -- $2
million); and (3) asset writedowns related to the exit of a North American
10

product line ($1 million). The cash cost of executing the restructuring programs
is anticipated to be approximately $5 million.

These restructurings yielded aggregate savings of approximately $75 million
through the end of 2001, and additional savings are expected to be realized in
2002 ($11 million) and 2003 ($5 million), primarily reflecting lower cost of
sales and lower selling, general, and administrative costs.

Spin-off Transaction Costs

In the fourth quarter of 1999, the company recorded transaction costs
related to the spin-off that 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 for special
curtailment and termination benefits for former Tenneco employees ($72 million),
professional services ($49 million), and separation from Tenneco operations ($15
million). In the fourth quarter of 2000 and 2001, the company reversed $20
million ($12 million after tax, or $0.08 per share) and $12 million ($7 million
after tax, or $0.04 per share), respectively, of the previously recorded
provisions for transaction costs to reflect lower-than-anticipated expenses. As
of December 31, 2001, actions related to the spin-off transaction were
substantially complete.

YEAR 2001 COMPARED WITH 2000

RESULTS OF CONTINUING OPERATIONS

Sales

Sales declined $240 million, or 7.9%, in 2001. Excluding the negative
impact of foreign-currency exchange rates, divestitures, and discontinued
product lines, sales were essentially even with last year.

Sales for the Consumer and Foodservice/Food Packaging business declined
$204 million, or 9.3%, in 2001. Excluding the effects of divestitures and
discontinued product lines, sales for this segment were 0.9% higher than in
2000, primarily because of higher selling prices and volume gains. Sales of
Protective and Flexible Packaging products declined $36 million, or 4.2%, from
2000. Excluding the negative impact of foreign-currency exchange rates and
businesses divested in 2001, sales for this segment were 1.8% lower than in
2000, as higher sales in Europe were more than offset by protective-packaging
volume declines in North America.

Operating Income -- Income before Interest Expense, Income Taxes, and
Minority Interest

Total operating income for 2001 included $12 million of restructuring and
other charges recorded in the fourth quarter and the reversal of $12 million of
spin-off transaction cost provisions originally recorded in 1999. Similarly,
total operating income for 2000 included $70 million of restructuring and other
charges, the reversal of $20 million of spin-off transaction cost provisions
originally recorded in 1999, and a $6

11

million gain on the sale of a business. Excluding the effect of these items
("unusual items"), operating income by segment was as follows:

Operating income before unusual items was $391 million in 2001, an increase
of $6 million, or 1.6%, over 2000. The increase was driven principally by the
effective management of the spread between selling prices and raw material costs
and cost savings from the 2000 restructuring program, offset partially by
protective-packaging volume declines in North America.

Operating income for the Consumer and Foodservice/Food Packaging segment
increased $8 million, or 2.9%, in 2001, driven principally by the effective
management of the spread between selling prices and raw material costs, volume
growth for core products, and lower logistics costs, offset partially by
increased spending in support of branded products and on new product launches.

Operating income for the Protective and Flexible Packaging segment declined
$2 million, or 4.5%, from 2000, driven principally by lower volume in North
America, offset in part by the favorable impact of year 2000 price increases and
manufacturing cost savings related to the 2000 restructuring program.

Operating income for the Other segment was $62 million in 2001, unchanged
from 2000.

Interest Expense, Net of Interest Capitalized

Interest expense was $107 million in 2001, down $27 million, or 20.1%, from
2000, mainly because of lower borrowings.

Income Taxes

Pactiv's effective tax rate for 2001 was 41.5% compared with 44.0% for
2000. Excluding the tax impact of the previously discussed restructuring and
other charges and spin-off transaction expenses, the effective tax rate for 2001
and 2000 was 41.5% and 42.0%, respectively.

Income from Continuing Operations

The company recorded net income from continuing operations of $165 million,
or $1.03 per share, in 2001, compared with net income of $113 million, or $0.70
per share, in 2000. Excluding restructuring and other charges, spin-off
transaction costs, and a gain on the sale of a business, net income from
continuing operations was $165 million, or $1.03 per share, in 2001, compared
with $143 million, or $0.89 per share, in 2000.

DISCONTINUED OPERATIONS

In 2001, the company recorded net income from discontinued operations of
$28 million, or $0.17 per share, which represented the after-tax gain on the
sale of the company's remaining holdings of PCA stock. In 2000, the company
reported net income from discontinued operations of $134 million, or $0.83 per
share, which represented the after-tax gain on the February 2000 sale of the
majority of the company's equity interest in PCA.

12

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

Pactiv's ratio of debt to total capitalization was 41.8% and 50.2% at
December 31, 2001, and December 31, 2000, respectively. Total borrowings
declined $355 million, or 22.6%, in 2001, as free cash flow and proceeds from
the sale of the packaging polyethylene business, the company's interest in a
joint venture, and PCA stock were used to repay debt.

Shareholders' equity increased $150 million in 2001, reflecting the
recording of income from continuing and discontinued operations of $165 million
and $28 million, respectively, offset partially by a decrease in unrealized
gains on PCA stock holdings.

Cash Flows

Cash provided by operating activities was $371 million in 2001, versus $290
million in 2000. The $81 million increase was driven principally by higher
income from continuing operations, increased utilization of net operating loss
carryforwards, and better working capital management.

Cash used by investing activities was $1 million in 2001, as proceeds ($146
million) from the sale of businesses ($69 million, related primarily to the
disposal of the packaging polyethylene unit) and PCA stock ($87 million)
slightly exceeded expenditures for property, plant, and equipment ($145
million). Cash provided by investing activities was $302 million in 2000, as
proceeds from the sale of PCA stock ($394 million) and certain product lines
($50 million) more than offset expenditures for property, plant, and equipment
($135 million).

Cash used by financing activities was $354 million in 2001, driven
primarily by the retirement of debt. Cash used by financing activities was $578
million in 2000, driven primarily by the retirement of debt and the repurchase
of stock.

Allowance for Bad Debts

The company's allowance for bad debts totaled $12 million at December 31,
2001, compared with $17 million at December 31, 2000. The $5 million decrease
was related to clearing old, uncollectible receivables for which reserves had
been established in prior years. This had no impact on net income or free cash
flow in 2001.

Capital Commitments

Commitments for authorized expenditures totaled approximately $93 million
at December 31, 2001. It is anticipated that the majority of these expenditures
will be funded over the next 12 months from existing cash and short-term
investments, internally generated cash, and borrowings.

13

Liquidity

The company's management believes that cash flow from operations along with
borrowing capacity under its existing credit facilities will be sufficient to
meet capital requirements.

At the time of the spin-off, the company made a one-time draw under a $1.5
billion term-loan facility in the amount of $300 million at a floating interest
rate based on LIBOR, adjusted for reserve requirements, plus a specified margin.
Borrowings under this facility were repaid in the first quarter of 2000
following the sale of the majority of the company's equity interest in PCA.

In November 1999, the company entered into a five-year, $750 million
revolving-credit agreement and a 364-day, $250 million revolving-credit
agreement. As of September 27, 2000, the 364-day agreement was extended for an
additional 364-day period, and total availability under the agreement was
increased to $300 million. The company elected not to renew the agreement upon
its September 26, 2001, expiration.

As of December 31, 2001, the company was in full compliance with financial
and other covenants in the five-year credit agreement.

See notes 3 and 20 to the financial statements for additional information
concerning liquidity, including off-balance-sheet financing.

YEAR 2000 COMPARED WITH 1999

RESULTS OF CONTINUING OPERATIONS

Sales

Sales grew $24 million, or 0.8%, in 2000. Excluding the negative impact of
foreign-currency exchange rates, divestitures, and discontinued product lines,
sales increased 7.7% in 2000, driven primarily by higher selling prices and
volume.

Sales for the Consumer and Foodservice/Food Packaging business advanced $69
million, or 3.2%, in 2000. Excluding the effects of divestitures and
discontinued product lines, sales for this segment were 9.2% higher than in
1999, primarily because of higher selling prices and volume gains. Sales of
Protective and Flexible Packaging products declined $45 million, or 5.0%, from
1999. Excluding the negative impact of foreign-currency exchange rates and
businesses divested in late 1999, sales for this segment were 4.6% higher than
in 1999, driven principally by selling price and volume increases.

Operating Income (Loss) -- Income (Loss) before Interest Expense, Income
Taxes, and
Minority Interest

Total operating income for 2000 included $70 million of restructuring and
other charges, the reversal of $20 million of spin-off transaction cost
provisions recorded in 1999, and a $6 million gain on the sale of a business.
Total operating loss for 1999 included restructuring and other charges of $183
million and spin-

14

off transaction expenses of $136 million. Excluding the effect of these unusual
items, operating income (loss) by segment was as follows:

Operating income before unusual items was $385 million in 2000, an increase
of $79 million, or 25.8%, from 1999. The increase was driven principally by
higher volume and selling prices, significant reductions in overhead costs, and
higher pension income; offset partially by higher resin costs.

Operating income for the Consumer and Foodservice/Food Packaging segment
increased $21 million, or 8.1%, in 2000 driven principally by selling price
increases and volume growth for core products, offset in part by higher raw
material, freight, and warehousing costs.

Operating income for the Protective and Flexible Packaging segment declined
$31 million, or 41.3%, from 1999. The decline was caused primarily by higher
resin costs, inefficiencies associated with plant consolidations and start-ups,
and the negative impact of foreign-currency exchange rates; offset partially by
selling price increases and volume gains.

Operating income for the Other segment was $62 million in 2000, compared
with a loss of $27 million in 1999. The $89 million improvement was driven
principally by reductions in corporate overhead costs, higher pension income,
and the favorable impact of billing Tenneco Automotive for the full cost of
administrative services provided by the company.

Interest Expense, Net of Interest Capitalized

Interest expense was $134 million in 2000, down $12 million, or 8.2%, from
1999, mainly because of lower borrowings. Prior to the spin-off, corporate debt
of Tenneco and associated interest expense were allocated to the company, and
related changes in allocated debt and after-tax interest costs were recorded as
a component of the company's combined equity.

Income Taxes

Pactiv's effective tax rate for 2000 was 44.0%, compared with 29.6%
(benefit) for 1999. Excluding the tax impact of the previously discussed
restructuring and other charges and spin-off transaction expenses, the effective
tax rate for 2000 and 1999 was 42.0% and 43.3%, respectively.

Income (Loss) from Continuing Operations

The company recorded net income from continuing operations of $113 million,
or $0.70 per share, in 2000, compared with a net loss of $112 million, or $0.67
per share, in 1999. Excluding restructuring and other charges, spin-off
transaction costs, and a gain on the sale of a business, net income from
continuing operations was $143 million, or $0.89 per share, in 2000, compared
with $93 million, or $0.55 per share, in 1999.

DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS

The company recorded net income from discontinued operations of $134
million, or $0.83 per share, in 2000, which represented the gain on the February
2000 sale of the majority of the company's equity interest in PCA. The company
recorded a net loss from discontinued operations of $193 million, or $1.15 per
share, in 1999, which was comprised principally of an after-tax loss of $206
million on the sale of the paperboard packaging operation. In 1999, the company
incurred an after-tax extraordinary loss of $7 million, or $0.04 per share, as a
result of the early retirement of debt.

15

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

Pactiv's ratio of debt to total capitalization was 50.2% and 60.1% at
December 31, 2000, and December 31, 1999, respectively. Total borrowings
declined $493 million, or 23.9%, in 2000, as proceeds from the sale of PCA stock
and free cash flow were used to repay debt.

Shareholders' equity increased $189 million in 2000, reflecting the
recording of income from continuing and discontinued operations of $113 million
and $134 million, respectively, and an unrealized gain of $42 million on the
remaining 6.2 million shares of PCA stock held by the company; offset partially
by the impact of repurchasing $100 million of the company's common stock.

Cash Flows

The $321 million increase in cash provided by operating activities in 2000
was driven principally by higher net income from continuing operations,
improvement in working capital management, and a decrease in the amount of cash
used by discontinued operations.

Investing activities generated $302 million in 2000, principally because
proceeds from the sale of PCA stock ($394 million) and other product lines ($50
million) more than offset expenditures for property, plant, and equipment ($135
million). Cash flow from investing activities in 1999 was impacted significantly
by transactions related to the discontinued paperboard packaging operation.

Cash used by financing activities was $578 million in 2000, reflecting
primarily the retirement of debt and the repurchase of company stock. Financing
activities provided $1,030 million in cash in 1999. During the second quarter of
1999, the company borrowed $1.8 billion in connection with the formation of the
PCA joint venture and used $1.2 billion of the proceeds to purchase assets used
by the discontinued containerboard business under operating leases and timber
cutting rights and to acquire previously sold accounts receivable of this
business. Remaining amounts from these borrowings were distributed to Tenneco.

CHANGES IN ACCOUNTING PRINCIPLES

In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities", which requires that start-up costs be expensed as
incurred. This standard also requires that previously capitalized start-up costs
be expensed as a cumulative effect of change 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, to expense previously capitalized start-up costs of its foreign
and administrative service operations. If SOP 98-5 had been applied
retroactively, net income for the year

16

ended December 31, 1998, would have been reduced by $14 million (net of an $8
million tax benefit), or $0.08 per share.

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS No. 133". In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities", an amendment to SFAS No. 133. SFAS No. 133, as
amended, requires that derivative instruments, including certain derivative
instruments embedded in other contracts, be recorded as either assets or
liabilities measured at fair value and that changes in derivative instruments'
fair value be recognized currently in earnings unless specific hedge-accounting
criteria are met. The company adopted SFAS No. 133, as amended, on January 1,
2001. In accordance with the transition provisions of SFAS No. 133, the company
was not required to record a transition adjustment. The adoption of SFAS No. 133
did not have a material effect on the earnings or financial position of the
company.

In May 2000, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives". This
issue addresses the recognition, measurement, and income-statement
classification of various types of sales incentives, including discounts,
coupons, rebates, and free products. With the company's fourth-quarter 2001
adoption of EITF No. 00-14, certain expenses that historically had been included
in selling, general, and administrative costs were reclassified as deductions
from sales for all periods presented herein.

In January 2001, the EITF reached a consensus on Issue 3 of No. 00-22,
"Accounting for "Points' and Certain Other Time-Based or Volume-Based Sales
Incentive Offers and Offers for Free Products or Services to be Delivered in the
Future". This consensus requires that certain rebate offers and free products be
reported as a reduction of sales. The impact of this issue, which the company
adopted in the first quarter of 2001, on the company's consolidated financial
statements was immaterial.

In April 2001, the EITF reached a consensus on Issue No. 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products". This consensus requires that consideration
provided by a vendor to a purchaser of its products be recognized as a reduction
of sales, except in those instances where an identifiable and measurable benefit
is or will be received by the vendor from the purchaser. With the company's
fourth-quarter 2001 adoption of EITF No. 00-25, certain expenses that
historically had been included in selling, general, and administrative costs
were reclassified as deductions from sales for all periods presented herein.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
business combinations initiated after June 30, 2001, be accounted for using the
purchase method of accounting and broadens the criteria for recording intangible
assets separate from goodwill. Recorded goodwill and intangibles are to be
evaluated against these new criteria, which may result in certain intangibles
being classified as goodwill, or vice versa. SFAS No. 142 does not permit
goodwill and certain intangibles to be amortized, but requires that an
impairment loss be recognized if recorded amounts exceed fair values. Effective
January 1, 2002, the company adopted SFAS No. 142, which is expected to add
approximately $19 million pretax, $14 million after tax, or $0.09 per share, to
reported results on a going-forward basis. The company continues to evaluate the
impact of this standard.

EURO CONVERSION

The formation of the European Monetary Union (EMU) resulted in the adoption
of a common currency, the euro, by 11 European nations. Effective January 1,
2002, the functional currency of company components in countries participating
in the EMU was switched to the euro. The costs to the company of transitioning
to the euro were not material.

17

CRITICAL ACCOUNTING POLICIES

Following are the accounting policies of Pactiv that, in the company's
opinion, are the most important in portraying its financial conditions and
results of operations. These policies involve the highest degree of subjectivity
and estimation and, therefore, may be subject to material revision if actual
results differ significantly from estimates. The company firmly believes its
policies closely adhere to generally accepted accounting principles consistently
applied and that the financial position and results of Pactiv are stated fairly.

Sales Deductions

In arriving at net sales, the company estimates the amount of sales
deductions likely to be earned or taken by customers in conjunction with
incentive programs such as volume rebates, early payment discounts, and coupon
redemptions. Such estimates are based on historical trends and are reviewed
quarterly for possible revision. The company believes the amount of sales
deductions reflected in net sales for the 12 months ended December 31, 2001, are
reasonable. In the event that future sales-deduction trends vary significantly
from past or expected trends, reported sales might increase or decrease by a
material amount.

Pension Income

The company has well-funded pension plans for current and former employees
and accounts for the pension plans in accordance with requirements of SFAS No.
87, "Employers Accounting for Pensions". Pension-plan income is included in the
statement of income as an offset to selling, general, and administrative
expenses. Such income is determined based on a number of factors, including
estimates of returns on plan assets, employee compensation, and participant life
expectancy. If actual amounts vary significantly from estimates, reported
selling, general, and administrative expenses might increase or decrease by a
material amount.

Postemployment Benefits

The company provides certain postemployment benefits to former employees
and accounts for such benefits in accordance with requirements of SFAS No. 106,
"Employers Accounting for Postemployment Benefits Other Than Pensions". Related
liabilities are determined based on certain factors, including estimates of
medical costs and mortality. If actual amounts vary significantly from
estimates, reported selling, general, and administrative expenses might increase
or decrease by a material amount.

Synthetic Leases

The company has entered into a synthetic-lease agreement with a third-party
lessor and various lenders to finance the cost of its headquarters building and
certain of its warehouse facilities. The synthetic-lease facility, which expires
in November 2005, contains customary terms and conditions covering, among other
things, residual-value guarantees, default provisions, and financial covenants.
Lease agreements for these properties require the company to satisfy certain
financial-ratio tests. At December 31, 2001, the termination payment on the
synthetic-lease agreement totaled $169 million, which represents
off-balance-sheet debt. In the event that either the company or the third-party
lessor were to cancel the agreement, either before or at expiration of the
lease, the company's debt might increase by the termination payment amount. See
note 20 to the financial statements for additional information concerning the
company's synthetic-lease agreement.

18

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 established 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 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, 2001, all of which will mature in 2002.

Interest Rates

The company is exposed to interest-rate risk on revolving-credit debt that
bears interest at a floating rate based on LIBOR. Amounts outstanding under
these facilities aggregated $36 million at December 31, 2001. In addition, the
company has public-debt securities outstanding ($1,187 million at December 31,
2001) with fixed interest rates and original maturity dates ranging from 4 to 26
years. Should the company decide to redeem these securities prior to their
stated maturity, it would incur costs based on the fair value of the securities
at that time.

The following table provides information about Pactiv's financial
instruments that are sensitive to interest-rate risks.

Prior to the spin-off, 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.

19

In the first quarter of 2001, the company entered into interest-rate swap
agreements that effectively convert floating-rate debt on its synthetic-lease
obligations to fixed-rate debt. This action was taken to reduce the company's
exposure to interest-rate risk. These swaps are accounted for as cash flow
hedges, with changes in value recorded as accumulated other comprehensive
income, a component of shareholders' equity. As of December 31, 2001, $5 million
of deferred net losses on derivative instruments was recorded in other
comprehensive income. Because of the highly effective nature of the swaps (as
defined in SFAS No. 133), there was no impact on the earnings of the company.
See note 20 to the financial statements for further information concerning the
company's synthetic leases.

Commodities

The company purchases commodities such as resin, paper, and aluminum at
market prices and does not use financial instruments to hedge commodity prices.
The company occasionally enters into short-term forward contracts with third
parties to fix a portion of the cost of natural gas used internally. Several of
such contracts remained open at December 31, 2001.

In December 1999, the company entered into an agreement with one of its
vendors to purchase certain materials at prices within a specified range.
Effective December 2001, this agreement was terminated by mutual consent.

The statements and other information (including the tables) in this annual
report constitute forward-looking statements.

20

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX OF THE FINANCIAL STATEMENTS OF PACTIV CORPORATION
AND CONSOLIDATED SUBSIDIARIES

21

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Pactiv Corporation:

We have audited the accompanying statements of financial position of Pactiv
Corporation (a Delaware corporation) and consolidated subsidiaries as of
December 31, 2001, and 2000, and the related statements of income (loss),
retained earnings, cash flows, changes in shareholders' equity, and
comprehensive income (loss) for each of the three years ended December 31, 2001.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 2001, and 2000, and the results of
its operations and its cash flows for the three years ended December 31, 2001,
in conformity with accounting principles generally accepted in the United
States.

As explained in note 3 to the financial statements referred to above,
effective January 1, 1999, the company changed its method of accounting for the
cost of start-up activities.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly state 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
January 22, 2002

22

STATEMENT OF INCOME (LOSS)

The accompanying notes to financial statements are an integral part of this
statement.

23

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The accompanying notes to financial statements are an integral part of this
statement.

24

STATEMENT OF CASH FLOWS

The accompanying notes to financial statements are an integral part of this
statement.

25

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

The accompanying notes to financial statements are an integral part of this
statement.

26

STATEMENT OF COMPREHENSIVE INCOME (LOSS)