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

(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, 2003

[ ] 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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes X No __

State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value is computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of the last business day of the registrant's most recently completed
second fiscal quarter.

CLASS OF VOTING STOCK AND NUMBER OF SHARES MARKET VALUE OF COMMON STOCK HELD BY
HELD BY NON-AFFILIATES AT JUNE 30, 2003 NON-AFFILIATES
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COMMON STOCK 156,337,490 SHARES $3,081,411,928

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). 153,809,913 shares outstanding as of February 29, 2004. (See Note 12
to the Financial Statements.)

DOCUMENTS INCORPORATED BY REFERENCE:

PART OF THE FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
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Pactiv Corporation's Definitive Proxy Statement for Part III
the Annual Meeting of Shareholders to be held May 14,
2004

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TABLE OF CONTENTS

PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 5
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
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........................................................ 21
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 57
Item 9A Controls and Procedures..................................... 57

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 57
Item 11. Executive Compensation...................................... 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 57
Item 13. Certain Relationships and Related Transactions.............. 58
Item 14. Principal Accounting Fees and Services...................... 58

PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 58

ITEM 1. BUSINESS.

OVERVIEW

Pactiv Corporation (Pactiv or the company) is a global supplier of
specialty-packaging and consumer products with 2003 sales of $3.1 billion. The
company operates 80 manufacturing facilities in 14 countries around the world.
Pactiv has three key operating segments: Consumer Products, Foodservice/Food
Packaging, and Protective and Flexible Packaging. The company's consumer
products include plastic, aluminum, and paper-based products such as waste bags,
food-storage bags, and disposable tableware and cookware. Pactiv's
foodservice/food packaging products include foam, clear plastic, aluminum,
pressed-paperboard, and molded-fibre packaging for customers in the
food-distribution channel, including wholesalers, supermarkets, and packer
processors, who prepare and process food for consumption. The company's
protective-packaging products are generally used to protect and cushion various
commercial and industrial products from the point of manufacture to the point of
delivery or pick-up. Pactiv's flexible-packaging products are used mainly in
food, medical, pharmaceutical, chemical, and hygienic applications, and often
involve custom design.

Pactiv was previously known as Tenneco Packaging Inc. and 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 of 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.

PRODUCTS AND MARKETS

Consumer Products

The company manufactures, markets, and sells consumer products such as
plastic storage bags for food and household items; plastic waste bags; foam,
pressed-paperboard, and molded-fibre 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) CinchSak(R), Hefty(R) The Gripper(R),
Hefty(R) Zoo Pals(R), Kordite(R), and EZ 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.

Foodservice/Food Packaging

For foodservice customers, the company offers products to merchandise and
serve 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, foam, molded-fibre, paperboard, 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. The company also manufactures plastic zipper
closures for a variety of other packaging applications.

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

The company also manufactures, markets, and sells foam products for use in
the construction industry.

Protective and Flexible Packaging

The company manufactures, markets, and sells protective packaging for use
in many industries, including 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.

BUSINESS STRATEGY

Pactiv expects to grow by expanding its existing businesses and through
strategic acquisitions. In seeking organic or acquisition growth, 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 2003, 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 EZ 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 2003, the company spent $32 million on research and
development activities and introduced more than 50 new products.

In the Consumer Products business segment, several major new products were
introduced in 2003: Hefty(R) Hearty Meals(TM) plates and bowls, Hefty(R) Zoo
Pals(R) slider bags for children, Hefty(R) Sports Pals(TM) plates, Hefty(R)
EasyFlaps(R) tall kitchen bags with Stretch & Grip(TM) Top, Hefty(R) Kitchen
Fresh(R) CinchSak(R) tall kitchen bags, and Hefty(R) OneZip(R) school bags.

In 2003, the Foodservice/Food Packaging business segment broadened its
product offerings through the introduction of new barrier trays for meat
packaging, sheetcake pans for a major grocery store, new containers for
agricultural products, and a new salad container for a major fast-food chain.

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In the U.S., the protective-packaging product line was expanded in 2003
with the introduction of the Pactiv Air 5000 air-cushioning system, and the
launching of Poly Plank engineered soft foam for use in protecting painted
surfaces and other applications requiring non-abrasive surface protection.

In 2002 and 2001, the company spent $35 million and $40 million,
respectively, on research and development efforts.

Service Capabilities

Building on broad product lines and strong relationships with national
distributors, in 2002, Pactiv completed the implementation of its
customer-linked manufacturing system for the Foodservice/Food Packaging segment.
Today, the systems and information-management infrastructure and distribution
network are fully in place to support this segment'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 2003, approximately 31% of the company's research and
development spending and roughly 25% of its capital spending was devoted to
efforts to reduce costs and improve manufacturing and distribution productivity.

Strategic Acquisitions

In 2003, the company spent a total of $82 million in acquiring the
remaining 30% of the stock of Central de Bolsas, S.A. de C.V. (Jaguar) and the
plastic-packaging assets of Rock-Tenn Company. Strategic acquisitions have been,
and will continue to be, an important element of the company's growth strategy.

MARKETING, DISTRIBUTION, AND CUSTOMERS

The company has a combined sales and marketing staff of approximately 500
people. Consumer products are sold through a direct sales force and a national
network of brokers and manufacturers' representatives. Foodservice and
food-packaging 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.

In 2003 and 2002, Wal-Mart Stores, Inc. accounted for 11.4% and 10.0%,
respectively, of the company's consolidated 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.

See note 16 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 that 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 16 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, polyvinyl chloride and
amorphous polyethylene terephthalate (APET); aluminum; paperboard; pulp; 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; oil, natural gas, and other energy-related feedstock costs; and
geopolitical circumstances. The supply of raw materials was adequate in 2003 and
the company's management believes that such supply will remain adequate in 2004

ENVIRONMENTAL REGULATION

The company is subject to a variety of environmental and pollution-control
laws and regulations in all jurisdictions in which it operates. Where it is
probable that related liabilities exist and where reasonable estimates of such
liabilities can be made, Pactiv establishes associated reserves. Estimated
liabilities are subject to change as additional information becomes available
regarding the magnitude of possible clean-up costs, the expense and
effectiveness of alternative clean-up methods, and other possible liabilities
associated with such situations. However, management believes that any
additional costs that may be incurred as more information becomes available will
not have a material adverse effect on the company's financial position, although
such costs could have a material effect on the company's results of operations
or cash flows in a particular period.

In early 2003, the company discovered that certain air emissions at one of
its California plants exceeded permitted levels. The company reported this
matter to the San Joaquin Valley Air Pollution Control District, and, effective
November 2003, has entered into a settlement agreement with that agency
regarding the appropriate actions to be taken to address the matter, which
settlement agreement is subject to the approval of the U.S. Environmental
Protection Agency. The company does not believe that the costs involved,
including any monetary sanctions, will have a material adverse effect on the
company's financial position, results of operations, or cash flows.

OTHER

As of December 31, 2003, Pactiv employed approximately 16,000 people, of
which approximately 600 were employed by joint ventures in which the company has
a controlling interest and 14% were covered by collective-bargaining agreements.
Four of those agreements, covering a total of 726 employees, are

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scheduled for renegotiation in 2004. In Europe and the Middle East, 2,516
employees are represented 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 significant with regard 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 and licensing rights are adequate for
its business.

AVAILABLE INFORMATION

The company's website is www.pactiv.com. On this website, under the
investor relations link, the company makes available free of charge its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to these reports, as soon as reasonably practicable after it
electronically files or furnishes such materials to the Securities and Exchange
Commission. The company also makes available on this website, under the Investor
Relations link, the company's code of ethics, including the code of ethics for
its principal executive, financial, and accounting officers.

ITEM 2. PROPERTIES.

Pactiv's executive offices are located at 1900 West Field Court, Lake
Forest, Illinois 60045. Its telephone number at that address is (847) 482-2000.

In North America, Pactiv operates 56 manufacturing facilities in 19 states,
Canada, and Mexico. Plastic and aluminum foodservice, consumer, and building
products are manufactured at 27 plants. The protective-packaging business
converts paperboard into honeycomb products at nine plants. Nine plants apply
extrusion, foaming, and converting technologies to produce flexible or
rigid-plastic protective packaging, using polystyrene, polyethylene, and
polypropylene resins. Molded-fibre packaging is produced at seven locations, and
tooling for molded-fibre plants is manufactured at one location. Ovenable-
paperboard products are manufactured at three facilities. A research and
development center for consumer and foodservice/food packaging products and
process development is located in Canandaigua, New York. A design center and
process-development operation for protective-and flexible-packaging products is
located in Buffalo Grove, Illinois. The company also operates 5 regional mixing
facilities in Illinois (2), Georgia, New York, and Texas.

Pactiv has 24 manufacturing facilities outside of North America. Fourteen
protective-packaging plants in Belgium, England, France, Germany, Italy, The
Netherlands, Poland, Spain, and the Czech Republic 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. A subsidiary produces cushioning and molded-fibre packaging in
Germany and England. Single-use thermoformed plastic food containers and films
are manufactured at three facilities in England, Scotland, and Wales. In
addition, Pactiv has joint-venture interests in a folding-carton operation in
Dongguan, China (50% owned) and a corrugated-converting operation in Shaoxing,
China (62.5% owned).

In general, management believes that the company's plant and equipment are
well maintained and in good operating condition, and that it 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 (through Tenneco's former containerboard
business), and a number of other containerboard manufacturers were named as
defendants in a consolidated, class-action complaint brought on behalf of
purchasers of corrugated containers that alleged a civil violation of Section I
of the Sherman Act. The company also was named as a defendant in a related
class-action antitrust lawsuit. Tenneco sold its containerboard business in
April 1999, prior to the spin-off of Pactiv in November 1999.

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In connection with the spin-off, Pactiv was assigned responsibility for
defending related claims against Tenneco and for any liability resulting
therefrom.

The lawsuits (In Re: Linerboard Litigation, U.S.D.C., E.D. of Pennsylvania,
MDL no.1261) alleged that the defendants, during the period from October 1,
1993, through November 30, 1995, conspired to limit the supply of linerboard,
and that the purpose and effect of the alleged conspiracy was to artificially
increase prices of corrugated containers and corrugated sheets. The lawsuits
sought treble damages of unspecified amounts, plus attorneys' fees.

Several entities have opted out of the classes, and the company has been
named as a defendant in 12 direct-action complaints that have been filed in
various federal courts across the country by opt-out entities. These cases
effectively have been consolidated for pretrial purposes before the Federal
District Court in the Eastern District of Pennsylvania, which is overseeing the
class actions, and it is expected that they will be transferred formally to that
court. All of the opt-out complaints included allegations against the defendants
that are substantially similar to those made in the class actions.

On November 3, 2003, the company reached an agreement to settle the
class-action lawsuits. The settlement, which must be approved by the court,
resulted in the company recording a charge of $56 million pretax, $35 million
after tax, or $0.22 per share, in the third quarter of 2003. This charge
includes the establishment of a reserve for the estimated liability associated
with the opt-out complaints. Actual amounts paid in settlement of these opt-out
liabilities, if any, may differ from the amount of the established reserve. No
trial date has been set for any of the opt-out lawsuits.

The company is party to other legal proceedings arising from its
operations. Related reserves are recorded when it is probable that liabilities
exist and where reasonable estimates of such liabilities can be made. While it
is not possible to predict the outcome of any of these proceedings, the
company's management, based on its assessment of the facts and circumstances now
known, does not believe that any of these proceedings, individually or in the
aggregate, will have a material adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flows in a
particular period.

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 2003.

ITEM 4.1.EXECUTIVE OFFICERS OF THE REGISTRANT.

Set forth below are the executive officers of the company at February 29,
2004, the positions held by such officers, and the date of appointment to such
positions. These descriptions are 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, 52, 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, 58, 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.

James V. Faulkner, Jr., 59, Vice President, General Counsel, and
Secretary. Mr. Faulkner has been Vice President and General Counsel of the
company since 1995, and was elected Secretary of the company in December 2002.

Peter H. Lazaredes, 53, Senior Vice President and General Manager,
Foodservice/Food Packaging. Mr. Lazaredes has served as Senior Vice President
and General Manager, Foodservice/Food Packaging,

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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.

James D. Morris, 50, Senior Vice President and General Manager, Protective
and Flexible Packaging. Mr. Morris has served as Senior 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, 54, Senior Vice President and General Manager, Hefty(R)
Consumer Products. Mr. Schwab has served as Senior Vice President and General
Manager, Hefty(R) 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, 59, 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.

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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
Corporation are listed on the New York Stock Exchange under the symbol "PTV".
Stock price and dividend information for 2003 and 2002 is shown below.

As of February 29, 2004, there were approximately 43,051 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 currently plan to declare a dividend; however,
the company periodically considers alternatives, including dividend payments, to
increase shareholder value.

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ITEM 6. SELECTED FINANCIAL DATA.

OTHER INFORMATION
The company has not paid a cash dividend in any of the past 5 years.

The notes to the financial statements cover changes in accounting principles in
Note 2 and reclassifications to components of sales in Note 16. Also, a new
accounting pronouncement required that a 1999 charge for debt extinguishment be
included in income (loss) from continuing operations.

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

BASIS OF PRESENTATION

Financial statements for all periods presented herein have been prepared on
a consolidated basis in accordance with generally accepted accounting principles
consistently applied. 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 2003.

The company reports the results of its segments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information." During 2003, the company
revised its segment reporting by separating its previously aggregated Consumer
and Foodservice/Food Packaging segment. Accordingly, the company now has 4
reporting segments: Consumer Products, which relates principally to the
manufacture and sale of disposable plastic, molded-fibre, pressed-paperboard,
and aluminum packaging products such as waste bags, tableware, food-storage
bags, and cookware for consumer markets such as grocery stores, mass
merchandisers, and discount chains; Foodservice/Food Packaging, which relates
primarily to the manufacture and sale of various disposable plastic,
molded-fibre, pressed-paperboard, and aluminum packaging products for
foodservice and food-packaging markets such as restaurants and other
institutional foodservice outlets, food processors, and grocery chains;
Protective and Flexible Packaging, which relates to the manufacture and sale of
plastic, paperboard, and molded-fibre 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. The
accounting policies of the reporting segments are the same as those for Pactiv
as a whole. Where discrete financial information is not available by segment,
reasonable allocations of expenses and assets are used. Previously reported
segment information has been restated to conform to the current year's
presentation.

RESTRUCTURING AND OTHER

In the fourth quarter of 2000, the company recorded a restructuring charge
of $71 million, $47 million after tax, or $0.29 per share. Of this amount, $45
million was for the impairment of assets held for sale, including those related
to the packaging-polyethylene business and the company's interest in Sentinel
Polyolefins LLC (Sentinel), 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 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 sale
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 the 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

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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 product line ($1 million).

In the second quarter of 2002, the company recognized a benefit of $4
million, $2 million after tax, or $0.02 per share, related to the partial
reversal of a previously recorded restructuring charge (netted against fixed
assets), primarily as a result of incurring a lower-than-anticipated loss on the
sale of a noncore European business.

In the fourth quarter of 2003, the company reversed $1 million of a
previously recorded restructuring charge in its Foodservice/Food Packaging
segment, reflecting lower-than-anticipated lease-termination costs for a
facility that was anticipated to be abandoned under the company's fourth-quarter
2001 restructuring plan but which has been converted into a storage facility.
Also in the fourth quarter of 2003, the company recorded $1 million of
restructuring expense in its Protective and Flexible Packaging segment,
reflecting higher-than-anticipated costs associated with the fourth-quarter 2001
restructuring program, mainly related to higher-than-expected lease-termination
costs.

As of December 31, 2003, all restructuring activity related to the above
programs was concluded.

EXECUTIVE OVERVIEW

BUSINESS

Pactiv's primary business is the manufacture and sale of consumer and
specialty-packaging products for the consumer, foodservice/food packaging, and
protective and flexible packaging markets. The company's consumer products
include plastic, aluminum, and paper-based products such as waste bags,
food-storage bags, and disposable tableware and cookware sold under such
well-known brand names as Hefty(R), Baggies(R), Hefty(R) OneZip(R), Hefty(R)
CinchSak(R), Hefty(R) The Gripper(R), Hefty(R) Zoo Pals(R), Kordite(R), and EZ
Foil(R). Foodservice and food-packaging products include foam, clear plastic,
aluminum, pressed-paperboard, and molded-fibre packaging for customers in the
food-distribution channel, including wholesalers, supermarkets, and packer
processors, who prepare and process food for consumption. The company's
protective-packaging products are generally used to protect and cushion various
commercial and industrial products from the point of manufacture to the point of
delivery or pick-up. Pactiv's flexible-packaging products are used mainly in
food, medical, pharmaceutical, chemical, and hygienic applications, and often
involve custom design. The company operates 80 manufacturing facilities in 14
countries worldwide.

Pactiv generates sales and profits through the arms-length sale of its
products to a wide array of customers, including grocery stores, mass
merchandisers, discount chains, restaurants, distributors, fabricators, and
directly to end-users worldwide. Costs are incurred in connection with the
manufacture and sale of these products and are recorded as either cost of sales
or selling, general, and administrative expenses.

Approximately 80% of Pactiv's sales comes from products made from different
types of plastics. The principal raw materials used to manufacture these
products are plastic resins, including polystyrene, polyethylene, polypropylene,
polyvinyl chloride, and APET. Plastic-resin prices can be volatile and are a
function of, among other things, the availability of production capacity; oil,
natural gas, and other energy-related feedstock costs; and geopolitical
circumstances.

The company generates cash by collecting receivables on profitable sales in
a timely manner, effectively managing inventory levels, maximizing
vendor-payment terms, utilizing tax-minimization strategies, and optimizing
other elements of working capital. Pactiv uses the cash it generates to invest
in property, plant, and equipment and acquisitions to provide long-term sales,
profit, and cash-flow growth; to retire debt; and, from time to time, to
repurchase its stock. The company anticipates that its cash flow from operations
will continue to be sufficient to fund its investing and financing activities.

11

Pactiv has pension plans that cover substantially all of its employees. In
addition, the company, in conjunction with its spin-off from Tenneco Inc.
(Tenneco) in 1999, became the sponsor of retirement plans covering participating
employees of Tenneco Automotive Inc. (whose benefits under these plans were
frozen as of November 30, 1999,) and certain former subsidiaries and affiliates
of Tenneco. Pactiv records net pension income on its pension plans as an offset
to selling, general, and administrative expenses; however, management typically
excludes the effects of pension income and pension assets and liabilities in
assessing performance and returns of the company.

Several opportunities and challenges may influence the company's continued
growth. Near-term risks include the impact of energy-market volatility on resin
costs, the ability to increase selling prices, and the continued effectiveness
of the company's productivity and procurement initiatives. Longer-term, the
company faces potential changes in consumer-demand patterns, possible supplier
and customer consolidations, potential increases in foreign-based competition,
and possible growth in unbranded products' market share. The company expects to
continue to be successful by adjusting selling prices to offset resin-price
movements, implementing aggressive cost-management and productivity programs,
leveraging its existing customer base into new distribution channels,
introducing innovative new products, and making strategic acquisitions.

SIGNIFICANT TRENDS AND OTHER

As noted above, the principal raw materials used to manufacture the
company's products are plastic resins, principally polystyrene and polyethylene.
Average industry prices for polystyrene were approximately 28% higher in 2003
than in 2002, driven principally by higher oil prices, while average industry
prices for polyethylene rose by approximately 27% in 2003 compared with 2002,
fueled by higher natural-gas prices. In response to the year-over-year increase
in average resin costs, the company raised selling prices in many areas of its
business during 2003. However, these price increases were only partially
effective in offsetting the impact of the resin-cost increases, as evidenced by
the decline in the company's gross margin from 31.7% in 2002 to 29.7% in 2003.

Major plastic-resin suppliers have announced additional price increases
effective in the first quarter of 2004, reflecting the continued volatility in
energy markets. These resin-cost increases are likely to have a near-term
dilutive effect on the company's gross margin until resin prices fall or the
company is able to raise selling prices correspondingly.

The company will implement a program in 2004 to enhance its growth through
allocation of productivity savings to new product development and marketing
support.

Capitalizing on productivity opportunities, the company will rationalize
and consolidate certain manufacturing operations. Among the actions being
considered are termination of production at a molded fibre plant in Great
Yarmouth, U.K., and limited consolidation of North American operations. These
rationalizations involve asset writeoffs, equipment removal, severance, and
abatement of asbestos insulation at Great Yarmouth.

These actions, coupled with select reductions in force and other
cost-reduction initiatives, are expected to reduce annualized pretax costs by
approximately $45 million ($28 million after tax). Approximately $25 million
will be redirected to additional new-product development activities and
marketing support. As a result of these actions, the company plans to take an
after-tax charge of approximately $60 million, of which approximately $48
million is expected to be recorded in the first quarter of 2004, with the
balance recognized throughout the remainder of the year. The after-tax cash cost
of executing the program will be approximately $36 million. The ultimate amount
and timing of the charges will depend upon the final costs of facility closures
and employee benefits, and conclusion of statutorily required discussions.

12

YEAR 2003 COMPARED WITH 2002

RESULTS OF CONTINUING OPERATIONS

Sales

Total sales increased $258 million, or 9.0%, in 2003. Excluding the
positive impact of foreign-currency exchange rates ($71 million) and
acquisitions ($116 million), sales grew 2%, driven primarily by price increases
and volume growth in the base business.

Sales for the Consumer Products business of $888 million increased $47
million, or 5.6%, from $841 million in 2002, reflecting strong volume growth,
higher waste-bag selling prices, and lower promotional spending. Volume grew
solidly in tableware and waste bags, aided by realizing the full-year effect of
new products introduced in 2002 (primarily Hefty(R) The Gripper(R) tall kitchen
bags). Similarly, the Hefty(R) Fun Pals line of children's plates introduced in
2002 posted volume and market-share growth during 2003.

Foodservice/Food Packaging segment sales of $1,371 million increased $150
million, or 12.3%, from $1,221 million in 2002. Excluding the positive impact of
acquisitions ($111 million) and foreign-currency exchange rates ($3 million),
sales grew 3%, driven primarily by higher selling prices. During 2003, price
increases were implemented in many areas of this business in response to higher
polystyrene resin prices.

Sales of Protective and Flexible Packaging products of $879 million
increased $61 million, or 7.5%, from $818 million in 2002. Excluding the
positive impact of foreign-currency exchange rates ($68 million) and
acquisitions ($5 million), sales for this segment fell 1%, primarily reflecting
volume softness in Europe, offset partially by price increases in both North
America and Europe.

Operating Income

Total operating income was $466 million in 2003, an increase of $3 million,
or 0.6%, over 2002. The increase was driven principally by volume growth in both
the base business and from acquisitions, benefits from the company's
productivity and procurement initiatives, and lower advertising and promotion
expenses, offset partially by unfavorable spread (the difference between selling
prices and raw-material costs), a $45 million decline in noncash pension income,
and a $4 million reversal in 2002 of a previously recorded restructuring charge.

Operating income for the Consumer Products segment increased $7 million, or
3.7%, in 2003, driven principally by volume growth, productivity improvements,
and lower advertising and promotion expenses, offset partially by lower spread.

Operating income for the Foodservice/Food Packaging segment increased $20
million, or 12.7%, in 2003, driven principally by volume growth in the base
business and through acquisitions, and productivity improvements, offset
partially by lower spread.

13

Operating income for the Protective and Flexible Packaging segment
decreased $4 million, or 6.5%, from 2002, mainly reflecting unfavorable spread,
lower volume, and the aforementioned $4 million reversal in 2002 of a previously
recorded restructuring charge, offset partially by benefits from productivity
improvements.

Operating income for the Other segment was $35 million in 2003, a decrease
of $20 million, or 36.4%, from 2002, driven mainly by a $45 million decline in
noncash pension income, offset partially by the impact of administrative
productivity improvement and procurement savings.

Tenneco Packaging Litigation Settlement and Other

In the third quarter of 2003, the company reached an agreement to settle a
civil, class-action lawsuit filed in 1999 against Tenneco, Tenneco Packaging,
and Packaging Corporation of America (PCA), Tenneco's former containerboard
business (Tenneco Packaging litigation). The settlement resulted in Pactiv
recording a pretax charge of $56 million, $35 million after tax, or $0.22 per
share. The company expects final approval of the settlement from the court in
March 2004. This charge includes the establishment of a reserve for the
estimated liability associated with lawsuits filed by certain members of the
original class action who opted out and filed their own lawsuits. While it is
not possible to predict the outcome of any of these proceedings, the company's
management, based on its assessment of the facts and circumstances now known,
does not believe that any of these proceedings, individually or in the
aggregate, will have a materially adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flows in a
particular period.

Income Taxes

The company's effective tax rate for 2003 was 37.7%, compared with 40.0%
for 2002, reflecting the positive impact of tax-planning strategies implemented
in the United States.

Income from Continuing Operations

The company recorded income from continuing operations of $195 million, or
$1.21 per share, in 2003, compared with $220 million, or $1.37 per share, in
2002. Income for 2003 included the impact of the Tenneco Packaging litigation
settlement of $35 million after tax, or $0.22 per share, and noncash pension
income of $40 million after tax, or $0.25 per share. Income for 2002 included
noncash pension income of $65 million after tax, or $0.41 per share, and $2
million after tax, or $0.01 per share, from the aforementioned reversal of a
previously recorded restructuring charge.

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES

In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation (FIN) No. 46, "Consolidation of Variable Interest
Entities." Pactiv adopted FIN No. 46 effective December 31, 2003, requiring the
company to recognize, as a cumulative effect of change in accounting principles,
depreciation expense on assets leased under its synthetic-lease arrangement from
lease inception to December 31, 2003, which reduced net income in 2003 by $12
million, or $0.07 per share. On a going-forward basis, consolidation of the
synthetic-lease variable-interest entity (VIE) is expected to reduce net income
by approximately $3 million, or $0.02 per share, annually.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Effective January 1, 2002, the company adopted SFAS No. 142 and
recorded a goodwill-impairment charge for certain Protective and Flexible
Packaging businesses of $83 million, $72 million after tax, or $0.45 per share,
as a cumulative effect of change in accounting principles in the first quarter
of 2002.

See "Changes in Accounting Principles" for further information.

14

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

Total debt increased $104 million from December 31, 2002, to December 31,
2003, primarily as a result of adopting FIN No. 46, which required that the
company's synthetic lease be recorded on the balance sheet, thereby increasing
debt by $169 million, partially offset by the retirement of debt ($65 million).
Minority interest fell to $8 million from $21 million at the end of 2002 in that
the company purchased the remaining 30% of Central de Bolsas, S.A. de C.V.
(Jaguar) it did not already own. Shareholders' equity increased $164 million
from December 31, 2002, to December 31, 2003, primarily reflecting the recording
of $183 million in net income, the recording of a $61 million favorable
currency-translation adjustment, and the issuing of company stock totaling $34
million, offset partially by the repurchasing of $87 million of company stock,
and the recording of an increase in the minimum pension-plan liability of $28
million.

The ratio of debt to total capitalization declined to 55.6% at December 31,
2003, from 57.4% at December 31, 2002, primarily because of the increase in
shareholders' equity.

Cash Flows

Cash provided by operating activities was $336 million in 2003, compared
with $384 million in 2002. The $48 million decrease reflected the 2003 cash
effect of the Tenneco Packaging litigation settlement ($19 million), higher cash
tax payments ($26 million), and higher operating working capital, primarily as a
result of higher raw-material costs.

Investing activities used $194 million of cash in 2003, principally for
capital expenditures ($112 million) and acquisitions ($82 million). Cash used by
investing activities was $244 million in 2002, principally for capital outlays
($126 million) and acquisitions ($125 million).

Cash used by financing activities was $134 million in 2003, driven
primarily by the repurchase of company stock ($87 million) and the retirement of
variable-rate debt ($67 million), offset partially by the issuance of company
stock in connection with the administration of employee-benefit plans ($20
million). Financing activities used $57 million of cash in 2002, primarily for
the repurchase of company stock ($40 million) and the retirement of debt ($28
million).

Capital Commitments

Commitments for authorized capital expenditures totaled approximately $71
million at December 31, 2003. It is anticipated that the majority of these
expenditures will be funded over the next 12 months from existing cash and
short-term investments and internally generated cash.

15

Contractual Obligations

The company enters into arrangements that obligate it to make future
payments under long-term contracts. Summarized below are such contractual
obligations at December 31, 2003.

- ---------------

(1) Includes fixed-rate debentures, variable-rate debt related to the company's
synthetic-lease agreement, and other fixed-rate debt, plus related
interest-payment obligations based on rates in effect at December 31, 2003.

(2) Includes open capital commitments, amounts related to the purchase of
minimum quantities of raw materials at current market prices under supply
agreements, and other long-term vendor agreements with specific payment
provisions and early termination penalties.

(3) Includes undiscounted workers' compensation obligations, undiscounted and
unfunded postretirement medical and supplemental pension-funding
requirements, and obligations associated with plant clean-up costs in the
United Kingdom.

Liquidity and Off-Balance-Sheet Financing

The company uses various sources of funding to manage liquidity. Sources of
liquidity include cash flow from operations and a 5-year, $750 million
revolving-credit facility, none of which was outstanding at December 31, 2003.
The company was in full compliance with financial and other covenants of its
revolving-credit agreement at year-end 2003. The company also utilizes an
asset-securitization program as off-balance-sheet financing. Amounts securitized
under this program were $10 million at both December 31, 2003, and December 31,
2002. Termination of the asset-securitization program would require the company
to increase its debt or decrease its cash balance by a corresponding amount.

The company has pension plans that cover substantially all of its
employees. Cash-funding requirements for the plans are governed primarily by the
Employee Retirement Income Security Act (ERISA). Based on long-term projections
at December 31, 2003, no cash contributions to the plans will be required
through at least 2013. For further information regarding the company's projected
cash-funding requirements under ERISA, see Exhibit 99.2 attached to this Form
10-K.

In the third quarter of 2003, the company reached an agreement to settle a
civil, class-action lawsuit filed in 1999 against Tenneco, Tenneco Packaging,
and PCA, Tenneco's former containerboard business (Tenneco Packaging
litigation). The settlement resulted in Pactiv recording a pretax charge of $56
million, $35 million after tax, or $0.22 per share, a portion of which ($35
million, or $19 million after tax) was paid in cash in 2003. While it is not
possible to predict the outcome of related proceedings, the company's
management, based on its assessment of the facts and circumstances now known,
does not believe that any of these proceedings, individually or in the
aggregate, will have a materially adverse effect on the company's financial
position. However, actual outcomes may be different than expected and could have
a material effect on the company's results of operations or cash flows in a
particular period.

In December 2003, the company's board of directors approved a plan to
repurchase up to 5 million shares of common stock. Using open-market or
privately negotiated transactions, shares will be acquired from time to time
based on market conditions. The repurchased shares will be held in treasury and
used for general corporate purposes. In 2003, the company repurchased 945,600
shares ($22 million) under this authorization, and has acquired approximately 3
million additional shares ($64 million) since December 31, 2003.

16

Management believes that cash flow from operations, available cash
reserves, and the ability to obtain cash under the company's credit facilities
and asset-securitization program will be sufficient to meet current and future
liquidity and capital requirements.

YEAR 2002 COMPARED WITH 2001

RESULTS OF CONTINUING OPERATIONS

Sales

Total sales increased $68 million, or 2.4%, in 2002. Excluding the positive
impact of foreign-currency exchange rates ($20 million), acquisitions ($67
million), and the negative effect of business divestitures ($50 million), sales
grew 1%. Volume, excluding divestitures, grew 8%, with 5 percentage points
coming from the base business and 3 percentage points coming from acquisitions.
Somewhat offsetting the volume gains were lower selling prices, primarily
related to the pass through of lower raw-material costs.

Sales for Consumer Products increased $26 million, or 3.2%, in 2002. Volume
in this business increased 8%, driven by growth in Hefty(R) One Zip(TM)
food-storage bags and tableware. Also contributing to the volume growth was the
introduction of new products: Hefty(R) The Gripper(R) tall kitchen bags and
Hefty(R) Zoo Pals(R) disposable plates for children. The higher volume was
offset somewhat by an increase in promotional spending in support of new-product
introductions.

Sales in the Foodservice/Food Packaging business increased $39 million, or
3.3%, in 2002. Excluding the negative effect of divestitures ($15 million),
sales for this segment grew 5%. Volume in this business increased 10%, with 5
percentage points coming from the base business and 5 percentage points coming
from acquisitions. The higher volume was offset partially by a decline in
selling prices related to the pass through of lower raw-material costs.

Sales of Protective and Flexible products increased $3 million, or 0.4%,
from 2001. Excluding the positive impact of foreign-currency exchange rates ($20
million) and the negative effect of businesses divested in 2001 ($35 million),
sales for this segment improved 2%. The increase reflected volume growth of 5%,
with 3 percentage points coming from the base business and 2 percentage points
coming from acquisitions, offset partially by a decline in selling prices
associated with the pass through of lower raw-material costs, principally in
North America.

Operating Income

Total operating income for 2002 was $463 million, up $72 million, or 18.4%,
from last year. The increase was driven principally by volume growth;
improvement in gross margin, primarily reflecting growth in higher-margin
product lines and benefits from the company's productivity initiatives; the
impact of reversing $4 million of a previously recorded restructuring charge
related to the Protective and Flexible Packaging segment; and the elimination of
goodwill amortization in 2002 ($19 million benefit), resulting from the adoption
of SFAS No. 142. See Changes in Accounting Principles for additional
information.

17

Operating income for 2001 included $12 million of restructuring and other
charges and the reversal of $12 million of spin-off transaction-cost provisions
originally recorded in 1999.

Operating income for the Consumer Products business increased $34 million,
or 22.1%, from 2001, driven primarily by volume growth, productivity
improvements, lower logistics costs, and the 2002 elimination of goodwill
amortization ($3 million benefit), offset partially by higher advertising
expenditures and promotional spending related to new-product introductions.

Operating income for the Foodservice/Food Packaging segment increased $24
million, or 17.9%, in 2002, driven principally by volume growth, productivity
improvements, lower logistics costs, and the 2002 elimination of goodwill
amortization ($9 million benefit), offset partially by lower spread.

Operating income for the Protective and Flexible Packaging segment
increased $33 million, or 113.8%, from 2001, mainly reflecting higher volume,
benefits from a restructuring program initiated in January 2001, the reversal in
2002 of previously recorded restructuring charges ($4 million benefit),
restructuring and other expenses in 2001 ($13 million) not repeated in 2002, and
the 2002 elimination of goodwill amortization ($7 million benefit), offset, in
part, by lower spread.

Operating income for the Other segment was $55 million in 2002, a decrease
of $19 million, or 25.7%, from 2001, driven mainly by the 2001 reversal of
spin-off transaction-cost provisions originally recorded in 1999 ($12 million
benefit), lower pension income, and higher stock-based compensation costs.

Interest Expense, Net of Interest Capitalized

Interest expense was $96 million in 2002, down $11 million, or 10.3%, from
2001, mainly because of lower borrowings.

Income Taxes

The company's effective tax rate for 2002 was 40.0%, compared with 41.5%
for 2001. This reduction was attributable principally to the elimination of
goodwill amortization.

Income from Continuing Operations

The company recorded income from continuing operations of $220 million, or
$1.37 per share, in 2002, compared with $165 million, or $1.03 per share, in
2001.

DISCONTINUED OPERATIONS

In 2001, the company recorded after-tax income from discontinued operations
of $28 million, or $0.17 per share, which represented gains on the sale of the
company's remaining holdings of PCA stock.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES

In July 2001, the FASB issued SFAS No. 142. >Effective January 1, 2002, the
company adopted SFAS No. 142 and recorded a goodwill-impairment charge for
certain Protective and Flexible Packaging businesses of $83 million, $72 million
after tax, or $0.45 per share, as a cumulative effect of change in accounting
principles in the first quarter of 2002.

CHANGES IN ACCOUNTING PRINCIPLES

In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142. SFAS No. 141 requires that business combinations initiated after
June 30, 2001, be accounted for using the purchase method of accounting and
broadens the criteria for recording intangible assets separate from goodwill.
SFAS No. 142 does not permit goodwill and 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, and
recorded a goodwill-impairment charge of $83 million, $72 million after tax, or
$0.45 per share, in the first quarter of 2002.
18

In January 2003, the FASB issued FIN No. 46. FIN No. 46 addresses
accounting for VIEs, defined as separate legal structures that either do not
have equity investors with voting rights or have equity investors with voting
rights that do not provide sufficient financial resources for entities to
support their activities. FIN No. 46 requires that (1) companies consolidate
VIEs if they are required to recognize the majority of such entities' gains and
losses and (2) disclosures be made regarding VIEs that companies are not
required to consolidate but in which they have a significant variable interest.
Consolidation requirements apply immediately to VIEs created after January 31,
2003, and to existing VIEs in the first fiscal year or interim period ending
after December 15, 2003. Certain of the disclosure requirements apply to
financial statements issued after January 31, 2003, regardless of when VIEs were
created. Upon Pactiv's December 31, 2003, adoption of FIN No. 46, the company
consolidated a VIE associated with properties covered by its synthetic-lease
facility, resulting in an increase in long-term debt and property, plant, and
equipment of $169 million and $150 million, respectively. Consolidation of the
VIE also required the company to recognize, as a cumulative effect of change in
accounting principles, depreciation expense on the leased assets from lease
inception to December 31, 2003, of $19 million, $12 million after tax, or $0.07
per share. On a going-forward basis, consolidation of the VIE is expected to
reduce net income by approximately $3 million, or $0.02 per share, annually.

CRITICAL ACCOUNTING POLICIES

Following are the accounting policies of Pactiv that, in management's
opinion, have the most significant impact on the company's financial condition
and results of operations. These policies involve a degree of judgment and/or
estimation concerning inherently uncertain factors.

REVENUE RECOGNITION

The company recognizes sales when the risks and rewards of ownership have
transferred to the customer, which is generally considered to have occurred as
products are shipped. 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,
2003, is reasonable. In the event that future sales-deduction trends vary
significantly from past or expected trends, reported sales may increase or
decrease by a material amount.

INVENTORY VALUATION

The company's inventories are stated at the lower of cost or market. A
portion of inventories (53% and 56% at December 31, 2003, and 2002,
respectively) is valued using the last-in, first-out (LIFO) method of
accounting. Management prefers the LIFO method in that it reflects in cost of
sales the current cost of the company's raw materials (primarily plastic
resins), which can be volatile. If the company had valued inventories using the
first-in, first-out (FIFO) accounting method, net income would have been $9
million, or $0.06 per share, higher in 2003, and would have been $2 million, or
$0.01 per share, and $10 million, or $0.06 per share, lower in 2002 and 2001,
respectively.

The company's Protective and Flexible Packaging businesses value their
inventory using FIFO or average-cost methods. Many of these businesses are
located in countries where use of the LIFO method is not permitted. Management
believes that the cost and complexity of using multiple inventory-accounting
methods in these countries would outweigh the benefits.

Management periodically reviews inventory balances to identify slow-moving
or obsolete items. This determination is based on a number of factors, including
new-product introductions, changes in consumer-demand patterns, and historical
usage trends.

19

PENSION PLANS

The company accounts for pension plans in accordance with requirements of
SFAS No. 87, "Employer's Accounting for Pensions." Pension-plan income ($64
million, $109 million, and $113 million for the 12 months ended December 31,
2003, 2002, and 2001, respectively) is included in the statement of income as an
offset to selling, general, and administrative expenses. Projections indicate
that the company's noncash pension income will decline to approximately $49
million in 2004, principally reflecting the amortization of unrecognized
actuarial losses and a one-half percentage point decline (from 6.75% to 6.25%)
in the discount rate used to measure pension obligations. See Exhibit 99.1
attached to this Form 10-K.

Pension income is based on a number of factors, including estimates of
future returns on pension-plan assets; amortization of actuarial gains/losses;
expectations regarding employee compensation; and assumptions pertaining to
participant turnover, retirement age, and life expectancy.

In developing its assumption regarding the rate of return on pension-plan
assets, the company projects future returns on various asset classes, risk-free
rates of return, and long-term inflation rates. Since inception in 1971, the
pension plans' annual rate of return on assets has averaged 10.9%. Historically,
the plans have invested approximately 65% of assets in equities and 35% in
fixed-income investments. After consideration of all of these factors, the
company concluded that a 9% rate of return on assets assumption was appropriate
for 2003. Holding all other assumptions constant, a one-half percentage-point
change in the rate-of-return assumption would impact the company's pension
income by approximately $25 million pretax.

The company's discount-rate assumption is based on the composite yield on a
portfolio of high-quality corporate bonds constructed with durations to match
the plans' future benefit obligations (approximately 6.25% at September 30,
2003). Consequently, the company lowered its discount-rate assumption for 2004
to 6.25%, from 6.75% in 2003. Holding all other assumptions constant, a one-half
percentage-point change in the discount rate would impact the company's pension
income by approximately $10 million pretax.

The company utilizes a market-related method for calculating the value of
plan assets. This method recognizes the difference between actual and expected
returns on plan assets over 5 years. The resulting unrecognized gains or losses,
along with other actuarial gains and losses, are amortized using the "corridor
approach" outlined in SFAS No. 87.

20

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 British pound and
the euro. Associated gains or losses offset 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, 2003, all of which will mature in 2004.

INTEREST RATES

The company has issued public-debt securities ($1,174 million at December
31, 2003,) with fixed interest rates and original maturity dates ranging from 2
to 24 years. Should the company decide to redeem these securities prior to their
stated maturity, it would incur costs based on the fair value of the securities
at that time. In addition, the company has other fixed-rate debt totaling $2
million and floating-rate debt of $169 million at December 31, 2003.

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.

In the first quarter of 2001, the company entered into interest-rate swap
agreements to 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. During the first quarter of 2002, the company exited these
swap

21

agreements, and the resulting accumulated net loss ($1 million at December 31,
2003,) is being expensed over the remaining life of the underlying obligation.

COMMODITY DERIVATIVES

During the third quarter of 2003, the company entered into natural-gas
forward contracts to hedge its exposure to adverse changes in the price levels
of natural gas during the period from November 2003 to March 2004. These
instruments limit the upside risk on purchases of natural gas used in the
production process at certain of the company's plants. In this connection, the
company paid an option premium that will be amortized over the November 2003 to
March 2004 period. The option does not obligate the company to purchase natural
gas, but limits upward price exposure, while allowing the company to benefit
fully from downward price movements. Changes in the market value of these
natural-gas hedges are recorded in other comprehensive income on the balance
sheet.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX OF THE FINANCIAL STATEMENTS OF PACTIV CORPORATION
AND CONSOLIDATED SUBSIDIARIES

23

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of Pactiv Corporation:

We have audited the accompanying consolidated statements of financial
position of Pactiv Corporation (a Delaware corporation) and consolidated
subsidiaries (the company) as of December 31, 2003, and 2002, and the related
consolidated statements of income, cash flows, and changes in shareholders'
equity and other comprehensive income for the years then ended. Our audits also
included the financial statement schedules listed in the index for Item 15,
relating to information as of December 31, 2003, and 2002, and for the years
then ended. These consolidated financial statements and schedules are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedules based on our
audits. The consolidated financial statements and schedule for the year ended
December 31, 2001, were audited by another auditor who has ceased operations and
whose report dated January 22, 2002, expressed an unqualified opinion on such
statements before the adjustments and additional disclosures referred to in the
last paragraph of this report.

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 consolidated financial position of the company as
of December 31, 2003, and 2002, and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects
the information set forth therein.

As discussed in Notes 2 and 9 to the financial statements, the company
changed its method of accounting for goodwill and intangible assets in the year
ended December 31, 2002, and for consolidation of variable interest entities as
of December 31, 2003.

As discussed above, the financial statements and schedule of Pactiv
Corporation and consolidated subsidiaries for the year ended December 31, 2001,
were audited by another auditor who has ceased operations. As described in Note
16, the company changed the composition of its reportable segments in 2003, and
the amounts in the 2001 financial statements relating to reportable segments in
Note 16 and the components of sales in the statement of income have been
restated to conform to the 2003 composition of reportable segments. We audited
the adjustments that were applied to restate the amounts for reportable segments
reflected in the 2001 financial statements. Our procedures included (1) agreeing
the adjusted amounts of segment sales to external customers; depreciation and
amortization; operating income; income from discontinued operations; total
assets; investment in affiliated companies; capital expenditures; and noncash
items other than depreciation and amortization to the company's underlying
records obtained from management, and (2) testing the mathematical accuracy of
the reconciliations of segment amounts to the consolidated financial statements.
Also, as described in Note 9, these financial statements have been revised to
include the transitional disclosures required by Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which was
adopted by the company as of January 1, 2002. Our audit procedures with respect
to the disclosures in Note 9 with respect to 2001 included (1) agreeing the
previously reported income from continuing operations to the previously issued
financial statements and agreeing the adjustments to reported income from
continuing operations representing amortization expense (including any related
tax effects) recognized in those periods related to goodwill and intangible
assets to the company's underlying records obtained from management, and (2)
testing the mathematical accuracy of the reconciliation of previously reported
income from continuing operations to

24

adjusted income from continuing operations and net income, and the related
earnings-per-share amounts. In addition, Schedule II -- Valuation and Qualifying
Accounts, as listed in the index for Item 15, was revised in 2003 to include
disclosure of inventory valuation, deferred tax asset valuation and fixed asset
valuation for 2001. Our procedures with respect to those disclosures for 2001
included 1) agreeing the amounts in each column to the company's underlying
records obtained from management, and 2) testing the mathematical accuracy of
the rollforward on the schedule of the beginning and ending balances. In our
opinion, these adjustments and disclosures are appropriate and have been
properly applied. However, we were not engaged to audit, review, or apply any
procedures to the 2001 financial statements or schedule of the company other
than with respect to such disclosures and adjustments and, accordingly, we do
not express an opinion or any other form of assurance on the 2001 financial
statements taken as a whole.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
January 21, 2004, except for Note 19,
as to which the date is March 15, 2004

25

BELOW IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH THE COMPANY'S FILING ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH THIS FILING ON FORM 10-K.

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 3 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 3 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 for 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 statement taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Chicago, Illinois
January 22, 2002

26

CONSOLIDATED STATEMENT OF INCOME

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

27

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

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

28

CONSOLIDATED STATEMENT OF CASH FLOWS

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

29

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME
(LOSS)