PACTIV CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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, 2004

[ ] 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. [X]

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, 2004 NON-AFFILIATES
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COMMON STOCK 149,268,385 SHARES $3,722,753,522

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). 148,956,990 shares outstanding as of February 28, 2005. (See Note 11
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 20,
2005

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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, Related Stockholder
Matters, and Issuer Purchases of Equity Securities.......... 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........................................................ 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
Item 9B. Other Information........................................... 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 and Financial Statement Schedules.................. 58

ITEM 1. BUSINESS.

OVERVIEW

Pactiv Corporation (Pactiv or the company) is a global supplier of
specialty-packaging and consumer products with 2004 sales of $3.4 billion. The
company operates 77 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-fiber 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 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 its 1999 spin-off
from Tenneco Inc., 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-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(R),
Hefty(R) Zoo Pals(R), Kordite(R), and EZ Foil(TM). 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-fiber, 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.

For food processors, the company's products include dual-ovenable
paperboard containers, molded-fiber egg cartons, 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

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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 zipper storage bags, tableware,
foodservice-foam containers, clear rigid-display packaging, foam trays, and
aluminum cookware. In 2004, 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(TM)
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 2004, the company spent $33 million on research and
development activities, compared with $32 million and $35 million in 2003 and
2002, respectively, and introduced more than 50 new products.

In the Consumer Products business segment, several major new products were
introduced in 2004: Hefty(R) Ultra Flex(TM) waste bags, Hefty(R) Handy Saks(TM)
waste bags and, Hefty(R) Zoo Pals(R) Bowls and Funtensils Cutlery(TM) for
children.

In 2004, the Foodservice/Food Packaging business segment broadened its
product offerings through the introduction of new containers for agricultural
products, a new sheetcake pan for a major grocery store, and several new
containers for major fast-food chains.

In the U.S., the protective-packaging product line was expanded in late
2004 with the introduction of the Pactiv 9000 Air-Paq(TM) inflatable engineered
cushioning system.

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, which is aimed at reducing supply-chain costs, enhancing customer
service, and improving productivity.

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Productivity/Cost Reduction

Pactiv's continuing focus on enhancing productivity and reducing
manufacturing and logistics costs is key to improving the business'
profitability. In 2004, approximately 28% of the company's research and
development spending and roughly 31% 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. Since the beginning of 2000, the
company has invested approximately $225 million to acquire businesses and
assets.

MARKETING, DISTRIBUTION, AND CUSTOMERS

The company has a combined sales and marketing staff of approximately 650
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 each of 2004 and 2003, Wal-Mart Stores, Inc. accounted for 11.4% 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 15 to the financial statements for additional segment and
geographic information.

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, and service.

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 15 to the financial statements for
additional information regarding the company's international operations.

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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. More than 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 2004 and
the company's management believes that such supply will remain adequate in 2005.

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, 2004, Pactiv employed approximately 14,500 people, of
which approximately 1,100 were employed by joint ventures in which the company
has a controlling interest and 11.4% were covered by collective-bargaining
agreements. Two of those agreements, covering a total of 466 employees, are
scheduled for renegotiation in 2005. In Europe and the Middle East,
approximately 2,800 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.

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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.

Following is a summary of the company's facilities worldwide.

In addition to the above, 2 research and development centers for consumer
and foodservice/food packaging products and process development are located in
Canandaigua, New York, and Vernon Hills, Illinois. 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
distribution centers throughout the United States. Also, 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.

On November 3, 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. This
charge included the establishment of a reserve for the estimated liability
associated with lawsuits filed by certain members of the original class-action
who opted out of the class 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.

The company is party to 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,

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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 2004.

ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT.

Set forth below are the executive officers of the company at February 28,
2005, 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, 53, 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, 59, 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., 60, 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 J. Lazaredes, 54, Executive Vice President and General Manager,
Foodservice/Food Packaging. Mr. Lazaredes has served as Executive Vice President
and General Manager, Foodservice/Food Packaging, since July 2004. Prior to 2004,
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, 51, 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, 55, 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, 60, 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, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES.

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 2004 and 2003 is shown below.

As of February 28, 2005, there were approximately 41,109 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.

The company did not purchase any shares of its common stock in the fourth
quarter of 2004. In August 2004, the board of directors approved a plan for the
company to repurchase up to 5,000,000 shares of its common stock, using
open-market or privately negotiated transactions, with the repurchased shares to
be held in treasury for general corporate purposes. As of December 31, 2004, the
maximum number of shares that may yet be purchased under this plan was
3,905,900.

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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 15.

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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 2004.

The company has 4 reporting segments: Consumer Products, which relates
principally to the manufacture and sale of disposable plastic, molded-fiber,
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-fiber, 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-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. 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.

RESTRUCTURING AND OTHER

In the first quarter of 2004, the company announced a restructuring program
to rationalize excess manufacturing capacity and reduce overhead costs, and to
reinvest a portion of the related savings in strategic growth initiatives. In
this connection, the company recorded restructuring and other charges totaling
$93 million, $58 million after tax, or $0.38 per share in 2004. The principal
strategic objectives of the program are to (1) rationalize inefficient
manufacturing assets, primarily certain molded-fiber facilities in North America
and the United Kingdom; (2) reduce overhead in several areas of the business,
thereby eliminating non-value-added activities; (3) increase the number of new
product launches over the next several years; and (4) increase the value of the
Hefty(R) brand. Implementation of the program resulted in the elimination of
approximately 1,000 salaried and hourly positions worldwide. The total cost of
the restructuring program is expected to be approximately $96 million, $60
million after tax, or $0.39 per share, covering severance, asset write-offs, and
other, which consists principally of asset removal costs, including asbestos
insulation abatement and associated expenses at the company's closed
molded-fiber facility in the United Kingdom. The majority of the program was
executed in the second quarter of 2004, with the balance of the program expected
to be completed in 2005.

After-tax cash payments related to the restructuring and other actions
totaled $12 million for full-year 2004.

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The following summarizes actual and expected impacts of restructuring and
related actions.

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(1) Consists principally of asset removal costs, including asbestos insulation
abatement and associated expenses at the company's closed molded-fiber
facility in the United Kingdom.

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(TM). Foodservice and 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. 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 77 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.

Greater than 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.

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The company generates cash by collecting receivables on profitable sales in
a timely manner, effectively managing inventory levels, optimizing
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.

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 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
effect 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

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 55% higher at the end of 2004 than at
the end of 2003, driven principally by higher oil and benzene prices, while
average industry prices for polyethylene rose by approximately 40% over the same
period, fueled by higher natural-gas prices. In response to the significant
escalation in resin costs, the company raised selling prices in many areas of
its business during 2004, which were effective in offsetting approximately 50%
of the resin-cost increases.

Raw-material costs will likely continue to be a source of uncertainty for
the company in the near-term future. Resin vendors have announced additional
price increases effective in the first and second quarters of 2005; however, at
this time it is not clear whether these price increases will be successfully
implemented as announced, or at all. The company is closely monitoring the resin
marketplace in order to respond quickly to any material cost increases.

The company is also sensitive to other energy-related cost movements,
particularly with respect to transportation and logistics costs. Historically,
the company has been able to mitigate higher energy-related costs with
productivity improvements and other cost reductions; however, future significant
energy-related cost increases may not be fully offset with productivity
initiatives.

The company recently announced the launch of a major new-product family in
its Consumer tableware business, and 2 additional new-product launches are
expected to occur in 2005. To support these growth initiatives and the Hefty(R)
UltraFlex(TM) waste-bag line that was launched in the third quarter of 2004, the
company's investment in advertising and promotion (A&P) in 2005 is expected to
increase between $60 million and $70 million compared with 2004. The impact on
pretax profit of higher A&P spending, net of operating income on incremental
new-product sales, is expected to be approximately $45 million to $55 million in
2005.

11

YEAR 2004 COMPARED WITH 2003

RESULTS OF CONTINUING OPERATIONS

Sales

Total sales increased $244 million, or 7.8%, in 2004. Excluding the
positive impact of foreign-currency exchange rates ($55 million), sales grew
5.9%, driven primarily by volume growth in the base business ($78 million) and
acquisitions ($55 million), as well as price increases ($56 million).

Sales for the Consumer Products business of $934 million increased $46
million, or 5.2%, from $888 million in 2003, reflecting strong volume growth.
Volume growth was broad-based, led by an increase in tableware and the
introduction of new products, including Hefty(R) Ultra-Flex(TM) waste bags and a
line of cups.

Foodservice/Food Packaging segment sales of $1.490 billion increased $119
million, or 8.7%, from $1.371 billion in 2003. Sales growth was driven by
broad-based volume gains ($65 million) and higher selling prices ($54 million).
Selling-price increases were implemented to offset the impact of significant
increases in polystyrene-resin costs.

Sales of Protective and Flexible Packaging products of $958 million
increased $79 million, or 9.0%, from $879 million in 2003. Excluding the
positive impact of foreign-currency exchange rates ($55 million), sales for this
segment increased 2.5%, primarily reflecting higher protective-packaging volume,
particularly in North America, offset partially by the effect of closing a
molded-fiber plant in the United Kingdom.

Operating Income

Total operating income was $345 million in 2004, a decrease of $121
million, or 26%, from 2003, driven in large part by the recording of
restructuring and other charges of $93 million in 2004, as well as by the
unfavorable effect of higher plastic-resin and other energy-related costs,
increased marketing-support expenditures, and lower noncash pension income,
offset partially by the positive impact of selling-price increases, volume
gains, restructuring-program benefits, and productivity improvements.

12

The following tables summarize by segment the impact of restructuring and
other charges on 2004 and 2003 operating income determined in accordance with
generally accepted accounting principles (GAAP).

The company's management believes that focusing on operating income
excluding the effect of restructuring and other charges is a meaningful
alternative way of evaluating the company's operating results. The restructuring
and other charges relate to actions that will have an ongoing effect on the
company, and to consider such charges as being only applicable to 2004 and 2003
could make the company's operating performance in those periods more difficult
to evaluate, particularly when compared with other periods in which there were
no such charges. The company's management uses operating income excluding
restructuring and other charges to evaluate operating performance, and, along
with other factors, in determining management compensation.

The following table summarizes operating income excluding restructuring and
other charges for 2004 and 2003.

Total operating income excluding restructuring and other charges was $438
million, down $28 million, or 6.0%, versus 2003, as increased plastic-resin and
other energy-related costs, higher marketing-support expenses, and lower noncash
pension income were only partially offset by higher selling prices, volume
growth, restructuring savings, and productivity gains.

Operating income excluding restructuring and other charges for the Consumer
Products business was $179 million, down 8.2% compared with 2003, as higher
plastic-resin and other energy-related costs and increased advertising and
promotional expenses were only partially offset by increased volume, higher
selling prices, and productivity gains.

Operating income excluding restructuring and other charges for the
Foodservice/Food Packaging business was $169 million, down 4.5% from a year ago,
reflecting the unfavorable impact of higher plastic-

13

resin and other energy-related costs, offset, in part, by selling price
increases, higher volume, and productivity improvements.

Operating income excluding restructuring and other charges for the
Protective and Flexible Packaging segment was $75 million, up 27.1% from 2003,
primarily reflecting volume growth in North America, restructuring benefits, and
productivity gains.

Operating income excluding restructuring and other charges for the Other
segment decreased 57.1% from 2003, principally because of a decline in noncash
pension income.

Income Taxes

The company's effective tax rate for 2004 was 36.7%, compared with 37.7%
for 2003, reflecting the positive impact of tax-planning strategies implemented
during the year.

Income from Continuing Operations

The company recorded income from continuing operations of $155 million, or
$1.01 per share, in 2004, compared with $195 million, or $1.21 per share, in
2003. The current-period results included restructuring and other charges of $58
million, or $0.38 per share, and noncash pension income of $30 million, or $0.20
per share. Prior-period results included charges for the Tenneco Packaging
litigation settlement and related matters of $35 million, or $0.22 per share,
and noncash pension income of $40 million after tax, or $0.25 per share.

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. Consolidation of the variable-interest entity (VIE)
associated with the company's synthetic-lease facility lowered 2004 net income
by approximately $3 million, or $0.02 per share.

See "Changes in Accounting Principles" for further information.

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

Short-term debt increased and long-term debt decreased by $467 million from
December 31, 2003, to December 31, 2004, reflecting the reclassification as
current of long-term debt amounts due during the following 12 months.
Shareholders' equity at the end of 2004 increased $22 million from the end of
2003, reflecting the recording of net income of $155 million, the issuance of
$45 million of company stock, the impact of favorable foreign-currency
translation adjustments of $33 million, and the recording of a favorable
minimum-pension liability adjustment of $19 million, offset partially by the
repurchase of $230 million of company stock.

14

The ratio of debt to total capitalization declined to 55.1% at December 31,
2004, from 55.6% at December 31, 2003, due to the increase in shareholders'
equity.

Cash Flows

Cash provided by operating activities was $367 million in 2004, compared
with $336 million in 2003. The $31 million increase reflected better
working-capital management, particularly with respect to inventories, and higher
cash earnings.

Investing activities used $91 million of cash in 2004, principally for
capital expenditures ($100 million). Cash used by investing activities was $194
million in 2003, primarily for capital outlays ($112 million) and acquisitions
($82 million).

Cash used by financing activities was $197 million in 2004, driven
primarily by the repurchase of company stock ($230 million), offset partially by
the issuance of company stock in connection with the administration of employee
benefit plans ($33 million). Financing activities used $134 million of cash in
2003, primarily related to 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).

Capital Commitments

Commitments for authorized capital expenditures totaled approximately $156
million at December 31, 2004, of which approximately $141 million will be spent
in 2005 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.

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, 2004.

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

(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, 2004.

(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.

15

(3) Includes undiscounted workers' compensation obligations, and undiscounted
and unfunded post-retirement medical and supplemental pension-funding
requirements.

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, $600 million
revolving-credit facility, none of which was outstanding at December 31, 2004.
The company was in full compliance with financial and other covenants of its
revolving-credit agreement at year-end 2004. 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, 2004, and December 31,
2003. 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
and regulations in existence at December 31, 2004, no cash contributions to the
plans will be required through at least 2014.

On November 3, 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, a
portion of which ($35 million, or $19 million after tax) was paid in cash in
2003. This charge included the establishment of a reserve for the estimated
liability associated with lawsuits filed by certain members of the original
class action who subsequently opted out of the class and filed their own
lawsuits. 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 board of directors approved a plan for the company to
repurchase up to 5 million shares of its common stock using open-market or
privately-negotiated transactions, with the repurchased shares to be held in
treasury for general corporate purposes. In March 2004, the board of directors
approved a plan for the company to repurchase an additional 5 million shares of
its common stock under terms and conditions similar to those included in the
December 2003 plan. In August 2004, the board of directors approved a plan for
the company to repurchase a third tranche of 5 million shares of its common
stock under terms and conditions similar to those included in the December 2003
and March 2004 plans. Pursuant to these authorizations, in 2004 the company
acquired 10.1 million shares at an average cost of $22.71 per share, or a total
outlay of $230 million. See Part II, Item 8 for additional information.

In January 2005, the company voluntarily prepaid its $169 million
synthetic-lease facility. See Note 18 for additional information.

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.

16

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
sales of new products introduced in 2002 (primarily Hefty(R) The Gripper(R) tall
kitchen bags). Similarly, the Hefty(R) 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 billion increased $150
million, or 12.3%, from $1.221 billion 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 costs.

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.

17

Operating income for the Protective and Flexible Packaging segment
decreased $4 million, or 6.5%, from 2002, mainly reflecting unfavorable spread,
lower volume, and a $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

On November 3, 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. 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 subsequently opted out of the class and
filed their own lawsuits. See Note 16 for additional information.

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 FASB issued 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.

In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets." Effective January 1,
2002, the company adopted SFAS No. 142 and recorded a related
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.

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 related 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.

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
SFAS No. 123(R) requires that the fair value of all share-based payments to
employees, including grants of stock options, be recognized in the financial
statements, and supercedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," which required that the "intrinsic
value" method be used in determining compensation expense for share-based
payments to employees. Under SFAS No. 123(R), employee-compensation expense is
based on the grant-date fair value of the award and is recognized in the
statement of income over the period during which an employee is required to
provide service (normally the vesting period). SFAS No. 123(R) is effective as
of the beginning of the first interim or annual period after June 30, 2005. The
impact of adopting SFAS 123(R) cannot be predicted at this time, since it
depends on levels of future share-based payments. However, if the company had
adopted SFAS 123(R) in prior periods, the impact of adoption would have
paralleled impacts described under the caption "Stock-Based Compensation" of
Note 2 to the financial statements. SFAS No. 123(R) also requires the benefits
of tax deductions in excess of recognized compensation cost be reported as cash
flow from financing activities, rather than its current classification in cash
flow from operating activities. It is not possible to predict these amounts,
since they depend on the timing of employee stock option exercises. Amounts
recognized for such excess tax deduction benefits were $6 million, $3 million,
and $1 million in 2004, 2003, and 2002, respectively.

CRITICAL ACCOUNTING POLICIES

Following are Pactiv's accounting policies that in management's opinion
involve the exercise of considerable judgment and the use of estimates, and have
the most significant impact on the company's financial condition and results of
operations.

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 deductions from sales that are 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, 2004, 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 (52% and 53% at December 31, 2004, and 2003,
respectively) is valued using the last-in, first-out
19

(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 $32 million, or $0.21 per share, higher in 2004, $9 million, or
$0.06 per share, higher in 2003, and $2 million, or $0.01 per share, higher in
2002.

The company's Protective and Flexible Packaging business values its
inventory using FIFO or average-cost methods. Many of this business' operations
are located in countries in which the use of the LIFO method of inventory
accounting is not permitted.

Management periodically reviews inventory balances to identify slow-moving
and/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.

PENSION PLANS

The company accounts for pension plans in accordance with requirements of
SFAS No. 87, "Employers' Accounting for Pensions." Pension-plan income ($48
million, $64 million, and $109 million for the 12 months ended December 31,
2004, 2003, and 2002, respectively) is included in the statement of income as an
offset to selling, general, and administrative expenses. It is estimated that
the company's noncash pension income will decline to $46 million in 2005.

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

In developing its assumption regarding the rate of return on pension-plan
assets, the company estimates future returns on various classes of assets,
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 11.0%.
Historically, the plans have invested approximately 70% of assets in equity
securities and 30% in fixed-income investments. After considering all of these
factors, the company concluded that the use of a 9% rate-of-return on assets
assumption was appropriate for 2004. Holding all other assumptions constant, a
one-half percentage-point change in the rate-of-return on assets assumption
would impact the company's pretax pension income by approximately $19 million.

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. In this connection, the company used a
discount-rate assumption of 6.25% for both 2004 and 2003. Holding all other
assumptions constant, a one-half percentage-point change in the discount rate
would impact the company's pretax pension income by approximately $5 million.

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 a 5-year period. Resulting unrecognized gains or
losses, along with other actuarial gains and losses, are amortized using the
"corridor approach" discussed 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, 2004, all of which will mature in 2005.

INTEREST RATES

At December 31, 2004, the company had public-debt securities of $1.174
billion outstanding, with fixed interest rates and maturity dates ranging from 1
to 23 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 had other fixed-rate debt of $1 million
and floating-rate debt of $169 million outstanding at December 31, 2004.

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

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

(1) In January 2005, the company voluntarily prepaid its $169 million
synthetic-lease facility. See Note 18 for additional information.

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.

21

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 agreements, and the resulting accumulated net loss ($1 million at December
31, 2004) is being expensed over the remaining life of the underlying
obligation.

22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX OF THE FINANCIAL STATEMENTS OF PACTIV CORPORATION
AND CONSOLIDATED SUBSIDIARIES

23

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the company is responsible for establishing and maintaining
effective internal control over financial reporting (as defined in Rules
13a-15(f) under the Securities Exchange Act of 1934). The company's internal
control over financial reporting is designed to provide reasonable assurance to
the company's management and board of directors regarding the preparation and
fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.

Management assessed the effectiveness of the company's internal control
over financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth in the Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on our assessment, we believe that, as of December 31,
2004, the company's internal control over financial reporting was effective
based on those criteria.

Management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2004, has been audited by Ernst & Young
LLP, the independent registered public accounting firm who also audited the
company's consolidated financial statements. Ernst & Young's attestation report
on management's assessment of the company's internal control over financial
reporting appears on page 25 hereof.

24

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Pactiv Corporation:

We have audited the accompanying consolidated statements of financial
position of Pactiv Corporation and consolidated subsidiaries (the company) as of
December 31, 2004, and 2003, and the related consolidated statements of income,
cash flows, and shareholders' equity and other comprehensive income (loss) for
each of the three years in the period ended December 31, 2004. Our audits also
included the financial statement schedule listed in the index for Item 15. These
financial statements and schedule are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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 Pactiv
Corporation and consolidated subsidiaries at December 31, 2004, and 2003, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Notes 2 and 8 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.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 15, 2005, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 15, 2005

25

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING

The Board of Directors and Shareholders of Pactiv Corporation:

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Pactiv
Corporation and consolidated subsidiaries (the "company") maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparations of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
control may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that the company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on the
COSO criteria.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the accompanying
consolidated financial statements of the company as of December 31, 2004 and
2003, and for each of the three years in the period ended December 31, 2004, and
our report dated March 15, 2005, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
March 15, 2005

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)