PACTIV CORP - 10-K Annual Report

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

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 1-15157

PACTIV CORPORATION
(Exact name of Registrant as Specified in its Charter)

DELAWARE 36-2552989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 WEST FIELD COURT 60045
LAKE FOREST, ILLINOIS (Zip Code)
(Address of principal executive offices)

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

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

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

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

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

Yes X No ___

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

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

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

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

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock ($.01
par value). 159,487,510 shares outstanding as of February 28, 2002. (See Note 15
to the Financial Statements.)

DOCUMENTS INCORPORATED BY REFERENCE:

PART OF THE FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
- -------------------------------------------------------- --------------------------------------------------------
Pactiv Corporation's Definitive Proxy Statement for Part III
the Annual Meeting of Shareholders to be held May 17,
2002

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TABLE OF CONTENTS

PART I

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

PART II

Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 7
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 19
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 55

PART III

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

PART IV

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

ITEM 1. BUSINESS.

OVERVIEW

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

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

Pactiv is a global supplier of specialty packaging and consumer products
with 2001 sales of $2.8 billion. The company operates 70 manufacturing
facilities in 13 countries around the world and employs approximately 13,000
people. Pactiv has two key operating segments: Consumer and Foodservice/ Food
Packaging and Protective and Flexible Packaging. The company's consumer products
include plastic, aluminum, and paper-based products such as waste bags,
disposable tableware, food-storage bags, and aluminum cookware. The company's
foodservice/food packaging products include foam, clear plastic, aluminum,
pressed-paperboard, and molded-fiber packaging for customers in the food
distribution channel, including wholesalers, supermarkets, and packer
processors, who prepare and process food for consumption. Pactiv's
protective-packaging products are used to protect and cushion various commercial
and industrial products from the point of manufacture to the point of delivery
or pick-up, principally serving the electronics, automotive, furniture, and
e-commerce markets. The company's flexible-packaging products are used mainly in
food, medical, pharmaceutical, chemical, and hygienic applications, and often
involve custom design.

PRODUCTS AND MARKETS

Consumer and Foodservice/Food Packaging

The company manufactures, markets, and sells consumer products such as
plastic storage bags for food and household items, plastic waste bags, foam and
molded-fiber tableware, and aluminum cookware. Many of these products are sold
under such recognized brand names as Hefty(R), Baggies(R), Hefty(R) OneZip(R),
Hefty(R) Cinch-Sak(R), Hefty(R) The Gripper(TM), Hefty(R) Zoo Pals(TM),
Kordite(R), and E-Z Foil(R). These products, which are typically used by
consumers in their homes, are sold through a variety of retailers, including
supermarkets, mass merchandisers, and other stores where consumers purchase
household goods. In addition to consumer products, the company manufactures
plastic zipper closures for a variety of other packaging applications.

For foodservice customers, the company offers products to merchandise and
serve both on-premises and takeout meals. These items include tableware products
such as plates, bowls, and cups and a broad line of takeout-service containers
made from clear plastic, microwaveable plastic, molded fiber, paperboard, foam,
and aluminum.

The company's food-packaging products are designed to protect food during
distribution, aid retailers in merchandising food products, and help customers
prepare and serve meals in their homes. Food packaging products for supermarkets
include clear rigid-display packaging for produce, delicatessen, and bakery
applications; microwaveable containers for prepared, ready-to-eat meals; and
foam trays for meat and produce.

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

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

Protective and Flexible Packaging

The company manufactures, markets, and sells protective packaging for use
in the automotive, computer, electronics, furniture, durable goods, building,
and construction industries. Pactiv's sheet foams and air-encapsulated bubble
products are used for cushioning and surface protection, and its paperboard
honeycomb and engineered foam-plank products provide protection against shock,
vibration, and thermal damage. Pactiv also offers padded mailers, a variety of
laminated protective coverings, and customized packaging systems.

The company's flexible-packaging products are used in consumer, medical,
pharmaceutical, chemical, hygienic, and industrial applications. These products
include liners for disposable diapers, wrap-around sleeves for glass and plastic
bottles, polypropylene bags for sterile intravenous fluid delivery, modified
atmosphere films, stand-up pouches, food and hygienic packaging, surgical
drapes, and medical packaging.

GROWTH STRATEGY

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

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

Market Presence

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

New Products/Design Services

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

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

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

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Service Capabilities

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

Productivity/Cost Reduction

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

Strategic Acquisitions

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

MARKETING, DISTRIBUTION, AND CUSTOMERS

The company has a combined sales and marketing staff of approximately 400
people. Consumer products are sold through a direct sales force and a national
network of brokers and manufacturers' representatives. Foodservice and
supermarket customers are served primarily through a network of independent
distributors, while food-packaging and packer-processor customers are served
principally through a direct sales force. The Protective and Flexible Packaging
business sells to distributors, fabricators, and directly to end-users
worldwide.

No one customer accounted for more than 10% of the company's 2001 sales. In
general, the company's backlog of orders is not material.

ANALYSIS OF SALES

The following table sets forth information regarding sales from continuing
operations. Prior to the spin-off, the combined results of the Consumer and
Foodservice/Food Packaging business and the Protective and Flexible Packaging
business were reported under the specialty-packaging segment by Tenneco. During
the fourth quarter of 1999, the company modified the composition of its
operating segments because of changes in its management-reporting structure
triggered by the spin-off. Segment information for the first three quarters of
1999 have been restated to conform with current segment presentation.

SALES

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

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COMPETITION

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

INTERNATIONAL

Pactiv has facilities and sells products in countries throughout the world.
As a result, it is subject to various risks such as fluctuations in
foreign-currency exchange rates, limitations on conversion of foreign currencies
into U.S. dollars, restrictions on remittance of dividends and other payments by
foreign subsidiaries, withholding and other taxes on remittances by foreign
subsidiaries, hyperinflation in foreign countries, and restrictions on
investments in foreign countries. See note 19 to the financial statements for
additional information regarding the company's international operations.

RAW MATERIALS

The principal raw materials used by the company are plastic resins,
including polystyrene, polyethylene, polypropylene, and polyvinyl chloride;
aluminum; paperboard; and recycled fiber. Approximately 80% of Pactiv's sales
come from products made from different types of plastics. In general, these raw
materials are readily available from a wide variety of suppliers. Raw material
prices can be volatile and are a function of, among other things, the
availability of production capacity and oil, natural gas, and other material
costs. The supply of raw materials was adequate in 2001, and the company's
management believes that such supply will remain adequate in 2002.

ENVIRONMENTAL REGULATION

Pactiv's operations are required to comply with existing and potential
federal, state, local, and foreign air emission legislation and other laws and
regulations affecting the environment. In addition, various consumer and special
interest groups have lobbied, from time to time, for the implementation of a
variety of environmental and pollution-control measures. Although management
believes that current laws and regulations have not had a material adverse
effect on the company's results, there can be no assurance that future
legislative or regulatory initiatives, if any, will not have a material adverse
effect on the company.

OTHER

As of December 31, 2001, Pactiv employed approximately 13,000 people, 16%
of whom were covered by collective bargaining agreements. Five of those
agreements, covering a total of 460 employees, are scheduled for renegotiation
in 2002. In Europe and the Middle East, approximately 1,960 employees are
governed by works councils. Management believes that employee relations are
generally satisfactory.

The company owns a number of U.S. and foreign patents, trademarks, and
other intellectual property that are important to the manufacture, marketing,
and distribution of certain products. The company also utilizes numerous
software licenses that are important to its business. The company believes that
its intellectual property rights and licensing rights are adequate for its
business.

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

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

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

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

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

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

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

ITEM 2. PROPERTIES.

HEADQUARTERS LOCATION

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

MANUFACTURING AND ENGINEERING FACILITIES

In North America, Pactiv operates 50 facilities in 21 states, Canada, and
Mexico. Plastic and aluminum foodservice and consumer products and building
products are manufactured at 21 plants. The protective packaging business
converts paperboard into honeycomb products at nine plants. Ten plants apply
extrusion, foaming, and converting technologies to produce flexible or
rigid-plastic protective packaging from polystyrene, polyethylene, and
polypropylene resins. Molded-fiber packaging is produced at seven locations, and
tooling for molded-fiber plants is manufactured at one location.
Ovenable-paperboard products are manufactured at two facilities. A research and
development center for consumer products and foodservice/food packaging and
process development is located in Canandaigua, New York. A design

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

Pactiv has 20 international manufacturing facilities. Ten
protective-packaging plants in Belgium, England, France, Germany, Italy, The
Netherlands, Poland, and Spain make plastic air-encapsulated bubble and
foam-sheet products, including mailers. Five flexible-packaging plants in Egypt
and Germany make flexible-packaging films, bags, labels, pouches, printed and
converted paper bags, and disposable medical packaging. Omni-Pac, a European
subsidiary, produces cushioning and molded-fiber packaging in Elsfleth, Germany,
and Great Yarmouth, England. Single-use thermoformed plastic food containers and
films are manufactured at three facilities in England, Scotland, and Wales. In
addition, Pactiv has a joint-venture interest in a folding-carton operation in
Dongguan, China, and a corrugated converting operation in Shaoxing, China.

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

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

ITEM 3. LEGAL PROCEEDINGS.

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

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

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the fourth
quarter of 2001.

ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT.

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

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

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

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

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

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

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

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

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

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

The outstanding shares of common stock ($0.01 par value) of Pactiv are
listed on the New York Stock Exchange (NYSE).

The stock began "regular way" trading on the NYSE on November 5, 1999 (the
business day immediately following the spin-off). Stock-price and dividend
information is shown below.

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

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

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ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA

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

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

BASIS OF PRESENTATION

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

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

STRATEGIC REALIGNMENT

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

On November 4, 1999, as part of a corporate reorganization, Pactiv's former
parent company, Tenneco Inc. (Tenneco), and its subsidiaries effected various
intercompany transfers and distributions to restructure and separate their
then-existing businesses, assets, liabilities, and operations so that, among
other things, the packaging businesses and certain corporate and administrative
service operations of Tenneco would be owned by Pactiv. Tenneco subsequently
distributed pro rata to holders of its common stock all of the outstanding
common stock of Pactiv (the "spin-off"). Prior to the spin-off, Pactiv was named
Tenneco Packaging Inc. (TPI). As used herein, the terms "company" or "Pactiv"
refer, for periods prior to the spin-off, to TPI and certain other packaging
subsidiaries of Tenneco and, for periods after the spin-off, to Pactiv and its
consolidated subsidiaries.

Before the spin-off, Tenneco realigned substantially all of its existing
debt through a combination of tender offers, exchange offers, and other
refinancings. The realignment was financed through borrowings by Tenneco
Automotive Inc. (formerly Tenneco, which changed its name to Tenneco Automotive
Inc. in connection with the spin-off) under a new credit facility, Tenneco
Automotive's issuance of subordinated debt, Pactiv's issuance of public debt,
and borrowings by Pactiv under new credit facilities.

At the spin-off date, Pactiv had total funded debt of $2.1 billion, which
was comprised of public-debt securities and credit-facility drawings. Pactiv's
debt, which is described in more detail in note 8 to the financial statements,
is rated as investment grade by both Standard & Poor's and Moody's.

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

UNUSUAL ITEMS

Restructuring and Other

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

$32 million, $20 million after tax, or $0.12 per share. The restructuring plan
involved the elimination of production lines and 104 positions at two plants,
exiting four joint ventures, and the elimination of 184 administrative positions
at business units and corporate headquarters. Related actions generally were
executed in accordance with the company's initial plan. As a result of this
restructuring, a total of 252 positions were eliminated as of December 31, 1999.

In the first quarter of 1999, a plan was adopted to realign company
functions and to close Tenneco's headquarters facility in Greenwich,
Connecticut. This plan, for which a $29 million restructuring charge, $17
million after tax, or $0.10 per share, was recorded, included the elimination of
40 positions. In the second quarter of 1999, $30 million was received in
connection with the sale of the Greenwich facility. These restructuring actions
were completed in 1999 and were executed in accordance with the company's
initial plan.

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

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

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

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

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

Spin-off Transaction Costs

In the fourth quarter of 1999, the company recorded transaction costs
related to the spin-off that reduced income before interest expense, income
taxes, and minority interest; net income; and earnings per share by $136
million, $96 million, and $0.57, respectively. These costs were for special
curtailment and termination benefits for former Tenneco employees ($72 million),
professional services ($49 million), and separation from Tenneco operations ($15
million). In the fourth quarter of 2000 and 2001, the company reversed $20
million ($12 million after tax, or $0.08 per share) and $12 million ($7 million
after tax, or $0.04 per share), respectively, of the previously recorded
provisions for transaction costs to reflect lower-than-anticipated expenses. As
of December 31, 2001, actions related to the spin-off transaction were
substantially complete.

YEAR 2001 COMPARED WITH 2000

RESULTS OF CONTINUING OPERATIONS

Sales

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

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

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

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

11

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

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

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

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

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

Interest Expense, Net of Interest Capitalized

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

Income Taxes

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

Income from Continuing Operations

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

DISCONTINUED OPERATIONS

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

12

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

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

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

Cash Flows

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

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

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

Allowance for Bad Debts

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

Capital Commitments

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

13

Liquidity

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

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

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

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

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

YEAR 2000 COMPARED WITH 1999

RESULTS OF CONTINUING OPERATIONS

Sales

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

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

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

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

14

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

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

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

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

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

Interest Expense, Net of Interest Capitalized

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

Income Taxes

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

Income (Loss) from Continuing Operations

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

DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS

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

15

LIQUIDITY AND CAPITAL RESOURCES

Capitalization

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

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

Cash Flows

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

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

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

CHANGES IN ACCOUNTING PRINCIPLES

In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities", which requires that start-up costs be expensed as
incurred. This standard also requires that previously capitalized start-up costs
be expensed as a cumulative effect of change in accounting principles upon
adoption. The company adopted SOP 98-5 on January 1, 1999, and recorded a
related after-tax charge of $32 million (net of a $9 million tax benefit), or
$0.19 per share, to expense previously capitalized start-up costs of its foreign
and administrative service operations. If SOP 98-5 had been applied
retroactively, net income for the year

16

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

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

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

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

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

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

EURO CONVERSION

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

17

CRITICAL ACCOUNTING POLICIES

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

Sales Deductions

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

Pension Income

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

Postemployment Benefits

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

Synthetic Leases

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

18

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

DERIVATIVE FINANCIAL INSTRUMENTS

The company is exposed to market risks related to changes in
foreign-currency exchange rates, interest rates, and commodity prices. To manage
these risks, the company, from time to time, enters into various hedging
contracts in accordance with established policies and procedures. The company
does not use hedging instruments for trading purposes and is not a party to any
transactions involving leveraged derivatives.

Foreign-Currency Exchange

The company uses foreign-currency forward contracts to hedge its exposure
to adverse changes in exchange rates, primarily related to the euro, British
pound, and Canadian dollar. Hedging is accomplished through the use of financial
instruments, with related gains or losses offsetting gains or losses on
underlying assets or liabilities.

In managing foreign-currency risk, the company aggregates existing
positions and hedges residual exposures through third-party derivative
contracts. The following table summarizes foreign-currency forward contracts in
effect at December 31, 2001, all of which will mature in 2002.

Interest Rates

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

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

Prior to the spin-off, the company entered into an interest-rate swap to
hedge its exposure to interest-rate movements. The company settled this swap in
November 1999, incurring a $43 million loss, which is being recognized as
additional interest expense over the average life of the underlying debt.

19

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

Commodities

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

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

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

20

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX OF THE FINANCIAL STATEMENTS OF PACTIV CORPORATION
AND CONSOLIDATED SUBSIDIARIES

21

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Pactiv Corporation:

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

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pactiv Corporation and
consolidated subsidiaries as of December 31, 2001, and 2000, and the results of
its operations and its cash flows for the three years ended December 31, 2001,
in conformity with accounting principles generally accepted in the United
States.

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

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements are presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Chicago, Illinois
January 22, 2002

22

STATEMENT OF INCOME (LOSS)

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

23

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

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

24

STATEMENT OF CASH FLOWS

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

25

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

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

26

STATEMENT OF COMPREHENSIVE INCOME (LOSS)

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

27

NOTES TO FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

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

NOTE 2. STRATEGIC REALIGNMENT

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

On November 4, 1999, as part of a corporate reorganization, Pactiv's former
parent company, Tenneco Inc. (Tenneco), and its subsidiaries effected various
intercompany transfers and distributions to restructure and separate their
then-existing businesses, assets, liabilities, and operations so that, among
other things, the packaging businesses and certain corporate and administrative
service operations of Tenneco would be owned by Pactiv. Tenneco subsequently
distributed pro rata to holders of its common stock all of the outstanding
common stock of Pactiv (the "spin-off"). Prior to the spin-off, Pactiv was named
Tenneco Packaging Inc. (TPI). As used herein, the terms "company" or "Pactiv"
refer, for periods prior to the spin-off, to TPI and certain other packaging
subsidiaries of Tenneco and, for periods after the spin-off, to Pactiv and its
consolidated subsidiaries.

Before the spin-off, Tenneco realigned substantially all of its existing
debt through a combination of tender offers, exchange offers, and other
refinancings. The realignment was financed through borrowings by Tenneco
Automotive Inc. (formerly Tenneco, which changed its name to Tenneco Automotive
Inc. in connection with the spin-off) under a new credit facility, Tenneco
Automotive's issuance of subordinated debt, Pactiv's issuance of public debt,
and borrowings by Pactiv under new credit facilities.

At the spin-off date, Pactiv had total funded debt of $2.1 billion, which
was comprised of new public-debt securities and credit-facility drawings.
Pactiv's debt, which is described in more detail in note 8 to the financial
statements, is rated as investment grade by both Standard & Poor's and Moody's.

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

28

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. SUMMARY OF ACCOUNTING POLICIES

Consolidation

The financial statements of the company include all majority-owned
subsidiaries. Investments in 20%-to 50%-owned companies in which Pactiv has the
ability to exert significant influence over operating and financial policies are
carried at cost plus share of equity in undistributed earnings since date of
acquisition. All significant intercompany transactions are eliminated.

Cash and Temporary Cash Investments

The company defines cash and temporary cash investments as checking
accounts, money-market accounts, certificates of deposit, and U.S. Treasury
notes having an original maturity of 90 days or less.

Accounts and Notes Receivable

On a recurring basis, the company sells an undivided interest in a pool of
trade receivables meeting certain criteria to a third party as an alternative to
debt financing. Amounts sold were $44 million and $120 million at December 31,
2001, and 2000, respectively. Such sales, which represent a form of off-
balance-sheet financing, are reflected as a reduction of accounts and notes
receivable in the statement of financial position, and related proceeds are
included in cash provided (used) by operating activities in the statement of
cash flows. Discounts and fees related to these sales totaled $5 million, $7
million, and $8 million in 2001, 2000, and 1999, respectively, and were included
in other income (expense) in the statement of income (loss). In the event that
either Pactiv or the third-party purchaser of the trade receivables were to
discontinue participation in these transactions, the company's debt might
increase by an amount corresponding to the level of sold receivables at such
time.

Inventories

Inventories are stated at the lower of cost or market. A portion of
inventories (57% and 56% at December 31, 2001, and 2000, respectively) is valued
using the last-in, first-out method of accounting. All other inventories are
valued using the first-in, first-out (FIFO) or average-cost methods. If FIFO or
average-cost methods had been used to value all inventories, the total inventory
balance would have been $9 million lower at December 31, 2001, and $9 million
higher at December 31, 2000.

Property, Plant, and Equipment, Net

Depreciation is recorded on a straight-line basis over the estimated useful
lives of assets. Useful lives range from 10 to 40 years for buildings and
improvements and from 3 to 25 years for machinery and equipment.

The company expenses start-up costs as incurred. Prior to January 1, 1999,
certain start-up expenditures were capitalized and amortized over periods
ranging from 3 to 5 years.

The company capitalizes certain costs related to the purchase and
development of software used in its business. Such costs are amortized over the
estimated useful lives of the assets, ranging from 3 to 12 years. Capitalized
software development costs, net of amortization, were $64 million and $54
million at December 31, 2001, and 2000, respectively.

The company periodically reevaluates carrying values and estimated useful
lives of long-lived assets to determine if adjustments are warranted. The
company uses estimates of undiscounted cash flows from long-lived assets to
determine whether the book value of such assets is recoverable over the assets'
remaining useful lives.

In 2001, the company changed estimated useful lives for certain assets in
the Protective and Flexible Packaging business in North America and Europe to be
consistent with those used for similar assets in its

29

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

other business segment. This change did not have a material impact on the
company's financial position or cash flow and increased net income in 2001 by
$1.2 million.

Goodwill and Intangibles, Net

Goodwill is amortized on a straight-line basis over 40 years. Capitalized
intangible assets, primarily trademarks and patents, are amortized on a
straight-line basis over periods ranging from 5 to 40 years.

Other Long-Term Assets

Grantor trusts were established at the time of the spin-off to pay certain
compensation and supplemental retirement benefits to Pactiv employees and former
employees of Tenneco. At December 31, 2001, funding for these benefits exceeded
requirements by $12 million, and the excess was classified as current assets. At
December 31, 2000, unpaid benefits were $28 million, for which offsetting
liabilities were included in deferred credits and other liabilities in the
statement of financial position.

Environmental Liabilities

Expenditures for compliance with environmental regulations that relate to
ongoing operations are expensed or capitalized as appropriate. Expenditures for
conditions that relate to operations that no longer contribute to the generation
of sales are expensed as incurred or as warranted by environmental assessments.
Liabilities are recorded when environmental assessments indicate that remedial
efforts are probable and that costs can be reasonably estimated. Estimated
liabilities are based on currently available facts, existing technology, and
requirements of current laws and regulations, taking into consideration the
likely effects of inflation and other factors. All available evidence is
considered, including prior remediation experience with contaminated sites,
other companies' clean-up experience, and data released by the U.S.
Environmental Protection Agency or other organizations. Estimated liabilities
are subject to revision in subsequent periods based on actual cost data or new
information. Liabilities reflected in the statement of financial position are
not discounted.

Sales Recognition

The company recognizes sales as products are shipped to customers.

Freight

The company records amounts billed to customers for shipping and handling
as sales and records shipping and handling expenses as cost of sales.

General and Administrative Expenses

Included in selling, general, and administrative (SG&A) costs in the
statement of income (loss) for 1999 were expenses totaling $43 million for the
company's share of Tenneco's corporate, general, and administrative costs. Also
included in the SG&A category for 1999 were costs aggregating $53 million for
corporate administrative services that were not allocated by Tenneco to its
business units.

Prior to the spin-off, the allocation of Tenneco's corporate general and
administrative expenses was based on estimated effort devoted to Tenneco's
various operations and the relative size of those operations based on sales,
gross property value, and payroll. Pactiv's management believes such allocations
were reasonable.

Research and Development

Research and development costs, which are expensed as incurred, totaled $44
million, $42 million, and $40 million in 2001, 2000, and 1999, respectively.
30

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Advertising

Advertising production costs are expensed as incurred, while advertising
media costs are expensed in the period in which the related advertising first
takes place. Advertising expenses were $11 million, $3 million, and $25 million,
in 2001, 2000, and 1999, respectively.

Income Taxes

The company utilizes the asset and liability method of accounting for
income taxes, in which deferred tax assets and liabilities are recorded to
reflect the future tax consequences of temporary timing differences between the
tax and financial statement basis of assets and liabilities. Deferred tax assets
are reduced by a valuation allowance if management determines that it is more
likely than not that a portion of deferred tax assets will not be realized in a
future period. Estimates used to recognize deferred tax assets are subject to
revision in subsequent periods based on new facts or circumstances.

The company does not provide for U.S. federal income taxes on unremitted
earnings of foreign subsidiaries in that it is management's present intention to
reinvest those earnings in foreign operations. Unremitted earnings of foreign
subsidiaries totaled $105 million at December 31, 2001. It is not practicable to
determine the amount of U.S. federal income taxes that would be payable if those
earnings were remitted.

In connection with the 1999 spin-off, the company entered into a
tax-sharing agreement with Tenneco Automotive that provides, among other things,
for the allocation between the parties of tax liabilities and assets applicable
to periods prior to the spin-off. The company and Tenneco Automotive are liable
for taxes pertaining to their respective businesses for periods prior to the
spin-off.

Changes in Accounting Principles

In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities", which requires that start-up costs be expensed as
incurred. This standard also requires that previously capitalized start-up costs
be expensed as a cumulative effect of change in accounting principles upon
adoption. The company adopted SOP 98-5 on January 1, 1999, and recorded a
related after-tax charge of $32 million (net of a $9 million tax benefit), or
$0.19 per share, to expense previously capitalized start-up costs of its foreign
and administrative service operations. If SOP 98-5 had been applied
retroactively, net income for the year ended December 31, 1998, would have been
reduced by $14 million (net of an $8 million tax benefit), or $0.08 per share.

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

In May 2000, the FASB's Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives". This
issue addresses the recognition, measurement, and income-statement
classification of various types of sales incentives, including discounts,
coupons,

31

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

rebates, and free products. With the company's fourth-quarter 2001 adoption of
EITF No. 00-14, certain expenses that historically had been included in selling,
general, and administrative costs were reclassified as deductions from sales for
all periods presented herein.

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

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

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

Earnings Per Share

Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of shares outstanding. Diluted
earnings per share is calculated in the same manner; however, adjustments are
made to reflect the potential issuance of dilutive shares.

Foreign-Currency Translation

Financial statements of international operations are translated into U.S.
dollars using end-of-period exchange rates for assets and liabilities and the
periods' weighted-average exchange rates for sales, expenses, gains, and losses.
Translation adjustments are recorded as a component of shareholders' equity.

Risk Management

From time to time, the company uses derivative financial instruments,
principally foreign-currency purchase and sale contracts with terms less than 1
year, to hedge its exposure to changes in foreign-currency exchange rates. Net
gains or losses on such contracts are recognized in the income statement as
offsets to foreign-currency gains or losses on the underlying transactions. In
the statement of cash flows, cash receipts and payments related to hedge
contracts are classified in the same way as cash flows from the transactions
being hedged.

Interest-rate risk management is accomplished through the use of swaps to
create synthetic debt instruments. Gains and losses on the settlement of swaps
are recognized as reductions of or additions to interest expense. The company
does not use derivative financial instruments for speculative purposes. See
management's discussion and analysis for further details.

32

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Stock-Based Compensation

The company follows requirements of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for
stock options.

Estimates

Financial statement presentation requires management to make estimates and
assumptions that affect reported amounts for assets, liabilities, sales, and
expenses. Actual results may differ from such estimates.

Reclassifications

Certain prior-year amounts have been reclassified to conform with
current-year presentation.

NOTE 4. UNUSUAL ITEMS

Restructuring and Other

In the fourth quarter of 1998, a restructuring plan was adopted to reduce
administrative and operating costs. As a result, Pactiv recorded a pretax charge
against income from continuing operations of $32 million, $20 million after tax,
or $0.12 per share. The restructuring plan involved the elimination of
production lines and 104 positions at two plants, exiting four joint ventures,
and the elimination of 184 administrative positions at business units and
corporate headquarters. Related actions generally were executed in accordance
with the company's initial plan. As a result of this restructuring, a total of
252 positions were eliminated as of December 31, 1999.

In the first quarter of 1999, a plan was adopted to realign company
functions and to close Tenneco's headquarters facility in Greenwich,
Connecticut. This plan, for which a $29 million restructuring charge, $17
million after tax, or $0.10 per share, was recorded, included the elimination of
40 positions. In the second quarter of 1999, $30 million was received in
connection with the sale of the Greenwich facility. These restructuring actions
were completed in 1999 and were executed in accordance with the company's
initial plan.

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

In the fourth quarter of 2000, the company recorded a restructuring charge
of $71 million, $47 million after tax, or $0.29 per share. Of this amount, $45
million was for the impairment of assets held for sale, including those related
to the packaging polyethylene business and the company's interest in Sentinel
Polyolefins LLC, a protective-packaging joint venture. In January 2001, the
company received cash proceeds of $72 million from the disposition of these
assets. The remaining $26 million was related to the realignment of operations
and the exiting of low-margin businesses in the company's Protective and
Flexible Packaging segment. Specifically, this charge was for (1) plant closures
in North America and

33

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Europe, including the elimination of 202 positions ($6 million); (2) other
workforce reductions (187 positions), mainly in Europe ($6 million); (3)
impairment of European long-lived assets held for sale ($10 million); and (4)
asset write-offs related to the elimination of certain low-margin product lines
($4 million). The impairment charge for European assets was recorded following
completion of an evaluation of strategic alternatives for the related businesses
and represented the difference between the carrying value of the assets and
their fair value based on market estimates. Restructuring-plan actions generally
have been completed. Actual cash outlays for severance and other costs were $3
million less than originally estimated, as 78 fewer positions were eliminated,
while charges for asset write-offs were approximately $3 million more than
initially estimated. Additionally, the company recognized a benefit of $6
million, $4 million after tax, or $0.02 per share, in the fourth quarter of
2001, largely to reflect a lower loss than was originally recorded on the sale
of the company's packaging polyethylene business.

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

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

Amounts related to the restructuring plans described above are shown in the
following table.

34

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Spin-off Transaction Costs

In the fourth quarter of 1999, the company recorded transaction costs
related to the spin-off that reduced income before interest expense, income
taxes, and minority interest; net income; and earnings per share by $136
million, $96 million, and $0.57, respectively. These costs were for special
curtailment and termination benefits for former Tenneco employees ($72 million),
professional services ($49 million), and separation from Tenneco operations ($15
million). In the fourth quarter of 2000 and 2001, the company reversed $20
million ($12 million after tax, or $0.08 per share) and $12 million ($7 million
after tax, or $0.04 per share), respectively, of the previously recorded
provisions for transaction costs to reflect lower-than-anticipated expenses. As
of December 31, 2001, actions related to the spin-off transaction were
substantially complete.

NOTE 5. TRANSACTIONS WITH FORMER PARENT (TENNECO)

Combined Equity

Combined equity in the statement of changes in shareholders' equity at
December 31, 1999, represented Tenneco's cumulative net investment in the
combined businesses of the company. Changes in combined equity were comprised of
net income (loss), net cash and noncash contributions from (distributions to)
Tenneco, accumulated other comprehensive income (loss), changes in allocated
corporate debt, and allocated corporate interest, net of tax.

Corporate Debt and Interest Allocation

Tenneco's historical practice had been to incur indebtedness for the
consolidated group at the parent-company level and at a limited number of
subsidiaries, rather than at the operating-company level. Consequently, prior to
the spin-off, corporate debt and related interest expense were allocated to
Pactiv generally based on the ratio of the company's net assets to Tenneco's
consolidated net assets plus debt. Interest expense was allocated at a rate
equivalent to the weighted-average cost of all corporate debt, which was 6.3%
for 1999. Total interest expense allocated to the company in 1999 was $118
million. Although interest costs and related tax effects were allocated to the
company for financial reporting purposes, Pactiv was not billed for these
amounts. Changes in allocated corporate debt and allocated after-tax interest
expense were included in combined equity.

Notes and Advances Receivable from Tenneco

In the statement of changes in shareholders' equity, amounts shown for cash
contributions from (distributions to) Tenneco represented net cash changes in
notes and advances receivable from the former parent. Historically, Tenneco had
utilized notes and advances to manage cash funding requirements of its
consolidated group. Amounts shown in the same statement for noncash
contributions from (distributions to) Tenneco primarily reflect the transfer of
assets and liabilities.

Employee Benefits

Certain employees of the company participated in Tenneco's stock-option and
stock-purchase plans. The stock-option plan provided for the grant of stock
options and other stock awards at prices not less than market value on the date
of grant. In connection with the spin-off, outstanding Tenneco options held by
Pactiv employees were replaced by options of the company, preserving the
aggregate value of Tenneco options held prior to the spin-off. Tenneco's
stock-purchase plan allowed employees to purchase stock at a 15% discount,
subject to certain thresholds. Pactiv established a similar stock-purchase plan
for its employees in April 2000. Employees of the company also participate in
certain postretirement and pension plans of Tenneco. See notes 15 and 18 for
information regarding these plans.

35

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6. ACQUISITIONS AND DISPOSITIONS

During 1999, the company made three acquisitions (the packaging businesses
of Whitesell Corporation and Schut Superflex B.V., and Simpla, SpA) and
additional equity contributions to two joint ventures, investing a total of $24
million. All of the acquisitions were accounted for as purchases, wherein
purchase prices were allocated to assets acquired and liabilities assumed based
on fair values, and the excess of purchase prices over net assets was recorded
as goodwill.

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

The company recorded a fourth-quarter 2000 charge of $45 million, $29
million after tax, or $0.18 per share, for the impairment of assets held for
sale, including those related to the packaging polyethylene business and the
company's interest in Sentinel Polyolefins LLC. In January 2001, the company
received cash proceeds of $72 million from the disposition of these assets. In
the third quarter of 2001, the company refunded $7 million to the purchaser of
the packaging polyethylene business as a final net asset adjustment. Also, as a
part of the company's 2000 restructuring plan, certain small, noncore European
businesses were disposed of in 2001, for which cash proceeds totaling $6 million
were received in December 2001. See note 4 for additional information.

NOTE 7. DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS

Discontinued Operations

In April 1999, the company contributed the containerboard assets of its
paperboard packaging operation to a newly formed joint venture, PCA. For the
contribution, Pactiv received approximately $2 billion in cash and assumed debt
and a 45% equity interest in PCA, which was subsequently reduced to 43% upon the
issuance of equity to PCA's management. The equity interest in PCA was valued at
approximately $200 million. In the first quarter of 1999, the company recorded
an estimated loss of $293 million, $178 million after tax, or $1.07 per share,
on the asset contribution, representing the amount by which the carrying value
of the assets exceeded their fair value, less selling costs.

Assets contributed to the joint venture included four paper mills, 67
corrugated plants, and an ownership or leasehold interest in approximately
950,000 acres of timberland. Prior to the formation of the joint venture, the
company borrowed $1.8 billion and used $1.2 billion of the proceeds to acquire
assets under lease by the containerboard business and to purchase accounts
receivable previously sold by this business to a third party. Remaining amounts
borrowed ($600 million) were remitted to Tenneco.

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

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

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

36

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The company provides office space and certain administrative services to
PCA under a transition-service agreement.

Net assets as of December 31, 2001, 2000, and 1999, and results of
operations for the years then ended for the paperboard packaging operation were
as follows:

Pactiv has retained responsibility for certain contingent liabilities of
its former paperboard packaging businesses and has recorded related reserves
where, in the judgment of management, it is probable that a quantifiable
liability exists. Management believes that these liabilities will not have a
material effect on the results of operations or financial position of the
company.

In connection with the formation of the PCA joint venture, Pactiv entered
into a 5-year agreement to purchase corrugated products from PCA on an arm's
length basis.

Extraordinary Loss

In the first quarter of 1999, the company recorded an extraordinary loss of
$7 million (net of a $3 million tax benefit), or $0.04 per share, on the early
retirement of debt.

NOTE 8. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS

General

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

In November 1999, the company entered into a 5-year, $750 million
revolving-credit agreement and a 364-day, $250 million revolving-credit
agreement. As of September 27, 2000, the 364-day agreement was extended for an
additional 364-day period and total availability under the agreement was
increased to $300 million. The company elected not to renew the agreement upon
its September 26, 2001, expiration.

37

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Long-Term Debt

Aggregate maturities and sinking-fund requirements for debt outstanding at
December 31, 2001, are $3 million, $2 million, $38 million, $300 million, $1
million, and $879 million for 2002, 2003, 2004, 2005, 2006, and thereafter,
respectively.

At December 31, 2001, the total amount of floating-rate, long-term debt was
$36 million. As of December 31, 2001, the company was in full compliance with
financial and other covenants in the various credit agreements.

Short-Term Debt

The company uses lines of credit and overnight borrowings to finance
certain of its short-term capital requirements. Information regarding short-term
debt is shown below.

(a) Includes borrowings under committed credit facilities and uncommitted lines
of credit.

38

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Financing Arrangements

(a) Agreements call for the payment of utilization fees on borrowings and
facility fees on commitments.

In conjunction with the realignment of Tenneco debt, the company paid bank
facility fees of $10 million and entered into an interest-rate swap to hedge its
exposure to interest-rate movement. The company settled this swap in November
1999 at a loss of $43 million. Both the loss on the swap and the bank facility
fees are being recognized as additional interest expense over the average life
of the underlying debt.

NOTE 9. FINANCIAL INSTRUMENTS

Asset and Liability Instruments

At December 31, 2001, and 2000, the fair value of cash and temporary cash
investments, short- and long-term receivables, accounts payable, and short- and
long-term debt were considered to be the same as, or not materially different
from, amounts recorded for these assets and liabilities.

Instruments with Off-Balance-Sheet Risk

From time to time, Pactiv enters into foreign-currency forward contracts
with terms of less than 1 year to mitigate its exposure to exchange-rate changes
related to third-party trade receivables and accounts payable. The following
table summarizes foreign-currency contracts entered into by the company at
December 31, 2001.

Based on exchange rates at December 31, 2001, the cost of replacing these
contracts in the event of nonperformance by the counterparties would not be
material.

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

See notes 3 and 20 to the financial statements for additional information
concerning instruments with off-balance-sheet risk.

39

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Lines of Credit and Guarantees

The company, from time to time, utilizes various short-term lines of credit
to finance operations. Total committed lines of credit were $31 million and $32
million at December 31, 2001, and December 31, 2000, respectively. Certain lines
of credit are backed by payment and performance guarantees. Borrowings under
lines of credit were not material at December 31, 2001, or December 31, 2000.

NOTE 10. INVENTORIES

NOTE 11. GOODWILL AND INTANGIBLES, NET

Goodwill amortization amounted to $19 million, $20 million, and $20 million
in 2001, 2000, and 1999, respectively. Amortization of intangible assets was $13
million, $15 million, and $15 million in 2001, 2000, and 1999, respectively.
With the January 1, 2002, adoption of SFAS No. 142, the company no longer will
amortize goodwill. The company continues to evaluate the impact of this
standard. See management's discussion and analysis for further information
concerning the adoption of SFAS No. 142.

NOTE 12. PROPERTY, PLANT, AND EQUIPMENT, NET

NOTE 13. OTHER LONG-TERM ASSETS

40

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14. INCOME TAXES

The domestic and foreign components of income (loss) from continuing
operations before income taxes were as follows:

Following is a comparative analysis of the components of income tax expense
(benefit) applicable to continuing operations:

Current income tax expense for 1999 included tax benefits of $38 million
related to the allocation of interest expense by the former parent. A
reconciliation of the difference between the U.S. statutory federal income tax
rate and the company's effective income tax rate is shown in the following
table.

41

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Summarized below are the components of the company's net deferred tax
liability.

The company had $6 million of U.S. federal tax-loss carryforwards at
December 31, 2001, which will expire in 2019. At December 31, 2001, the company
had $15 million of state tax-loss carryforwards, which will expire at various
dates from 2001 to 2014. Pactiv had $52 million of foreign tax-loss
carryforwards at December 31, 2001, of which $22 million will expire at various
dates from 2003 to 2011, with the remainder having unlimited lives. The
valuation allowance for deferred tax assets ($13 million at December 31, 2001)
was recorded to recognize the potential inability to utilize certain foreign
tax-loss carryforwards.

NOTE 15. COMMON STOCK

The company has 350 million authorized shares of common stock ($0.01 par
value), of which 159,431,382 shares were issued and outstanding as of December
31, 2001.

Reserved

Stock Plans

Stock-Ownership Plan -- In November 1999, the company initiated a
stock-ownership plan, that permits the granting of a variety of awards,
including common stock, restricted stock, performance shares, stock appreciation
rights, and stock options to directors, officers, and employees. Under the plan,
which will terminate on November 4, 2004, up to 24,000,000 shares of common
stock can be issued. In December 1996, Pactiv's former parent, Tenneco,
initiated a similar plan under which certain key employees of Pactiv were
granted restricted stock. In connection with the spin-off, outstanding
restricted stock of Tenneco became fully vested, and, as a result, the company
recorded an after-tax compensation

42

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

expense of $7 million in 1999. All Tenneco stock options granted to Pactiv
employees before the spin-off were canceled and replaced with options to
purchase the company's common stock. In this connection, the number of Pactiv
options received were such that the aggregate value of options before and after
the spin-off were equal.

The company granted restricted stock under the stock-ownership plan to
certain key employees. These awards generally require that, among other things,
grantees remain with the company during the restriction period. Performance
shares granted under the plan vest upon the attainment of specified performance
goals in the 3 years following the date of grant.

Details of performance- and restricted-stock balances are shown below.

Summarized below are stock options issued by Pactiv.

Stock options expire 10 to 20 years from date of grant and vest over
periods ranging from 1 to 3 years.

43

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The weighted-average fair value of options granted by the company in 2001
($6.15) and 2000 ($4.57) was determined using the Black-Scholes option-pricing
model with the following assumptions:

The company exchanged Tenneco options for Pactiv options at the date of the
spin-off. Black-Scholes option-pricing model assumptions and fair value for
these options were as follows: risk-free interest rate -- 5.4%; life -- 10.0
years; volatility -- 27.0%; expected dividend yield -- 3.5%; weighted-average
fair value -- $9.04.

Summarized below is information about stock options outstanding at December
31, 2001.

The company follows requirements of APB Opinion No. 25 in accounting for
stock-based compensation plans and recorded after-tax stock-based compensation
expense of $2 million, $2 million, and $8 million in 2001, 2000, and 1999,
respectively. Had stock-based compensation costs been determined in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation", the company's pro
forma net income for 2001, 2000, and 1999 would have been reduced by $9 million,
or $0.06 per share, $10 million, or $0.06 per share, and $7 million, or $0.04
per share, respectively.

Employee Stock-Purchase Plan -- In April 2000, the company established a
stock-purchase plan that allows U.S. and Canadian employees to purchase Pactiv
common stock at a 15% discount, subject to an annual limitation of $21,240. In
2001 and 2000, employees purchased 448,910 and 463,412 shares, respectively, of
Pactiv stock with a weighted-average price of $10.46 and $7.25, respectively.
Under a similar Tenneco plan, Pactiv employees purchased 184,370 shares of
Tenneco stock in 1999 with a weighted-average fair value of $4.30. Since the
spin-off, company employees no longer participate in the former parent's plan.

Grantor Trust -- In November 1999, the company established a grantor trust
and reserved 3,200,000 shares of Pactiv common stock for the trust. These shares
were issued to the trust in January 2000. This so-called "rabbi trust" is
designed to assure the payment of deferred-compensation and supplemental-
pension benefits. These shares are not considered to be outstanding.

Qualified Offer Rights Plan

In November 1999, Pactiv adopted a qualified offer rights plan (QORP) to
deter coercive takeover tactics and to prevent a potential acquirer from gaining
control of the company in a transaction that would not be in the best interests
of shareholders. Under the plan, if a person becomes the beneficial owner of 20%
or more of the company's outstanding common stock, other than pursuant to a
qualified offer, each

44

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

right will entitle its holder to purchase common stock having a market value of
twice the right's exercise price, but rights held by the 20%-or-more holder
would not be exercisable.

Rights are not exercisable in connection with a qualified offer, which is
defined as an all-cash tender offer for all outstanding shares of common stock
that is fully financed, remains open for a period of at least 60 business days,
results in the offeror owning at least 85% of the common stock after
consummation of the offer, assures a prompt second-step acquisition of shares
not purchased in the initial offer at the same price as the initial offer, and
meets certain other requirements.

In connection with the adoption of the QORP, the board of directors also
adopted an evaluation mechanism that calls for an independent board committee to
review, on an ongoing basis, the QORP and developments in rights plans in
general and, if it deems appropriate, to recommend modification or termination
of the plan. The independent committee is required to report to the board at
least every 3 years as to whether the QORP continues to be in the best interest
of shareholders.

Earnings Per Share

In connection with the spin-off, one share of Pactiv common stock was
issued for each share of Tenneco common stock then owned. Accordingly, basic
earnings per share for 1999 were calculated using the former parent's
weighted-average number of shares outstanding from January 1, 1999, to November
4, 1999, and the weighted-average number of Pactiv shares outstanding from
November 5, 1999, to December 31, 1999. Diluted earnings per share is calculated
in the same manner, but adjustments are made for the potential issuance of
additional shares related to stock options, restricted stock, and performance
shares.

Earnings (loss) from continuing operations per share of common stock
outstanding were computed as follows:

In accordance with a stock-repurchase plan announced in February 2000, the
company acquired 11,742,951 shares of its common stock in 2000 at an average
price of $8.50 per share for a total outlay of $100 million.

45

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 16. PREFERRED STOCK

Pactiv had 50 million shares of preferred stock ($0.01 par value)
authorized but unissued at December 31, 2001. The company has reserved 750,000
preferred shares as junior preferred stock for the QORP.

NOTE 17. MINORITY INTEREST

In December 2001, the company redeemed for $15 million the preferred stock
of a Pactiv subsidiary issued in 1997 in connection with the N.V. Koninklijke
KNP BT acquisition. This amount had previously been recorded as minority
interest in the company's statement of financial position. Remaining amounts at
December 31, 2001, and 2000, primarily represented the company's interest in a
joint venture in China.

NOTE 18. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

The company has pension plans that cover substantially all of its
employees. Benefits are based on years of service and, for most salaried
employees, final-average compensation. The company's funding policy is to
contribute to the plans amounts necessary to satisfy requirements of federal
laws and regulations. Plan assets consist principally of equity and fixed-income
securities. Effective with the spin-off, Pactiv became the sponsor of Tenneco's
retirement plans, retaining their assets and assuming the obligation to provide
pension benefits to participating employees of Tenneco Automotive and other
former subsidiaries and affiliates of Tenneco. For Tenneco Automotive employees,
benefits accrued under these plans were frozen as of November 30, 1999.

The company has postretirement health-care and life-insurance plans that
cover certain of its salaried and hourly employees. For salaried employees, the
plans cover individuals who retire on or after attaining age 55 with at least 10
years of service after reaching age 45. For hourly employees, postretirement
benefit plans cover individuals who retire in accordance with the various
provisions of such plans. Benefits may be subject to deductibles, co-payments,
and other limitations. The company reserves the right to change postretirement
plans, which are not funded.

Financial data pertaining to the company's pension and postretirement
benefit plans appear below.

46

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The impact of pension plans on income from continuing operations was as
follows:

Pension plan related amounts included in the statement of financial
position appear below.

47

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Actuarial assumptions used to determine costs and benefit obligations for
the pension plans are shown below.

For pension plans with accumulated benefit obligations in excess of plan
assets, the projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets were $84 million, $74 million, and $39 million,
respectively, at September 30, 2001, and $34 million, $31 million, and $1
million, respectively, at September 30, 2000.

The impact of postretirement benefit plans on continuing operations was as
follows:

Actuarial assumptions used to determine postretirement benefit obligations
follow:

- ---------------
(a) Assumed to decline to 5% over 5 years.

Increasing the assumed health-care cost trend 1% each year would increase
2001, 2000, and 1999 postretirement benefit obligations by approximately $2
million each year; however, the aggregate of service and interest costs would
not change for 2001, 2000, or 1999.

Decreasing the assumed health-care cost trend 1% each year would decrease
2001, 2000, and 1999 postretirement benefit obligations by approximately $2
million each year but would not change the aggregate of service and interest
costs for 2001, 2000, and 1999.

In accordance with current Employee Retirement Income Security Act
regulations, the company funded $9 million of its postretirement benefit
obligations with excess pension-plan assets in both 2001 and 2000.

NOTE 19. SEGMENT AND GEOGRAPHIC AREA INFORMATION

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

48

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Prior to the spin-off, the combined results of the Consumer and
Foodservice/Food Packaging and Protective and Flexible Packaging businesses were
reported under the specialty packaging segment by Tenneco. During the fourth
quarter of 1999, the company modified the composition of its operating units to
reflect changes in its management reporting structure triggered by the spin-off.
Segment information for the first three quarters of 1999 has been restated to
conform with current segment presentation.

The accounting policies of the segments are the same as those described in
note 3. Products are transferred between segments and among geographic areas at,
as nearly as possible, market value. No one customer accounted for more than 10%
of the company's 2001 sales. In general, the company's backlog of orders is not
material.

The following table sets forth certain segment information.

49

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(a) Includes restructuring and other charges (credits) of $(1) million, $31
million, and $66 million in 2001, 2000, and 1999, respectively.

(b) Includes restructuring and other charges of $13 million, $39 million, and
$77 million in 2001, 2000, and 1999, respectively.

(c) Includes pension-plan income; unallocated corporate expenses; restructuring
and other charges of $40 million in 1999; spin-off transaction cost
reversals of $12 million and $20 million in 2001 and 2000, respectively; and
spin-off transaction costs of $136 million in 1999.

(d) Includes assets related to pension plans and administrative service
operations.

(e) Includes pension-plan income.

The following table sets forth certain geographic area information.

50

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(a) Sales to external customers and long-lived assets for individual countries
(primarily in Europe) were not material.

(b)Geographic assignment is based on location of selling business.

(c)Long-lived assets include all long-term assets other than net assets of
discontinued operations, goodwill, intangibles, and deferred taxes.

NOTE 20. COMMITMENTS AND CONTINGENCIES

Capital Commitments

The company estimates that the completion of projects authorized at
December 31, 2001, and for which commitments have been made will require
expenditures of approximately $93 million in 2002.

Purchase Commitments

The company occasionally enters into short-term forward contracts with
third parties to fix a portion of the cost of natural gas used internally.
Several of such contracts remained open at December 31, 2001.

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

Lease Commitments

In November 1999, Pactiv entered into a $175 million synthetic-lease
agreement with a third-party lessor and various lenders to restructure or
replace certain existing operating leases and public warehouse arrangements and
to facilitate additional leasing arrangements for other operating facilities.
The synthetic-lease facility, which expires in November 2005, contains customary
terms and conditions covering, among other things, residual-value guarantees,
default provisions, and financial covenants. Cancellation of the lease
agreement, either before or at expiration, would require the company to make a
termination payment of $169 million, which represents off-balance-sheet debt in
that related funding might require the company to obtain alternative financing
for the properties.

Operating leases for the company's corporate headquarters building and
certain of its warehouse facilities are covered by the synthetic-lease
agreement. Following the initial lease periods for the properties, the company
may extend the leases on terms negotiated with the lessors or purchase the
leased assets under specified conditions. If the leases are not extended or the
purchase options are not exercised, the company is required to make guaranteed
residual payments to the lessors that may be refunded partially or in full
depending on the amounts received by the lessors upon the sale of the
properties. Lease agreements for these properties require the company to satisfy
certain financial-ratio tests. Annual lease payments under the synthetic-lease
agreement are expected to total approximately $11 million in 2002, 2003, and
2004, and $9 million in 2005.

Certain of the company's facilities, equipment, and other assets are leased
under long-term arrangements. Minimum lease payments under noncancelable
operating leases with lease terms in excess of 1 year are expected to total $31
million, $23 million, $17 million, $11 million, and $9 million for 2002, 2003,
2004, 2005, and 2006, respectively; and $36 million for subsequent years.

Commitments under capital leases are not significant. Total rental costs
for continuing operations for 2001, 2000, and 1999 were $40 million, $43
million, and $54 million, respectively, which included minimum rentals under
noncancelable operating leases of $35 million, $33 million, and $38 million for
the corresponding periods.

51

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Litigation

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

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

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

Environmental Matters

The company is subject to a variety of environmental and pollution-control
laws and regulations in all jurisdictions in which it operates. Pactiv provides
related reserves where it is probable that liabilities exist and where
reasonable estimates of the liabilities can be made. Estimated liabilities are
subject to change as more information becomes available regarding the magnitude
of possible clean-up costs and the cost and effectiveness of alternative
clean-up technologies. However, management believes that any additional costs
that may be incurred as more information becomes available will not have a
material effect on the earnings or financial condition of the company.

NOTE 21. SUBSEQUENT EVENTS

On January 4, 2002, the company purchased MSP Schmeiser GmbH, a German
medical products company, for $3 million.

NOTE 22. QUARTERLY FINANCIAL DATA (UNAUDITED)

52

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(a) The sum of amounts shown for individual quarters may not equal the total for
the year because of changes in the weighted-average number of shares
outstanding throughout the year.

The preceding notes are an integral part of the foregoing financial statements.

53

CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section and in the notes to the
financial statements included in this Annual Report on Form 10-K are
"forward-looking statements." These forward-looking statements generally can be
identified by the use of terms and phrases such as "will", "anticipate", "may",
"expect", "estimated", and similar terms and phrases. These forward-looking
statements are not based on historical facts, but rather on the company's
current expectations or projections about future events. Accordingly, these
forward-looking statements are subject to known and unknown risks and
uncertainties. While the company believes that the assumptions underlying these
forward-looking statements are reasonable and makes the statements in good
faith, actual results almost always vary from expected results, and the
differences can be material. Following are factors that might cause the
company's actual results to differ materially from future results expressed or
implied by these forward-looking statements.

- Changes in consumer demand and prices for the company's products that
could negatively impact sales and margins.

- Material substitutions and changes in the cost of raw materials,
including plastic resin, labor, or utilities that could negatively impact
the company's expenses and margins.

- Changes in laws or other governmental actions, including the cost of
complying with changes in regulations such as environmental regulations
relating to air emissions or plastics generally.

- Changes in capital availability or costs.

- Workforce factors such as strikes or other labor interruptions.

- The general economic, political and competitive conditions in markets and
countries where the company operates, including currency fluctuations and
other risks associated with operating outside of the United States.

- Changes by the Financial Accounting Standards Board or other accounting
regulatory bodies of generally accepted accounting principles or
policies.

54

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

On March 20, 2002, the Board of Directors of the company and its Audit
Committee decided to no longer engage Arthur Andersen LLP as the company's
independent public accounts, and engaged Ernst & Young LLP to serve as the
company's independent public accountants for the year 2002. The appointment of
Ernst & Young LLP is being submitted to the company's shareholders for
ratification at the company's Annual Meeting of Shareholders to be held May 17,
2002.

Arthur Andersen LLP did not resign or decline to stand for re-election as
the company's external auditors. Arthur Andersen LLP's reports on the company's
financial statements for the years ended December 31, 2001, and December 31,
2000, did not contain an adverse opinion or a disclaimer of opinion, nor were
such reports qualified or modified as to uncertainty, audit scope or accounting
principles. There have not been, during the company's two most recent fiscal
years or any subsequent interim period, any disagreements with Arthur Andersen
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which disagreements, if not resolved
to the satisfaction of Arthur Andersen LLP, would have caused Arthur Andersen
LLP to make reference to the subject matter of the disagreement in connection
with their report on the company's consolidated financial statements for such
years, and there have been no reportable events as defined in Item 304(a)(1)(v)
of Regulation S-K.

The company has provided Arthur Andersen LLP with a copy of the foregoing
disclosures. Arthur Andersen LLP has provided the company with a letter stating
its concurrence with such disclosures, which letter the company has filed as
Exhibit 16 to its Report on Form 8-K filed March 26, 2002.

During the years ended December 31, 2001 and 2000 and through the date
hereof, the company did not consult Ernst & Young LLP with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the company's consolidated financial statements, or any other matters or
reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

PART III

Item 10, "Directors and Executive Officers of the Registrant," Item 11,
"Executive Compensation," Item 12, "Security Ownership of Certain Beneficial
Owners and Management," and Item 13, "Certain Relationships and Related
Transactions," have been omitted from this report inasmuch as the company will
file with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this report a
definitive Proxy Statement for the Annual Meeting of Shareholders of Pactiv
Corporation to be held on May 17, 2002, at which meeting the shareholders will
vote upon the election of directors. The information under the caption "Election
of Directors" in such Proxy Statement is incorporated herein by reference.
Certain information regarding the executive officers of the company is set forth
in Item 4.1, "Executive Officers of the Registrant" above.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

FINANCIAL STATEMENTS INCLUDED IN ITEM 8

See "Index of Financial Statements of Pactiv Corporation and Consolidated
Subsidiaries" set forth in Item 8, "Financial Statements and Supplementary
Data."

55

INDEX OF FINANCIAL STATEMENTS AND SCHEDULES INCLUDED IN ITEM 14

56

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In millions)

57

REPORTS ON FORM 8-K

The company filed no reports on Form 8-K during the quarter ended December
31, 2001.

INDEX OF EXHIBITS

The following exhibits are filed as part of this Annual Report on Form 10-K
for the fiscal year ended December 31, 2001 (exhibits designated with an
asterisk are filed with this report; all other exhibits are incorporated by
reference):

- ---------------
* Filed herewith

61

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized.

PACTIV CORPORATION

By: /s/ RICHARD L. WAMBOLD
------------------------------------
Richard L. Wambold
Chairman, President and
Chief Executive Officer

Date: April 1, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following on behalf of the registrant and in
the capacities and on the dates indicated.