-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ImSv7sTFIhBW1HNsy3g54EMnlGnXt4n318fKWF1Mzbx+1x3tKsiUT4IEKR+a/jYk DkB3n3m5WAkoVZqrxxFFvg== 0000950137-07-003119.txt : 20070301 0000950137-07-003119.hdr.sgml : 20070301 20070301160955 ACCESSION NUMBER: 0000950137-07-003119 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070301 DATE AS OF CHANGE: 20070301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACTIV CORP CENTRAL INDEX KEY: 0001089976 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, FOIL & COATED PAPER BAGS [2673] IRS NUMBER: 362552989 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15157 FILM NUMBER: 07663476 BUSINESS ADDRESS: STREET 1: 1900 WEST FIELD CT CITY: LAKE FOREST STATE: IL ZIP: 60045 BUSINESS PHONE: 8474822000 MAIL ADDRESS: STREET 1: 1900 WEST FIELD CT CITY: LAKE FOREST STATE: IL ZIP: 60045 FORMER COMPANY: FORMER CONFORMED NAME: TENNECO PACKAGING INC DATE OF NAME CHANGE: 19990706 10-K 1 c12792e10vk.txt ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK 1) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 [ ] 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 LAKE FOREST, ILLINOIS 60045 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 482-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NAME OF EACH EXCHANGE ON WHICH REGISTERED TITLE OF EACH CLASS ------------------------------------------------------------ - ------------------------------------------------------------ Common Stock ($.01 par value) and associated Preferred New York Stock Exchange Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No ___ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ___ No X Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Act.) Large Accelerated Filer X Accelerated Filer ___ Non-Accelerated Filer ___ Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ___ No X State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value is computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of the last business day of the registrant's most recently completed second fiscal quarter. CLASS OF VOTING STOCK AND NUMBER OF SHARES MARKET VALUE OF COMMON STOCK HELD BY HELD BY NON-AFFILIATES AT JUNE 30, 2006 NON-AFFILIATES - ------------------------------------------------------------ ------------------------------------------------------------ COMMON STOCK 136,961,320 SHARES $3,389,792,670
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock ($.01 par value). 132,882,058 shares outstanding as of January 31, 2007. (See Note 11 to the Financial Statements.) DOCUMENTS INCORPORATED BY REFERENCE: PART OF THE FORM 10-K DOCUMENT INTO WHICH INCORPORATED - ------------------------------------------------------------ ------------------------------------------------------------ Pactiv Corporation's Definitive Proxy Statement for Part III the Annual Meeting of Shareholders to be held May 18, 2007
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I Item 1. Business.................................................... 1 Item 1A. Risk Factors................................................ 4 Item 1B. Unresolved Staff Comments................................... 6 Item 2. Properties.................................................. 6 Item 3. Legal Proceedings........................................... 6 Item 4. Submission of Matters to a Vote of Security Holders......... 7 Item 4.1 Executive Officers of the Registrant........................ 7 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.......... 8 Item 6. Selected Financial Data..................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 21 Item 8. Financial Statements and Supplementary Data................. 22 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................... 54 Item 9A. Controls and Procedures..................................... 54 Item 9B. Other Information........................................... 55 PART III Item 10. Directors, Executive Officers, and Corporate Governance..... 55 Item 11. Executive Compensation...................................... 55 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 55 Item 13. Certain Relationships and Related Transactions, and Director Independence................................................ 56 Item 14. Principal Accounting Fees and Services...................... 56 PART IV Item 15. Exhibits and Financial Statement Schedules.................. 56
ITEM 1. BUSINESS. OVERVIEW Pactiv Corporation is a leading producer of consumer and foodservice/food packaging products. With one of the broadest product lines in the specialty-packaging industry, we derive more than 80% of our sales from market sectors in which we hold the No. 1 or No. 2 market-share position. Our business operates 39 manufacturing facilities in North America, 3 in China, and 1 in Germany. In 2006, 95% of our $2.9 billion in sales were generated in North America. We have two operating segments: - Consumer Products manufactures disposable plastic, foam, molded-fiber, pressed-paperboard, and aluminum packaging products, and sells them to customers such as grocery stores, mass merchandisers, and discount chains. Products include waste bags, food-storage bags, and disposable tableware and cookware. We sell many of our consumer products under well-known trademarks, such as Hefty(R). - Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed-paperboard, and molded-fiber packaging products, and sells them to customers in the food-distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, other institutional foodservice outlets, food processors, and grocery chains. On October 12, 2005, we sold substantially all of our protective- and flexible-packaging businesses. The results of the sold businesses, as well as costs and charges associated with the transaction, are classified as discontinued operations. The portion of the businesses we retained is included in our Foodservice/Food Packaging segment. All financial statements included in this report reflect this change. Our company was incorporated in the state of Delaware in 1965 under the name of Packaging Corporation of America, operating as a subsidiary of Tenneco Inc. (Tenneco). In November 1995, we changed our name to Tenneco Packaging Inc. In November 1999, we were spun-off from Tenneco as an independent company, and changed our name to Pactiv Corporation. In this report, we sometimes refer to Pactiv Corporation and its subsidiaries as "Pactiv" or the "company." References in this report to our business, even those that cover prior periods, do not include the protective-and flexible-packaging businesses that were sold, except as otherwise indicated. PRODUCTS AND MARKETS Consumer Products We manufacture, market, and sell consumer products such as plastic storage bags for food and household items; plastic waste bags; aluminum cookware; and foam, pressed-paperboard, plastic, and molded-fiber tableware. These products are typically used by consumers in their homes and are sold through a variety of retailers, including supermarkets and mass merchandisers. Many of these products are sold under such recognized brand names as: - - Hefty(R) - Hefty(R) The Gripper(R) - Hefty(R) Zoo Pals(R) - - Baggies(R) - Hefty(R) Cinch Sak(R) - Hefty(R) Serve 'n - - Kordite(R) - Hefty(R) Ultra Flex(TM) Store(R) - - EZ Foil(TM) - Hefty(R) HandySaks(TM) - Hefty(R) Easy Grip(TM) - - Hefty(R) OneZip(R) - Hefty(R) Kitchen Fresh(R) - Hefty(R) EZ Ovenware(TM)
In 2006, Consumer Products accounted for 37% of our sales. 1 Foodservice/Food Packaging We are a leading provider of packaging products to the foodservice, supermarket, restaurant, and food packaging markets. Our products are designed to protect food during distribution, aid retailers in merchandising food products, and help customers prepare and serve meals in their homes. In 2006, Foodservice/Food Packaging accounted for 63% of our sales. Foodservice customers use our products to merchandise and sell food products on their premises and for takeout meals. Products include tableware items such as plates, bowls, and cups, and a broad line of takeout-service containers made from clear plastic, microwaveable plastic, foam, molded-fiber, paperboard, and aluminum. 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. We also manufacture plastic zipper closures for a variety of other packaging applications. Food-processor products include dual-ovenable paperboard containers, molded-fiber egg cartons, meat and poultry trays, and aluminum containers. BUSINESS STRATEGY Our business strategy is to grow by expanding our existing businesses and by making strategic acquisitions. Through our broad product lines and custom-design capability, we offer customers a range of products to fit their needs. As a result, we are a primary supplier to several national and international manufacturers and distributors, and have developed long-term relationships with key participants in the packaging and foodservice distribution markets. These relationships enable us to better identify and penetrate new markets. Market Presence Many of our products have strong market-share positions, including those in key markets such as zipper bags, tableware, foam trays, foodservice foam containers, clear rigid-display packaging, and aluminum cookware. In 2006, we derived more than 80% of our sales from market sectors in which we hold the No. 1 or No. 2 market-share position. This is a reflection of the: - Strength of our Hefty(R) and EZ Foil(TM) brands - Breadth of our product lines - Ability to offer "one-stop shopping" to our customers New Products/Design Services Successful development of new products and value-added product-line extensions are essential to our continued growth. In 2005, we opened a new product-development center to locate our research, development, and engineering teams close to our marketing and manufacturing teams, allowing us to better serve our customers. We spent $33 million on research and development activities in both 2006 and 2005 and $28 million in 2004. Service Capabilities The Foodservice/Food Packaging segment's "One Face to the Customer" strategy continues to deliver positive results. The systems and information-management infrastructure and distribution network supporting this customer-linked manufacturing process help us to reduce supply-chain costs, enhance customer service, and improve productivity. 2 Productivity/Cost Reduction Our continued focus on productivity enhancements and manufacturing and logistics cost reductions is key to improving our profitability. In 2006, approximately 40% of our research and development spending and 30% of our capital spending was devoted to efforts to reduce costs and improve manufacturing and distribution efficiency. Strategic Acquisitions Strategic acquisitions have been an important element of our growth strategy. Since the beginning of 2000, $323 million has been invested to acquire businesses that complement and/or expand our core businesses. Our focus is on products that have strong growth characteristics and attractive margins. MARKETING, DISTRIBUTION, AND CUSTOMERS We have a sales and marketing staff of approximately 400 people. Our consumer products are sold through a direct sales force and a national network of brokers and manufacturers' representatives. We primarily use a direct sales force to sell to our foodservice and food-packaging customers. Wal-Mart Stores, Inc., which accounted for approximately 16% of our consolidated sales in 2006 and 15% in 2005, was the only customer that accounted for more than 10% of our sales. Our backlog of orders is not material. ANALYSIS OF SALES The following table sets forth information regarding sales from continuing operations.
2006 2005 2004 ---------------- ---------------- ---------------- Amount % Total Amount % Total Amount % Total (In millions) ------ ------- ------ ------- ------ ------- Consumer Products......................... $1,085 37% $ 989 36% $ 934 37% Foodservice/Food Packaging................ 1,832 63 1,767 64 1,610 63 ------ --- ------ --- ------ --- Total..................................... $2,917 100% $2,756 100% $2,544 100% ------ --- ------ --- ------ ---
See Note 14 to the financial statements for additional segment and geographic information. COMPETITION Our businesses face significant competition in all of our product lines from numerous national and regional companies of various sizes. Many of our competitors, particularly in the foodservice industry, are significantly smaller and have lower fixed costs. Certain competitors offer a more specialized variety of packaging materials and concepts and may serve more geographic regions through various distribution channels. Our success in obtaining business is driven primarily by our price, quality, product features, and service. RAW MATERIALS The principal raw materials we use are plastic resins, aluminum, paperboard, and recycled paper. More than 80% of our sales were from products made from different types of plastics, including polystyrene, polyethylene, polypropylene, and amorphous polyethylene terephthalate (APET). These raw materials are readily available from a wide variety of suppliers. Our overall supply of raw materials was adequate in 2006, and we believe that our raw material supply will remain adequate in 2007. ENVIRONMENTAL REGULATION We are subject to a variety of environmental and pollution-control laws and regulations. Costs to continually monitor our compliance with these laws and regulations are a recurring part of our operations. 3 These costs are not a significant percentage of total operating costs. We do not expect continued compliance to have a material impact on our results of operations, financial condition, or cash flows. OTHER At December 31, 2006, we employed approximately 11,000 people, of whom 1,000 were employed by joint ventures, and approximately 12% were covered by collective-bargaining agreements. Two of those agreements, covering 108 employees, are scheduled for renegotiation in 2007. One of the agreements scheduled to be renegotiated in 2006, covering 282 employees, remains open, and is anticipated to be settled during the first quarter of 2007. Our employee relations remain satisfactory. We own a number of U.S. and foreign patents, trademarks, and other intellectual property that are significant with regard to the manufacture, marketing, and distribution of certain products. We also use numerous software licenses. The intellectual property and licensing rights we hold are adequate for our business. AVAILABLE INFORMATION Our website address is www.pactiv.com. Our investor relations link on this website has the following information available free of charge: - Annual reports on Form 10-K - Quarterly reports on Form 10-Q - Current reports on Form 8-K - Amendments to these reports - Code of business conduct/ethics - Code of ethical conduct for financial managers - Certain other corporate governance documents Investor relations information is updated on our website as soon as reasonably practical after we electronically file or furnish information to the Securities and Exchange Commission. In addition, copies of our annual report are made available, free of charge, upon request. ITEM 1A. RISK FACTORS. General economic conditions affect demand for our products and impact our production and selling costs. Listed below are some of the factors that may impact our results and cause our performance to differ materially from the results we may project. These are in addition to general economic factors and other items discussed elsewhere in this report (for example, in the Management's Discussion and Analysis of Financial Condition and Results of Operations). PRODUCT CHANGES AND INNOVATION We operate in a very competitive environment. Historically, product innovation and development have been key to our obtaining and maintaining market share and margins. Our future sales and profitability are partially impacted by our ability to anticipate and react more effectively than our competitors to changes in consumer demand for the types of products we sell. This requires understanding customer desires, creating products that meet those desires, and producing and selling products in a cost-effective manner. CHANGES IN CUSTOMERS We must address the demands of both the consumers who ultimately purchase and use our products and the retailers and others who sell our products to end-users. This is necessary for both of our segments, but it is particularly important in our Consumer Products segment. Our sales and margins can be impacted by changes in our distribution channels, customer mix, and merchandising strategies. Examples include customer concentration, consolidation, and substitution of unbranded products for branded products. 4 Although we have a diverse customer base, we have several large customers. These large customers provide us with cost-saving opportunities that may not be available with smaller, more diverse accounts. However, large customers can take actions that put pressure on our margins. Moreover, a significant downturn in the financial condition of one or more large customers could have an adverse effect on our business results. INCREASES IN PRODUCTION COSTS Most of our products are made from plastic. Plastic-resin prices are impacted by the price of oil, natural gas, and chemical intermediaries, such as benzene and ethylene, which can be volatile and affected by many factors, including overall economic activity, geopolitical situations (particularly in oil-exporting regions), natural disasters, and governmental policies and regulation. Our margins can be negatively impacted by the difference in timing of raw-material cost increases and corresponding product selling-price increases. Similarly, changes in costs of labor, utilities, or transportation can affect our margins. LAWS RELATING TO USE OR MANUFACTURE OF PLASTIC PRODUCTS Changes in laws or governmental actions regarding the use of disposable plastic products, such as laws relating to recycling or re-use of plastic products, could add costs to our products. These additional costs could make our products less competitive with products made from other materials. Similarly, changes in laws regarding air emissions could increase our manufacturing costs. GROWTH/ACQUISITIONS AND DIVESTITURES Growth, internally and through acquisitions, is an important element of our business strategy. We currently have adequate sources of liquidity for our operations. However, our ability to grow could be impacted if our cost of capital were to increase or if capital were to become more difficult to obtain. Our future success will depend somewhat on our ability to integrate new businesses that we may acquire, dispose of businesses or business segments that we may wish to divest, and re-deploy proceeds from any divestiture. INTERNATIONAL ISSUES Currently most of our production and sales are in the United States. Competition from products manufactured in countries that have lower labor and other costs than the U.S. could negatively impact our profitability. Additionally, if we manufacture or sell more of our products in countries outside of the U.S., we will be subject to additional risks, such as those related to economic, political, competitive, and foreign-currency considerations in those other countries. PENSION PLAN At the time of our spin-off from Tenneco in 1999, we became the sponsor of Tenneco (now Pactiv) pension plans. These plans cover individuals/beneficiaries from many companies previously owned by Tenneco, but not owned by Pactiv. As a result, the total number of individuals/beneficiaries covered by these plans is much larger than would have been the case if only Pactiv personnel were participants. For this reason, the impact of the pension plans on our net income and shareholders' equity is greater than is typically found at similarly sized companies. Changes in the following factors can have a disproportionate effect on our results compared with similarly sized companies or companies with no pension plan: - Assumptions regarding the long-term rate of return on pension assets and other factors - Interest rate used to discount projected benefit obligations - Level of amortization of actuarial gains and losses - Governmental regulations relating to funding of retirement plans in the U.S. and foreign countries Funding of the qualified U.S. pension plan is currently determined by requirements of the Employee Retirement Income Security Act, under which we were not required to make contributions to the plan in 5 2006. On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (PPA) into law. The PPA, which is effective for plan years beginning after December 31, 2007, significantly alters current funding requirements. Based on our current assumptions and requirements of the PPA, we do not anticipate that after-tax contributions to the plan will be significant for the foreseeable future. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. HEADQUARTERS Our corporate headquarters is located at 1900 West Field Court, Lake Forest, Illinois 60045. Our general telephone number is (847) 482-2000. MANUFACTURING AND DISTRIBUTION FACILITIES Our Consumer Products and Foodservice/Food Packaging segments operate 39 manufacturing and 8 distribution facilities in North America (United States, Mexico, and Canada). We also have a manufacturing facility in Germany and a distribution facility in the United Kingdom that support our Foodservice/Food Packaging segment. In addition, we have research and development centers in Canandaigua, New York, and Vernon Hills, Illinois. We also have joint-venture interests in a corrugated-converting operation in Shaoxing, China (62.5% owned) and in a folding-carton operation in Dongguan, China (50% owned at December 31, 2006). In January 2007, we purchased an additional 1% interest in the operation, bringing our total interest to 51%. Our plants and equipment are well maintained and in good operating condition. We have satisfactory title to our owned properties, which are subject to certain liens that do not detract materially from the value or use of the properties. ITEM 3. LEGAL PROCEEDINGS. We have been named as a defendant in multiple lawsuits, covering approximately 1,400 plaintiffs, all of which are pending in the United States District Court for the Middle District of Alabama. The claims allege that plaintiffs experienced personal injuries and property damages as a result of the alleged release of chemical substances from a wood-treatment facility in Lockhart, Alabama, during the period from 1963 to 1998. A predecessor of Pactiv owned the facility from 1978 to 1983. Louisiana-Pacific Corporation, the current owner of the facility, to whom a predecessor of Pactiv sold the facility in 1983, also is named as a defendant in each of the lawsuits. We are not currently able to quantify our financial exposure, if any, relating to this matter. We intend to defend these lawsuits vigorously. In February 2007, we entered into a consent decree with the Michigan Department of Environmental Quality (MDEQ) resolving a dispute associated with a declaratory-judgment action in the United States District Court, Eastern District of Michigan, related to a superfund site in Filer City, Michigan. In 1993, after years of study, the U.S. Environmental Protection Agency (USEPA) selected a final clean-up remedy for the site pursuant to a record of decision and administrative order, in which the USEPA expressly determined that conditions at the site posed no current or potentially unacceptable risk to human health or the environment and required only monitoring of the natural attenuation of the site. We contended that, because of the USEPA action, the MDEQ is precluded from demanding that we undertake additional investigative and remedial work at the site. Under the consent decree, the MDEQ has agreed not to seek the performance of any additional investigative or remedial work by us unless an investigation funded by the MDEQ generates new site data demonstrating that the USEPA's remedy is not working. The MDEQ also agreed to waive its claims for any past costs against us. In addition, we have reserved the right to challenge any future MDEQ demands related to the site. 6 We are party to other legal proceedings arising from our operations. We establish reserves for claims and proceedings when it is probable that liabilities exist and where reasonable estimates of such liabilities can be made. While it is not possible to predict the outcome of any of these matters, based on our assessment of the facts and circumstances now known, we do not believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 2006. ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT. Our executive officers, as of February 28, 2007, are listed below. This information 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, 55, 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 our spin-off in November 1999. Prior to 1999, Mr. Wambold served as Executive Vice President and General Manager of our foodservice/food packaging and consumer products business units. Andrew A. Campbell, 61, 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. Joseph E. Doyle, 47, Vice President, General Counsel, and Secretary Mr. Doyle was appointed Vice President, General Counsel, and Secretary of the company on February 1, 2007. Prior to joining the company, he was a partner at the law firm of Mayer, Brown, Rowe, & Maw, LLP from 2001 to 2007. Peter J. Lazaredes, 56, Executive Vice President and General Manager, Foodservice/Food Packaging. Mr. Lazaredes has served as Executive Vice President and General Manager, Foodservice/Food Packaging, since July 2004. Prior to 2004, and since he joined the company in 1996, Mr. Lazaredes held various senior management positions in the company's foodservice/food packaging business unit. John N. Schwab, 57, Senior Vice President and General Manager, Hefty(R) Consumer Products. Mr. Schwab has served as Senior Vice President and General Manager, Hefty(R) Consumer Products, since January 2001. Prior to 2001, and since he joined the company in 1995, Mr. Schwab held various senior management positions in the company's consumer products business unit. Henry M. Wells, III, 62, Vice President and Chief Human Resources Officer. Mr. Wells has served as Vice President and Chief Human Resources Officer since April 2000. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES. The outstanding shares of Pactiv Corporation common stock ($0.01 par value) are listed on the New York Stock Exchange under the symbol "PTV." Stock price and dividend information for 2006 and 2005 are shown below.
2006 2005 --------------------------- --------------------------- PRICE/SHARE PRICE/SHARE --------------- DIVIDENDS --------------- DIVIDENDS HIGH LOW PAID HIGH LOW PAID ------ ------ --------- ------ ------ --------- First quarter.......................... $25.07 $21.50 -- $25.58 $21.39 -- Second quarter......................... 26.00 22.61 -- 23.85 20.98 -- Third quarter.......................... 28.77 22.36 -- 22.38 16.91 -- Fourth quarter......................... 36.53 27.81 -- 22.19 16.50 --
At January 31, 2007, there were approximately 37,609 holders of record of the company's common stock, including brokers and other nominees. We periodically consider alternatives to increase shareholder value, including dividend payments. Dividend declarations are at the discretion of our board of directors. We currently do not pay a dividend. In October 2005, the board of directors approved the repurchase of 6.5 million shares of our common stock. On July 13, 2006, the board of directors approved the repurchase of an additional 10 million shares. As of December 31, 2006, the remaining number of shares authorized to be repurchased was 4 million. We repurchase shares using open market or privately negotiated transactions. Repurchased shares are held in treasury for general corporate purposes. There are no expiration dates for the current share-repurchase authorizations. The following table summarizes our stock repurchases in the fourth quarter of 2006.
TOTAL NUMBER OF SHARES MAXIMUM PURCHASED AS NUMBER OF PART OF PUBLICLY SHARES THAT MAY TOTAL NUMBER AVERAGE ANNOUNCED YET BE PURCHASED OF SHARES PRICE PAID PLANS OR UNDER PLANS OR PERIOD PURCHASED PER SHARE PROGRAMS PROGRAMS - ------ ------------ ---------- ---------------- ---------------- October 2006.............................. 180,800 $28.47 180,800 5,824,400 November 2006............................. 950,000 32.76 950,000 4,874,400 December 2006............................. 902,000 35.29 902,000 3,972,400(1) --------- --------- Total..................................... 2,032,800 2,032,800 --------- ---------
- --------------- (1) Represents the remaining number of shares that are available for repurchase as of December 31, 2006. 8 ITEM 6. SELECTED FINANCIAL DATA.
2006 2005 2004 2003 2002 FOR THE YEARS ENDING DECEMBER 31 -------- -------- -------- -------- -------- (In millions, except per-share data) STATEMENT OF INCOME Sales Consumer Products............................... $ 1,085 $ 989 $ 934 $ 888 $ 841 Foodservice/Food Packaging...................... 1,832 1,767 1,610 1,491 1,329 -------- -------- -------- -------- -------- 2,917 2,756 2,544 2,379 2,170 -------- -------- -------- -------- -------- Operating income prior to restructuring........... 423 306 376 420 403 Restructuring and other charges/(credits)......... (1) 6 79 (1) (3) -------- -------- -------- -------- -------- Operating income.................................. 424 300 297 421 406 -------- -------- -------- -------- -------- Tenneco Packaging litigation settlement........... -- -- -- 56 -- Realized foreign-currency exchange gain........... 31 -- -- -- -- Interest expense, net of interest capitalized..... 73 82 85 83 85 Income-tax expense................................ 114 81 78 108 130 Income from continuing operations................. 277 143 138 176 194 Income (loss) from discontinued operations, net of income tax...................................... (3) (89) 17 19 26 Cumulative effect of changes in accounting principles, net of income tax................... -- -- -- (12) (72) Net income........................................ $ 274 $ 54 $ 155 $ 183 $ 148 Weighted-average number of shares of common stock outstanding Basic........................................... 137.866 147.183 151.290 157.932 158.618 Diluted......................................... 139.704 148.849 153.763 160.144 160.613 Earnings (loss) per share Basic Continuing operations(1)...................... $ 2.01 $ 0.97 $ 0.91 $ 1.11 $ 1.22 Discontinued operations....................... (0.02) (0.60) 0.11 0.12 0.16 Cumulative effect of changes in accounting principles.................................. -- -- -- (0.07) (0.45) -------- -------- -------- -------- -------- $ 1.99 $ 0.37 $ 1.02 $ 1.16 $ 0.93 Diluted Continuing operations(2)...................... $ 1.98 $ 0.96 $ 0.90 $ 1.10 $ 1.21 Discontinued operations....................... (0.02) (0.60) 0.11 0.11 0.16 Cumulative effect of changes in accounting principles.................................. -- -- -- (0.07) (0.45) -------- -------- -------- -------- -------- $ 1.96 $ 0.36 $ 1.01 $ 1.14 $ 0.92 STATEMENT OF FINANCIAL POSITION Net assets of discontinued operations............. $ -- $ -- $ 739 $ 705 $ 669 Total assets...................................... 2,758 2,820 3,741 3,706 3,412 Short-term debt, including current maturities of long-term debt.................................. 98 3 471 4 9 Long-term debt.................................... 771 869 869 1,335 1,222 Minority interest................................. 9 9 9 8 21 Shareholders' equity.............................. 853 820 1,083 1,061 897 STATEMENT OF CASH FLOWS Cash provided by operating activities............. $ 372 $ 266 $ 366 $ 336 $ 384 Cash provided (used) by investing activities...... (75) 283 (91) (194) (244) Cash used by financing activities................. 294 595 197 134 57 Expenditures for property, plant, and equipment... 78 143 100 112 126
OTHER INFORMATION: The company has never paid a dividend. (1) 2006 includes $0.15 per share for a realized foreign-currency exchange gain and $0.21 for income-tax liability adjustments. (2) 2006 includes $0.14 per share for a realized foreign-currency exchange gain and $0.21 for income-tax liability adjustments. See Note 3 for restructuring and other and Note 5 for discontinued operations. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. BASIS OF PRESENTATION Financial statements for all periods presented in this report are prepared on a consolidated basis in accordance with generally accepted accounting principles consistently applied. All per-share information is presented on a diluted basis unless otherwise noted. Certain reclassifications have been made to prior- years' financial information to conform to current-year presentation. On October 12, 2005, we completed the sale of most of our protective- and flexible-packaging businesses to Pregis Corporation. These businesses historically were included in our Protective and Flexible Packaging segment. In conjunction with the sale of these entities, we reviewed our reporting segments in concert with requirements of the Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information." As a result, we elected to include the retained portions of the protective- and flexible-packaging businesses in our Foodservice/Food Packaging segment. We have three reporting segments: - Consumer Products manufactures disposable plastic, foam, molded-fiber, pressed-paperboard, and aluminum packaging products, and sells them to customers such as grocery stores, mass merchandisers, and discount chains. Products include waste bags, food-storage bags, and disposable tableware and cookware. We sell many of our consumer products under well-known trademarks, such as Hefty(R). - Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed-paperboard, and molded-fiber packaging products, and sells them to customers in the food-distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, and other institutional foodservice outlets, food processors, and grocery chains. - Other relates to corporate and administrative-service operations and retiree-benefit income and expense. The accounting policies of the reporting segments are the same as those for Pactiv as a whole. Where discrete financial information is not available by segment, reasonable allocations of expenses and assets/liabilities are used. EXECUTIVE OVERVIEW BUSINESS Our primary business involves the manufacture and sale of consumer and specialty-packaging products for the consumer and foodservice/food packaging markets. We operate 43 manufacturing facilities in 5 countries. Consumer products include plastic, aluminum, and paper-based products, such as waste bags, food-storage bags, and disposable tableware and cookware. These products are sold under such well-known brand names as Hefty(R), Baggies(R), Hefty(R) OneZip(R), Hefty(R) Cinch Sak(R), Hefty(R) The Gripper(R), Hefty(R) Zoo Pals(R), Kordite(R), EZ Foil(TM), and Hefty(R) Serve 'n Store(R). Foodservice and food-packaging products include foam, clear plastic, aluminum, pressed-paperboard, and molded-fiber packaging for customers in the food-distribution channel. Customers include wholesalers, supermarkets, restaurants, and packer processors, who prepare and process food for consumption. We sell our products to a wide array of customers worldwide. Customers include grocery stores, mass merchandisers, discount chains, restaurants, distributors, and fabricators. Costs incurred in connection with the manufacture and sale of these products are recorded in either cost of sales or selling, general, and administrative expenses. 10 Greater than 80% of our sales come from products made from different types of plastic resins, principally polystyrene and polyethylene, and to a lesser extent polypropylene and amorphous polyethylene terephthalate (APET). We have pension plans that cover substantially all of our employees. In addition, in conjunction with our spin-off from Tenneco Inc. (Tenneco) in 1999, we became the sponsor of retirement plans covering participating employees of certain former subsidiaries and affiliates of Tenneco. With the exception of pension-service costs associated with our production operations, we record pension income as an offset to selling, general, and administrative expenses. However, when assessing our performance and returns, we typically exclude the effect of pension income and pension assets and liabilities. SIGNIFICANT TRENDS, OPPORTUNITIES, AND CHALLENGES Several opportunities and challenges may influence our continued growth. Near-term risks include: - The impact of energy-cost volatility on resin costs - The ability to increase selling prices - The continued effectiveness of our productivity and procurement initiatives Longer-term risks include: - Potential changes in consumer demand - Possible supplier and customer consolidations - Potential increases in foreign-based competition - Possible growth in market share of unbranded products We expect to continue to be successful by: - Adjusting selling prices to offset resin-price movements - Implementing aggressive cost-management and productivity programs - Leveraging our existing products into new distribution channels - Introducing innovative new products - Making strategic acquisitions The primary raw materials used to manufacture our products are plastic resins, principally polystyrene and polyethylene. While average industry prices for polystyrene were slightly lower for the full year 2006 compared with 2005, they began to rise at the end of 2006, driven principally by higher benzene costs. In 2006, average industry prices for polyethylene rose approximately 8%, compared with 2005, driven by greater demand and higher ethylene prices. However, in the fourth quarter of 2006, polyethylene costs began to decline. Over the past three years, we were able to raise selling prices in many areas of our business to mitigate the effect of resin cost increases. It is likely that resin costs will continue to be a source of uncertainty for us. We continue to closely monitor the resin marketplace in order to respond quickly to any raw-material cost increases. Our business is sensitive to other energy-related cost movements, particularly those that affect transportation, logistics, and utility costs. Historically, we have been able to mitigate the effect of higher energy-related costs with productivity improvements and other cost reductions. However, if energy-related costs increase significantly in the future, we may not be able to fully offset such increases with productivity gains. In 2006, we began to introduce "lean" principles and tools in many of our operating facilities. We are expanding the use of lean principles to help us accelerate productivity improvements by reducing inventory and scrap levels, providing rapid stock replenishment, shortening scheduling cycles, improving our "one-stop shopping" service, eliminating nonvalue-added activities, and streamlining processes. We expect our ability to use these tools throughout the organization will positively affect our operating results over the next several years. 11 YEAR 2006 COMPARED WITH 2005 RESULTS OF CONTINUING OPERATIONS Sales
INCREASE (DECREASE) -------------------- 2006 2005 AMOUNT PERCENT (In millions) ------ ------ -------- --------- Consumer Products......................................... $1,085 $ 989 $ 96 9.7% Foodservice/Food Packaging................................ 1,832 1,767 65 3.7 ------ ------ ---- Total..................................................... $2,917 $2,756 $161 5.8% ------ ------ ----
The increase in total sales in 2006 reflected higher pricing, improved mix, and flat volume. Excluding the positive impact of acquisitions ($16 million), sales grew 5.3%. Sales for the Consumer Products business increased in 2006, reflecting price gains of 9% and 1% volume growth. A double-digit volume increase in food-storage bags more than offset a volume decrease in foam tableware and waste bags. Sales growth for the Foodservice/Food Packaging segment in 2006 was driven principally by pricing gains. Slight volume declines in the base business were partially offset by volume gains from acquisitions. Operating Income
INCREASE (DECREASE) -------------------- 2006 2005 AMOUNT PERCENT (In millions) ---- ---- -------- --------- Consumer Products........................................... $195 $112 $ 83 74.1% Foodservice/Food Packaging.................................. 244 186 58 31.2 Other....................................................... (15) 2 (17) ---- ---- ---- Total....................................................... $424 $300 $124 41.3% ---- ---- ----
Total operating income increased in 2006 as a result of positive spread (the difference between selling prices and raw-material costs), and lower operating costs, offset partially by higher selling, general, and administrative (SG&A) costs. SG&A expenses rose as a result of higher performance-related compensation costs, primarily driven by the increase in our stock price, lower pension income, and higher advertising and promotion expenses. Operating income for the Consumer Products business improved significantly from 2005. The increase was driven principally by positive spread, lower product-launch costs, and productivity gains, offset partially by higher advertising and promotion and other SG&A costs. The increase in operating income for the Foodservice/Food Packaging business in 2006 primarily reflected favorable spread, the benefit of the Newspring acquisition, and productivity gains, offset, in part, by higher SG&A costs. Operating income for the Other segment decreased from 2005, principally because of lower non-cash pension income and higher administrative expenses. Income Taxes Our effective tax rate for 2006 was 29.1%, compared with 36.0% for 2005. The reduction in the tax rate was driven principally by a reduction in accrued income taxes due to the expiration of the statute of limitations for prior tax years, offset partially by other accruals for income-tax liabilities. Income from Continuing Operations We recorded income from continuing operations of $277 million, or $1.98 per share, in 2006, compared with $143 million, or $0.96 per share, in 2005. Results in 2006 included noncash pension income of 12 $26 million after tax, or $0.19 per share, a realized foreign-currency exchange gain upon the liquidation of our European treasury operation of $20 million after tax, or $0.14 per share, and favorable income-tax liability adjustments of $29 million, or $0.21 per share. Prior-period results included non-cash pension income of $34 million after tax, or $0.23 per share. DISCONTINUED OPERATIONS Income (Loss) from Discontinued Operations Income (loss) from discontinued operations (See "Basis of Presentation" on page 10) was as follows:
2006 2005 FOR THE YEARS ENDED DECEMBER 31 (In millions) ---- ---- Sales....................................................... $-- $695 --- ---- Income (loss) from operations, net of tax of $0 and $13, respectively.............................................. (3) 18 Professional fees and other costs associated with the sale of the businesses......................................... -- (15) Goodwill impairment, net of tax of $12...................... -- (37) Estimated loss on the sale of the businesses, net of tax of $28 million............................................... -- (50) Tax on repatriated foreign earnings......................... -- (5) --- ---- Net loss from discontinued.................................. $(3) $(89) --- ----
In 2006, we recorded a loss on discontinued operations of $3 million related to final working-capital adjustments and taxes. Liabilities related to discontinued operations totaled $15 million at December 31, 2006, and $20 million at December 31, 2005, and included obligations related to income taxes, certain royalty payments, and the costs of closing a facility in Europe. Income (loss) from discontinued operations included an allocation of interest expense of $11 million for 2005. Amounts allocated were based on the ratio of the net assets of discontinued operations to the company's total net assets plus consolidated debt. For 2005, interest expense was allocated through October 12, the date of sale of the protective- and flexible-packaging businesses. The buyer of the businesses did not assume the debt of the discontinued operations. In addition, we did not have any debt-repayment requirements as a result of the sale. On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law. This act allowed us to take a special, one-time tax deduction of 85% of certain repatriated foreign earnings. In the fourth quarter of 2005, we repatriated $147 million of the accumulated foreign earnings of our discontinued operations, and recorded a related tax expense of $5 million. LIQUIDITY AND CAPITAL RESOURCES Capitalization
INCREASE 2006 2005 (DECREASE) (In millions) ------ ------ ---------- Short-term debt, including current maturities of long-term debt(a)................................................... $ 98 $ 3 $ 95 Long-term debt.............................................. 771 869 (98) ------ ------ ----- Total debt.................................................. 869 872 (3) Minority interest........................................... 9 9 -- Shareholders' equity........................................ 853 820 33 ------ ------ ----- Total capitalization........................................ $1,731 $1,701 $ 30 ------ ------ ----- Ratio of total debt to total capitalization................. 50.2% 51.3% (1.1)%
- --------------- (a) Short-term debt payable in April 2007 13 Shareholders' equity increased $33 million in 2006 as detailed below.
(In millions) Shareholders' equity at December 31, 2005................... $ 820 Increase (decrease) Impact of adopting SFAS No. 158(a)........................ (41) Additional minimum pension liability adjustment........... 89 Favorable foreign-currency translation adjustments........ 7 Realized foreign-currency exchange gain (included in net income of $274)........................................ (31) Stock repurchases......................................... (369) Net income................................................ 274 Stock-based compensation and issuance of common stock in connection with stock-option exercises................. 104 ----- Shareholders' equity at December 31, 2006................... $ 853 -----
(a) SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" Cash Flows Cash flows for continuing and discontinued operations were as follows:
INCREASE 2006 2005 (DECREASE) (In millions) ----- ----- ---------- Cash provided (used) by: Operating activities...................................... $ 372 $ 266 $ 106 Investing activities...................................... (75) 283 (358) Financing activities...................................... (294) (595) 301
The increase in cash provided by operating activities in 2006 was driven primarily by higher income from continuing operations ($79 million), better working capital management ($17 million), and an increase in non-cash pension and long-term compensation accruals ($19 million), offset partially by an increase in cash used by discontinued operations ($10 million). Investing activities in 2006 primarily represented capital expenditures. In 2005, investing activities represented proceeds of $524 million from the sale of the protective- and flexible-packaging businesses and other asset sales, offset, in part, by capital expenditures of $143 million and the cost of acquiring Newspring Industrial Corp. ($98 million). Cash used by financing activities in 2006 was driven primarily by the repurchase of company stock ($369 million), offset partially by proceeds ($73 million) from the issuance of company stock in connection with the exercise of stock options. Financing activities used $595 million of cash in 2005 for the repayment of debt ($610 million) and the repurchase of company stock ($164 million), offset partially by the issuance of debt ($142 million) and the receipt of proceeds in connection with the issuance of company stock related to the administration of employee-benefit plans ($28 million). Capital Commitments Commitments for authorized capital expenditures totaled approximately $103 million at December 31, 2006. It is anticipated that the majority of these expenditures will be funded over the next 12 months from existing cash and short-term investments and internally generated cash. 14 Contractual Obligations We enter into arrangements that obligate us to make future payments under long-term contracts. Our long-term contractual obligations at December 31, 2006, were as follows:
DUE IN ------------------------------------------------- LESS THAN MORE THAN TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS (In millions) ------ --------- ----------- ----------- --------- Long-term debt obligations(1)............... $1,895 $166 $126 $126 $1,477 Operating-lease obligations................. 87 23 31 19 14 Purchase obligations(2)..................... 455 380 75 -- -- Other long-term liabilities(3).............. 206 27 38 36 105 ------ ---- ---- ---- ------ Total....................................... $2,643 $596 $270 $181 $1,596 ------ ---- ---- ---- ------
- --------------- (1) Includes fixed-rate debentures, plus related interest-payment obligations based on rates in effect at December 31, 2006. (2) Includes open capital commitments, amounts related to the purchase of minimum quantities of raw materials at current market prices under supply agreements and other long-term vendor agreements with specific payment provisions and early termination penalties. (3) Includes undiscounted workers' compensation obligations, and undiscounted and unfunded postretirement medical and supplemental pension-funding requirements. Liquidity and Off-Balance-Sheet Financing We use various sources of funding to manage liquidity. Sources of liquidity include cash flow from operations and a 5-year revolving-credit facility of $750 million. No amounts were outstanding under the revolving-credit facility at December 31, 2006. We were in full compliance with the financial and other covenants of our revolving-credit agreement at year-end 2006. We also use an asset-securitization program as off-balance-sheet financing. No amounts were securitized under this program as of December 31, 2006, or December 31, 2005. We have pension plans that cover substantially all of our employees. Funding of the qualified U.S. pension plan is currently determined by requirements of the Employee Retirement Income Security Act, under which we were not required to make contributions to the plan in 2006. On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (PPA) into law. The PPA, which is effective for plan years beginning after December 31, 2007, significantly alters current funding requirements. Based on our current assumptions and requirements of the PPA, we do not anticipate that after-tax contributions to the plan will be significant for the foreseeable future. We believe that cash flow from operations, available cash reserves, and the ability to obtain cash under our credit facilities and asset-securitization program will be sufficient to meet current and future liquidity and capital requirements. YEAR 2005 COMPARED WITH 2004 RESULTS OF CONTINUING OPERATIONS In the first quarter of 2004, we announced a restructuring program to reduce manufacturing capacity and overhead costs and to reinvest a portion of the related savings in strategic growth initiatives. Implementation of the program resulted in the elimination of approximately 850 salaried and hourly positions worldwide. The total cost of the restructuring program was $84 million, $54 million after tax, or $0.35 per share, covering severance, asset write-offs, and other, which consisted principally of asset-removal costs. The majority of the program was executed in the second quarter of 2004. After-tax cash payments related to the restructuring and other actions totaled $4 million in 2005 and $9 million in 2004. See Note 3 for additional information. 15 Sales
INCREASE (DECREASE) -------------------- 2005 2004 AMOUNT PERCENT (In millions) ------ ------ -------- --------- Consumer Products.......................................... $ 989 $ 934 $ 55 5.9% Foodservice/Food Packaging................................. 1,767 1,610 157 9.8 ------ ------ ---- Total...................................................... $2,756 $2,544 $212 8.3% ------ ------ ----
Total sales increased in 2005 on flat volume. Excluding the positive impact of foreign-currency exchange rates ($5 million) and acquisitions ($51 million), sales grew 6.1%, driven mainly by the impact of pricing actions to offset increased resin costs. Sales for the Consumer Products business increased in 2005 primarily as a result of price increases. Sales growth was driven by an increase in tableware, with the introduction of Hefty(R) Serve n' Store(R)plates and bowls and Hefty(R) Easy Grip(TM) cups, along with the broad-based impact of pricing actions to offset increased resin costs. Foodservice/Food Packaging segment sales growth in 2005 was primarily a result of price increases implemented to offset the impact of higher polystyrene costs. Volume gains from acquisitions offset volume declines in the base business. Operating Income
INCREASE (DECREASE) -------------------- 2005 2004 AMOUNT PERCENT (In millions) ---- ---- -------- --------- Consumer Products........................................... $112 $175 $(63) (36.0)% Foodservice/Food Packaging.................................. 186 112 74 66.1 Other....................................................... 2 10 (8) (80.0) ---- ---- ---- Total....................................................... $300 $297 $ 3 1.0% ---- ---- ----
Total operating income increased in 2005 as a result of lower restructuring costs and positive spread (the difference between selling prices and raw-material costs), offset partially by higher new product launch costs, and higher manufacturing and logistics costs. The following tables summarize the impact of restructuring and other charges on 2005 and 2004 operating income by segment.
OPERATING INCOME -- TWELVE MONTHS ENDED DECEMBER 31, 2005 --------------------------------------------------- GAAP RESTRUCTURING AND EXCLUDING RESTRUCTURING BASIS OTHER CHARGES AND OTHER CHARGES (In millions) ----- ----------------- ----------------------- Consumer Products.................................. $112 $1 $113 Foodservice/Food Packaging......................... 186 5 191 Other.............................................. 2 -- 2 ---- -- ---- Total.............................................. $300 $6 $306 ---- -- ----
OPERATING INCOME -- TWELVE MONTHS ENDED DECEMBER 31, 2004 --------------------------------------------------- GAAP RESTRUCTURING AND EXCLUDING RESTRUCTURING BASIS OTHER CHARGES AND OTHER CHARGES (In millions) ----- ----------------- ----------------------- Consumer Products.................................. $175 $ 4 $179 Foodservice/Food Packaging......................... 112 72 184 Other.............................................. 10 3 13 ---- --- ---- Total.............................................. $297 $79 $376 ---- --- ----
16 We believe focusing on operating income excluding the effect of restructuring and other charges is a meaningful alternative way of evaluating our operating results. The restructuring and other charges relate to actions that will have an ongoing effect on our company. Considering such charges as being applicable to 2005 and 2004 only could make our operating performance in those periods more difficult to evaluate when compared with other periods in which there were no such charges. We use operating income excluding restructuring and other charges to evaluate operating performance. The following table summarizes operating income excluding restructuring and other charges for 2005 and 2004.
INCREASE (DECREASE) -------------------- 2005 2004 AMOUNT PERCENT (In millions) ---- ---- -------- --------- Consumer Products........................................... $113 $179 $(66) (36.9)% Foodservice/Food Packaging.................................. 191 184 7 3.8 Other....................................................... 2 13 (11) (84.6) ---- ---- ---- Total....................................................... $306 $376 $(70) (18.6)% ---- ---- ----
Total operating income excluding restructuring and other charges was down versus 2004. The decline primarily reflected higher new product launch, raw-material, energy-related, and logistics costs, which were offset partially by the effect of price increases. Operating income excluding restructuring and other charges for the Consumer Products business was down compared with 2004. The decline was driven primarily by increased new product launch expenses, higher plastic-resin and other energy-related costs, and increased logistics costs, which were offset partially by higher selling prices and productivity gains. Operating income excluding restructuring and other charges for the Foodservice/Food Packaging business increased from 2004. The increase primarily reflected favorable spread, the benefit of the Newspring acquisition, and productivity gains, offset, in part, by higher energy-related and logistics costs. Operating income excluding restructuring and other charges for the Other segment decreased from 2004, principally because of higher compensation-related expenses and a decrease in noncash pension income. Income Taxes Our effective tax rate for 2005 was 36.0%, compared with 36.2% for 2004. Income from Continuing Operations We recorded income from continuing operations of $143 million, or $0.96 per share, in 2005, compared with $138 million, or $0.90 per share, in 2004. Results for 2005 included restructuring and other charges of $4 million after tax, or $0.03 per share, and noncash pension income of $34 million after tax, or $0.23 per share. Results for 2004 included restructuring and other charges of $50 million after tax, or $0.32 per share, and noncash pension income of $35 million after tax, or $0.23 per share. 17 DISCONTINUED OPERATIONS Income (Loss) from Discontinued Operations Income (loss) from discontinued operations (see "Basis of Presentation" on page 10) was as follows:
2005 2004 FOR THE YEARS ENDED DECEMBER 31 (In millions) ---- ---- Sales....................................................... $695 $839 ---- ---- Income from operations, net of tax of $13 and $12, respectively.............................................. 18 17 Professional fees and other costs associated with the sale of the businesses......................................... (15) -- Goodwill impairment, net of tax of $12...................... (37) -- Estimated loss on the sale of the businesses, net of tax of $28 million............................................... (50) -- Tax on repatriated foreign earnings......................... (5) -- ---- ---- Net income (loss) from discontinued operations.............. $(89) $ 17 ---- ----
Income (loss) from discontinued operations included an allocation of interest expense for all periods presented. Amounts allocated were based on the ratio of the net assets of discontinued operations to the company's total net assets plus consolidated debt. For 2005, interest expense was allocated through October 12, the date of sale of the protective- and flexible-packaging businesses. Amounts allocated were $11 million for 2005 and $15 million for 2004. The buyer of the businesses did not assume the debt of the discontinued operations. In addition, we did not have any debt-repayment requirements as a result of the sale. On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law. This act allowed us to take a special, one-time tax deduction of 85% of certain repatriated foreign earnings. In the fourth quarter of 2005, we repatriated $147 million of the accumulated foreign earnings of our discontinued operations, and recorded a related tax expense of $5 million. Assets and liabilities from discontinued operations were as follows:
2005 2004 DECEMBER 31 (In millions) ---- ---- Accounts and notes receivable, net.......................... $-- $127 Inventories................................................. -- 95 Other current as sets....................................... -- 4 Property, plant, and equipment, net......................... -- 308 Other long-term assets...................................... -- 205 --- ---- Total assets from discontinued operations................... $-- $739 --- ---- Accounts payable............................................ $-- $ 64 Accrued expense and other................................... 20 41 Long-term liabilities....................................... -- 40 --- ---- Total liabilities from discontinued operations.............. $20 $145 --- ----
We have retained responsibility for certain liabilities related to the businesses sold. These included income taxes through October 12, 2005, certain royalty payments, and the costs of closing a facility in Europe. These costs were included in the calculation of the loss on the sale of the businesses. CHANGES IN ACCOUNTING PRINCIPLES In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) "Share-Based Payments," which requires that the fair value of all share-based payments to employees, including stock options, be recognized in financial statements. SFAS No. 123(R) superseded Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees," which required that the intrinsic-value method be used in determining compensation expense for share-based payments to employees. Under SFAS No. 123(R), employee-compensation expense is based on the grant-date fair 18 value of awards, and is recognized in the Statement of Income over the period that recipients of awards are required to provide related service (normally the vesting period). We adopted SFAS No. 123(R) using the modified prospective method as of January 1, 2006. The impact if SFAS No. 123(R) had been adopted in prior periods is shown in the "Stock Based Compensation" section of Note 2. The one-time cumulative adjustment recorded in connection with adopting SFAS No. 123(R) was immaterial for the twelve months ended December 31, 2006. We elected to use the simplified method in calculating our additional paid-in capital pool upon adoption of SFAS No. 123(R), as described in FASB Staff Position No. FAS 123(R) -- 3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." SFAS No. 123(R) requires that tax deductions for compensation costs in excess of amounts recognized for accounting purposes be reported as cash flow from financing activities, rather than as cash flow from operating activities. Such "excess" amounts totaled $4 million in 2006 and $6 million in both 2005 and 2004. In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes," which clarifies the application of SFAS No. 109, "Accounting for Income Taxes." FIN No. 48 establishes a threshold condition that a tax position must meet for any part of the benefit of such a position to be recognized in the financial statements. In addition, FIN No. 48 provides guidance regarding measurement, derecognition, classification, and disclosure of tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are currently reviewing FIN No. 48 and evaluating its potential impact on our financial statements. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- an Amendment of SFAS Nos. 87, 88, 106, and 132(R)." SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined-benefit postretirement plan as assets or liabilities in their statement of financial position. In this connection, previously disclosed but unrecognized gains or losses, prior-service costs or credits, and transition assets or obligations must be recognized upon adoption as a component of accumulated other comprehensive income, net of applicable taxes. SFAS No. 158 also requires that additional disclosures be provided in the notes to the financial statements regarding the impact on net periodic-benefit costs of delaying the recognition of gains or losses, prior-service costs or credits, and transition assets or obligations. These changes are effective for fiscal years ending after December 15, 2006. In addition, effective for fiscal years beginning after December 31, 2008, SFAS No. 158 precludes companies from using other than their fiscal year-end date to measure plan assets and obligations. We adopted the recognition and disclosure provision of SFAS No. 158 on December 31, 2006. We recorded a charge to other comprehensive income of $41 million upon adoption. CRITICAL ACCOUNTING POLICIES Following are our accounting policies that involve the exercise of considerable judgment and the use of estimates. These have the most significant impact on our financial condition and results of operations. REVENUE RECOGNITION We recognize sales when the risks and rewards of ownership have transferred to the customer, which generally occurs as products are shipped. In arriving at net sales, we estimate the amount of deductions from sales that are likely to be earned or taken by customers in conjunction with incentive programs. These include volume rebates, early payment discounts, and coupon redemptions. Estimates are based on historical trends and are reviewed quarterly for possible revision. The amount of sales deductions reflected in net sales for the 12 months ended December 31, 2006, are reasonable. In the event that future sales- deduction trends vary significantly from past or expected trends, reported sales may increase or decrease by a material amount. 19 INVENTORY VALUATION Our inventories are stated at the lower of cost or market. A portion of inventories (55% and 62% at December 31, 2006, and 2005, respectively) is valued using the last-in, first-out (LIFO) method of accounting. Given the volatility of our costs of raw materials (primarily plastic resins), we prefer the LIFO method because it reflects the current cost of inventories in cost of sales. If we had valued inventories using the first-in, first-out (FIFO) accounting method as of January 1, 2004, net income would have been $33 million, or $0.21 per share, higher in 2004; $2 million, or $0.01 per share, higher in 2005; and $2 million, or $0.02 per share, higher in 2006. We periodically review inventory balances to identify slow-moving and/or obsolete items. This determination is based on a number of factors, including new product introductions, changes in consumer-demand patterns, and historical usage trends. PENSION PLANS In September 2006, the FASB issued SFAS No. 158. See "Changes in Accounting Principles" on page 18 for additional information. Pretax pension-plan income was $42 million in 2006, $54 million in 2005, and $56 million in 2004. With the exception of pension-service costs associated with our production operations, pension income is included in the Statement of Income as an offset to selling, general, and administrative expenses. We estimate that our noncash pretax pension income will increase to $50 million in 2007. Projections of pension income are based on a number of factors, including estimates of future returns on pension-plan assets; assumptions pertaining to the amortization of actuarial gains/losses; expectations regarding employee compensation; and assumptions related to participant turnover, retirement age, and life expectancy. In developing our assumption regarding the rate of return on pension-plan assets, we estimate future returns on various classes of assets, risk-free rates of return, and long-term inflation rates. Since inception in 1971, our U.S. qualified pension plan's annual rate of return on assets has averaged 11%. Historically, the plan has invested approximately 70% of its assets in equity securities and 30% in fixed-income investments. After considering all of these factors, we concluded that the use of a 9% rate-of-return on assets assumption was appropriate for 2006. Holding all other assumptions constant, a one-half percentage-point change in the rate-of-return on assets assumption would impact our pretax pension income by approximately $19 million. The discount-rate assumption for our U.S. plan is based on the composite yield on a portfolio of high-quality corporate bonds constructed with durations to match the plan's future benefit obligations. In this connection, the discount-rate assumption for our U.S. plan at our September 30 measurement date was 5.93% for 2006 and 5.7% for 2005. Holding all other assumptions constant, a one-half percentage-point change in the discount rate would impact our pretax pension income by approximately $4 million. We use a market-related method for calculating the value of plan assets. This method recognizes the difference between actual and expected returns on plan assets over a 5-year period. Resulting unrecognized gains or losses, along with other actuarial gains and losses, are amortized using the "corridor approach" outlined in SFAS No. 87, "Employers' Accounting for Pensions." 20 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. DERIVATIVE FINANCIAL INSTRUMENTS We are exposed to market risks related to changes in foreign-currency exchange rates, interest rates, and commodity prices. To manage these risks we may enter into various hedging contracts in accordance with established policies and procedures. We do not use hedging instruments for trading purposes and are not a party to any transactions involving leveraged derivatives. COMMODITY DERIVATIVES During the fourth quarter of 2006, we entered into natural gas commodity purchase agreements with third parties, hedging a portion of anticipated first quarter 2007 purchases of natural gas used in the production process at certain of our plants. These purchase agreements are marked to market, with the resulting gains or losses recognized in earnings when hedged transactions are recorded. The mark-to-market adjustments at December 31, 2006, were not material. INTEREST RATES At December 31, 2006, we had public-debt securities of $875 million outstanding, with fixed interest rates and maturity dates ranging from 4 months to 21 years. Should we decide to redeem these securities prior to their stated maturity, we 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.
2007 THEREAFTER TOTAL (In millions) ---- ---------- ----- Fixed-rate debt............................................. $ 99 $776 $875 Average interest rate....................................... 8.0% 8.1% 8.1% Fair value.................................................. $ 99 $871 $970
Prior to our spin-off from Tenneco Inc., we entered into an interest-rate swap to hedge our exposure to interest-rate movements. We settled this swap in November 1999, incurring a $43 million loss, which is being recognized as additional interest expense over the life of the underlying debt. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX OF THE FINANCIAL STATEMENTS OF PACTIV CORPORATION AND CONSOLIDATED SUBSIDIARIES
PAGE ---- Management's Report on Internal Control Over Financial Reporting................................................. 23 Reports of Independent Registered Public Accounting Firm.... 24 Consolidated Statement of Income for each of the three years in the period ended December 31, 2006......................................... 26 Consolidated Statement of Financial Position at December 31, 2006, and 2005............................................ 27 Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 2006............... 28 Consolidated Statement of Shareholders' Equity for each of the three years in the period ended December 31, 2006..... 29 Notes to Financial Statements............................... 30
22 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. We assessed the effectiveness of our internal controls over financial reporting as of December 31, 2006. In making this assessment, we used the criteria set forth in the Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment using those criteria, we concluded that Pactiv's internal control over financial reporting at December 31, 2006, was effective. Our assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, has been audited by Ernst & Young LLP, the independent registered public accounting firm who also audited the company's consolidated financial statements. Ernst & Young's attestation report on management's assessment of the company's internal control over financial reporting appears on page 25. 23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Pactiv Corporation: We have audited the accompanying consolidated statements of financial position of Pactiv Corporation and consolidated subsidiaries (the company) as of December 31, 2006, and 2005, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pactiv Corporation and consolidated subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" and, effective December 31, 2006, the Company adopted certain provisions of Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans". We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Pactiv Corporation's internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Chicago, Illinois February 28, 2007 24 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Pactiv Corporation: We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that Pactiv Corporation maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Pactiv Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Pactiv Corporation maintained effective internal controls over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Pactiv Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Pactiv Corporation and consolidated subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 2006, and our report dated February 28, 2007 expressed an unqualified opinion therein. /s/ ERNST & YOUNG LLP Chicago, Illinois February 28, 2007 25 CONSOLIDATED STATEMENT OF INCOME
FOR YEARS ENDED DECEMBER 31 2006 2005 2004 (In millions, except share and per-share data) ------------ ------------ ------------ SALES Consumer Products................................ $ 1,085 $ 989 $ 934 Foodservice/Food Packaging....................... 1,832 1,767 1,610 ------------ ------------ ------------ 2,917 2,756 2,544 ------------ ------------ ------------ COSTS AND EXPENSES Cost of sales, excluding depreciation and amortization.................................. 2,027 2,035 1,795 Selling, general, and administrative............. 316 259 229 Depreciation and amortization.................... 145 146 139 Other expense.................................... 6 10 5 Restructuring and other.......................... (1) 6 79 ------------ ------------ ------------ 2,493 2,456 2,247 OPERATING INCOME................................... 424 300 297 OTHER INCOME (EXPENSE) Interest income.................................. 6 4 2 Realized foreign-currency exchange gain.......... 31 -- -- Interest expense, net of interest capitalized.... (73) (82) (85) Share of income of joint ventures................ 3 2 2 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES......................... 391 224 216 Income tax expense................................. 114 81 78 ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS.................. 277 143 138 Discontinued operations, net of tax................ (3) (89) 17 ------------ ------------ ------------ NET INCOME......................................... $ 274 $ 54 $ 155 ------------ ------------ ------------ EARNINGS PER SHARE Weighted-average number of shares of common stock outstanding Basic............................................ 137,865,929 147,182,776 151,289,798 Diluted.......................................... 139,704,381 148,849,418 153,763,156 Basic earnings (loss) per share of common stock Continuing operations............................ $ 2.01 $ 0.97 $ 0.91 Discontinued operations.......................... (0.02) (0.60) 0.11 ------------ ------------ ------------ Total............................................ $ 1.99 $ 0.37 $ 1.02 ------------ ------------ ------------ Diluted earnings (loss) per share of common stock Continuing operations............................ $ 1.98 $ 0.96 $ 0.90 Discontinued operations.......................... (0.02) (0.60) 0.11 ------------ ------------ ------------ Total............................................ $ 1.96 $ 0.36 $ 1.01 ------------ ------------ ------------
The accompanying notes to the financial statements are an integral part of this statement. 26 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2006 DECEMBER 31, 2005 AT DECEMBER 31 (In millions, except share data) -------------------- -------------------- ASSETS Current assets Cash and temporary cash investments....................... $ 181 $ 172 Accounts and notes receivable Trade, less allowances of $9 and $8 at the respective dates................................................ 310 299 Other.................................................. 13 20 ------ ------ Total accounts and notes receivable.................... 323 319 ------ ------ Inventories Finished goods......................................... 144 148 Work in process........................................ 52 41 Raw materials.......................................... 61 61 Other materials and supplies........................... 39 39 ------ ------ Total inventories...................................... 296 289 ------ ------ Other..................................................... 38 40 ------ ------ Total current assets...................................... 838 820 ------ ------ Property, plant, and equipment, net......................... 1,093 1,141 ------ ------ Other assets Goodwill.................................................. 525 527 Intangible assets, net.................................... 238 260 Other..................................................... 64 72 ------ ------ Total other assets........................................ 827 859 ------ ------ TOTAL ASSETS................................................ $2,758 $2,820 ------ ------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term debt, including current maturities of long-term debt................................................... $ 98 $ 3 Accounts payable.......................................... 152 179 Taxes accrued............................................. 54 32 Interest accrued.......................................... 8 8 Accrued promotions, rebates, and discounts................ 77 70 Accrued payroll and benefits.............................. 82 69 Other..................................................... 63 75 Liabilities from discontinued operations.................. 15 20 ------ ------ Total current liabilities................................. 549 456 ------ ------ Long-term debt.............................................. 771 869 ------ ------ Deferred income taxes....................................... 120 104 ------ ------ Pension and postretirement benefits......................... 403 525 ------ ------ Other....................................................... 53 37 ------ ------ Minority interest........................................... 9 9 ------ ------ Shareholders' equity Common stock (132,676,408 and 142,362,441 shares issued and outstanding, after deducting 39,106,769 and 29,420,736 shares held in treasury, at the respective dates)................................................. 1 2 Premium on common stock and other capital surplus......... 757 1,021 Accumulated other comprehensive income (loss) Currency translation adjustment........................ 10 34 Pension funded status.................................. (1,072) (1,120) Retained earnings......................................... 1,157 883 ------ ------ Total shareholders' equity................................ 853 820 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $2,758 $2,820 ------ ------
The accompanying notes to the financial statements are an integral part of this statement. 27 CONSOLIDATED STATEMENT OF CASH FLOWS
2006 2005 2004 FOR YEARS ENDING DECEMBER 31 (In millions) ----- ----- ----- OPERATING ACTIVITIES Net income.................................................. $ 274 $ 54 $ 155 Less results from discontinued operations................... 3 89 (17) ----- ----- ----- Income from continuing operations........................... 277 143 138 Adjustments to reconcile income from continuing operations to cash provided by operating activities -- continuing operations: Depreciation and amortization............................. 145 146 139 Deferred income taxes..................................... (19) 20 39 Restructuring and other................................... (1) (1) 32 Pension income............................................ (42) (54) (56) Noncash compensation expense.............................. 5 -- -- Realized foreign-exchange gain............................ (31) -- -- Changes in components of working capital Increase in receivables................................ (6) (30) (3) (Increase) decrease in inventories..................... (5) 25 4 (Increase) decrease in prepayments and other current assets................................................ (2) 2 4 Increase (decrease) in accounts payable................ (27) (7) 33 Increase (decrease) in taxes accrued................... 58 30 4 Decrease in interest accrued........................... -- (1) -- Increase (decrease) in other current liabilities....... 23 5 (5) Other..................................................... 11 (8) 4 ----- ----- ----- Cash provided by operating activities -- continuing operations................................................ 386 270 333 Cash provided (used) by operating activities -- discontinued operations................................................ (14) (4) 33 ----- ----- ----- CASH PROVIDED BY OPERATING ACTIVITIES....................... $ 372 $ 266 $ 366 ----- ----- ----- INVESTING ACTIVITIES Expenditures for property, plant, and equipment -- continuing operations........................ (78) (121) (78) Acquisitions of businesses and assets....................... -- (98) -- Proceeds from the sale of a business or assets.............. 3 524 2 ----- ----- ----- Cash provided (used) by investing activities -- continuing operations................................................ (75) 305 (76) Expenditures for property, plant, and equipment -- discontinued operations...................... -- (22) (22) Other discontinued operations investing activities.......... -- -- 7 ----- ----- ----- CASH PROVIDED (USED) BY INVESTING ACTIVITIES................ $ (75) $ 283 $ (91) ----- ----- ----- FINANCING ACTIVITIES Issuance of common stock.................................... 73 28 33 Purchase of common stock.................................... (369) (164) (230) Issuance of long-term debt.................................. -- 142 -- Retirement of long-term debt................................ -- (610) -- Net increase in short-term debt, excluding current maturities of long-term debt.............................. 2 9 -- ----- ----- ----- CASH USED BY FINANCING ACTIVITIES -- CONTINUING OPERATIONS................................................ $(294) $(595) $(197) ----- ----- ----- Effect of foreign-exchange rate changes on cash and temporary cash investments................................ 6 (4) 4 ----- ----- ----- INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS............................................... 9 (50) 82 Cash and temporary cash investments, January 1.............. 172 222 140 ----- ----- ----- CASH AND TEMPORARY CASH INVESTMENTS, DECEMBER 31............ $ 181 $ 172 $ 222 ----- ----- ----- SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION Cash paid for interest...................................... $ 73 $ 96 $ 100 Cash paid for income taxes -- continuing operations......... 73 31 35 Cash paid for income taxes -- discontinued operations....... 10 17 6
The accompanying notes to the financial statements are an integral part of this statement. 28 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PREMIUM ON ACCUMULATED COMMON STOCK OTHER TOTAL TOTAL COMMON AND OTHER RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE STOCK CAPITAL SURPLUS EARNINGS INCOME (LOSS) EQUITY INCOME (LOSS) (In millions, except share amounts) ------ --------------- -------- ------------- ------------- ------------- BALANCE, DECEMBER 31, 2003....... $ 2 $1,326 $ 674 $ (941) $1,061 Premium on common stock issued (2,524,346 shares)............. 45 45 Treasury stock repurchased (10,148,500 shares)............ (230) (230) Translation of foreign-currency statements..................... 33 33 $ 33 Additional minimum pension- liability adjustment, net of tax of $12......................... 19 19 19 Net income....................... 155 155 155 ---- Total comprehensive income....... 207 --- ------ ------ ------- ------ ---- BALANCE, DECEMBER 31, 2004....... 2 1,141 829 (889) 1,083 Premium on common stock issued (2,264,848 shares)............. 44 44 Treasury stock repurchased (8,614,222 shares)............. (164) (164) Translation of foreign-currency statements..................... (56) (56) (56) Additional minimum pension- liability adjustment, net of tax of $158........................ (141) (141) (141) Net income....................... 54 54 54 ---- Total comprehensive loss......... (143) --- ------ ------ ------- ------ ---- BALANCE, DECEMBER 31, 2005....... 2 1,021 883 (1,086) 820 Premium on common stock issued (4,218,967 shares)............. 74 74 Treasury stock repurchased (13,905,000 shares)............ (1) (368) (369) Non-cash realized foreign-currency exchange gain.................. (31) (31) (31) Translation of foreign-currency statements..................... 7 7 7 Stock-based compensation......... 30 30 Additional minimum pension- liability adjustment, net of tax of $55, before adopting SFAS No. 158(a)......................... 89 89 89 Impact of adopting SFAS No. 158 net of tax of ($36)................ (41) (41) Net income....................... 274 274 274 ---- TOTAL COMPREHENSIVE INCOME....... $339 --- ------ ------ ------- ------ ---- BALANCE, DECEMBER 31, 2006....... $ 1 $ 757 $1,157 $(1,062) $ 853 --- ------ ------ ------- ------
- --------------- (a) Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans." The accompanying notes to the financial statements are an integral part of this statement. 29 NOTES TO FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION Financial statements for all periods presented in this report are prepared on a consolidated basis in accordance with generally accepted accounting principles consistently applied. All per-share information is presented on a diluted basis unless otherwise noted. Certain reclassifications have been made to prior- years' financial information to conform to current-year presentation. On October 12, 2005, we completed the sale of most of our protective- and flexible-packaging businesses to Pregis Corporation. These businesses historically were included in our Protective and Flexible Packaging segment. In conjunction with the sale of these entities, we reviewed our reporting segments in concert with requirements of the Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information." As a result, we elected to include the retained portions of the protective- and flexible-packaging businesses in our Foodservice/Food Packaging segment. We have three reporting segments: - Consumer Products manufactures disposable plastic, foam, molded-fiber, pressed-paperboard, and aluminum packaging products, and sells them to customers such as grocery stores, mass merchandisers, and discount chains. Products include waste bags, food-storage bags, and disposable tableware and cookware. We sell many of our consumer products under well-known trademarks, such as Hefty(R). - Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed-paperboard, and molded-fiber packaging products, and sells them to customers in the food-distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, other institutional foodservice outlets, food processors, and grocery chains. - Other relates to corporate and administrative-service operations and retiree-benefit income and expense. The accounting policies of the reporting segments are the same as those for Pactiv as a whole. Where discrete financial information is not available by segment, reasonable allocations of expenses and assets/ liabilities are used. NOTE 2. SUMMARY OF ACCOUNTING POLICIES CONSOLIDATION Our financial statements include all majority-owned subsidiaries. Investments in 20%- to 50%-owned companies in which we have the ability to exert significant influence over operating and financial policies are carried at cost plus our share of change in equity earnings since date of acquisition. All intercompany transactions are eliminated. 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 weighted-average exchange rates for sales, expenses, gains, and losses. Translation adjustments are recorded as a component of shareholders' equity. CASH AND TEMPORARY CASH INVESTMENTS We define 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. 30 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) ACCOUNTS AND NOTES RECEIVABLE Trade accounts receivable are classified as current assets and are reported net of allowances for doubtful accounts. We record such allowances based on a number of factors, including historical trends and specific customer liquidity. On a recurring basis, we sell an undivided interest in a pool of trade receivables meeting certain criteria to a third party as an alternative to debt financing. Such sales, which represent a form of off-balance-sheet financing, are recorded as a reduction of accounts and notes receivable in the Statement of Financial Position. The related proceeds are included in cash provided by operating activities in the Statement of Cash Flows. No receivables were sold at December 31, 2006, or December 31, 2005. Discounts and fees related to these sales were not material in 2006, were $2 million in 2005, and were not material in 2004. These expenses are included in other expense in the Statement of Income. In the event that either Pactiv or the third-party purchaser of the trade receivables were to discontinue this program, our debt would increase, or our cash balance would decrease, by an amount corresponding to the level of sold receivables at such time. INVENTORIES Our inventories are stated at the lower of cost or market. A portion of inventories (55% and 62% at December 31, 2006, and 2005, respectively) is valued using the last-in, first-out (LIFO) method of accounting. All other inventories are valued using 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 $59 million higher at December 31, 2006, and $55 million higher at December 31, 2005. 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. Depreciation expense totaled $129 million, $129 million, and $124 million for the years ended December 31, 2006, 2005, and 2004, respectively. We capitalize certain costs related to the purchase and development of software used in our 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 $31 million and $38 million at December 31, 2006, and 2005, respectively. We periodically re-evaluate carrying values and estimated useful lives of long-lived assets to determine if adjustments are warranted. We use 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. GOODWILL AND INTANGIBLES, NET In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we review our goodwill and indefinite-lived intangibles for possible impairment. Our annual review is conducted in the fourth quarter of the year, or earlier if warranted by events or changes in circumstances. Possible impairment of goodwill and indefinite-lived intangibles is determined using a two-step process. - The first step requires that the fair value of individual reporting units be compared with their respective carrying values. If the carrying value of a reporting unit exceeds its fair value, a second step is performed to measure the amount of impairment, if any. 31 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - The second step requires that the fair value of a reporting unit be allocated to all of its assets and liabilities, including indefinite-lived intangibles. Any remaining fair value is the implied goodwill, which is then compared with the carrying value of goodwill to determine possible impairment. Estimates of fair value used in testing goodwill and indefinite-lived intangible assets for possible impairment are primarily determined using projected discounted cash flows, along with other publicly available market information. These approaches use estimates and assumptions, including the amount and timing of projected cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, and appropriate market comparables. Intangible assets that are not deemed to have an indefinite life are amortized over their useful lives. We assess the recoverability of the carrying value of such assets based on expected undiscounted cash flows, excluding interest charges, and record an impairment loss if the carrying amount of such assets exceeds the fair value. See Note 8 for additional information. ENVIRONMENTAL LIABILITIES We are subject to a variety of environmental and pollution-control laws and regulations. From time to time, we identify costs or liabilities arising from compliance with environmental laws and regulations. When related liabilities are probable and can be reasonably estimated, we establish appropriate reserves. Estimated liabilities may change as additional information becomes available. We appropriately adjust our reserves as new information on possible clean-up costs, expense and effectiveness of alternative clean-up methods, and other potential liabilities is received. We do not expect that any additional liabilities recorded as a result of the availability of new information will have a material adverse effect on our financial position. However, such costs could have a material effect on our results of operations or cash flows in a particular period. REVENUE RECOGNITION We recognize sales when the risks and rewards of ownership have transferred to the customer, which generally occurs as products are shipped. FREIGHT We record amounts billed to customers for shipping and handling as sales, and record shipping and handling expenses as cost of sales. GENERAL AND ADMINISTRATIVE EXPENSES With the exception of pension-service costs associated with our production operations, which approximated $7 million in 2006, and $6 million in both 2005 and 2004, we record pension income as an offset to selling, general, and administrative expenses. Noncash pension income was $49 million in 2006, $60 million in 2005, and $62 million in 2004. RESEARCH AND DEVELOPMENT Research and development costs, which are expensed as incurred, totaled $33 million in both 2006 and 2005 and $28 million in 2004. 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 $21 million in 2006, $16 million in 2005, and $11 million in 2004. 32 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STOCK-BASED COMPENSATION In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) "Share-Based Payments," which requires that the fair value of all share-based payments to employees, including stock options, be recognized in financial statements. SFAS No. 123(R) superseded Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," which required that the intrinsic-value method be used in determining compensation expense for share-based payments to employees. Under SFAS No. 123(R), employee-compensation expense is based on the grant-date fair value of awards, and is recognized in the Statement of Income over the period that recipients of awards are required to provide related service (normally the vesting period). Effective January 1, 2006, we adopted the fair-value method of accounting for employee stock-compensation costs as outlined in SFAS No. 123(R). Prior to that date, we used the intrinsic-value method in accordance with requirements of APB Opinion No. 25. The following table shows the effects on net income and earnings per share had the fair-value method been used in determining stock-based compensation costs in 2005 and 2004.
2005 2004 (In millions, except per-share data) ------ ------ NET INCOME As reported................................................. $ 54 $ 155 After-tax adjustment of stock-based compensation costs Intrinsic-value method.................................... 5 3 Fair-value method......................................... (17) (13) ------ ------ Pro forma................................................... $ 42 $ 145 ------ ------ EARNINGS PER SHARE Basic As reported................................................. $ 0.37 $ 1.02 Adjustment of stock-based compensation costs Intrinsic-value method.................................... 0.03 0.02 Fair-value method......................................... (0.12) (0.08) ------ ------ Pro forma................................................... $ 0.28 $ 0.96 ------ ------ Diluted As reported................................................. $ 0.36 $ 1.01 Adjustment of stock-based compensation costs Intrinsic-value method.................................... 0.03 0.02 Fair-value method......................................... (0.11) (0.08) ------ ------ Pro forma................................................... $ 0.28 $ 0.95 ------ ------
Effective November 28, 2005, our board of directors replaced stock options with performance shares under our long-term compensation program. As part of this change, the board accelerated the vesting of all unvested stock options as of that date. Accelerating the vesting of options will give rise to a reduction in compensation costs going forward, compared with what would have been the case if we had commenced the expensing of these options in 2006. INCOME TAXES We use the asset and liability method of accounting for income taxes. This method requires that deferred-tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the tax and financial-statement basis of assets and liabilities. If we determine that it is more likely than not that a portion of deferred-tax assets will not be realized in a future period, we reduce deferred-tax 33 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) assets by recording a valuation allowance. Estimates used to recognize deferred-tax assets are subject to revision in subsequent periods based on new facts or circumstances. We do not provide for U.S. federal income taxes on unremitted earnings of foreign subsidiaries because we intend to reinvest those earnings in foreign operations. Unremitted earnings of foreign subsidiaries totaled $40 million at December 31, 2006, and $41 million at December 31, 2005. The unrecognized deferred-tax liability associated with unremitted earnings totaled approximately $6 million at December 31, 2006, and $4 million at December 31, 2005. On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law. This act allowed us to take a special, one-time tax deduction of 85% of certain repatriated foreign earnings. In the fourth quarter of 2005, we repatriated $147 million of the accumulated foreign earnings of our discontinued foreign operations, and recorded a related tax expense of $5 million. 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. RISK MANAGEMENT From time to time, we use derivative financial instruments to hedge our exposure to changes in foreign-currency exchange rates, principally using foreign-currency purchase and sale contracts with terms of less than 1 year. Net gains or losses on such contracts are recognized in the Statement of Income as offsets to foreign-currency gains or losses on the underlying transactions. In the Statement of Cash Flows, cash receipts and payments related to hedging 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. Interest-rate swaps are recorded at their fair value at each reporting date, with an equal offset either in earnings or other accumulated comprehensive income depending on the designation (or lack thereof) for each swap as a hedging instrument. From time to time, we employ commodity forward or other derivative contracts to hedge our exposure to adverse changes in the price levels of certain commodities. These instruments are intended to limit the risk on purchases of commodities used in our production processes. Gains and losses on derivative contracts were not material in 2006, 2005, and 2004. We do not use derivative financial instruments for speculative purposes. CHANGES IN ACCOUNTING PRINCIPLES We adopted SFAS No. 123(R) using the modified prospective method as of January 1, 2006. The impact if SFAS No. 123(R) had been adopted in prior periods is shown in the "Stock Based Compensation" section of this note. The one-time cumulative adjustment recorded in connection with adopting SFAS No. 123(R) was immaterial for the twelve months ended December 31, 2006. We elected to use the simplified method in calculating our additional paid-in capital pool upon adoption of SFAS No. 123(R), as described in FASB Staff Position No. FAS 123(R) -- 3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." SFAS No. 123(R) requires that tax deductions for compensation costs in excess of amounts recognized for accounting purposes be reported as cash flow from financing activities, rather than as cash flow from operating activities. Such "excess" amounts totaled $4 million in 2006 and $6 million in both 2005 and 2004. 34 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes," which clarifies the application of SFAS No. 109, "Accounting for Income Taxes." FIN No. 48 establishes a threshold condition that a tax position must meet for any part of the benefit of such a position to be recognized in the financial statements. In addition, FIN No. 48 provides guidance regarding measurement, derecognition, classification, and disclosure of tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are currently reviewing FIN No. 48 and evaluating its potential impact on our financial statements. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- an Amendment of SFAS Nos. 87, 88, 106, and 132(R)." SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined-benefit postretirement plan as assets or liabilities in their statement of financial position. In this connection, previously disclosed but unrecognized gains or losses, prior-service costs or credits, and transition assets or obligations must be recognized upon adoption as a component of accumulated other comprehensive income, net of applicable taxes. SFAS No. 158 also requires that additional disclosures be provided in the notes to the financial statements regarding the impact on net periodic-benefit costs of delaying the recognition of gains or losses, prior-service costs or credits, and transition assets or obligations. These changes are effective for fiscal years ending after December 15, 2006. In addition, effective for fiscal years beginning after December 31, 2008, SFAS No. 158 precludes companies from using other than their fiscal year-end date to measure plan assets and obligations. We adopted the recognition and disclosure provision of SFAS No. 158 on December 31, 2006. We recorded a charge to accumulated other comprehensive income of $41 million upon adoption. See Note 13 for additional information. 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 3. RESTRUCTURING AND OTHER In the first quarter of 2004, we announced a restructuring program to reduce manufacturing capacity and overhead costs and to reinvest a portion of the related savings in strategic growth initiatives. Implementation of the program resulted in the elimination of approximately 850 salaried and hourly positions worldwide. The total cost of the restructuring program was approximately $84 million, $54 million after tax, or $0.35 per share, covering severance, asset write-offs, and other, which consisted principally of asset-removal costs. The majority of the program was executed in the second quarter of 2004. After-tax cash payments related to the restructuring and other actions totaled $4 million in 2005, and $9 million in 2004. 35 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes impacts of the restructuring and related actions.
ASSET SEVERANCE WRITE-OFFS OTHER(1) TOTAL (In millions) --------- ---------- --------- ----- Accrued restructuring balance at January 1, 2005......... $ 3 $-- $ 7 $10 --- --- --- --- Additions/adjustments to the account Consumer Products...................................... 1 -- -- 1 Foodservice/Food Packaging............................. (1) 7 (1) 5 --- --- --- --- Total additions/adjustments............................ 7 (1) 6 Cash payments............................................ (3) -- (4) (7) Charges against asset accounts........................... -- (7) -- (7) --- --- --- --- Accrued restructuring balance at December 31, 2005....... $-- $-- $ 2 $ 2 --- --- --- --- Additions/adjustments to the account Consumer Products...................................... -- -- -- -- Foodservice/Food Packaging............................. -- -- (1) (1) --- --- --- --- Total additions/adjustments............................ -- -- (1) (1) Cash payments............................................ -- -- -- -- --- --- --- --- Accrued restructuring balance at December 31, 2006....... $-- $-- $ 1 $ 1 --- --- --- --- CUMULATIVE RESTRUCTURING COSTS AT DECEMBER 31, 2006 Consumer Products...................................... $ 5 $-- $-- $ 5 Foodservice/Food Packaging............................. 10 31 35 76 Other.................................................. -- -- 3 3 --- --- --- --- TOTAL.................................................... $15 $31 $38 $84 --- --- --- ---
- --------------- (1) Principally asset-removal costs. NOTE 4. ACQUISITIONS On March 15, 2005, we acquired Newspring Industrial Corp. (Newspring) for $98 million. Newspring is a leading supplier of thin wall, injection-molded polypropylene products for use in the takeout, delicatessen, and foodservice markets. We paid $87 million for the stock of Newspring and recorded liabilities of $11 million for anticipated future payments related to non-compete agreements and other items. Appraisals of the fair-market value of the assets acquired were finalized during 2006. This resulted in goodwill being reduced by $1 million and other intangibles, property, plant, and equipment, and deferred-tax liabilities being increased by $2 million, $7 million, and $8 million, respectively. NOTE 5. DISCONTINUED OPERATIONS On October 12, 2005, we completed the sale of most of our protective- and flexible-packaging businesses to Pregis Corporation for $523 million. Results of these businesses are reported in our financial statements as discontinued operations. 36 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Income (loss) from discontinued operations in 2006, 2005, and 2004 (see Note 1) was as follows:
2006 2005 2004 DECEMBER 31 (In millions) ---- ---- ---- Sales....................................................... $-- $695 $839 --- ---- ---- Income from operations, net of tax of $0, $13, and $12, respectively.............................................. (3) 18 17 Professional fees and other costs associated with the sale of the businesses......................................... -- (15) -- Goodwill impairment, net of tax of $12...................... -- (37) -- Estimated loss on the sale of the businesses, net of tax of $28 million............................................... -- (50) -- Tax on repatriated foreign earnings......................... -- (5) -- --- ---- ---- Net income (loss) from discontinued operations.............. $(3) $(89) $ 17 --- ---- ----
In 2006, we recorded a loss on discontinued operations of $3 million related to final working-capital adjustments and taxes. Liabilities related to discontinued operations totaled $15 million at December 31, 2006, and $20 million at December 31, 2005, and included obligations related to income taxes, certain royalty payments, and the costs of closing a facility in Europe. Income (loss) from discontinued operations included an allocation of interest expense for 2005 and 2004. Amounts allocated were based on the ratio of the net assets of discontinued operations to the company's total net assets plus consolidated debt. For 2005, interest expense was allocated through October 12, the date of sale of the protective- and flexible-packaging businesses. Amounts allocated were $11 million for 2005 and $15 million for 2004. The buyer of the businesses did not assume the debt of the discontinued operations. In addition, we did not have any debt-repayment requirements as a result of the sale. On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law. This act allowed us to take a special, one-time tax deduction of 85% of certain repatriated foreign earnings. In the fourth quarter of 2005, we repatriated $147 million of the accumulated foreign earnings of our discontinued operations, and recorded a related tax expense of $5 million. NOTE 6. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS LONG-TERM DEBT
2006 2005 DECEMBER 31 (In millions) ---- ---- Notes due 2007, effective interest rate of 8.0%............. $ -- $ 98 Debentures due 2017, effective interest rate of 8.1%........ 300 300 Debentures due 2025, effective interest rate of 7.9%, net of $1 million of unamortized discount........................ 275 275 Debentures due 2027, effective interest rate of 8.4%, net of $4 million of unamortized discount........................ 196 196 ---- ---- Total long-term debt........................................ $771 $869 ---- ----
At December 31, 2006, aggregate maturities of debt outstanding were $776 million after 2016. We were in full compliance with financial and other covenants in our various credit agreements at December 31, 2006. SHORT-TERM DEBT
2006 2005 DECEMBER 31 (In millions) ---- ---- Current maturities of long-term debt........................ $98 $-- Other....................................................... -- 3 --- -- Total short-term debt....................................... $98 $3 --- --
37 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) We use lines of credit and overnight borrowings to finance certain of our short-term capital requirements. Information regarding short-term debt, excluding current maturities of long-term debt, is shown below. We had no short-term borrowings in 2006.
2005(A) DECEMBER 31 (In millions) ------- Borrowings at end of year................................... $ 3 Weighted-average interest rate on borrowings at end of year...................................................... 4.8% Maximum month-end borrowings during year.................... 4 Average month-end borrowings during year.................... 4 Weighted-average interest rate on average month-end borrowings during year.................................... 4.8%
- --------------- (a) Includes borrowings under committed credit facilities and uncommitted lines of credit. In 1999, our former parent, Tenneco Inc. (Tenneco) realigned certain of its debt in preparation for the spin-off of Pactiv. In conjunction with this realignment, we entered into an interest-rate swap to hedge our exposure to interest-rate movement. We settled this swap in November 1999 at a loss of $43 million. The loss on the swap is being recognized as additional interest expense over the life of the underlying debentures. At December 31, 2006, the unamortized balance was $38 million. NOTE 7. FINANCIAL INSTRUMENTS ASSET AND LIABILITY INSTRUMENTS At December 31, 2006, and 2005, the fair value of cash and temporary cash investments, short- and long-term receivables, accounts payable, and short-term debt were the same as, or not materially different than, the amounts recorded for these assets and liabilities. The fair value of long-term debt at December 31, 2006, and 2005, was approximately $871 million and $987 million, respectively. The recorded amount was $771 million at December 31, 2006, and $869 million at December 31, 2005. The fair value of long-term debt was based on quoted market prices for our debt instruments. INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (INCLUDING DERIVATIVES) We use derivative instruments, principally swaps, forward contracts, and options, to manage our exposure to movements in foreign-currency values, interest rates, and commodity prices. Amounts recognized in earnings related to our hedging transactions were not material in 2006, 2005, or 2004. From time to time, we enter into foreign-currency forward contracts with terms of less than 1 year. We do so to mitigate our exposure to exchange-rate changes related to third-party trade receivables and accounts payable. We had no open foreign currency contracts as of December 31, 2006. During the fourth quarter of 2006, we entered into natural gas commodity purchase agreements with third parties, hedging a portion of anticipated first-quarter 2007 purchases of natural gas used in the production process at certain of our plants. These purchase agreements are marked to market, with the resulting gains or losses recognized in earnings when hedged transactions are recorded. The mark-to-market adjustments at December 31, 2006, were not material. 38 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. GOODWILL AND INTANGIBLE ASSETS Changes in the carrying value of goodwill during 2006 and 2005 by operating segment are shown in the following table.
TOTAL CONSUMER FOODSERVICE/ CONTINUING PRODUCTS FOOD PACKAGING OPERATIONS (In millions) -------- -------------- ---------- Balance, December 31, 2004................................ $136 $326 $462 Goodwill additions........................................ -- 63 63 Foreign-currency translation adjustment................... -- 2 2 ---- ---- ---- Balance, December 31, 2005................................ $136 $391 $527 ---- ---- ---- Goodwill adjustment -- prior acquisitions................. -- (1) (1) Foreign-currency translation adjustment................... -- (1) (1) ---- ---- ---- Balance, December 31, 2006................................ $136 $389 $525 ---- ---- ----
Details of intangible assets are shown in the following table.
DECEMBER 31, 2006 DECEMBER 31, 2005 ----------------------------- ----------------------------- ACCUMULATED ACCUMULATED CARRYING VALUE AMORTIZATION CARRYING VALUE AMORTIZATION (In millions) -------------- ------------ -------------- ------------ Intangible assets subject to amortization Patents................................. $ 87 $ 59 $ 85 $ 52 Other................................... 148 67 157 59 ---- ---- ---- ---- 235 126 242 111 Intangible assets not subject to amortization (primarily trademarks)..... 129 -- 129 -- ---- ---- ---- ---- $364 $126 $371 $111 ---- ---- ---- ----
A pension-related intangible of $9 million was eliminated as a result of adjusting our minimum pension liability prior to adopting SFAS No. 158. The weighted-average amortization period used for patents and other intangible assets subject to amortization is 15 years and 22 years, respectively. Amortization of intangible assets was $14 million for the year ended December 31, 2006. Amortization expense is estimated to total $14 million, $13 million, $12 million, $11 million, and $10 million for 2007, 2008, 2009, 2010, and 2011, respectively. NOTE 9. PROPERTY, PLANT, AND EQUIPMENT, NET
2006 2005 DECEMBER 31 (In millions) ------ ------ Original cost Land, buildings, and improvements......................... $ 645 $ 636 Machinery and equipment................................... 1,507 1,454 Other, including construction in progress................. 82 94 ------ ------ $2,234 $2,184 Less accumulated depreciation and amortization.............. (1,141) (1,043) ------ ------ Net property, plant, and equipment.......................... $1,093 $1,141 ------ ------
Capitalized interest was $2 million in 2006, $3 million in 2005, and $2 million in 2004. 39 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10. INCOME TAXES Details of income (loss) from continuing operations before income taxes are shown below.
2006 2005 2004 (In millions) ---- ---- ---- Income (loss) from continuing operations before income taxes U.S. operations........................................... $368 $218 $249 Foreign operations........................................ 23 6 (33) ---- ---- ---- Total....................................................... $391 $224 $216 ---- ---- ----
Shown below are details of income-tax expense for continuing operations.
2006 2005 2004 (In millions) ---- ---- ---- Current Federal................................................... $109 $47 $28 State and local........................................... 16 3 1 Foreign................................................... 4 11 7 ---- --- --- 129 61 36 ---- --- --- Deferred Federal................................................... (14) 13 39 State and local........................................... (5) 5 6 Foreign................................................... 4 2 (3) ---- --- --- (15) 20 42 ---- --- --- Total income-tax expense -- continuing operations........... $114 $81 $78 ---- --- ---
In the third quarter of 2006, we reduced our accrued income taxes by $27 million, which gave rise to an increase of $29 million, or $0.21 per share, in income from continuing operations, for the year ended December 31, 2006, and a decrease of $2 million, or $0.02 per share, in income from discontinued operations for the same period. These adjustments, which were related principally to matters associated with our separation from Tenneco in 1999, reflected (1) a reduction in accrued income taxes of $40 million due to the expiration of the statute of limitations for prior tax years and (2) an increase in other accruals for income-tax liabilities of $13 million, primarily related to the status of tax audits in Europe. A reconciliation of the difference between the U.S. statutory federal income-tax rate and our effective income-tax rate is shown in the following table.
2006 2005 2004 ----- ---- ---- U.S. statutory federal income-tax rate...................... 35.0% 35.0% 35.0% Increase (decrease) in income-tax rate Foreign income taxed at various rates..................... -- 2.2 7.0 State and local taxes on income, net of U.S. federal income-tax benefit..................................... 2.4 1.5 2.2 Foreign branch losses..................................... -- (1.2) (5.4) Domestic production deduction............................. (0.7) (0.6) -- Research and experimentation credit....................... (0.1) (0.5) (2.5) Income-tax liability increase............................. 2.4 -- -- Income-tax liability decrease............................. (10.1) -- -- Other..................................................... 0.2 (0.4) (0.1) ----- ---- ---- Effective income-tax rate................................... 29.1% 36.0% 36.2% ----- ---- ----
Summarized below are the components of our net deferred-tax liabilities. 40 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2006 2005 DECEMBER 31 (In millions) ---- ---- Deferred-tax assets Tax-loss carryforwards Federal................................................ $ 15 $ -- State and local........................................ 3 3 Foreign................................................ 25 26 Pensions.................................................. 161 202 Post-retirement benefits.................................. 40 36 Other items............................................... 45 47 Valuation allowance(1).................................... (42) (24) ---- ---- Total deferred-tax liabilities............................ $247 $290 ---- ---- Deferred-tax liabilities Property and equipment.................................... 276 278 Other items............................................... 64 86 ---- ---- Total deferred-tax liabilities............................ 340 364 ---- ---- Net deferred-tax liabilities................................ $ 93 $ 74 ---- ----
- --------------- (1) Related to federal, state, and foreign tax loss carryforwards, and other deferred tax assets. We had federal capital loss carryforwards of $15 million as of December 31, 2006, which will expire in 2011. State tax-loss carryforwards at December 31, 2006, ($29 million) will expire at various dates from 2010 to 2018. Foreign tax-loss carryforwards at December 31, 2006, totaled $92 million, of which $29 million will expire at various dates from 2007 to 2015, with the balance having unlimited lives. In July 2006, the FASB issued FIN No. 48, which clarifies the application of SFAS No. 109. FIN No. 48 establishes a threshold condition that a tax position must meet for any part of the benefit of such a position to be recognized in the financial statements. In addition, FIN No. 48 provides guidance regarding measurement, derecognition, classification, and disclosure of tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are currently reviewing FIN No. 48, and evaluating its potential impact on our financial statements. NOTE 11. COMMON STOCK We have 350 million shares of common stock ($0.01 par value) authorized, of which 132,676,408 shares were issued and outstanding as of December 31, 2006. RESERVES Reserved shares at December 31, 2006 were as follows:
(In thousands) Thrift plans................................................ 860 2002 incentive-compensation plan............................ 18,412 Employee Stock purchase plan................................ 1,884 ------ Total....................................................... 21,156 ------
STOCK PLANS 2002 Incentive-Compensation Plan -- In November 1999, we initiated a stock-ownership plan that permits the granting of a variety of incentives, including common stock, restricted stock, performance shares, stock-appreciation rights, and stock options, to directors, officers, and employees. In May 2002, the 1999 plan was succeeded by the 2002 plan, and all balances under the 1999 plan were transferred to the new plan, which remains in effect until amended or terminated. Under the 2002 plan, up to 27 million shares 41 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) of common stock can be issued (including shares issued under the prior plan), of which 17 million were issued or granted as of December 31, 2006. Restricted-stock, performance-share, and stock-option awards generally require that, among other things, grantees remain with the company for certain periods of time. Performance shares granted under the plan vest upon the attainment of specified performance goals in the 3 years following the date of grant. Changes in performance-share balances were as follows:
PERFORMANCE SHARES ----------- Outstanding, December 31, 2004.............................. 632,386 Granted................................................... 532,173 Canceled.................................................. (41,275) Paid...................................................... (223,937) --------- Outstanding, December 31, 2005.............................. 899,347 Granted................................................... 653,146 Canceled.................................................. (20,678) Paid...................................................... (147,959) --------- Outstanding, December 31, 2006.............................. 1,383,856 ---------
Additional information related to performance-shares is as follows:
WEIGHTED-AVERAGE PRE-TAX ASSOCIATED GRANT-DATE FAIR COMPENSATION TAX IMPACT ON VALUE PER SHARE EXPENSE BENEFIT NET INCOME (In millions, except share data) ---------------- ------------ ----------- ---------- 2006......................................... $22.20 $17 $6 $11 2005......................................... 19.84 8 3 5 2004......................................... 22.06 4 2 2
There is $17 million, after tax, of unamortized performance-share expenses at December 31, 2006, of which $9 million and $8 million, after tax, will be charged to net income in 2007 and 2008, respectively. Summarized below are changes in stock-option balances.
SHARES UNDER WEIGHTED-AVERAGE OPTION EXERCISE PRICE ------------ ---------------- Outstanding, January 1, 2005................................ 14,317,588 $21.89 Granted................................................... 15,470 20.65 Exercised................................................. (1,591,381) 15.14 Canceled.................................................. (551,381) 29.12 ---------- Outstanding and exercisable, December 31, 2005.............. 12,190,296 22.45 ---------- Outstanding, January 1, 2006................................ 12,190,296 22.45 Exercised................................................. (4,166,947) 17.71 Canceled.................................................. (1,186,762) 37.40 ---------- Outstanding, December 31, 2006.............................. 6,836,587 22.74 ---------- Exercisable, December 31, 2006.............................. 6,833,079 22.74 ----------
42 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Stock options expire 10 to 20 years following the date of grant. The weighted-average fair value of options granted in 2005 ($4.99) was determined using the Black-Scholes option-pricing model with the following assumptions:
2005 2004 ---- ---- ACTUARIAL ASSUMPTIONS Risk-free interest rate................................... 4.1% 3.4% Life (years).............................................. 0.9 4.5 Volatility................................................ 19.7% 34.1%
Options granted in 2005 principally represented shares acquired under the employee stock-purchase plan that were treated as stock options in accordance with requirements of SFAS No. 123(R). These options had a life of less than 1 year and therefore had a low Black-Scholes value. Summarized below is information regarding stock options outstanding and exercisable at December 31, 2006.
OUTSTANDING OPTIONS ---------------------------------------- WEIGHTED- WEIGHTED-AVERAGE AVERAGE REMAINING EXERCISE NUMBER CONTRACTUAL LIFE PRICE RANGE OF EXERCISE PRICE --------- ---------------- --------- $7 to $12.............................................. 266,071 3.8 years $11.68 $13 to $21.............................................. 3,805,578 4.9 16.82 $22 to $29.............................................. 1,133,617 7.6 23.99 $30 to $37.............................................. 634,472 5.3 33.61 $38 to $45.............................................. 996,849 0.2 39.96 --------- 6,836,587 4.7 22.74 ---------
See Note 2 for additional information regarding accounting for stock-based employee compensation. Employee Stock-Purchase Plan -- Prior to 2006, our stock-purchase plan allowed U.S. and Canadian employees to purchase Pactiv stock (up to $25,000 annually) at a 15% discount. In 2005 and 2004, employees purchased 199,114 and 270,298 shares of stock, respectively, at a weighted-average price of $17.66 and $19.52 per share, respectively. We terminated the plan on December 31, 2005. Employee 401(k) Plans -- We have qualified 401(k) plans for employees under which eligible participants may make contributions equal to a percentage of their annual salary. We matched a portion of such contributions with Pactiv common stock until February 2006. Effective March 2006, all matching contributions are in cash. The company or plan participants may contribute additional amounts in accordance with the plans' terms. In 2006, 2005, and 2004, we incurred 401(k) plan expense of $9 million, $10 million, and $11 million, respectively. Grantor Trust -- In November 1999, we established a grantor trust and issued 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 outstanding for purposes of financial reporting. QUALIFIED OFFER RIGHTS PLAN In November 1999, we adopted a qualified offer rights plan (QORP). Its purpose is 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 interest of shareholders. Under this plan, if a person becomes a beneficial owner of 20% or more of our outstanding common stock without a qualified offer, any right holder, other 43 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) than the 20% holder is entitled to purchase common stock having a market value of twice the right's exercise price. Rights are not exercisable in connection with a qualified offer. A qualified offer 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 in 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. It calls for an independent board committee (the Three-year Independent Director Evaluation (TIDE) Committee) to review, on an ongoing basis, the QORP and developments in rights plans in general. Based on its review, the TIDE Committee can recommend modification or termination of the plan. At least every 3 years, the TIDE Committee is required to report to the board whether the QORP continues to be in the best interest of shareholders. In May 2005, upon consideration and advice of the TIDE Committee, the board decided to retain the QORP. EARNINGS PER SHARE Earnings from continuing operations per share of common stock outstanding were computed as follows:
2006 2005 2004 (In millions, except share and per-share data) ------------ ------------ ------------ BASIC EARNINGS PER SHARE Income from continuing operations.................. $ 277 $ 143 $ 138 Weighted-average number of shares of common stock outstanding...................................... 137,865,929 147,182,776 151,289,798 ------------ ------------ ------------ Basic earnings from continuing operations per share............................................ $ 2.01 $ 0.97 $ 0.91 ------------ ------------ ------------ DILUTED EARNINGS PER SHARE Income from continuing operations.................. $ 277 $ 143 $ 138 Weighted-average number of shares of common stock outstanding...................................... 137,865,929 147,182,776 151,289,798 Effect of dilutive securities Stock options.................................... 1,619,705 1,328,286 2,033,810 Performance shares............................... 218,270 338,356 439,548 Restricted shares................................ 477 -- -- ------------ ------------ ------------ Weighted-average number of shares of common stock outstanding, including dilutive securities....... 139,704,381 148,849,418 153,763,156 ------------ ------------ ------------ Diluted earnings from continuing operations per share............................................ $ 1.98 $ 0.96 $ 0.90 ------------ ------------ ------------
The following table summarizes annual repurchases of our common stock for 2004 through 2006.
AVERAGE PRICE NUMBER OF PAID PER TOTAL OUTLAY SHARES SHARE (IN MILLIONS) ---------- ------------- ------------- 2006..................................................... 13,905,000 $26.53 $369 2005..................................................... 8,614,222 $19.00 $164 2004..................................................... 10,148,500 $22.71 $230
NOTE 12. PREFERRED STOCK Pactiv has 50 million shares of preferred stock ($0.01 par value) authorized, none of which was issued at December 31, 2006. We have reserved 750,000 shares of preferred stock for the QORP. 44 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 13. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS We have pension plans that cover substantially all of our employees. Benefits are based on years of service and, for most salaried employees, final average compensation. Our funding policy is to contribute to the plans amounts necessary to satisfy requirements of applicable laws and regulations. Plan assets of our U.S. qualified plan consist principally of equity and fixed-income securities. Effective December 31, 2004, after the plans' September 30 measurement date, the company's two U.S. qualified pension plans were merged. The merger had no effect on participants' benefits or any other substantive features of the plans. However, the merger resulted in a write-off of pension assets of $203 million and the recording of corresponding reductions of pension liabilities, equity (other comprehensive income), and deferred-tax liabilities of $88 million, $72 million, and $43 million, respectively, in 2005. The merger had a negligible impact on pension plan income. We have postretirement health-care and life-insurance plans that cover certain of our salaried and hourly employees who retire in accordance with the various provisions of such plans. Benefits may be subject to deductibles, co-payments, and other limitations. These postretirement plans are not funded, and we reserve the right to change them. On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was enacted. This act expands Medicare coverage, primarily by adding a prescription-drug benefit for Medicare-eligible participants, starting in 2006. The act provides employers currently sponsoring prescription-drug programs for Medicare-eligible participants with a range of options to coordinate with the new government-sponsored program to potentially reduce employers' costs. These options include supplementing the government program on a secondary payor basis, or accepting a direct subsidy from the government to support a portion of the costs of employers' programs. Our plans currently provide prescription-drug benefits that will be coordinated with the related Medicare benefits. As a result, subsidies from Medicare for prescription-drug benefits will average approximately $2 million per year for the foreseeable future, which will reduce our plans' expense by a similar amount. Effective December 31, 2006, we adopted the recognition and disclosure provisions of SFAS No. 158. See Note 2. Prior to the adoption of the recognition provisions of SFAS No. 158, we accounted for our defined-benefit postretirement plans in accordance with requirements of SFAS No. 87, "Employers Accounting for Pensions", and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." If the accumulated benefit obligations of a pension plan exceeded its fair value of plan assets, SFAS No. 87 required that an additional minimum pension liability be recorded as a noncash charge to accumulated other comprehensive income (loss) in shareholders' equity (deficit). SFAS No. 106 required that the liability for postretirement benefits other than pensions represent the actuarial present value of all future benefits attributable to employees' service rendered to date. Under both SFAS Nos. 87 and 106, changes in the funded status were deferred and recognized ratably over future periods. Upon the adoption of the recognition provisions of SFAS No. 158, we recognized prior changes in the funded status of our postretirement benefit plans by recording the following adjustments in individual line items of our Consolidated Statement of Financial Position at December 31, 2006.
IMPACT OF ADOPTING SFAS NO. 158 ------------------------------- POSTRETIREMENT PRIOR TO DEFINED- OBLIGATIONS BALANCE ADOPTING BENEFIT OTHER THAN DECEMBER 31, (IN MILLIONS) SFAS NO. 158 PENSION PLAN PENSION 2006 - ------------- -------------- -------------- -------------- -------------- Deferred income taxes.................... $(156) $19 $17 $(120) Pension and postretirement benefit liability.............................. (326) (51) (26) (403) Accumulated other comprehensive loss..... 1,031 32 9 1,072
45 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The adoption of SFAS No. 158 had no effect on our Consolidated Statement of Income for the year ended December 31, 2006, or for any prior period presented herein, and had no impact on our debt covenants. Funding of the qualified U.S. pension plan is currently determined by requirements of the Employee Retirement Income Security Act, under which we were not required to make contributions to the plan in 2006. On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (PPA) into law. The PPA, which is effective for plan years beginning after December 31, 2007, significantly alters current funding requirements. Based on our current assumptions and requirements of the PPA, we do not anticipate that after-tax contributions to the plan will be significant for the foreseeable future. 46 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Financial data pertaining to our pension- and postretirement benefit plans appears below.
POSTRETIREMENT PENSION PLANS PLANS --------------- --------------- 2006 2005 2006 2005 (In millions) ------ ------ ------ ------ Accumulated benefit obligation, September 30................ $3,954 $4,102 $ -- $ -- Changes in projected benefit obligations Benefit obligations at September 30 of the previous year................................................... 4,138 3,862 99 98 Currency-rate conversion.................................. 4 (4) -- -- Service cost of benefits earned........................... 19 21 1 1 Interest cost of benefit obligations...................... 228 233 5 6 Actuarial (gains)/losses.................................. (121) 295 (6) 2 Benefits paid............................................. (277) (269) (12) (12) Participants contributions................................ -- -- 5 4 Medicare Part D reimbursement............................. -- -- 1 -- ------ ------ ---- ---- Benefit obligations at September 30....................... $3,991 $4,138 $ 93 $ 99 ------ ------ ---- ---- Changes in fair value of plan assets Fair value at September 30 of the previous year........... $3,636 $3,500 $ -- $ -- Currency-rate conversion.................................. 3 (2) -- -- Actual return on plan assets.............................. 294 401 -- -- Employer contributions.................................... 9 6 7 8 Participant contributions................................. -- -- 5 4 Benefits paid............................................. (277) (269) (12) (12) ------ ------ ---- ---- Fair value at September 30 $3,665 $3,636 $ -- $ -- ------ ------ ---- ---- Development of amounts recognized in the statement of financial positions Funded status at September 30............................. (326) (502) (93) (99) Contributions during the fourth quarter................... 1 4 1 2 ------ ------ ---- ---- Funded status at December 31.............................. $ (325) (498) $(92) (97) ------ ---- Unrecognized costs Actuarial losses....................................... 1,849 36 Prior-service costs.................................... 9 (2) ------ ---- Net amount recognized at December 31...................... $1,360 $(63) ------ ---- Amounts recognized in the statements of financial position Contributions during the fourth quarter................... $ 4 $ -- Accrued benefit costs..................................... (468) (63) Intangible assets......................................... 10 -- Accumulated other comprehensive loss (pre-tax)............ 1,814 -- ------ ---- Net amount recognized at December 31...................... $1,360 $(63) ------ ---- Amounts recognized in accumulated other comprehensive loss (pre-tax) Net actuarial loss........................................ $1,725 $ 27 Prior-service credit...................................... (5) (1) ------ ---- $1,720 $ 26 ------ ---- Estimated effect of amortization of accumulated other comprehensive loss on 2007 net periodic benefit cost Net actuarial loss........................................ $ 47 $ 2 Prior-service cost (credit)............................... -- (1) ------ ---- $ 47 $ 1 ------ ----
47 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The additional minimum liability for our pension plans was $1.823 billion at December 31, 2005. An additional other comprehensive loss of $141 million after tax was recognized in 2005 as a result of the merger of the two U.S. plans, changes in discount-rate assumptions, the use of updated mortality tables, and the sale of the protective- and flexible-packaging businesses. Benefit payments expected to be made under the pension plans and postretirement benefit plans over the next 10 years are summarized below.
POSTRETIREMENT PLANS, NET OF EXPECTED PENSION PLANS MEDICARE SUBSIDY (In millions) ------------- ---------------------- 2007........................................................ $ 276 $ 8 2008........................................................ 273 8 2009........................................................ 274 8 2010........................................................ 279 7 2011........................................................ 277 7 2012-2016................................................... 1,439 32
We expect to contribute $10 million to our foreign and non-qualified pension plans. The impact of pension plans on pretax income from continuing operations was as follows:
2006 2005 2004 (In millions) ----- ----- ----- Components of periodic benefit income (expense) Service cost of benefits earned........................... $ (19) $ (20) $ (25) Interest cost of benefit obligations...................... (228) (231) (230) Expected return on plan assets............................ 344 344 346 Amortization of: Unrecognized net losses................................... (51) (36) (31) Unrecognized prior-service costs.......................... (2) (3) (4) Additional cost due to SFAS No. 88(a)....................... (2) -- -- ----- ----- ----- Total net periodic benefit income........................... $ 42 $ 54 $ 56 ----- ----- -----
- --------------- (a) SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination of Benefits." Pension-plan actuarial assumptions are shown below.
2006 2005 2004 SEPTEMBER 30 ---- ---- ---- Actuarial assumptions Discount rate............................................. 5.93% 5.70% 6.25% Compensation increases.................................... 4.00 4.00 4.00 Return on assets.......................................... 9.00 9.00 9.00
For all of our worldwide pension plans, accumulated benefit obligations totaled $3.954 billion and $4.102 billion at December 31, 2006, and 2005, respectively. 48 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Pension plans with accumulated benefit obligations in excess of plan assets were as follows:
2006 2005 SEPTEMBER 30 (In millions) ------ ------ Projected benefit obligations............................... $3,991 $4,138 Accumulated benefit obligations............................. 3,954 4,102 Fair value of plan assets................................... 3,665 3,636
The discount-rate assumption for our U.S. plan is based on the composite yield of a portfolio of high-quality corporate bonds constructed with durations to match the plan's future benefit obligations In developing actuarial assumptions for the return on pension-plan assets, we receive independent input on asset-allocation strategies, projections regarding long-term rates of return on various asset classes, risk-free rates of return, and long-term inflation rates. Since inception in 1971, our U.S. qualified pension plan's annual rate of return on assets has averaged approximately 11%. At December 31, 2006, and 2005, the percentage of pension plan assets invested in equity securities and fixed-income securities was approximately 75% and 25%, respectively. A mixture of equity and fixed-income investments is used to maximize the long-term return on pension-plan assets for a prudent level of risk. Risk tolerances are established based on careful consideration of plan liabilities, plan funded status, and the company's financial condition. The plan's investment portfolio contains a diversified mix of equity and fixed-income investments. Equity investments include U.S. and non-U.S. stocks, as well as growth, value, and small-and large-capitalization stocks. Other asset classes, such as private equity investments, are used judiciously to enhance long-term returns while increasing portfolio diversification. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset/liability studies. After considering all of these factors, we concluded that a 9% rate of return on assets assumption for our U.S. plan was appropriate for 2006 and 2005. We use a market-related method for calculating the value of plan assets. This method recognizes the difference between actual and expected returns on plan assets over a 5-year period. Resulting unrecognized gains or losses, along with other actuarial gains and losses, are amortized using the "corridor approach" outlined in SFAS No. 87. The impact of postretirement benefit plans on pretax income from continuing operations was as follows:
2006 2005 2004 (In millions) ---- ---- ---- Service cost of benefits earned............................. $ 1 $ 1 $ 1 Interest cost of benefit obligations........................ 5 6 6 Prior-service costs......................................... (1) (1) -- Losses...................................................... 3 3 4 --- --- --- Total post-retirement benefit-plan costs.................... $ 8 $ 9 $11 --- --- ---
Actuarial assumptions used to determine postretirement benefit obligations follow.
2006 2005 2004 ---- ---- ----- Actuarial assumptions Health-care cost inflation(a) Prior to age 65........................................ 9.5% 10.0% 10.0% After age 65........................................... 11.0 10.0 10.0 Discount rate............................................. 5.93 5.70 6.25
- --------------- (a) Assumed to decline to 5% in 2012. In 2006, our assumption was different for participants under age 65. 49 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A one percentage-point change in assumed health-care cost inflation would have the following effects:
1% INCREASE 1% DECREASE (In millions) ----------- ----------- Effect on total service and interest costs.................. $-- $-- Effect on post-retirement benefit obligations............... 3 (3)
We contributed $7 million and $8 million in 2006 and 2005, respectively, to fund postretirement medical-plan obligations. We expect to contribute $8 million to fund our postretirement medical-plan obligations in 2007. NOTE 14. SEGMENT AND GEOGRAPHIC AREA INFORMATION We report the results of our segments in accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." We reclassified our reporting segments following the sale of most of our protective- and flexible-packaging businesses. Our three segments are Consumer Products, Foodservice/Food Packaging, and Other. See Note 1 for additional details. Products are transferred between segments and among geographic areas at, as nearly as possible, market value. Wal-Mart Stores, Inc. accounted for approximately 16% and 15% of our consolidated sales in 2006 and 2005, respectively. These sales were reflected primarily in the results of the Consumer Products segment and, to a lesser extent, in the results of the Foodservice/Food Packaging segment. Our backlog of orders is not material. The following table sets forth certain segment information.
FOODSERVICE/ CONSUMER FOOD PRODUCTS PACKAGING OTHER TOTAL (In millions) -------- ------------ ------ ------ FOR THE YEAR ENDING DECEMBER 31, 2006 Sales to external customers..................... $1,085 $1,832 $ -- $2,917 Depreciation and amortization................... 57 81 7 145 Operating income................................ 195 244(b) (15)(c) 424 Total assets.................................... 1,043 1,445 270 2,758 Capital expenditures from continuing operations.................................... 14 58 6 78 Noncash items other than depreciation and amortization.................................. -- -- (37)(e) (37) FOR THE YEAR ENDING DECEMBER 31, 2005 Sales to external customers..................... $ 989 $1,767 $ -- $2,756 Depreciation and amortization................... 55 83 8 146 Operating income................................ 112(a) 186(b) 2(c) 300 Total assets.................................... 1,028 1,478 314 2,820 Capital expenditures from continuing operations.................................... 25 91 5 121 Noncash items other than depreciation and amortization.................................. -- (1) (54)(e) (55) FOR THE YEAR ENDING DECEMBER 31, 2004 Sales to external customers..................... $ 934 $1,610 $ -- $2,544 Depreciation and amortization................... 53 78 8 139 Operating income................................ 175(a) 112(b) 10(c) 297 Total assets.................................... 1,062 1,357 1,322(d) 3,741 Capital expenditures from continuing operations.................................... 16 58 4 78 Noncash items other than depreciation and amortization.................................. -- 32 (56)(e) (24)
50 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) - --------------- (a) Includes restructuring and other charges of $1 million in 2005 and $4 million in 2004. (b) Includes restructuring and other charges/(credits) of $(1) million, $5 million, and $72 million in 2006, 2005, and 2004, respectively. (c) Includes pension-plan income, unallocated corporate expense, and $3 million restructuring and other charges in 2004. (d) Includes administrative-service operations and assets from discontinued operations of $739 million at December 31, 2004. (e) Includes pension-plan income and compensation expense for 2006 and pension-plan income for 2005 and 2004. The following table sets forth certain geographic area information.
GEOGRAPHIC AREA ------------------- UNITED STATES FOREIGN(A) TOTAL (In millions) ------ ---------- ------ AT DECEMBER 31, 2006, AND FOR THE YEAR THEN ENDED Sales to external customers(b).............................. $2,625 $292 $2,917 Long-lived assets(c)........................................ 1,055 102 1,157 Total assets................................................ 2,452 306 2,758 AT DECEMBER 31, 2005, AND FOR THE YEAR THEN ENDED Sales to external customers(b).............................. $2,482 $274 $2,756 Long-lived assets(c)........................................ 1,115 98 1,213 Total assets................................................ 2,513 307 2,820 AT DECEMBER 31, 2004, AND FOR THE YEAR THEN ENDED Sales to external customers(b).............................. $2,293 $251 $2,544 Long-lived assets(c)........................................ 1,322 94 1,416 Total assets(d)............................................. 2,755 986 3,741
- --------------- (a) Sales to external customers and long-lived assets for individual countries (primarily Germany, Canada, and Mexico) 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. (d) Total assets include assets from discontinued operations of $739 million. NOTE 15. COMMITMENTS AND CONTINGENCIES CAPITAL COMMITMENTS Commitments for authorized capital expenditures totaled approximately $103 million at December 31, 2006. It is anticipated that the majority of these expenditures will be funded over the next 12 months from existing cash and short-term investments and internally generated cash. LEASE COMMITMENTS Certain of our 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 $23 million, $17 million, $14 million, $10 million, and $9 million for 2007, 2008, 2009, 2010, and 2011, respectively, and $14 million for subsequent years. Commitments under capital leases are not significant. Total rental costs for continuing operations for 2006, 2005, and 2004 were $27 million, $25 million, and $26 million, respectively, which included minimum 51 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) rentals under noncancelable operating leases of $27 million, $25 million, and $21 million for the respective periods. LITIGATION We have been named as a defendant in multiple lawsuits, covering approximately 1,400 plaintiffs, all of which are pending in the United States District Court for the Middle District of Alabama. The claims allege that plaintiffs experienced personal injuries and property damages as a result of the alleged release of chemical substances from a wood-treatment facility in Lockhart, Alabama, during the period from 1963 to 1998. A predecessor of Pactiv owned the facility from 1978 to 1983. Louisiana-Pacific Corporation, the current owner of the facility, to whom a predecessor of Pactiv sold the facility in 1983, also is named as a defendant in each of the lawsuits. We are not currently able to quantify our financial exposure, if any, relating to this matter. We intend to defend these lawsuits vigorously. In February 2007, we entered into a consent decree with the Michigan Department of Environmental Quality (MDEQ) resolving a dispute associated with a declaratory-judgment action in the United States District Court, Eastern District of Michigan, related to a superfund site in Filer City, Michigan. In 1993, after years of study, the U.S. Environmental Protection Agency (USEPA) selected a final clean-up remedy for the site pursuant to a record of decision and administrative order, in which the USEPA expressly determined that conditions at the site posed no current or potentially unacceptable risk to human health or the environment and required only monitoring of the natural attenuation of the site. We contended that, because of the USEPA action, the MDEQ is precluded from demanding that we undertake additional investigative and remedial work at the site. Under the consent decree, the MDEQ has agreed not to seek the performance of any additional investigative or remedial work by us unless an investigation funded by the MDEQ generates new site data demonstrating that the USEPA's remedy is not working. The MDEQ also agreed to waive its claims for any past costs against us. In addition, we reserved the right to challenge any future MDEQ demands related to the site. We are party to other legal proceedings arising from our operations. We establish reserves for claims and proceedings when it is probable that liabilities exist and where reasonable estimates of such liabilities can be made. While it is not possible to predict the outcome of any of these matters, based on our assessment of the facts and circumstances now known, we do not believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial position. However, actual outcomes may be different from those expected and could have a material effect on our results of operations or cash flows in a particular period. ENVIRONMENTAL MATTERS We are subject to a variety of environmental and pollution-control laws and regulations. From time to time, we identify costs or liabilities arising from compliance with environmental laws and regulations. When related liabilities are probable and can be reasonably estimated, we establish appropriate reserves. Estimated liabilities may change as additional information becomes available. We appropriately adjust our reserves as new information on possible clean-up costs, expense and effectiveness of alternative clean-up methods, and other potential liabilities is received. We do not expect that any additional liabilities recorded as a result of the availability of new information will have a material adverse effect on our financial position. However, such costs could have a material effect on our results of operations or cash flows in a particular period. 52 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
INCOME (LOSS) INCOME FROM FROM COST OF RESTRUCTURING CONTINUING DISCONTINUED SALES SALES AND OTHER OPERATIONS OPERATIONS NET INCOME (In millions) ------ ------- ------------- ----------- ------------- ---------- 2006 First quarter............. $ 680 $ 482 $(1) $ 51 $ -- $ 51 Second quarter............ 750 511 -- 69 -- 69 Third quarter............. 749 518 -- 104 (2) 102 Fourth quarter............ 738 516 -- 53 (1) 52 ------ ------ --- ---- ---- ---- $2,917 $2,027 $(1) $277 $( 3) $274 ------ ------ --- ---- ---- ---- 2005 First quarter............. $ 613 $ 463 $ 6 $ 21 $ 1 $ 22 Second quarter............ 707 525 -- 37 (79) (42) Third quarter............. 695 507 -- 42 (3) 39 Fourth quarter............ 741 540 -- 43 (8) 35 ------ ------ --- ---- ---- ---- $2,756 $2,035 $ 6 $143 $(89) $ 54 ------ ------ --- ---- ---- ----
BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE OF COMMON STOCK (A) OF COMMON STOCK (A) ---------------------------------- ---------------------------------- STOCK PRICE/ SHARE CONTINUING DISCONTINUED NET CONTINUING DISCONTINUED NET ------------------- OPERATIONS OPERATIONS INCOME OPERATIONS OPERATIONS INCOME HIGH LOW ---------- ------------ ------ ---------- ------------ ------ -------- -------- 2006 First quarter.......... $0.36 $ -- $ 0.36 $0.35 $ -- $ 0.35 $25.07 $21.50 Second quarter......... 0.50 -- 0.50 0.49 -- 0.49 26.00 22.61 Third quarter.......... 0.76 (0.02) 0.74 0.75 (0.02) 0.73 28.77 22.36 Fourth quarter......... 0.40 -- 0.40 0.39 -- 0.39 36.53 27.81 Total year............. 2.01 (0.02) 1.99 1.98 (0.02) 1.96 36.53 21.50 2005 First quarter.......... $0.14 $ 0.01 $ 0.15 $0.14 $ 0.01 $ 0.15 $25.58 $21.39 Second quarter......... 0.25 (0.53) (0.28) 0.24 (0.52) (0.28) 23.85 20.98 Third quarter.......... 0.28 (0.02) 0.26 0.28 (0.02) 0.26 22.38 16.91 Fourth quarter......... 0.30 (0.05) 0.25 0.30 (0.05) 0.25 22.19 16.50 Total year............. 0.97 (0.60) 0.37 0.96 (0.60) 0.36 25.58 16.50
- --------------- (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 included in this Annual Report on Form 10-K, including statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and in the notes to the financial statements, are "forward-looking statements." All statements other than statements of historical fact, including statements regarding prospects and future results, are forward-looking. These forward-looking statements generally can be identified by the use of terms and phrases such as "will", "believe", "anticipate", "may", "might", "could", "expect", "estimated", "projects", "intends", "foreseeable future", and similar terms and phrases. These forward-looking statements are not based on historical facts, but rather on our current expectations or projections about future events. Accordingly, these forward-looking statements are subject to known and unknown risks and uncertainties. While we believe that the assumptions underlying these forward-looking statements are reasonable and make the statements in good faith, actual results almost always vary from expected results, and differences could be material. In the "Risk Factors" section (Item 1A), we have attempted to list some of the factors that we believe could cause our actual results to differ materially from future results expressed or implied by these forward-looking statements. These factors include the following: - Changes in consumer demand and selling prices for our products, including new products that our competitors or we may introduce that could impact sales and margins. - Material substitutions and changes in costs of raw materials, including plastic resins, labor, utilities, or transportation that could impact our expenses and margins. - Changes in laws or governmental actions, including changes in regulations such as those relating to air emissions or plastics generally. - The availability or cost of capital could impact growth or acquisition opportunities. - Workforce factors such as strikes or other labor interruptions. - The general economic, political, and competitive conditions in countries in which we operate, including currency fluctuations and other risks associated with operating outside of the U.S. - Changes in (1) assumptions regarding the long-term rate of return on pension assets and other factors, (2) the discount rate, and (3) the level of amortization of actuarial gains and losses. - Changes in U.S. and/or foreign governmental regulations relating to pension-plan funding. - Changes enacted by the SEC, the Financial Accounting Standards Board, or other regulatory or accounting bodies. See "Changes in Accounting Principles." - Competition from producers located in countries that have lower labor and other costs. - Our ability to integrate new businesses that we may acquire or to dispose of businesses or business segments that we may wish to divest. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the appropriate time periods. We, under the supervision and with the participation of our management, including our principal 54 executive officer and principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures, and we and such officers have concluded that such controls and procedures were adequate and effective as of December 31, 2006. We completed our evaluation of such controls and procedures in connection with the preparation of this annual report on Form 10-K on March 1, 2007. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses therein. There were no changes in internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2006, that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. ITEM 9B. OTHER INFORMATION. None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE. Information regarding our executive officers required by this Item 10 is set forth in Item 4.1 of Part I, "Executive Officers of the Registrant." The following information required by this Item 10 is included in our Proxy Statement related to our May 18, 2007, Annual Meeting of Shareholders, and is incorporated by reference herein. - Information regarding our directors - Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 - Information regarding our code of ethics ITEM 11. EXECUTIVE COMPENSATION. Information regarding the compensation of certain of the company's executive officers required by this Item 11 is included in our Proxy Statement related to our May 18, 2007, Annual Meeting of Shareholders, and is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Information regarding the security ownership of certain beneficial owners and management and related stockholder matters of the company required by this Item 12 is included in our Proxy Statement related to our May 18, 2007, Annual Meeting of Shareholders, and is incorporated by reference herein. 55 The following table summarizes our equity-compensation plans at December 31, 2006.
NUMBER OF SHARES NUMBER OF SHARES OF COMMON STOCK OF COMMON STOCK AVAILABLE FOR FUTURE TO BE ISSUED UPON WEIGHTED-AVERAGE ISSUANCE UNDER EXERCISE OF EXERCISE PRICE OF EQUITY- PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS COMPENSATION PLANS - ------------- ------------------- ------------------- -------------------- Equity-compensation plans approved by shareholders............................. 8,216,935(1) $ 22.74 10,063,028 Equity-compensation plans not approved by shareholders............................. 468,045(2) $ 35.69 1,884,095(3) --------- ---------- Total...................................... 8,684,980 11,947,123 --------- ----------
- --------------- (1) Includes outstanding options and performance-share awards. Stock options generally expire 10 to 20 years after date of grant and vest over 1 to 3 years. Outstanding performance-share awards are subject to achievement of performance criteria, vesting, and continued employment, and are paid in stock, except for executive officers who will be paid 50% in cash and 50% in stock. See Note 11 to the financial statements for additional information. (2) Pactiv common stock index units (common stock equivalents) held pursuant to the company's deferred-compensation plan. (3) Represents shares reserved for issuance under the now discontinued employee stock-purchase plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. Information required by this Item 13 is included in our Proxy Statement related to our May 18, 2007, Annual Meeting of Shareholders, and is incorporated by reference herein. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Information required by this Item 14 is included in our Proxy Statement related to our May 18, 2007, Annual Meeting of Shareholders, and is incorporated by reference herein. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. FINANCIAL STATEMENTS INCLUDED IN ITEM 8 See "Index of Financial Statements of Pactiv Corporation and Consolidated Subsidiaries" in Item 8, "Financial Statements and Supplementary Data." 56 INDEX OF FINANCIAL STATEMENTS AND SCHEDULES INCLUDED IN ITEM 15
PAGE ---- Schedule II -- Valuation and qualifying accounts -- three years ended December 31, 2006............................. 58 SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE Schedule I -- Condensed financial information of registrant Schedule III -- Real estate and accumulated depreciation Schedule IV -- Mortgage loans on real estate Schedule V -- Supplemental information concerning property -- casualty insurance operations
57 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (In millions)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------------------------------------- ---------- -------------------------- ---------- --------- ADDITIONS -------------------------- CHARGED TO CHARGED TO BALANCE AT (REVERSED (REVERSED) BALANCE BEGINNING FROM) COSTS FROM) OTHER AT END OF DESCRIPTION OF YEAR AND EXPENSES ACCOUNTS DEDUCTIONS YEAR ----------- ---------- ------------ ----------- ---------- --------- Allowance for doubtful accounts Year ended December 31, 2006......... $ 8 $ 2 $(1) $-- $ 9 Year ended December 31, 2005......... 6 4 (1) (1) 8 Year ended December 31, 2004......... 7 5 -- (6) 6 Inventory valuation Year ended December 31, 2006......... $55 $(7) $ 7 $-- $55 Year ended December 31, 2005......... 47 8 -- -- 55 Year ended December 31, 2004......... (4) 51 -- -- 47 Deferred tax asset valuation Year ended December 31, 2006......... $24 $(4) $22 $-- $42 Year ended December 31, 2005......... 25 -- (1) -- 24 Year ended December 31, 2004......... 8 15 2 -- 25
58 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, 2006. (Exhibits designated with an asterisk are filed with this report; all other exhibits are incorporated by reference.)
EXHIBIT NO. DESCRIPTION - ----------- ----------- 2 Distribution Agreement by and between Tenneco Inc. and the registrant (incorporated herein by reference to Exhibit 2 to Pactiv Corporation's Current Report on Form 8-K dated November 11, 1999, File No. 1-15157). 3.1 Restated Certificate of Incorporation of the registrant (incorporated herein by reference to Exhibit 3.1 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 3.2 Amended and Restated By-laws of the registrant adopted May 17, 2001 (incorporated herein by reference to Exhibit 3.2 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File No. 1-15157). 4.1 Specimen Stock Certificate of Pactiv Corporation Common Stock (incorporated herein by reference to Exhibit 4.1 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 4.2(a) Qualified Offer Plan Rights Agreement, dated as of November 4, 1999, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference to Exhibit 4.2 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 4.2(b) Amendment No. 1 to Rights Agreement, dated as of November 7, 2002, by and between the registrant and National City Bank, as rights agent (incorporated herein by reference to Exhibit 4.4(a) to Pactiv Corporation's Registration Statement on Form S-8, File No. 333-101121). 4.3(a) Indenture, dated September 29, 1999, by and between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to Tenneco Packaging Inc.'s Registration Statement on Form S-4, File No. 333-82923). 4.3(b) First Supplemental Indenture, dated as of November 4, 1999, to Indenture dated as of September 29, 1999, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3(b) to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 4.3(c) Second Supplemental Indenture, dated as of November 4, 1999, to Indenture dated as of September 29, 1999, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3(c) to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 4.3(d) Third Supplemental Indenture, dated as of November 4, 1999, to Indenture dated as of September 29, 1999, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3(d) to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 4.3(e) Fourth Supplemental Indenture, dated as of November 4, 1999, to Indenture dated as of September 1999, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3(e) to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 4.3(f) Fifth Supplemental Indenture, dated as of November 4, 1999, to Indenture dated as of September 29, 1999, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.3(f) to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 4.4 Registration Rights Agreement, dated as of November 4, 1999, by and between the registrant and the trustees under the Pactiv Corporation Rabbi Trust (incorporated herein by reference to Exhibit 4.4 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
59
EXHIBIT NO. DESCRIPTION - ----------- ----------- 9 None. 10.1 Human Resources Agreement, dated as of November 4, 1999, by and between Tenneco Inc. and the registrant (incorporated herein by reference to Exhibit 16.1 to Tenneco Inc.'s Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 10.2 Tax Sharing Agreement, dated as of November 3, 1999, by and between Tenneco Inc. and the registrant (incorporated herein by reference to Exhibit 16.2 to Tenneco Inc.'s Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 10.3 Amended and Restated Transition Services Agreement, dated as of November 4, 1999, by and between Tenneco Inc. and the registrant (incorporated herein by reference to Exhibit 10.3 to Tenneco Automotive Inc.'s Quarterly Report on Form 10-Q for quarterly period ended September 30, 1999, File No. 1-12387). 10.4 Pactiv Corporation (formerly known as Tenneco Packaging Inc.) Executive Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.5 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 10.5 Pactiv Corporation (formerly known as Tenneco Packaging Inc.) Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.6 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). * 10.6 Amended and Restated Change in Control Severance Benefit Plan for Key Executives as of December 31, 2006 (incorporated herein by reference to Exhibit 10.6 to Pactiv Corporation's Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-15157) (superseding Pactiv Corporation Change in Control Severance Benefit Plan for Key Executives as of March 1, 2005). 10.7 Pactiv Corporation (formerly known as Tenneco Packaging Inc.) Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 10.8 Pactiv Corporation Rabbi Trust (incorporated herein by reference to Exhibit 10.11 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 10.9 Employment Agreement, dated as of March 11, 1997, by and between Richard L. Wambold and Tenneco Inc. (incorporated herein by reference to Exhibit 10.17 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 10.10 Long Term Credit Agreement, dated as of September 29, 1999, among the registrant, Bank of America, N.A., as Administrative Agent, Credit Suisse First Boston, as Syndication Agent, Bank One, NA and Banque Nationale de Paris, as Co-Documentation Agents, and the other financial institutions party thereto (incorporated herein by reference to Exhibit 4.3 to Tenneco Packaging Inc.'s Registration Statement on Form S-4, File No. 333-82923). 10.11 Term Loan Agreement, dated as of November 3, 1999, between the registrant and Bank of America (incorporated herein by reference to Exhibit 10.21 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 10.12 Letter of Agreement dated September 10, 1999, by and among Tenneco Inc., Bank of America, N.A., and Bank of America Securities LLC, related to Term Loan Agreement, dated as of November 3, 1999, by and between the registrant and Bank of America (incorporated herein by reference to Exhibit 10.22 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157). 10.13 Participation Agreement, dated as of October 28, 1999, among the registrant, First Security Bank, N.A., Bank of America, as Administrative Agent, and the other financial institutions party thereto (incorporated herein by reference to Exhibit 10.23 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-15157).
60
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.14 Pactiv Corporation 2002 Incentive Compensation Plan (incorporated herein by reference to Exhibit 4.7 to Pactiv Corporation's Registration Statement on Form S-8, File No. 333-101121). 10.15 Credit Agreement, dated as of April 19, 2006, among the registrant, Bank of America, N.A., as Administrative Agent, JP Morgan Chase Bank, N. A., as Syndication Agent and L/C Issuer, BNP Paribas, Suntrust Bank, and Citibank, N. A., Inc., as Co-Documentation Agents, and the other financial institutions party thereto (incorporated herein by reference to Exhibit 10.15 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-15157). 10.16 Pactiv Corporation Defined Retirement Savings Plan (incorporated herein by reference to Exhibit 10.16 to Pactiv Corporation's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-15157). 10.17 Form Pactiv Corporation Non-Qualified Stock Option Award Agreement (incorporated herein by reference to Exhibit 10.17 to Pactiv Corporation's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-15157). 10.18 Form of Pactiv Corporation Performance Share Award Agreement (incorporated herein by reference to Exhibit 10.18 to Pactiv Corporation's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-15157). 10.19 Summary of Compensation Arrangements of Directors (incorporated herein by reference to Exhibit 10.19 to Pactiv Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 1-15157). 10.20 Summary of Named Executive Officer Compensation Arrangements (incorporated herein by reference to Exhibit 10.20 to Pactiv Corporation's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 1-15157). 10.21 Stock Purchase agreement dated as of June 23, 2005, among Pactiv Corporation and certain of its affiliates, as sellers, and PFP Holding II Corporation, as purchaser (incorporated herein by reference to Exhibit 10.21 to Pactiv Corporation's Current Report on Form 8-K dated June 23, 2005, File No. 1-15157). * 10.22 Receivables Purchase Agreement, dated as of December 21, 2006, among the registrant and Atlantic Asset Securitization LLC and Calyon New York Branch, as agent for Purchasers. 11 None. 13 None. 14 Code of Ethical Conduct for Financial Managers (posted to company's website, www.pactiv.com) in accordance with Item 406(c) (2) of Regulation S-K. 15 None. 16 None. 18 None. * 21 List of subsidiaries of Pactiv Corporation. 22 None. * 23.1 Consent of Ernst & Young LLP. * 24 Powers of Attorney for the following directors of Pactiv Corporation: Larry D. Brady, K. Dane Brooksher, Robert J. Darnall, Mary R. (Nina) Henderson, N. Thomas Linebarger, Roger B. Porter, and Norman H. Wesley. * 31.1 Rule 13a-14(a)/15d-14(a) Certification. * 31.2 Rule 13a-14(a)/15d-14(a) Certification. **32.1 Section 1350 Certification. **32.2 Section 1350 Certification.
- --------------- * Filed herewith ** Furnished 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: March 1, 2007 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.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD L. WAMBOLD Chairman, President, Chief March 1, 2007 - ------------------------------------------------ Executive Officer and Director Richard L. Wambold (principal executive officer) /s/ ANDREW A. CAMPBELL Senior Vice President and Chief March 1, 2007 - ------------------------------------------------ Financial Officer (principal Andrew A. Campbell financial and accounting officer) /s/ LARRY D. BRADY* Director March 1, 2007 - ------------------------------------------------ Larry D. Brady /s/ K. DANE BROOKSHER* Director March 1, 2007 - ------------------------------------------------ K. Dane Brooksher /s/ ROBERT J. DARNALL* Director March 1, 2007 - ------------------------------------------------ Robert J. Darnall /s/ MARY R. (NINA) HENDERSON* Director March 1, 2007 - ------------------------------------------------ Mary R. (Nina) Henderson /s/ N. THOMAS LINEBARGER* Director March 1, 2007 - ------------------------------------------------ N. Thomas Linebarger /s/ ROGER B. PORTER* Director March 1, 2007 - ------------------------------------------------ Roger B. Porter /s/ NORMAN H. WESLEY* Director March 1, 2007 - ------------------------------------------------ Norman H. Wesley *By: /s/ JOSEPH E. DOYLE March 1, 2007 ----------------------------------------- Joseph E. Doyle Attorney-in-fact
62 EX-10.6 2 c12792exv10w6.txt AMENDED AND RESTATED CHANGE IN CONTROL SEVERANCE PLAN FOR KEY EXECUTIVES PACTIV CORPORATION CHANGE-IN-CONTROL SEVERANCE BENEFIT PLAN FOR KEY EXECUTIVES The Pactiv Corporation Change-in-Control Severance Benefit Plan for Key Executives (the "Plan") was established by Pactiv Corporation (the "Company") November 4, 1999 (the "Effective Date"). It was amended and restated effective March 1, 2005 and is hereby further amended and restated effective December 29, 2006. The purpose of the Plan is to induce Key Executives to enter into or continue services or employment with, and to steadfastly serve, the Company if and when a Change in Control (as defined below) is threatened, despite attendant career uncertainties, by committing the Company to provide severance benefits in the event their employment terminates as a result of a Change in Control. ARTICLE 1. DEFINITIONS (a) "CHANGE IN CONTROL" shall mean the first to occur of the following events (but no event other than the following events), except as otherwise provided herein: (i) Any person and any of their affiliates or associates becomes the beneficial owner, directly or indirectly, of securities of the Company representing twenty percent (20%) or more of either the Company's then outstanding shares of common stock or the combined voting power of the Company's then outstanding securities having general voting rights. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to this paragraph solely because the requisite percentage of the Company's then outstanding shares of common stock or the combined voting power of the Company's then outstanding securities having general voting rights is acquired by one (1) or more employee benefit plans maintained by the Company; or (ii) Members of the Incumbent Board cease to constitute a majority of the Company Board; or (iii) The consummation of any plan of merger, consolidation, share exchange, or combination between the Company and any person including without limitation becoming a subsidiary of any other person without members of the Incumbent Board, as constituted immediately prior to the merger, consolidation, share exchange, or combination constituting a majority of the board of directors of: (1) the surviving or successor corporation, or (2) if the surviving or successor corporation is a majority-owned subsidiary of another corporation or corporations, the ultimate parent company of the surviving or successor corporation; or (iv) The consummation of any sale, exchange, or other disposition of all or substantially all of the Company's assets without members of the Incumbent Board immediately prior to any sale, exchange, or disposition of all or substantially all of the Company's assets constituting a majority of the board of directors of: (1) the corporation which holds such assets after such disposition, or (2) if such corporation is a majority-owned subsidiary of another corporation or corporations, the ultimate parent company of the successor corporation, provided that the Company Board may determine conclusively that any transaction does not constitute a sale, exchange, or other disposition of substantially all of the Company's assets; or (v) The Company's stockholders approve a plan of complete liquidation or dissolution of the Company. (b) "COMPANY" means Pactiv Corporation and any stock corporation of which a majority of the voting common or capital stock is owned directly or indirectly by Pactiv Corporation. (c) "COMPANY BOARD" means the Board of Directors of the Company. (d) "CONSTRUCTIVE TERMINATION" will be deemed to have occurred if, upon or following the Change in Control and within two (2) years after the Key Executive becomes aware of a circumstance described in (i)--(v) below, a Key Executive Separates from Service from the Company after the Company, by action or inaction, and without the Key Executive's express prior written consent; provided, however, that a Constructive Termination shall not be effective unless a written notice is delivered from the Key Executive to the Company specifically identifying an event provided in (i)--(v) below and of his or her intent to terminate due to such event (a "Constructive Termination Notice"). Upon receipt of a Constructive Termination Notice, the Company shall have thirty (30) days to correct the circumstance described by such notice. The Constructive Termination circumstances are as follows: (i) Diminish in any manner the Key Executive's status, position, duties, or responsibilities with the Company from those in effect immediately prior to the Change in Control; without limiting the foregoing, for purposes of this clause (i), a diminution will be deemed to have occurred if the Key Executive does not maintain the same or greater status, position, duties, and responsibilities with the ultimate parent corporation of a controlled group of corporations of which the Company is a member upon consummation of the transaction or transactions constituting the Change in Control; (ii) Reduce the Key Executive's then current annual cash compensation from the Company below the sum of: (1) the Key Executive's annual base salary or annual base compensation from the Company in effect immediately prior to the Change in Control, and (2) the Key Executive's average annual award under the Company's Executive Incentive Compensation Plan (or any successor plan) for the three (3) calendar year periods (or for such shorter period as the Key Executive has been employed by the Company) completed immediately prior to the Change in Control; (iii) Cause a material reduction in: (1) the level of aggregate Company-paid medical benefit, life insurance, and disability plan coverages; or (2) the aggregate rate of Company-paid thrift/savings plan contributions and of Company-paid defined benefit retirement plan benefit accrual, from those coverages and rates in effect immediately prior to the Change in Control; 2 (iv) Effectively require the Key Executive to relocate because of transfer of the Key Executive's place of employment with the Company from the place where the Key Executive was employed immediately prior to the Change in Control; for purposes of the foregoing, a transfer of place of employment shall be deemed to require a Key Executive to relocate if such transfer: (1) is greater than twenty-five (25) miles from the place where the Key Executive was employed immediately prior to the Change in Control, and (2) increases the normal commuting time of such Key Executive by more than fifty percent (50%); or (v) Materially breach their duties and obligations under the Plan. A Constructive Termination will be deemed to have occurred for all Key Executives if any successor to the Company in a merger, consolidation, purchase, or other combination constituting a Change in Control fails to assume, in writing, all of the Company's obligations under the Plan promptly upon consummation of such Change in Control. In addition, a determination that a Key Executive has been Constructively Terminated for purposes of eligibility for benefits under this Plan shall be based solely on the criteria set forth in this paragraph (d) and the Key Executive's eligibility or application for, or receipt of, any retirement benefits from the Company following Separation from Service shall have no bearing on such determination. (e) "DISCHARGE FOR CAUSE" shall be deemed to have occurred only if, following the Change in Control, a Key Executive is discharged by the Company from employment because: (i) The Key Executive has engaged in dishonesty or other serious misconduct related to the Key Executive's material duties as an employee of the Company; or (ii) The Key Executive has willfully and continually failed (unless due to incapacity resulting from physical or mental illness) to perform the duties of his or her employment by the Company after written demand for substantial performance is delivered to the Key Executive by the Company specifically identifying the manner in which the Key Executive has not substantially performed such duties. Notwithstanding the foregoing, a Key Executive who, immediately prior to the Change in Control, is a member of Executive Group I shall not be deemed to have been Discharged for Cause under paragraph (i) or (ii) above unless a written notice has been delivered to the Key Executive stating that the Company has terminated the Key Executive's employment, which notice shall include a resolution, adopted by at least a three-quarter's vote of the Incumbent Board (after the Key Executive has been provided with reasonable notice and an opportunity, together with counsel, for a hearing before the entire Incumbent Board), finding that the Key Executive has engaged in the conduct set forth in clause (i) or (ii) of this Article 1(e). 3 (f) "EXECUTIVE GROUP I" shall consist of each individual who is an executive officer of the Company and any other officer as approved by the Committee in writing on or before the Change in Control as a member of Executive Group I. (g) "EXECUTIVE GROUP II" shall consist of each individual who: (i) immediately prior to the Change in Control, is an active participant in the Company's Executive Incentive Compensation Plan, is not a member of Executive Group I and has been designated in writing by the Chairman of the Board and Chief Executive Officer of the Company, or (ii) immediately prior to the Change in Control, is an employee of the Company who has been designated by the Chairman of the Board and Chief Executive Officer of the Company, in writing on or before the Change in Control, as a member of Executive Group II. (h) "INCENTIVE COMPENSATION" shall include Annual Incentive Awards, Performance Units, Performance Shares, Cash-Based Awards, and Stock Awards under the Pactiv Corporation 2002 Incentive Compensation Plan, or any similar or successor plan, and any other compensation under any other compensation or incentive plans of the Company that is contingent upon the achievement of specified performance goals, but which shall exclude Stock Options, Stock Appreciation Rights, Restricted Stock, or Restricted Stock Units which may be granted under the Pactiv Corporation 2002 Incentive Compensation Plan, or any similar or successor plan. (i) "INCUMBENT BOARD" means: (i) The members of the Company Board on the Effective Date, to the extent that they continue to serve as members of the Company Board; and (ii) Any individual who becomes a member of the Company Board after the Effective Date, if his or her election or nomination for election as a director is approved by a vote of at least three-quarters of then Incumbent Board. (j) "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended. (k) "KEY EXECUTIVE" means an individual who, immediately prior to the Change in Control, is a member of Executive Group I or Executive Group II. (l) "SEPARATES FROM SERVICE" or "SEPARATION FROM SERVICE" shall mean the Key Executive's "separation from service," with the same meaning as prescribed in Internal Revenue Code Section 409A and the regulations thereunder. (m) "SPECIFIED EMPLOYEE" shall mean as of the date of Separation from Service, a specified employee as defined in Internal Code Section 409A and the regulations thereunder. (n) "THREATENED CHANGE IN CONTROL" shall mean: (i) any publicly disclosed proposal, offer, actual or proposed purchase of stock, or other action which, if consummated, would, in the opinion of the Incumbent Board, constitute a Change in Control, including the Company entering into an agreement, the consummation of which would result in a Change in Control, or (ii) the adoption of a resolution by the Incumbent Board that a Threatened Change in Control has occurred. 4 (o) "THREATENED CHANGE-IN-CONTROL PERIOD" shall mean the period beginning on the date a Threatened Change in Control occurs and ending on the earlier of: (i) the date the proposal, offer, actual or proposed purchase of stock, or other action is formally withdrawn or the Incumbent Board has determined that the circumstances which constituted the Threatened Change in Control no longer exist, or (ii) the date a Change in Control occurs. For purposes of the foregoing definitions, the terms "associate," "affiliate," "person," and "beneficial owner" shall have the respective meaning set forth in Sections 13(a) and 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the regulations promulgated thereunder, and the regulations promulgated under Section 12 of the Exchange Act. ARTICLE 2. ELIGIBILITY FOR BENEFITS If: (a) within two (2) years after a Change in Control, a Key Executive is Separated from Service as an employee with the Company because: (i) the Key Executive is discharged by the Company, provided such discharge is not a Discharge for Cause, is not a voluntary termination by the Executive, or is not a termination due to death or disability, or (ii) because of Constructive Termination, and (b) throughout the period beginning with the Change in Control and ending with such Separation from Service with the Company, the Key Executive remains an employee of the Company, he or she shall be entitled to receive the benefits described in Articles 3, 4, and 6 below; provided that: (i) the Key Executive has executed a Waiver and Release Agreement that releases any employment-related claims against the Company, other than claims for vested benefits under the benefits and compensation plans, programs, and arrangements of the Company; and (ii) the Key Executive has executed a Restrictive Covenant Agreement certifying his or her willingness to comply with a noncompetition, nonsolicitation and/or confidentiality covenant. ARTICLE 3. SEVERANCE BENEFITS (a) If the Key Executive is a member of Executive Group I immediately prior to the Change in Control--an amount equal to two (2) times the sum of: (i) the Key Executive's annual base salary in effect immediately prior to the Change in Control, plus (ii) the greater of: (1) the average of the Key Executive's annual awards under the Company's Executive Incentive Compensation Plan (or any successor plan) for the last three (3) years of the Key Executive's employment with the Company or such shorter period as the Key Executive has been employed by the Company, or (2) the Key Executive's targeted annual award under such plans in effect immediately prior to the Change in Control. (b) If the Key Executive is a member of Executive Group II immediately prior to the Change in Control--an amount equal to one (1) times the sum of: (i) the Key Executive's annual base salary in effect immediately prior to the Change in Control, plus (ii) the greater of: (1) the average of the Key Executive's annual awards under the Company's Executive Incentive Compensation Plan (or any successor plan) for the last three (3) years of the Key Executive's employment with the Company or such shorter period as the Key Executive has been employed by the Company, or (2) the Key Executive's targeted annual award under such plans in effect immediately prior to the Change in Control. 5 (c) All deferred compensation (and earnings accrued thereon) credited to the account of a Key Executive under any deferred compensation plan, program, or arrangement of the Company shall be paid to such Key Executive, notwithstanding any provisions of such plan, program, or arrangement to the contrary. (d) The Key Executive and his or her eligible dependents, if any, shall continue to be covered by the health, life, and disability plans applicable to comparably situated active employees as in effect from time to time and subject to the rules thereof (including any requirement to make contributions or pay premiums, except that the Key Executive shall contribute or pay on an after-tax basis) for the period described below. For persons entitled to Executive Group I benefits, and their eligible dependents, the period is two (2) years from his or her Separation from Service. For persons entitled to Executive Group II benefits, and their eligible dependents, the period is one (1) year from his or her Separation from Service. This period of coverage will not count against the maximum period of health coverage required by the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), and persons covered by this provision will be afforded their applicable COBRA rights at the end of the health coverage provided herein. If, as of the Key Executive's date of Separation from Service, the provision to the Executive of the insurance coverage described in this Article 3(e) would either: (i) violate the terms of the Company's health insurance plan (or any other related insurance policies), (ii) violate any of the Internal Revenue Code's nondiscrimination requirements applicable to the health insurance coverage, or (iii) cause the Key Executive to be subject to the excise tax under Internal Revenue Code Section 409A, then the Company, in its sole discretion, may elect to pay the Key Executive, in lieu of the health insurance coverage described under this Article 3(e) a lump-sum cash payment equal to the total monthly premiums (or in the case of a self-funded plan, the cost of COBRA continuation coverage) that would have been paid by the Company for the Key Executive under the insurance plan from the date of termination through the time period specified for Executive Group I or Executive Group II, whichever is applicable. In the event that any insurance coverage provided under this Article 3(e) is subject to federal, state, or local income or employment taxes or Internal Revenue Code Section 409A excise tax, or in the event that a lump-sum payment is made in lieu of insurance coverage, the Company shall provide the Key Executive with an additional payment in the amount necessary such that after payment by the Key Executive of all such taxes (calculated after assuming the Key Executive pays such taxes for the year in which the payment or benefit occurs at the highest marginal tax rate applicable), including any taxes imposed on the additional payments, the Key Executive effectively received coverage on a tax-free basis or retains a cash amount equal to the health insurance cash payments provided pursuant to this Article 3(e). (e) The Company shall provide the Key Executive with the lump-sum cash value of an additional pension benefit in its retirement plans, including its Supplemental Retirement Plan, as if the Key Executive's employment had continued for an additional one (1) year for Executive Group II or two (2) years for Executive Group I, and calculated as if relevant pay for such additional period is at the same level as on the date the Key Executive Separates from Service. 6 (f) The Company shall provide each Key Executive with the lump-sum cash value of reasonable outplacement services not to exceed fifty thousand dollars ($50,000), consistent with past practices of the Company with respect to officers at such level prior to the Change in Control. (g) If a Key Executive receives other cash severance benefits from the Company, the amount of severance benefit to which the Key Executive is entitled under Article 3(a),(b), or (c) above shall be considered to be satisfied to the extent of such other cash severance payment. ARTICLE 4. OTHER BENEFITS Upon a Change in Control, and without regard to the Key Executive's employment status following such Change in Control, the Key Executive shall receive an amount, paid in a single lump sum of cash, equal to the sum of: (i) any Incentive Compensation, which has been allocated or awarded to such Key Executive for a completed calendar year or other measuring period preceding the Change in Control but has not yet been paid; and (ii) a pro rata portion to the date of the Change in Control of the aggregate value of all contingent Incentive Compensation awards to such Key Executive for the current calendar year or other measuring period, calculated as if one hundred percent (100%) of any performance target or goal was achieved or otherwise on a basis on which such Key Executive will receive with a pro rata portion (based on elapsed time) of the amounts he or she would have been entitled to receive if he or she had continued to be employed by the Company throughout the period contemplated with respect to such award and if all other conditions for receiving the maximum amount with respect to all such awards had been met, notwithstanding any provision of any such plan to the contrary. Upon a Change in Control, and without regard to the Key Executive's employment status following such Change in Control, and except to the extent an applicable award is replaced by a Replacement Award (as defined below): (i) all Stock Options and Stock Appreciation Rights under the Company's Stock Ownership Plan or the Pactiv Corporation 2002 Incentive Compensation Plan, or any other similar plan maintained by the Company, shall immediately become fully vested and exercisable; and (ii) all Restricted Stock or Restricted Stock Units under the Pactiv Corporation 2002 Incentive Compensation Plan, or any other similar plan maintained by the Company, whose vesting depends merely on the satisfaction of a service obligation by a Key Executive to the Company shall vest in full and be free of restrictions related to the vesting of such awards. To the extent an applicable award is replaced by a Replacement Award, and the Key Executive Separates from Service due to an involuntary termination of employment or a Constructive Termination within the two (2) year period following a Change in Control, all Replacement Awards shall become fully vested and, if applicable, exercisable. Stock Options and Stock Appreciation Rights shall remain exercisable for the lesser of thirty-six (36) months or the remaining life of the Stock Option or the Stock Appreciation Right. The terms "Stock Options," "Stock Appreciation Right," "Restricted Stock," and "Restricted Stock Unit" shall have the meaning ascribed to those terms as in the Pactiv Corporation 2002 Incentive Compensation Plan. For the purposes of this Article 4, the term Replacement Award shall mean an award which: (i) which has a value at least equal to the value of the replaced award as determined by the Company in its sole discretion; (ii) relates to publicly traded equity securities of the Company or 7 its successor in the Change in Control or another entity that is affiliated with the Company or its successor following the Change in Control; (iii) other terms and conditions are not less favorable to the Key Executive than the terms and conditions of the replaced award (including the provisions that would apply in the event of a subsequent Change in Control); and (iv) the terms of the Replacement Award satisfy the conditions of Internal Revenue Code Section 409A. Without limiting the generality of the foregoing, the Replacement Award may take the form of a continuation of the replaced award if the requirements of the preceding sentence are satisfied. The determination of whether the conditions of this Article 4 are satisfied shall be made by the Committee, as constituted immediately before the Change in Control, in its sole discretion. ARTICLE 5. METHOD OF PAYMENT If the Key Executive is not a Specified Employee, the Company shall pay, or cause to be paid, the cash severance benefits under the Plan to the Key Executive in a single cash sum as soon as administratively practicable, but in no event later than March 15 of the calendar year after the calendar year of the Executive's date of Separation from Service. If the Key Executive is a Specified Employee, the Company shall pay, or cause to be paid, the cash severance benefits under the Plan to the Key Executive in a single cash sum not sooner than the six (6) month anniversary of the Key Executive's Separation from Service. Notwithstanding the above, payment shall not be made by the Company prior to the submission of a claim as required by Article 12 of the Plan. Notwithstanding the preceding paragraph, no payment provided under this Plan shall constitute an impermissible acceleration of deferred compensation within the contemplation of Section 409A of the Internal Revenue Code, and no payment shall be made until the earliest date on which it would not constitute such an acceleration. Except for withholdings required by law to satisfy local, state, and federal tax withholding requirements, no offset or any other reduction shall be taken in paying such benefit. Notwithstanding this Article 5, the Company's obligation to pay cash severance amounts due the Key Executive pursuant to this Article 5, to the extent not already paid, shall cease immediately and such obligation will be forfeited if it is determined by the Company within a six (6) month period following the Key Executive's Separation from Service, that the Key Executive committed an act which would have resulted in the Key Executive's Discharge for Cause. To the extent already paid, if it is determined by the Company within a six (6) month period following the Key Executive's Separation from Service that the Key Executive committed an act which would have resulted in the Key Executive's Discharge for Cause, the severance amounts provided hereunder shall be repaid in their entirety by the Key Executive to the Company, and all rights to such payments shall be forfeited. ARTICLE 6. GROSS-UP PAYMENT If the sum (the "combined amount") of the payments as described herein and other payments or benefits which the Key Executive has received or has the right to receive from the Company or any of its subsidiaries which are defined in Internal Revenue Code Section 280G(b)(2)(A)(i) would constitute a "parachute payment" (as defined in Internal Revenue Code Section 280G(b)(2)), the combined amount shall, unless the following sentence applies, be decreased by the smallest amount that will eliminate any parachute payment. If the decrease referred to in the preceding sentence is 10 percent (10%) or more of the combined amount, the combined amount 8 shall not be decreased, but rather the Company shall pay to the Key Executive an amount sufficient to provide the Key Executive, after tax, a net amount equal to the Internal Revenue Code Section 4999 excise tax imposed on such combined amount, as increased pursuant to this Article 6 (the "Gross-Up Payment"). For this purpose, "after tax" means the amount retained by the Key Executive after satisfaction (whether through withholding, direct payment, or otherwise) of all applicable federal, state, provincial, and local income taxes at the highest marginal tax rate, and the Key Executive's share of any applicable FICA taxes. If a Key Executive becomes entitled to a Gross-Up Payment as provided in this Article 6 of the Plan, the Company shall pay the Gross-Up Payment, and such payment shall include all Gross-Up Payments due in respect of payments made before, payments made at the same time as, and payments projected to be made after the payment dates as provided in Article 5 of the Plan. If the Key Executive is not a Specified Employee, the Company shall pay the Gross-Up Payment as soon as administratively practicable, but not later than March 15 in the calendar year following the Key Executive's Separation from Service. If the Key Executive is a Specified Employee, the Company shall pay the Gross-Up Payment as soon as administratively practicable on or after the date six (6) months following the date of the Executive's Separation from Service. In determining the potential impact of the Internal Revenue Code Section 4999 excise tax, the Company may rely on any advice it deems appropriate, including, but not limited to, the counsel of its independent auditors; however, such advice shall be deemed mutually acceptable to the Company and the Key Executive. All calculations for purposes of determining whether any of the combined amount will be subject to the excise tax and the amounts of such excise tax will be made in accordance with applicable rules and regulations under Internal Revenue Code Section 280G in effect at the relevant time. The Company shall make the calculations available to the Key Executive and the Key Executive's tax advisor and shall pay the reasonable fees of the advisor for reviewing and counseling the Key Executive with respect to such calculations, not to exceed ten thousand dollars ($10,000). If the Internal Revenue Service adjusts the computation of the Company so that the Executive did not receive the greatest net benefit, the Company shall reimburse the Executive for the full amount necessary to make the Executive whole, plus a market rate of interest, as reasonably determined by the Plan Administrator. If the Key Executive is a Specified Employee, such reimbursement shall be made as soon as administratively practicable on a date on or after the date six (6) months following the Key Executive's date of Separation from Service, and if the Key Executive is not a Specified Employee, such reimbursement shall be made as soon as administratively practicable but not later than March 15 of the calendar year following the calendar year in which the Internal Revenue Service adjusts the Key Executive's computation. If the Internal Revenue Service adjusts the computation such that the Company has exceeded the maximum amount as provided for, then the amount paid in excess shall be owed back to the Company with applicable interest. If, after the receipt by the Key Executive of an amount advanced by the Company pursuant to this Article 6, the Key Executive becomes entitled to receive any refund with respect to such claim due to an overpayment of any excise tax or income tax, including interest and penalties with respect thereto, the Executive shall (subject to the Company's complying with the requirements of this Article 6) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). 9 ARTICLE 7. ASSIGNMENT No Key Executive may assign, transfer, convey, mortgage, hypothecate, or in any way encumber any severance benefit payable under the Plan, nor shall the Key Executive have any right to receive any severance benefit under the Plan except at the time, in the amount and in the manner provided in the Plan, provided that the rights of a Key Executive under the Plan may be enforced by the Key Executive's heirs and legal representatives. This Plan may and shall be assigned or transferred to, and shall be binding upon and shall inure to the benefit of, any successor of the Company, and any such successor shall be deemed substituted for all purposes of "the Company" under the provisions of the Plan. As used in the preceding sentence, the term "successor" shall mean any person, firm, corporation, or business entity which at any time, whether by merger, purchase, or otherwise, acquires all, or substantially all, of the assets or business of the Company. Notwithstanding such assignments, the Company shall remain, with such successor, jointly and severally liable for all obligations under the Plan, which, except as herein provided, may not be assigned by the Company. ARTICLE 8. PLAN AMENDMENT AND TERMINATION The Plan may be terminated or amended at any time by the Company Board provided that during a Threatened Change-in-Control Period, the Plan may not be terminated or amended in any manner that reduces the benefits to a Key Executive or adversely affects the rights of a Key Executive under the Plan, with any such reduction or adverse effect determined as if the Key Executive had incurred a Separation from Service as described in Article 2. In the event of a Change in Control, no amendment or termination made on or after the date of the Change in Control shall apply to any Key Executive until the expiration of two (2) years from the date of the Change in Control. ARTICLE 9. FUNDING The Company shall pay, or cause to be paid, any severance benefit under the Plan out of general assets of the Company. Nothing contained herein shall preclude the Company from establishing a grantor trust through which assets to satisfy obligations under the Plan may be set aside to provide for benefit payments to participants in the Plan. Any assets or property held by such trust shall be subject to the claims of general creditors of the Company, but only upon the insolvency or bankruptcy of the Company and only to the extent that the assets or property held by such trust are attributable to contributions made by the Company. No person other than the Company shall, by virtue of the provisions of the Plan, have any interest in such funds. ARTICLE 10. CONTROLLING LAW The Plan shall be interpreted under the laws of the state of Illinois, except to the extent that federal law preempts such laws. 10 ARTICLE 11. PLAN ADMINISTRATOR The Company is the Plan Administrator, and it shall have the authority to control and manage the operation of this Plan with the authority to interpret the Plan. Following a Change in Control, the Plan Administrator for purposes of any disputed claim under Article 12 shall be an independent third party selected by individuals constituting at least a majority of the Incumbent Board immediately prior to the Change in Control. The Company shall pay the expenses of such individuals in connection with such selection and shall pay the fees and expenses of the third party serving as Plan Administrator. ARTICLE 12. MAKING A CLAIM (a) SUBMISSION OF A CLAIM. In order to claim a severance benefit under this Plan, a Key Executive need only advise the Plan Administrator in writing that the Key Executive's employment with the Company has terminated, that the Key Executive claims a severance benefit under the Plan, and of the mailing address to which the severance benefit or related correspondence is to be sent. (b) DENIAL OF A CLAIM. If a Key Executive has made a claim for benefit under this Plan and any portion of the claim is denied, the Plan Administrator will furnish the Key Executive with a written notice stating the specific reasons for the denial, specific reference to pertinent Plan provisions upon which the denial was based, a description of any additional information or material necessary to perfect the claim and an explanation of why such information or material is necessary, and appropriate information concerning steps to take if the Key Executive wishes to submit the claim for review. The claim will be deemed accepted if the Plan Administrator does not approve the claim and fails to notify the Key Executive within ninety (90) days after receipt of the claim, plus any extension of time for processing the claim, not to exceed ninety (90) additional days, as special circumstances require. To obtain an extension, the Plan Administrator must advise the Key Executive in writing during the initial ninety (90) days if an extension is necessary, stating the special circumstances requiring the extension and the date by which the Key Executive can expect the Plan Administrator's decision regarding the claim. (c) REVIEW PROCEDURE. Within sixty (60) days after the date of written notice denying any benefits, the Key Executive or the Key Executive's authorized representative may write to the Plan Administrator requesting a review of that decision by the Company Board or the Committee for Key Executives in Executive Groups I, or by the Plan Administrator for Key Executives in Executive Group II. The request for review may contain such issues and comments as the Key Executive wishes to have considered in the review. The Key Executive may also review pertinent documents in the Plan Administrator's possession. The Plan Administrator, Company Board, or Committee, whichever is applicable, will make a final determination with respect to the claim as soon as practicable. The Plan Administrator will advise the Key Executive of the determination in writing and will set forth the specific reasons for the determination and the specific references to any pertinent Plan provisions upon which the determination is based. 11 The claim will be deemed accepted on review if the Plan Administrator fails to give the Key Executive written notice of final determination within sixty (60) days after receipt of the request for review, plus any extension of time for completing the review, not to exceed sixty (60) additional days, as special circumstances require. To obtain an extension, the Plan Administrator must advise the Key Executive in writing during the initial sixty (60) days if any extension is necessary, stating the special circumstances requiring the extension and the date by which the Key Executive can expect the Company's decision, regarding the review of the claim. ARTICLE 13. LEGAL FEES AND COSTS In the event a Key Executive initiates legal action to enforce his or her right to any benefit under this Plan, the Company shall pay all reasonable legal fees and costs incurred by the Key Executive in connection with such legal action, provided that the Key Executive prevails on any material issue that is a subject of the legal action. ARTICLE 14. SEVERABILITY If for any reason any provision or provisions of the Plan are determined invalid or unenforceable, the validity and effect of the other provisions of the Plan shall not be affected thereby. IN WITNESS WHEREOF, the Company has caused the Plan to be executed on its behalf by its respective officers thereunder duly authorized, on the day and year set forth below. PACTIV CORPORATION /s/ Henry M. Wells III ---------------------- By: Henry M. Wells, III Its: Vice President & Chief Human Resources Officer Date: December 29, 2006 12 EX-10.22 3 c12792exv10w22.txt RECEIVABLES PURCHASE AGREEMENT CONFORMED EXECUTION COPY ================================================================================ RECEIVABLES PURCHASE AGREEMENT dated as of December 21, 2006 Among PACTIV RSA LLC, as Seller, PACTIV FACTORING LLC, as Servicer, ATLANTIC ASSET SECURITIZATION LLC and CALYON NEW YORK BRANCH as Agent ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I PURCHASE ARRANGEMENTS.............................................. 4 Section 1.1 Purchase Facility..................................... 4 Section 1.2 Increases............................................. 5 Section 1.3 Decreases............................................. 5 Section 1.4 Payment Requirements.................................. 5 ARTICLE II PAYMENTS AND COLLECTIONS........................................... 6 Section 2.1 Payments.............................................. 6 Section 2.2 Collections Prior to Amortization..................... 6 Section 2.3 Collections Following Amortization.................... 7 Section 2.4 Application of Collections............................ 7 Section 2.5 Payment Rescission.................................... 7 Section 2.6 Maximum Purchaser Interests........................... 8 Section 2.7 Clean Up Call......................................... 8 ARTICLE III COMPANY FUNDING.................................................... 8 Section 3.1 CP Costs.............................................. 8 Section 3.2 CP Costs Payments..................................... 8 Section 3.3 Calculation of CP Costs............................... 8 ARTICLE IV FINANCIAL INSTITUTION FUNDING...................................... 8 Section 4.1 Financial Institution Funding......................... 8 Section 4.2 Yield Payments........................................ 9 Section 4.3 Selection and Continuation of Tranche Periods......... 9 Section 4.4 Suspension of the LIBO Rate........................... 9 ARTICLE V REPRESENTATIONS AND WARRANTIES..................................... 10 Section 5.1 Representations and Warranties of the Seller Parties.. 10 Section 5.2 Financial Institution Representations and Warranties.. 14 ARTICLE VI CONDITIONS OF PURCHASES............................................ 14 Section 6.1 Conditions Precedent to Initial Incremental Purchase.. 14 Section 6.2 Conditions Precedent to All Purchases and Reinvestments...................................... 14
i ARTICLE VII COVENANTS.......................................................... 15 Section 7.1 Affirmative Covenants of The Seller Parties........... 15 Section 7.2 Negative Covenants of the Seller Parties.............. 22 ARTICLE VIII ADMINISTRATION AND COLLECTION...................................... 23 Section 8.1 Designation of Servicer............................... 23 Section 8.2 Duties of Servicer.................................... 24 Section 8.3 Collection Notices.................................... 25 Section 8.4 Responsibilities of Seller............................ 25 Section 8.5 Reports............................................... 26 Section 8.6 Servicing Fees........................................ 26 ARTICLE IX AMORTIZATION EVENTS................................................ 26 Section 9.1 Amortization Events................................... 26 Section 9.2 Remedies.............................................. 28 ARTICLE X INDEMNIFICATION.................................................... 29 Section 10.1 Indemnities by the Seller Parties..................... 29 Section 10.2 Increased Costs and Reduced Return.................... 31 Section 10.3 Other Costs and Expenses.............................. 32 ARTICLE XI THE AGENT.......................................................... 33 Section 11.1 Authorization and Action.............................. 33 Section 11.2 Delegation of Duties.................................. 33 Section 11.3 Exculpatory Provisions................................ 33 Section 11.4 Reliance by Agent..................................... 34 Section 11.5 Non-Reliance on Agent and Other Purchasers............ 34 Section 11.6 Reimbursement and Indemnification..................... 34 Section 11.7 Agent in its Individual Capacity...................... 35 Section 11.8 Successor Agent....................................... 35 ARTICLE XII ASSIGNMENTS; PARTICIPATIONS........................................ 35 Section 12.1 Assignments........................................... 35 ARTICLE XIII MISCELLANEOUS...................................................... 36 Section 13.1 Waivers and Amendments................................ 36 Section 13.2 Notices............................................... 37
ii Section 13.3 Ratable Payments...................................... 38 Section 13.4 Protection of Ownership Interests of the Purchasers... 38 Section 13.5 Confidentiality....................................... 38 Section 13.6 Bankruptcy Petition................................... 39 Section 13.7 Limitation of Liability............................... 39 Section 13.8 CHOICE OF LAW......................................... 39 Section 13.9 CONSENT TO JURISDICTION............................... 40 Section 13.10 WAIVER OF JURY TRIAL.................................. 40 Section 13.11 Integration; Binding Effect; Survival of Terms........ 40 Section 13.12 Counterparts; Severability; Section References........ 41 Section 13.13 Calyon Roles.......................................... 41 Section 13.14 Characterization...................................... 41
Exhibits and Schedules Exhibit I Definitions Exhibit II Form of Purchase Notice Exhibit III Places of Business of the Seller Parties; Locations of Records; Federal Employer Identification Number(s) Exhibit IV Names of Collection Banks; Collection Accounts Exhibit V Form of Compliance Certificate Exhibit VI Form of Collection Account Agreement Exhibit VII Credit and Collection Policy Exhibit VIII Form of Monthly Report Schedule A Commitments Schedule B Closing Documents Schedule C Equivalent Long-Term Ratings iii PACTIV RSA LLC RECEIVABLES PURCHASE AGREEMENT This Receivables Purchase Agreement, dated as of December 21, 2006, is among PACTIV RSA LLC, a Delaware limited liability company ("Seller"), PACTIV FACTORING LLC, a Delaware limited liability company ("Factoring"), as initial Servicer (in such capacity, the "Servicer," and together with Seller, the "Seller Parties" and each a "Seller Party"), the entities from time to time listed on Schedule A to this Agreement (together with any of their respective successors and assigns hereunder, the "Financial Institutions"), ATLANTIC ASSET SECURITIZATION LLC ("Company") and CALYON NEW YORK BRANCH, as agent for the Purchasers hereunder or any successor agent hereunder (together with its successors and assigns hereunder, the "Agent"). Unless defined elsewhere herein, capitalized terms used in this Agreement shall have the meanings assigned to such terms in Exhibit I. PRELIMINARY STATEMENTS Seller desires to transfer and assign Purchaser Interests to the Purchasers from time to time. Company may, in its absolute and sole discretion, purchase Purchaser Interests from Seller from time to time. In the event that Company declines to make any purchase, the Financial Institutions shall, at the request of Seller, purchase Purchaser Interests from time to time. In addition, the Financial Institutions have agreed to provide a liquidity facility to Company. Calyon New York Branch has been requested and is willing to act as Agent on behalf of Company and the Financial Institutions in accordance with the terms hereof. ARTICLE I PURCHASE ARRANGEMENTS Section 1.1 Purchase Facility. (a) Upon the terms and subject to the conditions hereof, Seller may, at its option, sell and assign Purchaser Interests to the Agent for the benefit of one or more of the Purchasers. In accordance with the terms and conditions set forth herein, Company may, at its option, instruct the Agent to purchase on behalf of Company, or if Company shall decline to purchase, the Financial Institutions hereby agree that the Agent shall purchase, on behalf of the Financial Institutions, Purchaser Interests from time to time in an aggregate amount not to exceed at such time the lesser of (i) the Purchase Limit and (ii) the aggregate amount of the Commitments during the period from the date hereof to but not including the Facility Termination Date. (b) Seller may, upon at least 10 Business Days' notice to the Agent, terminate in whole or reduce in part, ratably among the Financial Institutions, the unused portion of the Purchase Limit; provided that each partial reduction of the Purchase Limit shall be in an amount equal to $5,000,000 or an integral multiple thereof. Section 1.2 Increases. Seller shall provide the Agent with notice in a form set forth as Exhibit II hereto of each Incremental Purchase (a "Purchase Notice") no later than twelve noon (New York time) on the third (3rd) Business Day prior to such Incremental Purchase. Each Purchase Notice shall be subject to Section 6.2 hereof and, except as set forth below, shall be irrevocable and shall specify the requested Purchase Price (which shall not be less than $1,000,000) and Purchase Date (which, in the case of any Incremental Purchase (after the initial Incremental Purchase hereunder), shall only be on a Settlement Date) and, in the case of an Incremental Purchase to be funded by the Financial Institutions, the requested Discount Rate and Tranche Period. Following receipt of a Purchase Notice, the Agent will determine whether Company agrees to make the purchase. If Company declines to make a proposed purchase, Seller may cancel the Purchase Notice or, in the absence of such a cancellation, the Incremental Purchase of the Purchaser Interest will be made by the Financial Institutions. On the date of each Incremental Purchase, upon satisfaction of the applicable conditions precedent set forth in Article VI, Company or the Financial Institutions, as applicable, shall deposit to the Facility Account, in immediately available funds, no later than 1:00 p.m. (New York time), an amount equal to (i) in the case of Company, the aggregate Purchase Price of the Purchaser Interests Company is then purchasing or (ii) in the case of a Financial Institution, such Financial Institution's Pro Rata Share of the aggregate Purchase Price of the Purchaser Interests the Financial Institution is purchasing. Section 1.3 Decreases. Seller shall provide the Agent with prior written notice in conformity with the Required Notice Period (a "Reduction Notice") of any proposed reduction of Aggregate Capital. Such Reduction Notice shall designate (i) the date (the "Proposed Reduction Date") upon which any such reduction of Aggregate Capital shall occur (which date shall give effect to the applicable Required Notice Period), and (ii) the amount of Aggregate Capital to be reduced which shall be applied ratably to the Purchaser Interests of Company and the Financial Institutions in accordance with the amount of Capital (if any) owing to Company, on the one hand, and the amount of Capital (if any) owing to the Financial Institutions (ratably, based on their respective Pro Rata Shares), on the other hand (the "Aggregate Reduction"). Only one (1) Reduction Notice shall be outstanding at any time. Section 1.4 Payment Requirements. All amounts to be paid or deposited by any Seller Party pursuant to any provision of this Agreement shall be paid or deposited in accordance with the terms hereof no later than twelve noon (New York time) on the day when due in immediately available funds, and if not received before twelve noon (New York time) shall be deemed to be received on the next succeeding Business Day. If such amounts are payable to a Purchaser they shall be paid to the Agent, for the account of such Purchaser, at the office of Calyon New York Branch ABA 026008073; account number 01-25680-0001-00-001 "Pactiv/AAS" until otherwise notified by the Agent. All computations of Yield, per annum fees calculated as part of any CP Costs, per annum fees hereunder and per annum fees under the Fee Letter shall be made on the basis of a year of 360 days for the actual number of days elapsed; provided, however, that all computations of Yield calculated with respect to the Base Rate shall be made on the basis of a year of 365 days for the actual number of days elapsed. If any amount hereunder shall be payable on a day which is not a Business Day, such amount shall be payable on the next succeeding Business Day; provided, however, that if any amount hereunder calculated 5 with respect to the LIBO Rate shall be payable on a day which is not a Business Day, such amount shall be payable on the immediately preceding Business Day. ARTICLE II PAYMENTS AND COLLECTIONS Section 2.1 Payments. Notwithstanding any limitation on recourse contained in this Agreement, Seller shall immediately pay to the Agent when due, for the account of the relevant Purchaser or Purchasers on a full recourse basis, (i) the fees set forth in the Fee Letter (which fees shall satisfy all fees owing by the Seller to the Financial Institutions), (ii) all CP Costs allocable to Capital funded by Commercial Paper, (iii) all accrued and unpaid Yield (to the extent not included in CP Costs), (iv) all amounts payable as Deemed Collections (which shall be immediately due and payable by Seller and applied to reduce outstanding Aggregate Capital hereunder in accordance with Sections 2.2 and 2.3 hereof), (v) all amounts payable to reduce the Purchaser Interests, if required, pursuant to Section 2.6, (vi) all amounts payable pursuant to Article X, if any, (vii) if Factoring or one of its Affiliates is not the Servicer hereunder, all Servicer costs and expenses, including the Servicing Fee, in connection with servicing, administering and collecting the Receivables, (viii) all Broken Funding Costs and (ix) all Default Fees (collectively, the "Obligations"). If any Person fails to pay any of the Obligations when due, such Person agrees to pay, on demand, the Default Fee in respect thereof until paid. Notwithstanding the foregoing, no provision of this Agreement or the Fee Letter shall require the payment or permit the collection of any amounts hereunder in excess of the maximum permitted by applicable law. If at any time Seller receives any Collections or is deemed to receive any Collections, Seller shall immediately pay such Collections or Deemed Collections to the Servicer for application in accordance with the terms and conditions hereof and, at all times prior to such payment, such Collections or Deemed Collections shall be held in trust by Seller for the exclusive benefit of the Purchasers and the Agent. Section 2.2 Collections Prior to Amortization. Prior to the Amortization Date, any Collections and/or Deemed Collections received by the Servicer shall be set aside and held in trust by the Servicer for the payment of any accrued and unpaid Aggregate Unpaids or for a Reinvestment as provided in this Section 2.2. If at any time any Collections are received by the Servicer prior to the Amortization Date, Seller hereby requests and the Purchasers hereby agree to make, simultaneously with such receipt, a reinvestment (each a "Reinvestment") with that portion of the balance of each and every Collection received by the Servicer that is part of any Purchaser Interest, such that after giving effect to such Reinvestment, the amount of Capital of such Purchaser Interest immediately after such receipt and corresponding Reinvestment shall be equal to the amount of Capital immediately prior to such receipt. On each Settlement Date prior to the occurrence of the Amortization Date, the Servicer shall remit to the Agent's account the amounts set aside during the preceding Settlement Period that have not been subject to a Reinvestment and apply such amounts (if not previously paid in accordance with Section 2.1), to reduce unpaid Obligations. If such Capital and Obligations shall be reduced to zero, any additional Collections received by the Servicer (i) if applicable, shall be remitted to the Agent's account no later than twelve noon (New York time) to the extent required to fund any Aggregate Reduction on such Settlement Date and (ii) any balance remaining thereafter shall be remitted from the Servicer to Seller on such Settlement Date. 6 Section 2.3 Collections Following Amortization. On the Amortization Date and on each day thereafter, the Servicer shall set aside and hold in trust, for the holder of each Purchaser Interest, all Collections received on such day and an additional amount for the payment of any accrued and unpaid Obligations owed by Seller and not previously paid by Seller in accordance with Section 2.1. On and after the Amortization Date, the Servicer shall, at any time upon the request from time to time by (or pursuant to standing instructions from) the Agent (i) remit to the Agent's account the amounts set aside pursuant to the preceding sentence, and (ii) apply such amounts to reduce the Capital associated with each such Purchaser Interest and any other Aggregate Unpaids. Section 2.4 Application of Collections. If there shall be insufficient funds on deposit for the Servicer to distribute funds in payment in full of the aforementioned amounts pursuant to Section 2.2 or 2.3 (as applicable), the Servicer shall distribute funds: first, to the payment of the Servicer's reasonable out-of-pocket costs and expenses in connection with servicing, administering and collecting the Receivables, including the Servicing Fee, if Factoring or one of its Affiliates is not then acting as the Servicer, second, to the reimbursement of the Agent's costs of collection and enforcement of this Agreement, third, ratably to the payment of all accrued CP Costs, accrued and unpaid Yield and fees payable pursuant to the Fee Letter, fourth, (to the extent applicable) to the ratable reduction of the Aggregate Capital, fifth, for the ratable payment of all other unpaid Obligations, sixth, to the payment of the accrued and unpaid Servicing Fee, if Factoring or one of its Affiliates is acting as the Servicer, and seventh, after the Aggregate Unpaids have been indefeasibly reduced to zero, to Seller. Collections applied to the payment of Aggregate Unpaids shall be distributed in accordance with the aforementioned provisions, and, giving effect to each of the priorities set forth in this Section 2.4, shall be shared ratably (within each priority) among the Agent and the Purchasers in accordance with the amount of such Aggregate Unpaids owing to each of them in respect of each such priority. Section 2.5 Payment Rescission. No payment of any of the Aggregate Unpaids shall be considered paid or applied hereunder to the extent that, at any time, all or any portion of such payment or application is rescinded by application of law or judicial authority, or must otherwise be returned or refunded for any reason. Seller shall remain obligated for the amount of any payment or application so rescinded, returned or refunded, and shall promptly pay to the Agent (for application to the Person or Persons who suffered such rescission, return or refund) the full amount thereof, plus the Default Fee from the date of any such rescission, return or refunding. 7 Section 2.6 Maximum Purchaser Interests. Seller shall ensure that the Purchaser Interests of the Purchasers shall at no time exceed in the aggregate 100%. If the aggregate of the Purchaser Interests of the Purchasers exceeds 100%, Seller shall immediately pay to the Agent an amount to be applied to reduce the Aggregate Capital (as allocated by the Agent), such that after giving effect to such payment the aggregate of the Purchaser Interests equals or is less than 100%. Section 2.7 Clean Up Call. In addition to Seller's rights pursuant to Section 1.3, Seller shall have the right (after providing written notice to the Agent in accordance with the Required Notice Period), at any time following the reduction of the Aggregate Capital to a level that is less than 10.0% of the original Purchase Limit, to repurchase from the Purchasers all, but not less than all, of the then outstanding Purchaser Interests. The purchase price in respect thereof shall be an amount equal to the Aggregate Unpaids through the date of such repurchase, payable in immediately available funds. Such repurchase shall be without representation, warranty or recourse of any kind by, on the part of, or against any Purchaser or the Agent. ARTICLE III COMPANY FUNDING Section 3.1 CP Costs. Seller shall pay CP Costs with respect to the Capital associated with each Purchaser Interest of Company for each day that any Capital in respect of such Purchaser Interest is outstanding. Each Purchaser Interest funded substantially with Pooled Commercial Paper will accrue CP Costs each day on a pro rata basis, based upon the percentage share the Capital in respect of such Purchaser Interest represents in relation to all assets held by Company and funded substantially with Pooled Commercial Paper. Section 3.2 CP Costs Payments. On each Settlement Date, Seller shall pay to the Agent (for the benefit of Company) an aggregate amount equal to all accrued and unpaid CP Costs in respect of the Capital associated with all Purchaser Interests of Company for the immediately preceding Accrual Period in accordance with Article II. Section 3.3 Calculation of CP Costs. On the third Business Day immediately preceding each Settlement Date, Company shall calculate the aggregate amount of CP Costs for the applicable Accrual Period and shall notify Seller of such aggregate amount. ARTICLE IV FINANCIAL INSTITUTION FUNDING Section 4.1 Financial Institution Funding. The Agent shall notify the Seller if the Purchaser Interest will be funded by Financial Institutions. Each Purchaser Interest of the Financial Institutions shall accrue Yield for each day during its Tranche Period at either the LIBO Rate or the Base Rate in accordance with the terms and conditions hereof. Until Seller gives notice to the Agent of another Discount Rate in accordance with Section 4.4, the initial Discount Rate for any Purchaser Interest transferred to the Financial Institutions pursuant to the terms and conditions hereof shall be the Base Rate. If the Financial Institutions acquire by assignment from Company any Purchaser Interest pursuant to the Liquidity Agreement, each Purchaser Interest so 8 assigned shall each be deemed to have a new Tranche Period commencing on the date of any such assignment. Section 4.2 Yield Payments. On the Settlement Date for each Purchaser Interest of the Financial Institutions, Seller shall pay to the Agent (for the benefit of the Financial Institutions) an aggregate amount equal to the accrued and unpaid Yield for the entire Tranche Period of each such Purchaser Interest in accordance with Article II. Section 4.3 Selection and Continuation of Tranche Periods. (a) With consultation from (and approval by) the Agent, Seller shall from time to time request Tranche Periods for the Purchaser Interests of the Financial Institutions, provided that, if at any time the Financial Institutions shall have a Purchaser Interest, Seller shall always request Tranche Periods such that at least one Tranche Period shall end on the date specified in clause (A) of the definition of Settlement Date. (b) Seller or the Agent, upon notice to and consent by the other received at least three (3) Business Days prior to the end of a Tranche Period (the "Terminating Tranche") for any Purchaser Interest, may, effective on the last day of the Terminating Tranche: (i) divide any such Purchaser Interest into multiple Purchaser Interests, (ii) combine any such Purchaser Interest with one or more other Purchaser Interests that have a Terminating Tranche ending on the same day as such Terminating Tranche or (iii) combine any such Purchaser Interest with new Purchaser Interests to be purchased on the day such Terminating Tranche ends, provided, that in no event may a Purchaser Interest of Company be combined with a Purchaser Interest of the Financial Institutions. (c) Financial Institution Discount Rates. Seller may select the LIBO Rate or the Base Rate for each Purchaser Interest of the Financial Institutions. Seller shall by twelve noon (New York time): (i) at least three (3) Business Days prior to the expiration of any Terminating Tranche with respect to which the LIBO Rate is being requested as a new Discount Rate and (ii) at least one (1) Business Day prior to the expiration of any Terminating Tranche with respect to which the Base Rate is being requested as a new Discount Rate, give the Agent irrevocable notice of the new Discount Rate for the Purchaser Interest associated with such Terminating Tranche. Until Seller gives notice to the Agent of another Discount Rate, the initial Discount Rate for any Purchaser Interest transferred to the Financial Institutions pursuant to the terms and conditions hereof shall be the Base Rate. Section 4.4 Suspension of the LIBO Rate. (a) If any Financial Institution notifies the Agent that it has determined that funding its Pro Rata Share of the Purchaser Interests of the Financial Institutions at a LIBO Rate would violate any applicable law, rule, regulation or directive of any governmental or regulatory authority, whether or not having the force of law, or that (i) deposits of a type and maturity appropriate to match fund its Purchaser Interests at such LIBO Rate are not available or (ii) such LIBO Rate does not accurately reflect the cost of acquiring or maintaining a Purchaser Interest at such LIBO Rate, then the Agent shall suspend the availability of such LIBO Rate and require Seller to select the Base Rate for any Purchaser Interest accruing Yield at such LIBO Rate. 9 (b) If less than all of the Financial Institutions give a notice to the Agent pursuant to Section 4.5(a), each Financial Institution which gave such a notice shall be obliged, at the request of Seller, Company or the Agent, to assign all of its rights and obligations hereunder to (i) another Financial Institution or (ii) another funding entity nominated by Seller or the Agent that is acceptable to Company and willing to participate in this Agreement through the Liquidity Termination Date in the place of such notifying Financial Institution; provided that (i) the notifying Financial Institution receives payment in full, pursuant to an Assignment Agreement, of an amount equal to such notifying Financial Institution's Pro Rata Share of the Capital and Yield owing to all of the Financial Institutions and all accrued but unpaid fees and other costs and expenses payable in respect of its Pro Rata Share of the Purchaser Interests of the Financial Institutions, and (ii) the replacement Financial Institution otherwise satisfies the requirements of Section 12.1(b). ARTICLE V REPRESENTATIONS AND WARRANTIES Section 5.1 Representations and Warranties of the Seller Parties. Each Seller Party hereby represents and warrants to the Agent and the Purchasers, as to itself, as of the date hereof and as of the date of each Incremental Purchase and the date of each Reinvestment that: (a) Existence and Power. Such Seller Party is a limited liability company duly organized, validly existing and in good standing under the laws of its state of formation. Such Seller Party is duly qualified to do business and is in good standing as a foreign limited liability company, and has and holds all power, corporate or otherwise, and all governmental licenses, authorizations, consents and approvals required to carry on its business in each jurisdiction in which its business is conducted except where the failure to so qualify or so hold could not reasonably be expected to have a Material Adverse Effect. (b) Power and Authority; Due Authorization, Execution and Delivery. The execution and delivery by such Seller Party of this Agreement and each other Transaction Document to which it is a party, and the performance of its obligations hereunder and thereunder and, in the case of Seller, Seller's use of the proceeds of purchases made hereunder, are within its powers, corporate or otherwise, and authority and have been duly authorized by all necessary action, corporate or otherwise, on its part. This Agreement and each other Transaction Document to which such Seller Party is a party has been duly executed and delivered by such Seller Party. (c) No Conflict. The execution and delivery by such Seller Party of this Agreement and each other Transaction Document to which it is a party, and the performance of its obligations hereunder and thereunder do not contravene or violate (i) its certificate of formation or limited liability company operating agreement, (ii) any law, rule or regulation applicable to it, (iii) any restrictions under any agreement, contract or instrument to which it is a party or by which it or any of its property is bound, or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting it or its property, and do not result in the creation or imposition of any Adverse Claim on assets of such Seller Party or its Subsidiaries (except as created hereunder) except, in any case, where such contravention or violation could not 10 reasonably be expected to have a Material Adverse Effect; and no transaction contemplated hereby requires compliance with any bulk sales act or similar law. (d) Governmental Authorization. Other than the filing of the financing statements required hereunder, no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution and delivery by such Seller Party of this Agreement and each other Transaction Document to which it is a party and the performance of its obligations hereunder and thereunder. (e) Actions, Suits. There are no actions, suits or proceedings pending, or to the best of such Seller Party's knowledge, threatened, against or affecting such Seller Party, or any of its properties, in or before any court, arbitrator or other body, that could reasonably be expected to have a Material Adverse Effect. Such Seller Party is not in default with respect to any order of any court, arbitrator or governmental body (which, in the case of the Servicer, could reasonably be expected to have a Material Adverse Effect). (f) Binding Effect. This Agreement and each other Transaction Document to which such Seller Party is a party constitute the legal, valid and binding obligations of such Seller Party enforceable against such Seller Party in accordance with their respective terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or limiting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). (g) Accuracy of Information. All information heretofore furnished by such Seller Party or any of its Affiliates to the Agent or the Purchasers for purposes of or in connection with this Agreement, any of the other Transaction Documents or any transaction contemplated hereby or thereby is, and all such information (including without limitation, all Monthly Reports) hereafter furnished by such Seller Party or any of its Affiliates to the Agent or the Purchasers will be, true and accurate in every material respect on the date such information is stated or certified and does not and will not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained therein not misleading. (h) Use of Proceeds. No proceeds of any purchase hereunder will be used for a purpose that violates, or would be inconsistent with, Regulation T, U or X promulgated by the Board of Governors of the Federal Reserve System from time to time. (i) Good Title. Immediately prior to each purchase hereunder, Seller shall be the legal and beneficial owner of the Receivables and Related Security with respect thereto, free and clear of any Adverse Claim, except as created by the Transaction Documents. There have been duly filed all financing statements or other similar instruments or documents necessary under the UCC (or any comparable law) of all appropriate jurisdictions to perfect Seller's ownership interest in each Receivable, its Collections and the Related Security. (j) Perfection. This Agreement and the Collection Account Agreements, together with the filing of the financing statements contemplated hereby, are effective to, and shall, upon each purchase hereunder, transfer to the Agent for the benefit of the relevant Purchaser or Purchasers (and the Agent for the benefit of such Purchaser or Purchasers shall 11 acquire from Seller) a valid and perfected first priority undivided percentage ownership interest or security interest in each Receivable existing or hereafter arising and in the Related Security and Collections with respect thereto, free and clear of any Adverse Claim, except as created by the Transactions Documents. There have been duly filed all financing statements or other similar instruments or documents necessary under the UCC (or any comparable law) of all appropriate jurisdictions to perfect the Agent's (on behalf of the Purchasers) ownership or security interest in the Receivables, the Related Security and the Collections. (k) Places of Business and Locations of Records. The principal places of business and chief executive office of such Seller Party and the offices where it keeps all of its Records are located at the address(es) listed on Exhibit III or such other locations of which the Agent has been notified in accordance with Section 7.2(a) in jurisdictions where all action required by Section 13.4(a) has been taken and completed. Seller's Federal Employer Identification Number and organizational identification number, if any, are correctly set forth on Exhibit III. (l) Collections. The conditions and requirements set forth in Section 7.1(j) and Section 8.2 have at all times been satisfied and duly performed. The names and addresses of all Collection Banks, together with the account numbers of the Collection Accounts of Seller at each Collection Bank and the post office box number of each Lock-Box, are listed on Exhibit IV. Seller has not granted any Person, other than the Agent as contemplated by this Agreement, dominion and control of any Lock-Box or Collection Account, or the right to take dominion and control of any such Lock-Box or Collection Account at a future time or upon the occurrence of a future event. (m) Material Adverse Effect. (i) The initial Servicer represents and warrants that since the date of this Agreement, no event has occurred that would have a material adverse effect on the financial condition or operations of the initial Servicer and its Subsidiaries or the ability of the initial Servicer or its Subsidiaries to perform their respective obligations under this Agreement, and (ii) Seller represents and warrants that since the date of this Agreement, no event has occurred that would have a material adverse effect on (A) the financial condition or operations of Seller, (B) the ability of Seller to perform its obligations under the Transaction Documents, or (C) the collectibility of the Receivables generally or any material portion of the Receivables. (n) Names. In the past five (5) years, Seller has not used any corporate names, trade names or assumed names other than the name in which it has executed this Agreement. (o) Ownership of Seller. Factoring owns, directly or indirectly, 100% of the membership interests of Seller, free and clear of any Adverse Claim. Such membership interests are validly issued, fully paid and nonassessable, and there are no options, warrants or other rights to acquire membership interests of Seller. (p) Not an Investment Company. Such Seller Party is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or any successor statute. 12 (q) Compliance with Law. Such Seller Party has complied in all respects with all applicable laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. Each Receivable, together with the Contract related thereto, does not contravene any laws, rules or regulations applicable thereto (including, without limitation, laws, rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy), and no part of such Contract is in violation of any such law, rule or regulation, except where such contravention or violation could not reasonably be expected to have a Material Adverse Effect. (r) Compliance with Credit and Collection Policy. Such Seller Party has complied in all material respects with the Credit and Collection Policy with regard to each Receivable and the related Contract, and has not made any change to such Credit and Collection Policy, other than as permitted under Section 7.2(c), and in compliance with the notification requirements in Section 7.1(a)(vii). (s) Payments to Factoring. With respect to each Receivable transferred to Seller under the Receivables Sale Agreement, Seller has given reasonably equivalent value to Factoring in consideration therefor and such transfer was not made for or on account of an antecedent debt. No transfer by Factoring of any Receivable under the Receivables Sale Agreement is or may be voidable under any section of the Bankruptcy Reform Act of 1978 (11 U.S.C. Sections 101 et seq.), as amended. (t) Enforceability of Contracts. Each Contract with respect to each Receivable is effective to create, and has created, a legal, valid and binding obligation of the related Obligor to pay the Outstanding Balance of the Receivable created thereunder and any accrued interest thereon, enforceable against the Obligor in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or limiting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). (u) Eligible Receivables. Each Receivable included in the Net Receivables Balance as an Eligible Receivable on the date of purchase under the Receivables Sale Agreement was an Eligible Receivable on such purchase date. (v) Net Receivables Balance. Seller has determined that, immediately after giving effect to each purchase hereunder, the Net Receivables Balance is at least equal to the sum of the Aggregate Capital plus the Aggregate Reserves. (w) Accounting. The manner in which such Seller Party accounts for the transactions contemplated by this Agreement and the Receivables Sale Agreement does not jeopardize the true sale analysis. (x) Purpose. Seller has determined that, from a business viewpoint, the purchase of the Receivables and related interests thereto from Factoring under the Receivables Sale Agreement, and the sale of Purchaser Interests to the Purchasers and the other transactions contemplated herein, are in the best interests of Seller. 13 (y) Other Representations and Warranties. This Agreement is effective to transfer to the Agent and the Purchasers, as assignees of Seller, the full benefit of and a direct claim against each of Factoring and each Original Seller in respect of each representation or warranty made by Factoring and each Original Seller under any Transaction Document. Section 5.2 Financial Institution Representations and Warranties. Each Financial Institution hereby represents and warrants to the Agent and Company that: (a) Existence and Power. Such Financial Institution is a corporation or a banking association duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, and has all corporate power to perform its obligations hereunder. (b) No Conflict. The execution and delivery by such Financial Institution of this Agreement and the performance of its obligations hereunder are within its corporate powers, have been duly authorized by all necessary corporate action, do not contravene or violate (i) its certificate or articles of incorporation or association or by-laws, (ii) any law, rule or regulation applicable to it, (iii) any restrictions under any agreement, contract or instrument to which it is a party or any of its property is bound, or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting it or its property, and do not result in the creation or imposition of any Adverse Claim on its assets. This Agreement has been duly authorized, executed and delivered by such Financial Institution. (c) Governmental Authorization. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution and delivery by such Financial Institution of this Agreement and the performance of its obligations hereunder. (d) Binding Effect. This Agreement constitutes the legal, valid and binding obligation of such Financial Institution enforceable against such Financial Institution in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or limiting creditors' rights generally and by general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law). ARTICLE VI CONDITIONS OF PURCHASES Section 6.1 Conditions Precedent to Initial Incremental Purchase. The initial Incremental Purchase of a Purchaser Interest under this Agreement is subject to the conditions precedent that the Agent shall have received on or before the date of such purchase those documents listed on Schedule B and the Agent shall have received all fees and expenses required to be paid on such date pursuant to the terms of this Agreement and the Fee Letter. Section 6.2 Conditions Precedent to All Purchases and Reinvestments. Each purchase of a Purchaser Interest (other than pursuant to the Liquidity Agreement) and each Reinvestment shall be subject to the further conditions precedent that in the case of each such purchase or Reinvestment: (a) the Servicer shall have delivered to the Agent on or prior to the date 14 of such purchase, in form and substance satisfactory to the Agent, all Monthly Reports as and when due under Section 8.5; (b) the Facility Termination Date shall not have occurred; (c) the Agent shall have received such other approvals, opinions or documents as it may reasonably request related to any change (or knowledge thereof) in law or circumstances which gives rise to concern that a Material Adverse Effect shall have occurred or which could be reasonably expected to have a Material Adverse Effect; and (d) on the date of each such Incremental Purchase or Reinvestment, the following statements shall be true (and acceptance of the proceeds of such Incremental Purchase or Reinvestment shall be deemed a representation and warranty by Seller that such statements are then true): (i) the representations and warranties set forth in Section 5.1 are true and correct on and as of the date of such Incremental Purchase or Reinvestment as though made on and as of such date; (ii) no event has occurred and is continuing, or would result from such Incremental Purchase or Reinvestment, that will constitute an Amortization Event, and no event has occurred and is continuing, or would result from such Incremental Purchase, that would constitute a Potential Amortization Event; (iii) the Aggregate Capital does not exceed the Purchase Limit and the aggregate Purchaser Interests do not exceed 100%; and (iv) no involuntary proceeding of the type described in Section 9.1(d)(ii) has been instituted, and remains undismissed or unstayed, against any Seller Party. It is expressly understood that each Reinvestment shall, unless otherwise directed by the Agent or any Purchaser, occur automatically on each day that the Servicer shall receive any Collections without the requirement that any further action be taken on the part of any Person and notwithstanding the failure of Seller to satisfy any of the foregoing conditions precedent in respect of such Reinvestment. The failure of Seller to satisfy any of the foregoing conditions precedent in respect of any Reinvestment shall give rise to a right of the Agent, which right may be exercised at any time on demand of the Agent, to rescind the related purchase and direct Seller to pay to the Agent for the benefit of the Purchasers an amount equal to the Collections prior to the Amortization Date that shall have been applied to the affected Reinvestment. ARTICLE VII COVENANTS Section 7.1 Affirmative Covenants of The Seller Parties. Until the date on which the Aggregate Unpaids have been indefeasibly paid in full and this Agreement terminates in accordance with its terms, each Seller Party hereby covenants, as to itself, as set forth below: (a) Reporting. Such Seller Party will maintain, for itself and each of its Subsidiaries, a system of accounting established and administered in accordance with GAAP, and furnish or cause to be furnished to the Agent: (i) Annual Reporting. Within ninety (90) days after the close of each of its respective fiscal years, unaudited financial statements (which shall include balance 15 sheets, statements of income and retained earnings and a statement of cash flows) for such Seller Party for such fiscal year certified by its respective Authorized Officer. (ii) Quarterly Reporting. Within forty-five (45) days after the close of the first three (3) quarterly periods of each of its respective fiscal years, balance sheets of each Seller Party as at the close of each such period and statements of income and retained earnings and a statement of cash flows for each Seller Party for the period from the beginning of such fiscal year to the end of such quarter, all certified by its respective Authorized Officer. (iii) Compliance Certificate. Together with the financial statements required hereunder, a compliance certificate in substantially the form of Exhibit V signed by such Seller Party's Authorized Officer and dated the date of such annual financial statement or such quarterly financial statement, as the case may be. (iv) Shareholders Statements and Reports. Promptly upon the furnishing thereof to the shareholders of such Seller Party copies of all financial statements, reports and proxy statements so furnished. (v) S.E.C. Filings. Promptly upon the filing thereof, copies of all registration statements and annual, quarterly, monthly or other regular reports which Provider or any of its Subsidiaries files with the Securities and Exchange Commission. (vi) Copies of Notices. Promptly upon its receipt of any notice, request for consent, financial statements, certification, report or other communication under or in connection with any Transaction Document from any Person other than the Agent or Company, copies of the same. (vii) Change in Credit and Collection Policy. At least thirty (30) days prior to the effectiveness of any material change in or material amendment to the Credit and Collection Policy, a copy of the Credit and Collection Policy then in effect and a notice (A) indicating such change or amendment, and (B) if such proposed change or amendment would be reasonably likely to have a Material Adverse Effect on the collectibility of the Receivables or decrease the credit quality of any newly created Receivables, requesting the Agent's consent thereto. (viii) Other Information. Promptly, from time to time, such other information, documents, records or reports relating to the Receivables or the condition or operations, financial or otherwise, of such Seller Party as the Agent may from time to time reasonably request in order to protect the interests of the Agent and the Purchasers under or as contemplated by this Agreement. (b) Notices. Such Seller Party will notify the Agent in writing of any of the following promptly upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken with respect thereto: (i) Amortization Events or Potential Amortization Events. The occurrence of each Amortization Event and each Potential Amortization Event, by a statement of an Authorized Officer of such Seller Party. 16 (ii) Judgment and Proceedings. (A) The entry of any judgment or decree against the Provider or any of its Subsidiaries if the aggregate amount of all judgments and decrees then outstanding against the Provider and its Subsidiaries, taken as a whole, exceeds $50,000,000; (B) the institution of any litigation, arbitration proceeding or governmental proceeding against the Provider or the Servicer or any of their respective Subsidiaries which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; and (C) the entry of any judgment or decree or the institution of any litigation, arbitration proceeding or governmental proceeding against Seller. (iii) Material Adverse Effect. The occurrence of any event or condition that has had, or could reasonably be expected to have, a Material Adverse Effect. (iv) Amortization Date. The occurrence of the "Amortization Date" under the Receivables Sale Agreement or any Transfer Agreement. (v) Defaults Under Other Agreements. The occurrence of a default or an event of default under any other financing arrangement in excess of $50,000,000 pursuant to which the Provider is a debtor or an obligor. (vi) Downgrade of Provider. Any downgrade in the rating of any Indebtedness of Provider by Standard & Poor's Ratings Group or by Moody's Investors Service, Inc., setting forth the Indebtedness affected and the nature of such change. (c) Compliance with Laws and Preservation of Existence. Such Seller Party will comply in all respects with all applicable laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. Such Seller Party will preserve and maintain its existence, rights, franchises and privileges in the jurisdiction of its formation, and qualify and remain qualified in good standing as a foreign limited liability company in each jurisdiction where its business is conducted, except where the failure to so preserve and maintain or qualify could not reasonably be expected to have a Material Adverse Effect. (d) Audits. Such Seller Party will furnish to the Agent from time to time such information with respect to it and the Receivables as the Agent may reasonably request. Such Seller Party will, from time to time during regular business hours as requested by the Agent upon reasonable notice and at the sole cost of such Seller Party, permit the Agent, or its agents or representatives (and shall cause Factoring and each Original Seller to permit the Agent or its agents or representatives), (i) to examine and make copies of and abstracts from all Records in the possession or under the control of such Person relating to the Receivables and the Related Security, including, without limitation, the related Contracts, and (ii) to visit the offices and properties of such Person for the purpose of examining such materials described in clause (i) above, and to discuss matters relating to such Person's financial condition or the Receivables and the Related Security or any Person's performance under any of the Transaction Documents or any Person's performance under the Contracts and, in each case, with any of the officers or employees of Seller or the Servicer having knowledge of such matters. Notwithstanding the 17 foregoing, no Seller Party shall be liable for the cost of more than one (1) such audit during each calendar year, starting with the year 2007, unless an Amortization Event has occurred. (e) Keeping and Marking of Records and Books. (i) The Servicer will (and will cause Factoring and each Original Seller to) maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Receivables in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Receivables (including, without limitation, records adequate to permit the immediate identification of each new Receivable and all Collections of and adjustments to each existing Receivable). The Servicer will (and will cause Factoring and each Original Seller to) give the Agent notice of any material change in the administrative and operating procedures referred to in the previous sentence. (ii) Such Seller Party will (and will cause Factoring and each Original Seller to) (A) on or prior to the date hereof, mark its master data processing records relating to the Purchaser Interests with a legend, acceptable to the Agent, describing the Purchaser Interests and (B) after the occurrence of an Amortization Event, upon the request of the Agent (x) mark each Contract and other books and records relating to the Purchaser Interests with a legend describing the Purchaser Interests and (y) deliver to the Agent all Contracts (including, without limitation, all multiple originals of any such Contract) relating to the Receivables. (f) Compliance with Contracts and Credit and Collection Policy. Such Seller Party will (and will cause Factoring and each Original Seller to) timely and fully (i) perform and comply in all material respects with all provisions, covenants and other promises required to be observed by it under the Contracts related to the Receivables, and (ii) comply in all material respects with the Credit and Collection Policy in regard to each Receivable and the related Contract. (g) Performance and Enforcement of Receivables Sale Agreement. Seller will, and will require Factoring and each Original Seller to, perform each of their respective obligations and undertakings under and pursuant to the Receivables Sale Agreement, will purchase Receivables thereunder in strict compliance with the terms thereof and will vigorously enforce the rights and remedies accorded to Seller under the Receivables Sale Agreement. Seller will take all actions to perfect and enforce its rights and interests (and the rights and interests of the Agent and the Purchasers as assignees of Seller) under the Receivables Sale Agreement as the Agent may from time to time reasonably request, including, without limitation, making claims to which it may be entitled under any indemnity, reimbursement or similar provision contained in the Receivables Sale Agreement. (h) Ownership. Seller will (or will cause Factoring and each Original Seller to) take all necessary action to (i) vest legal and equitable title to the Receivables, the Related Security and the Collections purchased under the Receivables Sale Agreement irrevocably in Seller, free and clear of any Adverse Claims other than Adverse Claims in favor of the Agent and the Purchasers (including, without limitation, the filing of all financing statements or other 18 similar instruments or documents necessary under the UCC (or any comparable law) of all appropriate jurisdictions to perfect Seller's interest in such Receivables, Related Security and Collections and such other action to perfect, protect or more fully evidence the interest of Seller therein as the Agent may reasonably request), and (ii) establish and maintain, in favor of the Agent, for the benefit of the Purchasers, a valid and perfected first priority undivided percentage ownership interest (and/or a valid and perfected first priority security interest) in all Receivables, Related Security and Collections to the full extent contemplated herein, free and clear of any Adverse Claims other than Adverse Claims in favor of the Agent for the benefit of the Purchasers (including, without limitation, the filing of all financing statements or other similar instruments or documents necessary under the UCC (or any comparable law) of all appropriate jurisdictions to perfect the Agent's (for the benefit of the Purchasers) interest in such Receivables, Related Security and Collections and such other action to perfect, protect or more fully evidence the interest of the Agent for the benefit of the Purchasers as the Agent may reasonably request). (i) Purchasers' Reliance. Seller acknowledges that the Purchasers are entering into the transactions contemplated by this Agreement in reliance upon Seller's identity as a legal entity that is separate from Provider or any Affiliate thereof. Therefore, from and after the date of execution and delivery of this Agreement, Seller shall take all reasonable steps, including, without limitation, all steps that the Agent or any Purchaser may from time to time reasonably request, to maintain Seller's identity as a separate legal entity and to make it manifest to third parties that Seller is an entity with assets and liabilities distinct from those of Provider and any Affiliate thereof and not just a division of Provider or any such Affiliate. Without limiting the generality of the foregoing and in addition to the other covenants set forth herein, Seller will: (i) conduct its own business in its own name and require that all full-time employees of Seller, if any, identify themselves as such and not as employees of Provider or any Affiliate thereof (including, without limitation, by means of providing appropriate employees with business or identification cards identifying such employees as Seller's employees); (ii) compensate all employees, consultants and agents directly, from Seller's own funds, for services provided to Seller by such employees, consultants and agents and, to the extent any employee, consultant or agent of Seller is also an employee, consultant or agent of Provider or any Affiliate thereof, allocate the compensation of such employee, consultant or agent between Seller and Provider or such Affiliate, as applicable, on a basis that reflects the services rendered to Seller and Provider or such Affiliate, as applicable; (iii) clearly identify its offices (by signage or otherwise) as its offices and, if such office is located in the offices of Provider or any Affiliate thereof, Seller shall lease such office at a fair market rent; (iv) have a separate telephone number, which will be answered only in its name and separate stationery, invoices and checks in its own name; 19 (v) conduct all transactions with Provider, all Affiliates thereof and the Servicer (including, without limitation, any delegation of its obligations hereunder as Servicer) strictly on an arm's-length basis, allocate all overhead expenses (including, without limitation, telephone and other utility charges) for items shared between Seller and Provider or any Affiliate thereof on the basis of actual use to the extent practicable and, to the extent such allocation is not practicable, on a basis reasonably related to actual use; (vi) at all times have a Board of Directors consisting of at least three members, at least one member of which is an Independent Director; (vii) observe all limited liability company formalities as a distinct entity, and ensure that all actions relating to (A) the selection, maintenance or replacement of the Independent Director, (B) the dissolution or liquidation of Seller or (C) the initiation of, participation in, acquiescence in or consent to any bankruptcy, insolvency, reorganization or similar proceeding involving Seller, are duly authorized by unanimous vote of its Board of Directors (including the Independent Director); (viii) maintain Seller's books and records separate from those of Provider and any Affiliate thereof and otherwise readily identifiable as its own assets rather than assets of Provider and any Affiliate thereof; (ix) prepare its financial statements separately from those of Provider and any Affiliate thereof and insure that any consolidated financial statements of Provider or any Affiliate thereof that include Seller and that are filed with the Securities and Exchange Commission or any other governmental agency have notes clearly stating that Seller is a separate legal entity and that its assets will be available first and foremost to satisfy the claims of the creditors of Seller; (x) except as herein specifically otherwise provided, maintain the funds or other assets of Seller separate from, and not commingled with, those of Provider or any Affiliate thereof and only maintain bank accounts or other depository accounts to which Seller alone is the account party, into which Seller alone makes deposits and from which Seller alone (or the Agent hereunder) has the power to make withdrawals; (xi) pay all of Seller's operating expenses from Seller's own assets (except for certain payments by Provider or other Persons pursuant to allocation arrangements that comply with the requirements of this Section 7.1(i)); (xii) operate its business and activities such that: it does not engage in any business or activity of any kind, or enter into any transaction or indenture, mortgage, instrument, agreement, contract, lease or other undertaking, other than the transactions contemplated and authorized by this Agreement and the Receivables Sale Agreement; and does not create, incur, guarantee, assume or suffer to exist any indebtedness or other liabilities, whether direct or contingent, other than (1) as a result of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, (2) the incurrence of obligations under this Agreement, (3) the incurrence of obligations, as expressly contemplated in the Receivables Sale Agreement, 20 to make payment to Factoring thereunder for the purchase of Receivables from Factoring under the Receivables Sale Agreement, and (4) the incurrence of operating expenses in the ordinary course of business of the type otherwise contemplated by this Agreement; (xiii) maintain its limited liability company charter in conformity with this Agreement, such that it does not amend, restate, supplement or otherwise modify its Certificate of Formation or limited liability company operating agreement in any respect that would impair its ability to comply with the terms or provisions of any of the Transaction Documents, including, without limitation, this Section 7.1(i); (xiv) maintain the effectiveness of, and continue to perform under the Receivables Sale Agreement and the Factoring Performance Undertaking, such that it does not amend, restate, supplement, cancel, terminate or otherwise modify the Receivables Sale Agreement or the Factoring Performance Undertaking, or give any consent, waiver, directive or approval thereunder or waive any default, action, omission or breach under the Receivables Sale Agreement or the Factoring Performance Undertaking or otherwise grant any indulgence thereunder, without (in each case) the prior written consent of the Agent; (xv) maintain its legal separateness such that it does not merge or consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions, and except as otherwise contemplated herein) all or substantially all of its assets (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any Person, nor at any time create, have, acquire, maintain or hold any interest in any Subsidiary. (xvi) maintain at all times the Required Capital Amount (as defined in the Receivables Sale Agreement) and refrain from making any dividend, distribution, redemption of membership interests or payment of any subordinated indebtedness which would cause the Required Capital Amount to cease to be so maintained; and (xvii) take such other actions as are necessary on its part to ensure that the facts and assumptions set forth in the opinion issued by Mayer, Brown Rowe & Maw LLP, as counsel for Seller, in connection with the closing or initial Incremental Purchase under this Agreement and relating to substantive consolidation issues, and in the certificates accompanying such opinion, remain true and correct in all material respects at all times. (j) Collections. Such Seller Party will cause (1) all proceeds from all Lock-Boxes to be directly deposited by a Collection Bank into a Collection Account and (2) each Lock-Box and Collection Account to be subject at all times to a Collection Account Agreement that is in full force and effect. In the event any payments relating to Receivables are remitted directly to Seller or any Affiliate of Seller, Seller will remit (or will cause all such payments to be remitted) directly to a Collection Bank and deposited into a Collection Account within two (2) Business Days following receipt thereof, and, at all times prior to such remittance, Seller will itself hold or, if applicable, will cause such payments to be held in trust for the exclusive benefit of the Agent and the Purchasers. Seller will maintain exclusive ownership, dominion and control (subject to the terms of this Agreement) of each Lock-Box and Collection Account and shall not grant the right to take dominion and control of any Lock-Box or Collection Account at a future 21 time or upon the occurrence of a future event to any Person, except to the Agent as contemplated by this Agreement and the Collection Account Agreements. (k) Taxes. Such Seller Party will file all tax returns and reports required by law to be filed by it and will promptly pay all taxes and governmental charges at any time owing Seller will pay when due any taxes payable in connection with the Receivables, exclusive of taxes on or measured by income or gross receipts of Company, the Agent or any Financial Institution. (l) Insurance. Seller will maintain in effect, or cause to be maintained in effect, at Seller's own expense, such casualty and liability insurance as Seller shall deem appropriate in its good faith business judgment. The foregoing requirements shall not be construed to negate, reduce or modify, and are in addition to, Seller's obligations hereunder. (m) Payment to Factoring and Original Sellers. With respect to any Receivable purchased by Seller from Factoring such sale shall be effected under, and in strict compliance with the terms of, the Receivables Sale Agreement, including, without limitation, the terms relating to the amount and timing of payments to be made to Factoring in respect of the purchase price for such Receivable. With respect to any Receivable purchased by Factoring from an Original Seller, such sale shall be effected under, and in strict compliance with the terms of, the applicable Transfer Agreement, including, without limitation, the terms relating to the amount and timing of payments to be made to each Original Seller in respect of the purchase price for such Receivable. Section 7.2 Negative Covenants of the Seller Parties. Until the date on which the Aggregate Unpaids have been indefeasibly paid in full and this Agreement terminates in accordance with its terms, each Seller Party hereby covenants, as to itself, that: (a) Change in Organization, Etc. Such Seller Party will not change its jurisdiction of organization, the location of any office at which Records are maintained or its name, identity or corporate structure or make any other change such that any financing statement filed or other action taken to perfect the Agent's interests hereunder would or could become seriously misleading or would otherwise be rendered ineffective, unless such Seller Party shall have given the Agent not less than 30 days' prior written notice of such change and shall have cured such circumstances. Each Seller Party shall at all times maintain its jurisdiction of organization, its chief executive office, the location of the Records and the offices from which it primarily services the Receivables within a jurisdiction in the United States in which Article Nine of the UCC (2001 or later revision) is in effect. In the event that a Seller Party shall change the jurisdiction in which it is organized or otherwise enter into any transaction which would result in a "new debtor" (as defined in the UCC), such Seller Party shall comply with the terms of Section 7.1(h) hereof. (b) Change in Payment Instructions to Obligors. Except as may be required by the Agent pursuant to Section 8.2(b), such Seller Party will not add or terminate any bank as a Collection Bank, or make any change in the instructions to Obligors regarding payments to be made to any Lock-Box or Collection Account, unless the Agent shall have received, at least ten (10) days before the proposed effective date therefor, (i) written notice of such addition, termination or change and (ii) with respect to the addition of a Collection Bank or a Collection 22 Account or Lock-Box, an executed Collection Account Agreement with respect to the new Collection Account or Lock-Box; provided, however, that the Servicer may make changes in instructions to Obligors regarding payments if such new instructions require such Obligor to make payments to another existing Collection Account. (c) Modifications to Contracts and Credit and Collection Policy. Such Seller Party will not, and will not permit Factoring or any Original Seller to, make any change to the Credit and Collection Policy that could materially and adversely affect the collectibility of the Receivables or decrease the credit quality of any newly created Receivables. Except as provided in Section 8.2(c), the Servicer will not, and will not permit Factoring or any Original Seller to, extend, amend or otherwise modify the terms of any Receivable or any Contract related thereto other than in accordance with the Credit and Collection Policy. (d) Sales, Liens. Seller will not sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, or create or suffer to exist any Adverse Claim upon (including, without limitation, the filing of any financing statement) or with respect to, any Receivable, Related Security or Collections, or upon or with respect to any Contract under which any Receivable arises, or any Lock-Box or Collection Account, or assign any right to receive income with respect thereto (other than, in each case, the creation of the interests therein in favor of the Agent and the Purchasers provided for herein), and Seller will defend the right, title and interest of the Agent and the Purchasers in, to and under any of the foregoing property, against all claims of third parties claiming through or under Seller, Factoring or any Original Seller. Seller will not create or suffer to exist any mortgage, pledge, security interest, encumbrance, lien, charge or other similar arrangement on any of its inventory. (e) Net Receivables Balance. At no time prior to the Amortization Date shall Seller permit the Net Receivables Balance to be less than an amount equal to the sum of the Aggregate Capital plus the Aggregate Reserves. (f) Termination Date Determination. Seller will not designate the Termination Date (as defined in the Receivables Sale Agreement), or send any written notice to Factoring in respect thereof, without the prior written consent of the Agent, except with respect to the occurrence of such Termination Date arising pursuant to Section 5.1(d) of the Receivables Sale Agreement. (g) Restricted Junior Payments. From and after the occurrence of any Amortization Event, Seller will not make any Restricted Junior Payment if, after giving effect thereto, Seller would fail to meet its obligations set forth in Section 7.2(e). ARTICLE VIII ADMINISTRATION AND COLLECTION Section 8.1 Designation of Servicer. (a) The servicing, administration and collection of the Receivables shall be conducted by such Person (the "Servicer") so designated from time to time in accordance with this Section 8.1. Factoring is hereby designated as, and hereby agrees to perform the duties and obligations of, the Servicer pursuant to the terms of this Agreement. The Agent may at any time 23 after an Amortization Event, designate as Servicer any Person to succeed Factoring or any successor Servicer. (b) Without the prior written consent of the Agent, Factoring shall not be permitted to delegate any of its duties or responsibilities as Servicer to any Person other than, with respect to certain Charged-Off Receivables, outside collection agencies in accordance with its customary practices. (c) Notwithstanding the foregoing subsection (b), (i) Factoring shall be and remain primarily liable to the Agent and the Purchasers for the full and prompt performance of all duties and responsibilities of the Servicer hereunder and (ii) the Agent and the Purchasers shall be entitled to deal exclusively with Factoring in matters relating to the discharge by the Servicer of its duties and responsibilities hereunder. The Agent and the Purchasers shall not be required to give notice, demand or other communication to any Person other than Factoring in order for communication to the Servicer and its sub-servicer or other delegate with respect thereto to be accomplished. Factoring, at all times that it is the Servicer, shall be responsible for providing any sub-servicer or other delegate of the Servicer with any notice given to the Servicer under this Agreement. Section 8.2 Duties of Servicer. The Servicer shall take or cause to be taken all such actions as may be necessary or advisable to collect each Receivable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. (a) The Servicer will instruct all Obligors to pay all Collections directly to a Lock-Box or Collection Account. The Servicer shall effect a Collection Account Agreement substantially in the form of Exhibit VI with each bank party to a Collection Account at any time. In the case of any remittances received in any Lock-Box or Collection Account that shall have been identified, to the satisfaction of the Servicer, to not constitute Collections or other proceeds of the Receivables or the Related Security, the Servicer shall promptly remit such items to the Person identified to it as being the owner of such remittances. From and after the date the Agent delivers to any Collection Bank a Collection Notice pursuant to Section 8.3, the Agent may request that the Servicer, and the Servicer thereupon promptly shall, instruct all Obligors with respect to the Receivables to remit all payments thereon to a new depositary account specified by the Agent and, at all times thereafter, Seller and the Servicer shall not deposit or otherwise credit, and shall not permit any other Person to deposit or otherwise credit to such new depositary account any cash or payment item other than Collections. (b) The Servicer shall administer the Collections in accordance with the procedures described herein and in Article II. The Servicer shall set aside and hold in trust for the account of Seller and the Purchasers their respective shares of the Collections in accordance with Article II. The Servicer shall, upon the request of the Agent after an Amortization Event, segregate, in a manner acceptable to the Agent, all cash, checks and other instruments received by it from time to time constituting Collections from the general funds of the Servicer or Seller prior to the remittance thereof in accordance with Article II. If the Servicer shall be required to segregate Collections pursuant to the preceding sentence, the Servicer shall segregate and deposit with a bank designated by the Agent such allocable share of Collections of Receivables set aside 24 for the Purchasers on the first Business Day following receipt by the Servicer of such Collections, duly endorsed or with duly executed instruments of transfer. (c) The Servicer may, in accordance with the Credit and Collection Policy, extend the maturity of any Receivable or adjust the Outstanding Balance of any Receivable as the Servicer determines to be appropriate to maximize Collections thereof; provided, however, that such extension or adjustment shall not alter the status of such Receivable as a Delinquent Receivable or Charged-Off Receivable or limit the rights of the Agent or the Purchasers under this Agreement. Notwithstanding anything to the contrary contained herein, after an Amortization Event, the Agent shall have the absolute and unlimited right to direct the Servicer to commence or settle any legal action with respect to any Receivable or to foreclose upon or repossess any Related Security; provided, that the Agent has given the Seller seven (7) days' prior notice and during such notice period the Outstanding Balance of such Receivable has not been reduced to zero. (d) The Servicer shall hold in trust for Seller and the Purchasers all Records that (i) evidence or relate to the Receivables, the related Contracts and Related Security or (ii) are otherwise necessary or desirable to collect the Receivables and shall, as soon as practicable upon demand of the Agent, deliver or make available to the Agent all such Records, at a place selected by the Agent. The Servicer shall, as soon as practicable following receipt thereof turn over to Seller any cash collections or other cash proceeds received with respect to Indebtedness not constituting Receivables. The Servicer shall, from time to time at the request of any Purchaser, furnish to the Purchasers (promptly after any such request) a calculation of the amounts set aside for the Purchasers pursuant to Article II. (e) Any payment by an Obligor in respect of any indebtedness owed by it to an Original Seller, Factoring or Seller shall, except as otherwise specified by such Obligor or otherwise required by contract or law and unless otherwise instructed by the Agent, be applied as a Collection of any Receivable of such Obligor (starting with the oldest such Receivable) to the extent of any amounts then due and payable thereunder before being applied to any other receivable or other obligation of such Obligor. Section 8.3 Collection Notices. The Agent is authorized at any time after an Amortization Event to date and to deliver to the Collection Banks the Collection Notices. Seller hereby transfers to the Agent for the benefit of the Purchasers, effective when the Agent delivers such notice, the exclusive ownership and control of each Lock-Box and the Collection Accounts. In case any authorized signatory of Seller whose signature appears on a Collection Account Agreement shall cease to have such authority before the delivery of such notice, such Collection Notice shall nevertheless be valid as if such authority had remained in force. Seller hereby authorizes the Agent, and agrees that the Agent shall be entitled to (i) endorse Seller's name on checks and other instruments representing Collections, (ii) enforce the Receivables, the related Contracts and the Related Security and (iii) take such action as shall be necessary or desirable to cause all cash, checks and other instruments constituting Collections of Receivables to come into the possession of the Agent rather than Seller. Section 8.4 Responsibilities of Seller. Anything herein to the contrary notwithstanding, the exercise by the Agent and the Purchasers of their rights hereunder shall not release the Servicer, the applicable Original Seller, Factoring or Seller from any of their duties or 25 obligations with respect to any Receivables or under the related Contracts. The Purchasers shall have no obligation or liability with respect to any Receivables or related Contracts, nor shall any of them be obligated to perform the obligations of Seller. Section 8.5 Reports. The Servicer shall prepare and forward to the Agent (i) on each Monthly Reporting Date and at such times as the Agent shall request, a Monthly Report and (ii) at such times as the Agent shall request, a listing by Obligor of all Receivables together with an aging of such Receivables. Section 8.6 Servicing Fees. (a) In consideration of Factoring's agreement to act as Servicer hereunder, so long as Factoring shall continue to perform as Servicer hereunder, Seller shall pay to Factoring a fee (the "Servicing Fee") on each Settlement Date, in arrears for the immediately preceding calendar month, equal to 1.0% per annum of the average aggregate Outstanding Balance of all Receivables during such period. The Servicing Fee shall be the exclusive compensation to Factoring for its services as Servicer and reimbursement for all of its costs and expenses as Servicer, and neither the Seller nor any other party hereto shall have any obligation to reimburse Factoring in respect of any costs or expenses suffered or incurred by Factoring in such capacity, all of which are intended to be covered by the Servicing Fee. Factoring acknowledges that its claim for payment of the Servicing Fee is a limited recourse claim, payable only on the terms and conditions set forth in, and to the extent of available funds under, Section 2.4 hereof. (b) In the event that Factoring is replaced as Servicer pursuant to Section 8.1(a), in consideration of such replacement Servicer's agreement to act as Servicer hereunder, the Purchasers hereby agree that, so long as such replacement Servicer shall continue to perform as Servicer hereunder, Seller shall pay the Servicing Fee over to such replacement Servicer, which such fee shall be paid at such times and in such reasonable amounts as agreed to by the Agent and such replacement Servicer. ARTICLE IX AMORTIZATION EVENTS Section 9.1 Amortization Events. The occurrence of any one or more of the following events shall constitute an Amortization Event (each an "Amortization Event"): (a) Any Seller Party shall fail (i) to make any payment or deposit required hereunder or (ii) to perform or observe any term, covenant or agreement hereunder (other than as referred to in clause (i) of this paragraph (a) and Section 9.1(d)) and such failure shall continue for five (5) consecutive Business Days. (b) Any representation, warranty, certification or statement made by any Seller Party in this Agreement, any other Transaction Document or in any other document delivered pursuant hereto or thereto shall prove to have been incorrect when made or deemed made; provided, however, that (i) any breach of the representations and warranties set forth in Sections 5.1(i), (t) or (u) shall not constitute an Amortization Event unless such breach or breaches apply in the aggregate to a material portion of the Receivables, and (ii) the occurrence of an immaterial error in any Monthly Report shall not constitute an Amortization Event. 26 (c) Failure of Seller to pay any Indebtedness when due or the failure of any other Seller Party or Provider to pay Indebtedness in excess of $50,000,000 when due (in each case, after giving effect to any applicable grace periods) unless waived in writing by the holder or holders of such Indebtedness; or, the default by any Seller Party or Provider in the performance of any term, provision or condition contained in any agreement under which any such Indebtedness was created or is governed (in each case, after giving effect to any applicable grace periods), the effect of which is to cause, or to permit the holder or holders of such Indebtedness to cause, such Indebtedness to become due prior to its stated maturity, unless waived in writing by the holder or holders of such Indebtedness; or any such Indebtedness of any Seller Party or Provider shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the date of maturity thereof. (d) Any Seller Party or Provider or any of their respective Subsidiaries shall generally not pay its debts as such debts become due or shall admit in writing its inability to pay its debts generally or shall make a general assignment for the benefit of creditors; or (ii) any proceeding shall be instituted by or against any Seller Party or Provider or any of their respective Subsidiaries seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property, and, in the case of any such involuntary proceeding instituted against Provider, such proceeding remains undismissed or unstayed for a period in excess of sixty (60) days; or (iii) any Seller Party or Provider or any of their respective Subsidiaries shall take any action to authorize any of the actions set forth in clauses (i) or (ii) above in this subsection (d). (e) Seller shall fail to comply with the terms of Section 2.6 hereof (Maximum Purchaser Interests). (f) As at the end of any calendar month, (i) the average of the Delinquency Ratios as at the end of such month and the two preceding months shall exceed 5.25%; or (ii) the average of the Loss-to-Liquidation Ratios as at the end of such month and the two preceding months shall exceed 2.25%; or (iii) the average of the Dilution Ratios as at the end of such month and the two preceding months shall exceed 8.75%. (g) A Change of Control shall occur. (h) (i) One or more final judgments for the payment of money shall be entered against Seller or (ii) one or more final judgments for the payment of money in an amount in excess of $50,000,000, individually or in the aggregate, shall be entered against the Servicer, any Original Seller, Factoring or Provider, taken as a whole, on claims not covered by insurance or as to which the insurance carrier has denied its responsibility, and such judgment shall continue unsatisfied and in effect for thirty (30) consecutive days without a stay of execution. 27 (i) (i) (A) The "Amortization Date" under and as defined in the Receivables Sale Agreement shall occur, (B) Factoring shall for any reason cease to transfer or cease to have the legal capacity to transfer, or otherwise be incapable of transferring Receivables to Seller under the Receivables Sale Agreement, or (C) Seller or Factoring shall cease to perform any of their respective material obligations and undertaking under and pursuant to the Receivables Sale Agreement or shall fail to enforce the rights and remedies accorded under the Receivables Sale Agreement after the occurrence of such failure; or (ii) (A) the "Amortization Date" under and as defined in any Transfer Agreement shall occur, (B) any Original Seller shall for any reason cease to transfer or cease to have the legal capacity to transfer, or otherwise be incapable of transferring Receivables to Factoring under any Transfer Agreement, or (C) Factoring or any Original Seller shall cease to perform any of their respective material obligations and undertakings under and pursuant to any Transfer Agreement or shall fail to enforce the rights and remedies accorded under such Transfer Agreement after the occurrence of such failure. (j) This Agreement shall terminate in whole or in part (except in accordance with its terms), or shall cease to be effective or to be the legally valid, binding and enforceable obligation of Seller, or any Obligor shall directly or indirectly contest in any manner such effectiveness, validity, binding nature or enforceability, or the Agent for the benefit of the Purchasers shall cease to have a valid and perfected first priority security interest in the Receivables, the Related Security and the Collections with respect thereto and the Collection Accounts. (k) Provider shall fail to perform or observe any term, covenant or agreement required to be performed by it under either the Servicer Performance Undertaking or the Factoring Performance Undertaking, or either the Servicer Performance Undertaking or the Factoring Performance Undertaking shall cease to be effective or to be the legally valid, binding and enforceable obligation of Provider, or Provider shall directly or indirectly contest in any manner such effectiveness, validity, binding nature or enforceability. (l) Pactiv shall fail to comply with the financial covenants set forth in Section 7.1 of the Pactiv Loan Agreement as is in effect on the date hereof or as amended from time to time pursuant to any amendment which is consented to in writing by the Agent (after giving effect to any applicable grace periods or waivers which are consented to in writing by the Agent). (m) An event has occurred that would have a material adverse effect on the financial condition or operations of Pactiv that could affect the value or collectability of the Receivables. Section 9.2 Remedies. Upon the occurrence and during the continuation of an Amortization Event, the Agent may, or upon the direction of the Required Financial Institutions shall, take any of the following actions: (i) replace the Person then acting as Servicer, (ii) declare the Amortization Date to have occurred, whereupon the Amortization Date shall forthwith occur, without demand, protest or further notice of any kind, all of which are hereby expressly waived by each Seller Party; provided, however, that upon the occurrence of an Amortization Event described in Section 9.1(d), or of an actual or deemed entry of an order for relief with respect to any Seller Party under the Federal Bankruptcy Code, the Amortization Date shall automatically occur, without demand, protest or any notice of any kind, all of which are hereby expressly 28 waived by each Seller Party, (iii) to the fullest extent permitted by applicable law, declare that the Default Fee shall accrue with respect to any of the Aggregate Unpaids outstanding at such time, (iv) deliver the Collection Notices to the Collection Banks, and (v) notify Obligors of the Purchasers' interest in the Receivables. The aforementioned rights and remedies shall be without limitation, and shall be in addition to all other rights and remedies of the Agent and the Purchasers otherwise available under any other provision of this Agreement, by operation of law, at equity or otherwise, all of which are hereby expressly preserved, including, without limitation, all rights and remedies provided under the UCC, all of which rights shall be cumulative. ARTICLE X INDEMNIFICATION Section 10.1 Indemnities by the Seller Parties. Without limiting any other rights that the Agent or any Purchaser or any Funding Source or any of their respective assigns, officers, directors, agents and employees (each an "Indemnified Party") may have hereunder or under applicable law, (A) Seller hereby agrees to indemnify (and pay upon demand to) each Indemnified Party from and against any and all damages, losses, claims, taxes, liabilities, costs, expenses and for all other amounts payable, including reasonable attorneys' fees (which attorneys may be employees of the Agent or such Purchaser) and disbursements (all of the foregoing being collectively referred to as "Indemnified Amounts") awarded against or incurred by any of them arising out of or as a result of this Agreement or the acquisition, either directly or indirectly, by a Purchaser of an interest in the Receivables, and (B) the Servicer hereby agrees to indemnify (and pay upon demand to) each Indemnified Party for Indemnified Amounts awarded against or incurred by any of them arising out of the Servicer's activities as Servicer hereunder excluding, however, in all of the foregoing instances under the preceding clauses (A) and (B): (i) Indemnified Amounts to the extent a final judgment of a court of competent jurisdiction holds that such Indemnified Amounts resulted from gross negligence or willful misconduct on the part of the Indemnified Party seeking indemnification; (ii) Indemnified Amounts to the extent the same includes losses in respect of Receivables that are uncollectible on account of the insolvency, bankruptcy or lack of creditworthiness of the related Obligor; or (iii) taxes on the net income (and taxes in lieu thereof) and franchise taxes of the Indemnified Party, in each case to the extent imposed by the jurisdiction of organization (or any subdivision thereof) of such Indemnified Party or any jurisdiction (or subdivision thereof) where the transactions contemplated herein are booked by such indemnified party or where such transactions are otherwise effectively connected in respect of such Indemnified Party; provided, however, that nothing contained in this sentence shall limit the liability of any Seller Party or limit the recourse of the Purchasers to any Seller Party for amounts otherwise specifically provided to be paid by such Seller Party under the terms of this Agreement. Without limiting the generality of the foregoing indemnification, Seller and Servicer, as applicable, shall indemnify the Agent and the Purchasers for Indemnified Amounts (including, 29 without limitation, losses in respect of uncollectible Receivables (other than losses resulting solely from the circumstances described in clause (ii) above), regardless of whether reimbursement therefor would constitute recourse to Seller or the Servicer) relating to or resulting from: (1) any representation or warranty made by any Seller Party, Factoring or any Original Seller (or any officers of any such Person) under or in connection with this Agreement, any other Transaction Document or any other information or report delivered by any such Person pursuant hereto or thereto, which shall have been false or incorrect when made or deemed made; (2) the failure by any Seller Party, Factoring or any Original Seller to comply with any applicable law, rule or regulation with respect to any Receivable or Contract related thereto, or the nonconformity of any Receivable or Contract included therein with any such applicable law, rule or regulation or any failure of any Original Seller to keep or perform any of its obligations, express or implied, with respect to any Contract; (3) any failure of any Seller Party, Factoring or any Original Seller to perform its duties, covenants or other obligations in accordance with the provisions of this Agreement or any other Transaction Document; (4) any products liability, personal injury or damage suit, or other similar claim arising out of or in connection with merchandise, insurance or services that are the subject of any Contract or any Receivable; (5) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Receivable (including, without limitation, a defense based on such Receivable or the related Contract not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or service related to such Receivable or the furnishing or failure to furnish such merchandise or services; (6) the commingling of Collections of Receivables at any time with other funds; (7) any investigation, litigation or proceeding related to or arising from this Agreement or any other Transaction Document, the transactions contemplated hereby, the use of the proceeds of an Incremental Purchase or a Reinvestment, the ownership of the Purchaser Interests or any other investigation, litigation or proceeding relating to any Seller Party, Factoring or any Original Seller in which any Indemnified Party becomes involved as a result of any of the transactions contemplated hereby; (8) any inability to litigate any claim against any Obligor in respect of any Receivable as a result of such Obligor being immune from civil and commercial law and suit on the grounds of sovereignty or otherwise from any legal action, suit or proceeding; (9) any Amortization Event described in Section 9.1(d); 30 (10) any failure of Seller to acquire and maintain legal and equitable title to, and ownership of any Receivable and the Related Security and Collections with respect thereto from Factoring, free and clear of any Adverse Claim (other than as created hereunder); or any failure of Seller to give reasonably equivalent value to Factoring under the Receivables Sale Agreement in consideration of the transfer by Factoring of any Receivable, or any attempt by any Person to void such transfer under statutory provisions or common law or equitable action; (11) any failure of Factoring to acquire and maintain legal and equitable title to, and ownership of any Receivable and the Related Security and Collections with respect thereto from any Original Seller, free and clear of any Adverse Claim (other than as created hereunder); or any failure of Factoring to give reasonably equivalent value to any Original Seller under the related Transfer Agreement in consideration of the transfer by such Original Seller of any Receivable, or any attempt by any Person to void such transfer under statutory provisions or common law or equitable action; (12) any failure to vest and maintain vested in the Agent for the benefit of the Purchasers, or to transfer to the Agent for the benefit of the Purchasers, legal and equitable title to, and ownership of, a first priority perfected undivided percentage ownership interest (to the extent of the Purchaser Interests contemplated hereunder) or security interest in the Receivables, the Related Security and the Collections, free and clear of any Adverse Claim (except as created by the Transaction Documents); (13) the failure to have filed, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivable, the Related Security and Collections with respect thereto, and the proceeds of any thereof, whether at the time of any Incremental Purchase or Reinvestment or at any subsequent time; (14) any action or omission by any Seller Party which reduces or impairs the rights of the Agent or the Purchasers with respect to any Receivable or the value of any such Receivable; (15) any attempt by any Person to void any Incremental Purchase or Reinvestment hereunder under statutory provisions or common law or equitable action; (16) the failure of any Receivable included in the calculation of the Net Receivables Balance as an Eligible Receivable to be an Eligible Receivable at the time so included; and (17) any claim by any Obligor under a Contract that the transfer, sale or assignment of the rights and duties of an Original Seller or any of its assignees under such Contract is not valid without the express consent of such Obligor. Section 10.2 Increased Costs and Reduced Return. (a) If after the date hereof, any Funding Source shall be charged any fee, expense or increased cost on account of the adoption of any applicable law, rule or regulation (including any applicable law, rule or regulation regarding capital adequacy) or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency 31 charged with the interpretation or administration thereof, or compliance with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency (a "Regulatory Change"): (i) that subjects any Funding Source to any charge or withholding on or with respect to any Funding Agreement or this Agreement or a Funding Source's obligations under a Funding Agreement, or on or with respect to the Receivables, or changes the basis of taxation of payments to any Funding Source of any amounts payable under any Funding Agreement (except for changes in the rate of tax on the overall net income of a Funding Source or taxes excluded by Section 10.1) or (ii) that imposes, modifies or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of a Funding Source, or credit extended by a Funding Source pursuant to a Funding Agreement or (iii) that has the effect of reducing the rate of return on such Funding Source's capital to a level below that which such Funding Source could have achieved but for such adoption, change or compliance (taking into consideration such Funding Source's policies concerning capital adequacy) or (iv) that imposes any other condition and the result of any of the foregoing is (x) to impose a cost on, or increase the cost to, any Funding Source of its commitment under any Funding Agreement or of purchasing, maintaining or funding any interest acquired under any Funding Agreement, (y) to reduce the amount of any sum received or receivable by, or to reduce the rate of return of, any Funding Source under any Funding Agreement or (z) to require any payment calculated by reference to the amount of interests held or amounts received by it hereunder, then, upon demand by the Agent, Seller shall pay to the Agent, for the benefit of the relevant Funding Source, such amounts charged to such Funding Source or such amounts to otherwise compensate such Funding Source for such increased cost or such reduction. Any demand by Agent pursuant to the preceding sentence shall not cover a period of more than ninety days preceding the date of such demand. (b) Each Funding Source agrees that on the occurrence of any event giving rise to the operation of this Section with respect to such Funding Source, it will, if requested by the Seller, use reasonable efforts (subject to overall policy considerations of such Funding Source) to designate another office for any credit accommodation affected by such event, provided that such designation is made on such terms that such Funding Source and its office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of such Section. In calculating such amounts, such Funding Source shall use reasonable attribution methods and such amounts shall not be unreasonable in relation to the amounts charged to other parties, if any, the terms and circumstances of whose relationship with such Funding Source are similar to those of Seller. Section 10.3 Other Costs and Expenses. Seller shall pay to the Agent and Company on demand all costs and out-of-pocket expenses in connection with the preparation, execution, delivery and administration of this Agreement, the transactions contemplated hereby 32 and the other documents to be delivered hereunder, including without limitation, the cost of Company's auditors auditing the books, records and procedures of Seller (subject to the limitations of Section 7.1(d)), reasonable fees and out-of-pocket expenses of legal counsel for Company and the Agent (which such counsel may be employees of Company or the Agent) with respect thereto and with respect to advising Company and the Agent as to their respective rights and remedies under this Agreement. Seller shall pay to the Agent on demand any and all costs and expenses of the Agent and the Purchasers, if any, including reasonable counsel fees and expenses in connection with the enforcement of this Agreement and the other documents delivered hereunder and in connection with any restructuring or workout of this Agreement or such documents, or the administration of this Agreement following an Amortization Event. ARTICLE XI THE AGENT Section 11.1 Authorization and Action. Each Purchaser hereby designates and appoints Calyon to act as its agent hereunder and under each other Transaction Document, and authorizes the Agent to take such actions as agent on its behalf and to exercise such powers as are delegated to the Agent by the terms of this Agreement and the other Transaction Documents together with such powers as are reasonably incidental thereto. The Agent shall not have any duties or responsibilities, except those expressly set forth herein or in any other Transaction Document, or any fiduciary relationship with any Purchaser, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of the Agent shall be read into this Agreement or any other Transaction Document or otherwise exist for the Agent. In performing its functions and duties hereunder and under the other Transaction Documents, the Agent shall act solely as agent for the Purchasers and does not assume nor shall be deemed to have assumed any obligation or relationship of trust or agency with or for any Seller Party or any of such Seller Party's successors or assigns. The Agent shall not be required to take any action that exposes the Agent to personal liability or that is contrary to this Agreement, any other Transaction Document or applicable law. The appointment and authority of the Agent hereunder shall terminate upon the indefeasible payment in full of all Aggregate Unpaids. Each Purchaser hereby authorizes the Agent to file the Uniform Commercial Code financing statements and execute the Fee Letter and the Collection Account Agreements on behalf of such Purchaser (the terms of which shall be binding on such Purchaser). Section 11.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement and each other Transaction Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. Section 11.3 Exculpatory Provisions. Neither the Agent nor any of its directors, officers, agents or employees shall be (i) liable for any action lawfully taken or omitted to be taken by it or them under or in connection with this Agreement or any other Transaction Document (except for its, their or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Purchasers for any recitals, statements, representations or warranties made by any Seller Party contained in this Agreement, any other Transaction Document or any certificate, report, statement or other document referred to or provided for in, or 33 received under or in connection with, this Agreement, or any other Transaction Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, or any other Transaction Document or any other document furnished in connection herewith or therewith, or for any failure of any Seller Party to perform its obligations hereunder or thereunder, or for the satisfaction of any condition specified in Article VI, or for the perfection, priority, condition, value or sufficiency of any collateral pledged in connection herewith. The Agent shall not be under any obligation to any Purchaser to ascertain or to inquire as to the observance or performance of any of the agreements or covenants contained in, or conditions of, this Agreement or any other Transaction Document, or to inspect the properties, books or records of the Seller Parties. The Agent shall not be deemed to have knowledge of any Amortization Event or Potential Amortization Event unless the Agent has received notice from Seller or a Purchaser. Section 11.4 Reliance by Agent. The Agent shall in all cases be entitled to rely, and shall be fully protected in relying, upon any document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to Seller), independent accountants and other experts selected by the Agent. The Agent shall in all cases be fully justified in failing or refusing to take any action under this Agreement or any other Transaction Document unless it shall first receive such advice or concurrence of Company or the Required Financial Institutions or all of the Purchasers, as applicable, as it deems appropriate and it shall first be indemnified to its satisfaction by the Purchasers, provided that unless and until the Agent shall have received such advice, the Agent may take or refrain from taking any action, as the Agent shall deem advisable and in the best interests of the Purchasers. The Agent shall in all cases be fully protected in acting, or in refraining from acting, in accordance with a request of Company or the Required Financial Institutions or all of the Purchasers, as applicable, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Purchasers. Section 11.5 Non-Reliance on Agent and Other Purchasers. Each Purchaser expressly acknowledges that neither the Agent, nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Agent hereafter taken, including, without limitation, any review of the affairs of any Seller Party, shall be deemed to constitute any representation or warranty by the Agent. Each Purchaser represents and warrants to the Agent that it has and will, independently and without reliance upon the Agent or any other Purchaser and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, prospects, financial and other conditions and creditworthiness of Seller and made its own decision to enter into this Agreement, the other Transaction Documents and all other documents related hereto or thereto. Section 11.6 Reimbursement and Indemnification. The Financial Institutions agree to reimburse and indemnify the Agent and its officers, directors, employees, representatives and agents ratably according to their Pro Rata Shares, to the extent not paid or reimbursed by the Seller Parties (i) for any amounts for which the Agent, acting in its capacity as Agent, is entitled to reimbursement by the Seller Parties hereunder and (ii) for any other expenses incurred by the Agent, in its capacity as Agent and acting on behalf of the Purchasers, in connection with the administration and enforcement of this Agreement and the other Transaction Documents. 34 Section 11.7 Agent in its Individual Capacity. The Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with Seller or any Affiliate of Seller as though the Agent were not the Agent hereunder. With respect to the acquisition of Purchaser Interests pursuant to this Agreement, the Agent shall have the same rights and powers under this Agreement in its individual capacity as any Purchaser and may exercise the same as though it were not the Agent, and the terms "Financial Institution," "Purchaser," "Financial Institutions" and "Purchasers" shall include the Agent in its individual capacity. Section 11.8 Successor Agent. The Agent may, upon five days' notice to Seller and the Purchasers, and the Agent will, upon the direction of all of the Purchasers (other than the Agent, in its individual capacity) resign as Agent. If the Agent shall resign, then the Required Financial Institutions during such five-day period shall appoint from among the Purchasers a successor agent. If for any reason no successor Agent is appointed by the Required Financial Institutions during such five-day period, then effective upon the termination of such five day period, the Purchasers shall perform all of the duties of the Agent hereunder and under the other Transaction Documents and Seller and the Servicer (as applicable) shall make all payments in respect of the Aggregate Unpaids directly to the applicable Purchasers and for all purposes shall deal directly with the Purchasers. After the effectiveness of any retiring Agent's resignation hereunder as Agent, the retiring Agent shall be discharged from its duties and obligations hereunder and under the other Transaction Documents and the provisions of this Article XI and Article X shall continue in effect for its benefit with respect to any actions taken or omitted to be taken by it while it was Agent under this Agreement and under the other Transaction Documents. ARTICLE XII ASSIGNMENTS; PARTICIPATIONS Section 12.1 Assignments. (a) Seller and each Financial Institution hereby agree and consent to the complete or partial assignment by Company of all or any portion of its rights under, interest in, title to and obligations under this Agreement to the Financial Institutions pursuant to the Liquidity Agreement or to any other Person, and upon such assignment, Company shall be released from its obligations so assigned. Further, Seller and each Financial Institution hereby agree that any assignee of Company of this Agreement or all or any of the Purchaser Interests of Company shall have all of the rights and benefits under this Agreement as if the term "Company" explicitly referred to such party, and no such assignment shall in any way impair the rights and benefits of Company hereunder. Neither Seller nor the Servicer shall have the right to assign its rights or obligations under this Agreement. (b) Any Financial Institution may at any time and from time to time assign to one or more Persons ("Purchasing Financial Institutions") all or any part of its rights and obligations under this Agreement pursuant to an assignment agreement (the "Assignment Agreement") executed by such Purchasing Financial Institution and such selling Financial Institution. The consent of Company shall be required prior to the effectiveness of any such assignment. Each assignee of a Financial Institution must (i) have a short-term debt rating of A-1 or better by Standard & Poor's Ratings Group and P-1 by Moody's Investors Service, Inc. and (ii) 35 agree to deliver to the Agent, promptly following any request therefor by the Agent or Company, an enforceability opinion in form and substance satisfactory to the Agent and Company. Upon delivery of the executed Assignment Agreement to the Agent, such selling Financial Institution shall be released from its obligations hereunder to the extent of such assignment. Thereafter the Purchasing Financial Institution shall for all purposes be a Financial Institution party to this Agreement and shall have all the rights and obligations of a Financial Institution under this Agreement to the same extent as if it were an original party hereto and no further consent or action by Seller, the Purchasers or the Agent shall be required. (c) Each of the Financial Institutions agrees that in the event that it shall cease to have a short-term debt rating of A-1 or better by Standard & Poor's Ratings Group and P-1 by Moody's Investors Service, Inc. (an "Affected Financial Institution"), such Affected Financial Institution shall be obliged, at the request of Company or the Agent, to assign all of its rights and obligations hereunder to (x) another Financial Institution or (y) another funding entity nominated by the Agent and acceptable to Company, and willing to participate in this Agreement through the Liquidity Termination Date in the place of such Affected Financial Institution; provided that the Affected Financial Institution receives payment in full, pursuant to an Assignment Agreement, of an amount equal to such Financial Institution's Pro Rata Share of the Aggregate Capital and Yield owing to the Financial Institutions and all accrued but unpaid fees and other costs and expenses payable in respect of its Pro Rata Share of the Purchaser Interests of the Financial Institutions. (d) Participations. Any Financial Institution may, in the ordinary course of its business at any time sell to one or more Persons (each a "Participant") participating interests in its Pro Rata Share of the Purchaser Interests of the Financial Institutions, or any other interest of such Financial Institution hereunder. Notwithstanding any such sale by a Financial Institution of a participating interest to a Participant, such Financial Institution's rights and obligations under this Agreement shall remain unchanged, such Financial Institution shall remain solely responsible for the performance of its obligations hereunder, and Seller, Company and the Agent shall continue to deal solely and directly with such Financial Institution in connection with such Financial Institution's rights and obligations under this Agreement. Each Financial Institution agrees that any agreement between such Financial Institution and any such Participant in respect of such participating interest shall not restrict such Financial Institution's right to agree to any amendment, supplement, waiver or modification to this Agreement, except for any amendment, supplement, waiver or modification described in Section 13.1(b)(i)(A-F). ARTICLE XIII MISCELLANEOUS Section 13.1 Waivers and Amendments. (a) No failure or delay on the part of the Agent or any Purchaser in exercising any power, right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other further exercise thereof or the exercise of any other power, right or remedy. The rights and remedies herein provided shall be cumulative and nonexclusive of any rights or remedies provided by law. Any 36 waiver of this Agreement shall be effective only in the specific instance and for the specific purpose for which given. (b) No provision of this Agreement may be amended, supplemented, modified or waived except in writing in accordance with the provisions of this Section 13.1(b). Company, Seller and the Agent, at the direction (or with the consent) of the Required Financial Institutions, may enter into written modifications or waivers of any provisions of this Agreement, provided, however, that no such modification or waiver shall: (i) without the consent of each affected Purchaser, (A) extend the Liquidity Termination Date or the date of any payment or deposit of Collections by Seller or the Servicer, (B) reduce the rate or extend the time of payment of Yield or any other CP Costs (or any component of Yield or CP Costs), (C) reduce any fee payable to the Agent for the benefit of the Purchasers, (D) except pursuant to Article XII hereof, change the amount of the Capital of any Purchaser, any Financial Institution's Pro Rata Share (except pursuant to the Liquidity Agreement) or any Financial Institution's Commitment, (E) amend, modify or waive any provision of the definition of Required Financial Institutions or this Section 13.1(b), (F) consent to or permit the assignment or transfer by Seller of any of its rights and obligations under this Agreement, (G) change the definition of "Aggregate Reserves," "Concentration Limit," "Delinquency Ratio," "Dilution Ratio," "Dilution Reserve," "Dilution Reserve Ratio," "Eligible Receivable," "Loss Reserve," "Loss Reserve Ratio," "Loss-to-Liquidation Ratio," "Net Receivables Balance," "Servicing Reserve," or "Yield Reserve," (H) release the Provider from its obligations under the Servicer Performance Undertaking or the Factoring Performance Undertaking or (I) amend or modify any defined term (or any defined term used directly or indirectly in such defined term) used in clauses (A) through (H) above in a manner that would circumvent the intention of the restrictions set forth in such clauses; or (ii) without the written consent of the then Agent, amend, modify or waive any provision of this Agreement if the effect thereof is to affect the rights or duties of such Agent. Notwithstanding the foregoing, (i) without the consent of the Financial Institutions, the Agent may amend this Agreement solely to add additional Persons as Financial Institutions hereunder and (ii) the Agent, the Required Financial Institutions and Company may enter into amendments to modify any of the terms or provisions of Article XI or Section 13.13 without the consent of Seller, provided that such amendment has no negative impact upon Seller. Any modification or waiver made in accordance with this Section 13.1 shall apply to each of the Purchasers equally and shall be binding upon Seller, the Purchasers and the Agent. Section 13.2 Notices. Except as provided in this Section 13.2, all communications and notices provided for hereunder shall be in writing (including bank wire, telecopy or electronic transmission or similar writing) and shall be given to the other parties hereto at their respective addresses or telecopy numbers set forth on the signature pages hereof or at such other address or telecopy number as such Person may hereafter specify for the purpose of notice to each of the other parties hereto. Each such notice or other communication shall be effective if given by telecopy or other electronic transmission, upon confirmation of the receipt thereof, if given by mail, three (3) Business Days after the time such communication is deposited 37 in the mail with first class postage prepaid or if given by any other means, when received at the address specified in this Section 13.2. Seller hereby authorizes the Agent to effect purchases and Tranche Period and Discount Rate selections based on telephonic notices made by any Person whom the Agent in good faith believes to be acting on behalf of Seller. Seller agrees to deliver promptly to the Agent a written confirmation of each telephonic notice signed by an Authorized Officer of Seller; provided, however, the absence of such confirmation shall not affect the validity of such notice. If the written confirmation differs from the action taken by the Agent, the records of the Agent shall govern absent manifest error. Section 13.3 Ratable Payments. If any Purchaser, whether by setoff or otherwise, has payment made to it with respect to any portion of the Aggregate Unpaids owing to such Purchaser (other than payments received pursuant to Section 10.2 or 10.3) in a greater proportion than that received by any other Purchaser entitled to receive a ratable share of such Aggregate Unpaids, such Purchaser agrees, promptly upon demand, to purchase for cash without recourse or warranty a portion of such Aggregate Unpaids held by the other Purchasers so that after such purchase each Purchaser will hold its ratable proportion of such Aggregate Unpaids; provided that if all or any portion of such excess amount is thereafter recovered from such Purchaser, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. Section 13.4 Protection of Ownership Interests of the Purchasers. (a) Seller agrees that from time to time, at its expense, it will promptly execute and deliver all instruments and documents, and take all actions, that may be necessary or desirable, or that the Agent may request, to perfect, protect or more fully evidence the Purchaser Interests, or to enable the Agent or the Purchasers to exercise and enforce their rights and remedies hereunder. At any time after an Amortization Event, the Agent may, or the Agent may direct Seller or the Servicer to, notify the Obligors of Receivables, at Seller's expense, of the ownership or security interests of the Purchasers under this Agreement and may also direct that payments of all amounts due or that become due under any or all Receivables be made directly to the Agent or its designee. Seller or the Servicer (as applicable) shall, at any Purchaser's request, withhold the identity of such Purchaser in any such notification. (b) If any Seller Party fails to perform any of its obligations hereunder, the Agent or any Purchaser may (but shall not be required to) perform, or cause performance of, such obligations, and the Agent's or such Purchaser's costs and expenses incurred in connection therewith shall be payable by Seller as provided in Section 10.3. Each Seller Party irrevocably authorizes the Agent at any time and from time to time in the sole discretion of the Agent, and appoints the Agent as its attorney-in-fact, to act on behalf of such Seller Party to file financing statements necessary or desirable in the Agent's sole discretion to perfect and to maintain the perfection and priority of the interest of the Purchasers in the Receivables. This appointment is coupled with an interest and is irrevocable. Section 13.5 Confidentiality. (a) Each Seller Party and each Purchaser shall maintain and shall cause each of its employees and officers to maintain the confidentiality of this Agreement and the other confidential or proprietary information with respect to the Agent and Company and their 38 respective businesses obtained by it or them in connection with the structuring, negotiating and execution of the transactions contemplated herein, except that such Seller Party and such Purchaser and its officers and employees may disclose such information to such Seller Party's and such Purchaser's external accountants and attorneys, the financial institutions party to the Pactiv Loan Agreement, and as required by any applicable law or order of any judicial or administrative proceeding. (b) The Agent, the Company and each Financial Institution shall maintain and shall cause each of its employees and officers to maintain the confidentiality of the confidential or proprietary information with respect to the Seller Parties and the Original Sellers and their respective businesses obtained by it or them in connection with the structuring, negotiating and execution of the transactions contemplated herein; provided, however, that each Seller Party hereby consents to the disclosure of any nonpublic information with respect to it (i) to the Agent, the Financial Institutions or Company by each other, (ii) by the Agent or the Purchasers to any prospective or actual assignee or participant of any of them and (iii) by the Agent to any rating agency, Commercial Paper dealer or provider of a surety, guaranty or credit or liquidity enhancement to Company or any entity organized for the purpose of purchasing, or making loans secured by, financial assets for which Calyon acts as the administrative agent and to any officers, directors, employees, outside accountants and attorneys of any of the foregoing, provided each such Person is informed of the confidential nature of such information, and (except in the case of rating agencies) agrees to keep such information confidential. In addition, the Purchasers and the Agent may disclose any such nonpublic information pursuant to any law, rule, regulation, direction, request or order of any judicial, administrative or regulatory authority or proceedings (whether or not having the force or effect of law). Section 13.6 Bankruptcy Petition. Each Seller Party, the Agent and each Financial Institution hereby covenants and agrees that, prior to the date that is one year and one day after the payment in full of all Commercial Paper and other outstanding senior indebtedness of Company, it will not institute against, or join any other Person in instituting against, Company or any such entity any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States. Section 13.7 Limitation of Liability. Except with respect to any claim arising out of the willful misconduct or gross negligence of Company, the Agent or any Financial Institution, no claim may be made by any Seller Party or any other Person against Company, the Agent or any Financial Institution or their respective Affiliates, directors, officers, employees, attorneys or agents for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event occurring in connection therewith; and each Seller Party hereby waives, releases, and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. Section 13.8 CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK AND THE MANDATORY CHOICE OF LAW PROVISIONS SET FORTH IN ARTICLE 9 OF THE NEW YORK UCC (WITHOUT GIVING EFFECT TO THE CONFLICT 39 OF LAWS PRINCIPLES THEREOF OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, WHICH SHALL APPLY HERETO). Section 13.9 CONSENT TO JURISDICTION. EACH SELLER PARTY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY DOCUMENT EXECUTED BY SUCH PERSON PURSUANT TO THIS AGREEMENT AND EACH SELLER PARTY HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY PURCHASER TO BRING PROCEEDINGS AGAINST ANY SELLER PARTY IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY ANY SELLER PARTY AGAINST THE AGENT OR ANY PURCHASER OR ANY AFFILIATE OF THE AGENT OR ANY PURCHASER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT OR ANY DOCUMENT EXECUTED BY SUCH SELLER PARTY PURSUANT TO THIS AGREEMENT SHALL BE BROUGHT ONLY IN A COURT IN NEW YORK, NEW YORK. Section 13.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT, ANY DOCUMENT EXECUTED BY ANY SELLER PARTY PURSUANT TO THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER OR THEREUNDER. Section 13.11 Integration; Binding Effect; Survival of Terms. (a) This Agreement and each other Transaction Document contain the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings. (b) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns (including any trustee in bankruptcy). This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms and shall remain in full force and effect until terminated in accordance with its terms; provided, however, that the rights and remedies with respect to (i) any breach of any representation and warranty made by any Seller Party pursuant to Article V, (ii) the indemnification and payment provisions of Article X, and Sections 13.5, 13.6 and 13.15 shall be continuing and shall survive any termination of this Agreement. 40 Section 13.12 Counterparts; Severability; Section References. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier or other electronic means shall be effective as delivery of a manually executed counterpart of this Agreement. Any provisions of this Agreement which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Unless otherwise expressly indicated, all references herein to "Article," "Section," "Schedule" or "Exhibit" shall mean articles and sections of, and schedules and exhibits to, this Agreement. Section 13.13 Calyon Roles. Each of the Financial Institutions acknowledges that Calyon acts, or may in the future act, (i) as administrative agent for Company or any Financial Institution, (ii) as issuing and paying agent for the Commercial Paper, (iii) to provide credit or liquidity enhancement for the timely payment for the Commercial Paper and (iv) to provide other services from time to time for Company or any Financial Institution (collectively, the "Calyon Roles"). Without limiting the generality of this Section 13.13, each Financial Institution hereby acknowledges and consents to any and all Calyon Roles and agrees that in connection with any Calyon Role, Calyon may take, or refrain from taking, any action that it, in its discretion, deems appropriate, including, without limitation, in its role as administrative agent for Company, and the giving of notice to the Agent of a mandatory purchase pursuant to the Liquidity Agreement. Section 13.14 Characterization. (a) It is the intention of the parties hereto that each purchase hereunder shall constitute and be treated as an absolute and irrevocable sale, which purchase shall provide the applicable Purchaser with the full benefits of ownership of the applicable Purchaser Interest. Except as specifically provided in this Agreement, each sale of a Purchaser Interest hereunder is made without recourse to Seller; provided, however, that (i) Seller shall be liable to each Purchaser and the Agent for all representations, warranties, covenants and indemnities made by Seller pursuant to the terms of this Agreement, (ii) such sale does not constitute and is not intended to result in an assumption by any Purchaser or the Agent or any assignee thereof of any obligation of Seller, Factoring, any Original Seller or any other person arising in connection with the Receivables, the Related Security or the related Contracts, or any other obligations of Seller, Factoring or any Original Seller, and (iii) such sale may be considered debt for tax purposes. (b) In addition to any ownership interest which the Agent may from time to time acquire pursuant hereto, Seller hereby grants to the Agent for the ratable benefit of the Purchasers a valid and perfected security interest in all of Seller's right, title and interest in, to and under (but none of the Seller's obligations under) the following assets now existing or hereafter arising: the Receivables Sale Agreement (including the right of the Seller to compel performance and otherwise exercise all remedies thereunder), all Receivables, the Collections, each Lock-Box, each Collection Account, all Related Security, all other rights and payments relating to such Receivables, and all proceeds of any of the foregoing, and all other assets in which the Agent has acquired, may hereafter acquire and/or purport to have acquired an interest 41 hereunder, prior to all other liens on and security interests therein to secure the prompt and complete payment of the Aggregate Unpaids. The Agent and the Purchasers shall have, in addition to the rights and remedies that they may have under this Agreement, all other rights and remedies provided to a secured creditor under the UCC and other applicable law, which rights and remedies shall be cumulative. Section 13.15 Excess Funds. The Company shall not be obligated to pay any amount pursuant to this Agreement unless the Company has excess cash flow from operations or has received funds with respect to such obligation which may be used to make such payment and which funds or excess cash flow are not required to repay when due the Commercial Paper of the Company. Any and all claims against the Company under this Agreement shall be subordinate to the claims of the holders of the Commercial Paper. Any amount which the Company does not pay pursuant to the operation of the preceding sentence shall not constitute a claim, as defined in Section 101(5) of the United States Bankruptcy Code, against the Company for any such insufficiency unless and until the Company does have excess cash flow or excess funds. [SIGNATURE PAGES FOLLOW] 42 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date hereof. PACTIV RSA LLC, as Seller By: /s/ Gregory A. Hanson ------------------------------------ Name: Gregory A. Hanson Title: President PACTIV RSA LLC 1900 West Field Court Lake Forest, Illinois 60045 Attn: General Counsel Fax: (847) 482-4544 (Attn: Greg Hanson) Fax: (847) 615-6621 (Attn: General Counsel) Email: ghanson@pactiv.com dbrekke@pactiv.com PACTIV FACTORING LLC, as Servicer By: /s/ Gregory A. Hanson ------------------------------------ Name: Gregory A. Hanson Title: President PACTIV FACTORING LLC 1900 West Field Court Lake Forest, Illinois 60045 Attn: General Counsel Fax: (847) 482-4544 (Attn: Greg Hanson) Fax: (847) 615-6621 (Attn: General Counsel) Email: ghanson@pactiv.com dbrekke@pactiv.com ATLANTIC ASSET SECURITIZATION LLC By: /s/ Gary Miller ------------------------------------ Name: Gary Miller Title: Managing Director By: /s/ Michael Guarda ------------------------------------ Name: Michael Guarda Title: Director Atlantic Asset Securitization LLC c/o Calyon New York Branch 1301 Avenue of the Americas New York, NY 10019 Fax: (212) 459-3528 Email: conduitsec@calyon.com CALYON NEW YORK BRANCH, as a Financial Institution and as Agent By: /s/ Gary Miller ------------------------------------ Name: Gary Miller Title: Managing Director By: /s/ Michael Guarda ------------------------------------ Name: Michael Guarda Title: Director Calyon New York Branch Debt Capital Markets - Liquid Assets Securitization 1301 Avenue of the Americas New York, NY 10019 Fax: (212) 459-3528 Email: conduitsec@calyon.com EXHIBIT I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Accrual Period" means each calendar month, provided that the initial Accrual Period hereunder means the period from (and including) the date of the initial purchase hereunder to (and including) the last day of the calendar month thereafter. "Adverse Claim" means a lien, security interest, charge or encumbrance, or other right or claim in, of or on any Person's assets or properties in favor of any other Person. "Affected Financial Institution" has the meaning specified in Section 12.1(c). "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person or any Subsidiary of such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Agent" has the meaning set forth in the preamble to this Agreement. "Aggregate Capital" means, on any date of determination, the aggregate amount of Capital of all Purchaser Interests outstanding on such date. "Aggregate Reduction" has the meaning specified in Section 1.3. "Aggregate Reserves" means, on any date of determination, the sum of the Loss Reserve, the Yield Reserve, the Servicing Reserve and the Dilution Reserve. "Aggregate Unpaids" means, at any time, an amount equal to the sum of all Aggregate Capital and all other unpaid Obligations (whether due or accrued) at such time. "Agreement" means this Receivables Purchase Agreement, as it may be amended or modified and in effect from time to time. "Amortization Date" means the earliest to occur of (i) the day on which any of the conditions precedent set forth in Section 6.2 are not satisfied, (ii) the Business Day immediately prior to the occurrence of an Amortization Event set forth in Section 9.1(d), (iii) the Business Day specified in a written notice from the Agent following the occurrence of any other Amortization Event, and (iv) the date which is thirty (30) days after the Agent's receipt of written notice from Seller that it wishes to terminate the facility evidenced by this Agreement. "Amortization Event" has the meaning specified in Article IX. Exh. I-1 "Assignment Agreement" has the meaning set forth in Section 12.1(b). "Authorized Officer" means, with respect to any Person, its president, corporate controller, treasurer or chief financial officer. "Base Rate" means a rate per annum equal to the higher of (i) the corporate base rate, prime rate or base rate of interest, as applicable, announced by Calyon New York Branch in New York, New York from time to time, changing when and as such rate changes and (ii) the sum of the Federal Funds Rate and 2%. "Broken Funding Costs" means for any Purchaser Interest which: (i) has its Capital reduced without compliance by Seller with the notice requirements hereunder or (ii) does not become subject to an Aggregate Reduction following the delivery of any Reduction Notice or (iii) is assigned or terminated prior to the date on which it was originally scheduled to end; an amount equal to the excess, if any, of (A) the CP Costs or Yield (as applicable) that would have accrued during the remainder of the Tranche Periods or the tranche periods for Commercial Paper determined by the Agent to relate to such Purchaser Interest (as applicable) subsequent to the date of such reduction, assignment or termination (or in respect of clause (ii) above, the date such Aggregate Reduction was designated to occur pursuant to the Reduction Notice) of the Capital of such Purchaser Interest if such reduction, assignment or termination had not occurred or such Reduction Notice had not been delivered, over (B) the sum of (x) to the extent all or a portion of such Capital is allocated to another Purchaser Interest, the amount of CP Costs or Yield actually accrued during the remainder of such period on such Capital for the new Purchaser Interest, and (y) to the extent such Capital is not allocated to another Purchaser Interest, the income, if any, actually received during the remainder of such period by the holder of such Purchaser Interest from investing the portion of such Capital not so allocated. In the event that the amount referred to in clause (B) exceeds the amount referred to in clause (A), the relevant Purchaser or Purchasers agree to pay to Seller the amount of such excess. All Broken Funding Costs shall be due and payable hereunder upon demand. Notwithstanding any contrary provision herein, Broken Funding Costs shall be calculated without giving effect to clause (ii) of the definition of LIBO Rate. "Business Day" means any day on which banks are not authorized or required to close in New York, New York or Chicago, Illinois and The Depository Trust Company of New York is open for business, and, if the applicable Business Day relates to any computation or payment to be made with respect to the LIBO Rate, any day on which dealings in dollar deposits are carried on in the London interbank market. "Calyon" means Calyon New York Branch in its individual capacity and its successors. "Capital" of any Purchaser Interest means, at any time, (A) the Purchase Price of such Purchaser Interest, minus (B) the sum of the aggregate amount of Collections and other payments received by the Agent which in each case are applied to reduce such Capital in accordance with the terms and conditions of this Agreement; provided that such Capital shall be restored (in accordance with Section 2.5) in the amount of any Collections or other payments so Exh. I-2 received and applied if at any time the distribution of such Collections or payments are rescinded, returned or refunded for any reason. "Change of Control" means (i) with respect to Provider, the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of voting stock of Provider, (ii) with respect to Factoring, the failure of Provider to own directly, free and clear of all Adverse Claims, all of the membership interests of Factoring, or (iii) with respect to Seller, the failure of Factoring to own directly, free and clear of all Adverse Claims, all of the membership interests of Seller. "Charged-Off Receivable" means a Receivable: (i) as to which the Obligor thereof has taken any action, or suffered any event to occur, of the type described in Section 9.1(d) (as if references to Seller Party therein refer to such Obligor); (ii) as to which the Obligor thereof, if a natural person, is deceased, (iii) which, consistent with the Credit and Collection Policy, would be written off Seller's books as uncollectible, (iv) which has been identified by Seller as uncollectible or (v) as to which any payment, or part thereof, remains unpaid for ninety-one (91) days or more from the original due date for such payment. "Collection Account" means each concentration account, depositary account, lock-box account or similar account in which any Collections are collected or deposited and which is listed on Exhibit IV. "Collection Account Agreement" means an agreement substantially in the form of Exhibit VI among Factoring, Seller, the Agent, an Original Seller and a Collection Bank. "Collection Bank" means, at any time, any of the banks holding one or more Collection Accounts. "Collection Notice" means a notice, in substantially the form of Annex A to Exhibit VI, from the Agent to a Collection Bank. "Collections" means, with respect to any Receivable, all cash collections and other cash proceeds in respect of such Receivable, including, without limitation, all yield, Finance Charges or other related amounts accruing in respect thereof and all cash proceeds of Related Security with respect to such Receivable. "Commercial Paper" means promissory notes of Company issued by Company in the commercial paper market. "Commitment" means, for each Financial Institution, the commitment of such Financial Institution to purchase Purchaser Interests from Seller and Company, in an amount not to exceed (i) in the aggregate, the amount set forth opposite such Financial Institution's name on Schedule A to this Agreement, as such amount may be modified in accordance with the terms hereof and (ii) with respect to any individual purchase hereunder, its Pro Rata Share of the Purchase Price therefor. Exh. I-3 "Commitment Termination Date" means December 10, 2012, as such date may be extended by agreement of the parties hereto. "Company" has the meaning set forth in the preamble to this Agreement. "Concentration Limit" means, at any time, for any Obligor, 2.5% of the aggregate Eligible Receivables Balance at such time, or such other amount (a "Special Concentration Limit") for such Obligor designated by the Agent; provided, that in the case of an Obligor and any Affiliate of such Obligor, the Concentration Limit shall be calculated as if such Obligor and such Affiliate are one Obligor; and provided, further, that the Agent may, upon not less than three (3) Business Days' notice to Seller, cancel any Special Concentration Limit. As of the date hereof, (i) a Special Concentration Limit is designated by the Agent for Walmart/Sam's Club equal to 20.0% of the aggregate Eligible Receivables Balance, (ii) a Special Concentration Limit is designated by the Agent for Bunzl equal to 5.0% of the aggregate Eligible Receivables Balance and (iii) Special Concentration Limits equal to specified percentages of the Eligible Receivables Balance will be available for Obligors who have the specified short-term ratings (or the equivalent long-term ratings as set forth in Schedule C hereto) as set forth below:
Short-Term Rating of Obligor Special Concentration Limit - ---------------------------- --------------------------- At least A-1+ and P-1 10.0% At least A-1 and P-1 10.0% At least A-2 and P-2 8.0% At least A-3 and P-3 4.0%
"Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract or application for a letter of credit. "Contract" means, with respect to any Receivable, any and all instruments, agreements, invoices or other writings pursuant to which such Receivable arises or which evidences such Receivable. "Contractual Dilutions" means, at any time, those Dilutions which are not Floating Dilutions, as shown in the Monthly Report. "CP Costs" means, for each day, (a) with respect to Commercial Paper issued to finance the Company's acquisition of Purchaser Interests hereunder which is not Pooled Commercial Paper, the sum of (i) Yield accrued on such Commercial Paper on such day plus (ii) any and all accrued commissions in respect of placement agents and Commercial Paper dealers allocable to such Commercial Paper, and any issuing and paying agent fees incurred, in respect of such Commercial Paper for such day, minus (iii) any payment received on such Exh. I-4 day net of expenses in respect of Broken Funding Costs related to the prepayment of any Purchaser Interest of Company and (b) with respect to Pooled Commercial Paper, the sum of (i) discount or yield accrued on Pooled Commercial Paper on such day, plus (ii) any and all accrued commissions in respect of placement agents and Commercial Paper dealers, and issuing and paying agent fees incurred, in respect of such Pooled Commercial Paper for such day, plus (iii) other costs associated with funding small or odd-lot amounts with respect to all receivable purchase facilities which are funded by Pooled Commercial Paper for such day, minus (iv) any accrual of income net of expenses received on such day from investment of collections received under all receivable purchase facilities funded substantially with Pooled Commercial Paper, minus (v) any payment received on such day net of expenses in respect of Broken Funding Costs related to the prepayment of any Purchaser Interest of Company pursuant to the terms of any receivable purchase facilities funded substantially with Pooled Commercial Paper. In addition to the foregoing costs, if Seller shall request any Incremental Purchase during any period of time determined by the Agent in its sole discretion to result in incrementally higher CP Costs applicable to such Incremental Purchase, the Capital associated with any such Incremental Purchase shall, during such period, be deemed to be funded by Company in a special pool (which may include capital associated with other receivable purchase facilities) for purposes of determining such additional CP Costs applicable only to such special pool and charged each day during such period against such Capital. "CP Rate" for any Accrual Period or portion thereof for any Purchaser Interest means, to the extent Company funds such Purchaser Interest for such Accrual Period or portion thereof by issuing Commercial Paper, the rate (or if more than one rate, the weighted average of the rates) at which Commercial Paper notes of Company having a term equal to such Accrual Period or portion thereof or portion thereof and to be issued to fund such Purchaser Interest may be sold by any placement agent or commercial paper dealer selected by the Agent on behalf of Company, as agreed between each such agent or dealer and the Agent and notice of which has been given by the Agent to the Servicer; provided if the rate (or rates) as agreed between any such agent or dealer and the Agent for any Accrual Period or portion thereof for any Purchaser Interest is a discount rate (or rates), then such rate shall be the rate (or if more than one rate, the weighted average of the rates) resulting from converting such discount rate (or rates) to an interest-bearing equivalent rate per annum. "Credit and Collection Policy" means Seller's credit and collection policies and practices relating to Contracts and Receivables existing on the date hereof and summarized in Exhibit VII hereto, as modified from time to time in accordance with this Agreement. "Days Sales Outstandings" means, on any date, the product of (a) the number of days in the month most recently ended and (b) the amount obtained by dividing (i) the Outstanding Balance of Receivables as of the last day of such month by (ii) the aggregate dollar amount of Receivables created during such month. Exh. I-5 "Deductions" means, at any time, the Outstanding Balance of all Receivables that are related to short payments under investigation, as shown in the Monthly Report. "Deemed Collections" means the aggregate of all amounts Seller shall have been deemed to have received as a Collection of a Receivable. Seller shall be deemed to have received a Collection in respect of a Receivable (i) in the amount by which the Outstanding Balance of any such Receivable is at any time either (x) reduced as a result of any defective or rejected goods or services, any discount or any adjustment or otherwise by Seller (other than cash Collections on account of the Receivables) or (y) reduced or canceled as a result of a setoff in respect of any claim by any Person (whether such claim arises out of the same or a related transaction or an unrelated transaction) or (ii) in the full amount of any such Receivable if any of the representations or warranties in clauses (i), (j), (k), (l), (q), (r), (s), (t) or (u) of Section 5.1 are no longer true with respect to such Receivable. "Default Fee" means with respect to any amount due and payable by Seller in respect of any Aggregate Unpaids, an amount equal to the greater of (i) $1000 and (ii) interest on any such unpaid Aggregate Unpaids at a rate per annum equal to 2% above the Base Rate. "Default Proxy Ratio" means, for any calendar month, a fraction (calculated as a percentage) equal to (i) the aggregate Outstanding Balance of all Receivables (without duplication and excluding the Deductions) which, as of the last day of such calendar month, remain unpaid for at least sixty-one (61) but less than ninety-one (91) days from the original due date plus the aggregate Outstanding Balance of all Receivables (without duplication) which, consistent with the Credit and Collection Policy, were or should have been written off the Seller's books as uncollectible during such calendar month, divided by (ii) the aggregate Outstanding Balance of all Receivables generated during the calendar month which ended on the date three (3) months prior to the last day of the current calendar month. "Delinquency Ratio" means, for any calendar month, a percentage equal to (i) the aggregate Outstanding Balance of all Receivables that were Delinquent Receivables as of the last day of such calendar month divided by (ii) the aggregate Outstanding Balance of all Receivables (excluding the Deductions) as of the last day of such calendar month. "Delinquent Receivable" means a Receivable as to which any payment, or part thereof, remains unpaid for sixty-one (61) days or more from the original due date for such payment (but does not include any Receivables which are already part of the Deductions). "Designated Obligor" means an Obligor indicated by the Agent to Seller in writing. "Dilution Horizon Ratio" means, as of any date as set forth in the most recent Monthly Report, a ratio computed by dividing (i) the aggregate of all Receivables generated during the two (2) most recently ended calendar months by (ii) the aggregate Net Receivables Balance plus Contractual Dilutions as of the last day of the most recently ended calendar month. "Dilution Ratio" means, for any calendar month, the ratio (expressed as a percentage) computed as of the last day of such calendar month by dividing (i) the aggregate amount of Floating Dilutions during such calendar month, by (ii) the aggregate Outstanding Balance of all Exh. I-6 Receivables generated during the calendar month which ended on the date two (2) months prior to the last day of the current calendar month. "Dilution Reserve" means, on any date, an amount equal to the product of (i) the Dilution Reserve Ratio then in effect times (ii) the Aggregate Capital as of the close of business on the immediately preceding Business Day; provided, however, that as long as the long-term public senior debt rating of Pactiv is at least BBB- by Standard & Poor's Ratings Group and at least Baa3 by Moody's Investors Service, Inc., the Dilution Reserve shall be zero. "Dilution Reserve Ratio" means, as of any date, an amount calculated as follows: Dilution Reserve Ratio = [(2.25 x ADR) + [(HDR - ADR) x (HDR/ADR)]] x DHR where: ADR = the average of the Dilution Ratios for the most recent twelve calendar months; HDR = the highest three month rolling average of the Dilution Ratios during the most recent twelve calendar months; and DHR = the Dilution Horizon Ratio. The Dilution Reserve Ratio shall be calculated monthly in each Monthly Report and such Dilution Reserve Ratio shall, absent manifest error, be effective from the corresponding Settlement Date until the next succeeding Settlement Date. "Dilutions" means, at any time, the aggregate amount of reductions or cancellations described in clause (i) of the definition of "Deemed Collections." "Discount Rate" means, the LIBO Rate or the Base Rate, as applicable, with respect to each Purchaser Interest of the Financial Institutions. "Eligible Receivable" means, at any time, a Receivable: (i) the Obligor of which (a) if a natural person, is a resident of the United States or, if a corporation or other business organization, is organized under the laws of the United States or any political subdivision thereof and has its chief executive office in the United States; (b) is not an Affiliate of any of the parties hereto; (c) is not a Designated Obligor; and (d) is not a government or a governmental subdivision or agency, (ii) the Obligor of which is not the Obligor of any Receivables as to which any payment, or part thereof, remains unpaid for 61 days or more past the original due date if the sum of such unpaid amounts equal more than 25% of the aggregate Outstanding Balance of all Receivables due from such Obligor or its Affiliates, Exh. I-7 (iii) which is not a Charged-Off Receivable or a Delinquent Receivable, (iv) (1) which by its terms is due and payable within 30 days of the original billing date therefor and has not had its payment terms extended, or (2) which by its terms is due and payable at least 31 but less than 62 days after the original billing date therefor and has not had its payment terms extended, provided, that the Outstanding Balance of such Receivable, when added to the Outstanding Balance of all other Receivables which by their terms are due and payable at least 31 but less than 62 days after the original billing date therefor, shall not exceed 25% of the aggregate Outstanding Balance of all Receivables, (v) which is an "account" within the meaning of Section 9-102 (or any successor section) of the UCC of all applicable jurisdictions, (vi) which is denominated and payable only in United States dollars in the United States, (vii) which arises under a Contract which, together with such Receivable, is in full force and effect and constitutes the legal, valid and binding obligation of the related Obligor enforceable against such Obligor in accordance with its terms subject to no offset, counterclaim or other defense, (viii) which arises under a Contract which does not contain a confidentiality provision that purports to restrict the ability of any Purchaser to exercise its rights under this Agreement, including, without limitation, its right to review the Contract, (ix) which arises under a Contract that contains an obligation to pay a specified sum of money, contingent only upon the sale of goods or the provision of services by an Original Seller, (x) which, together with the Contract related thereto, does not contravene any law, rule or regulation applicable thereto (including, without limitation, any law, rule and regulation relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no part of the Contract related thereto is in violation of any such law, rule or regulation, (xi) which satisfies all applicable requirements of the Credit and Collection Policy, (xii) which was generated in the ordinary course of an Original Seller's business, (xiii) which arises solely from the sale of goods or the provision of services to the related Obligor by an Original Seller, and not by any other Person (in whole or in part), Exh. I-8 (xiv) as to which the Agent has not notified Seller that the Agent has determined that such Receivable or class of Receivables is not acceptable as an Eligible Receivable. (xv) which is not subject to any asserted right of rescission, set-off or counterclaim or any other defense (including defenses arising out of violations of usury laws) of the applicable Obligor against an Original Seller or any other Adverse Claim, and the Obligor thereon holds no right as against an Original Seller to cause such Original Seller to repurchase the goods or merchandise the sale of which shall have given rise to such Receivable (except with respect to sale discounts effected pursuant to the Contract, or defective goods returned in accordance with the terms of the Contract), (xvi) as to which the applicable Original Seller has satisfied and fully performed all obligations on its part with respect to such Receivable required to be fulfilled by it, and no further action is required to be performed by any Person with respect thereto other than payment thereon by the applicable Obligor, (xvii) all right, title and interest to and in which has been validly transferred by the applicable Original Seller to Factoring in accordance with a Transfer Agreement and, thereafter, by Factoring directly to Seller under and in accordance with the Receivables Sale Agreement, and Seller has good and marketable title thereto free and clear of any Adverse Claim, and (xviii) which is not a note receivable or for an amount related to sales taxes. "Eligible Receivables Balance" means, at any time, the Outstanding Balance of all Eligible Receivables (excluding any Finance Charges) less the amounts specified in the Monthly Report as the Contractual Dilutions and the Deductions. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Excluded Receivable" means any indebtedness or other obligations owed to Pactiv, whether constituting an account, chattel paper, instrument or general intangible (i) bearing on the face of the invoice with respect thereto the logo, trade name or trademark "Molded Fibre" or (ii) arising from the operation of the former Pactiv facilities located at 838 North Delsea Drive, Clayton, New Jersey or 39 Pierce Industrial Park, Shelbyville, Kentucky, or (iii) for which the Obligor is AlliedSignal, Inc. "Facility Account" means Seller's Account No. 35097861 at Northern Trust Bank. "Facility Termination Date" means the earlier of (i) the Liquidity Termination Date, (ii) the Amortization Date and (iii) the Commitment Termination Date. "Factoring Performance Undertaking" means that certain Factoring Performance Undertaking, dated as of December 28, 2000, by Provider in favor of the Seller, as the same may be amended, restated or otherwise modified from time to time. Exh. I-9 "Federal Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy," as amended and any successor statute thereto. "Federal Funds Effective Rate" means, for any period, a fluctuating interest rate per annum for each day during such period equal to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the preceding Business Day) by the Federal Reserve Bank of New York in the Composite Closing Quotations for U.S. Government Securities; or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 11:30 a.m. (New York time) for such day on such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. "Fee Letter" means that certain letter agreement, dated as of the date hereof, among Seller, the Company and the Agent, as it may be amended or modified and in effect from time to time. "Finance Charges" means, with respect to a Receivable, any finance, interest, late payment charges or similar charges owing by an Obligor pursuant to the related Contract. "Financial Institutions" has the meaning set forth in the preamble in this Agreement. "Floating Dilutions" means, at any time, Dilutions which are not subject to or limited by an arrangement or agreement with the related Obligor, existing at the time the related Receivable is generated, in connection with early payment or volume or other types of purchases. "Funding Agreement" means this Agreement and any agreement or instrument executed by any Funding Source with or for the benefit of Company. "Funding Source" means (i) any Financial Institution or (ii) any insurance company, bank or other funding entity providing liquidity, credit enhancement or back-up purchase support or facilities to Company. "GAAP" means generally accepted accounting principles in effect in the United States of America from time to time. "Incremental Purchase" means a purchase of one or more Purchaser Interests which increases the total outstanding Aggregate Capital hereunder. "Indebtedness" of a Person means such Person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of property or services (other than accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade), (iii) obligations, whether or not assumed, secured by liens or payable out of the proceeds or production from property now or hereafter owned or acquired by such Person, (iv) obligations which are evidenced by notes, acceptances, or other instruments, (v) capitalized lease obligations, (vi) net liabilities under interest rate swap, exchange or cap agreements, (vii) Exh. I-10 Contingent Obligations and (viii) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA. "Independent Director" shall mean a member of the Board of Directors of Seller who (i) is an individual with at least three (3) years' prior experience in transactions involving the securitization of financial assets, and prior experience as an independent director for an entity (other than Seller) whose charter documents require the unanimous consent of all independent directors, partners or members before such entity could file a bankruptcy proceeding or consent to the institution of bankruptcy proceedings against it and (ii) is not at such time, and has not been at any time during the preceding five (5) years, (a) a director, member, officer, employee or affiliate of Seller, Factoring, Provider or any of their respective Subsidiaries or Affiliates (other than any such Subsidiary or Affiliate which is a special purpose entity engaged solely in the purchase and sale of financial assets in connection with the securitization of such assets), or (b) the beneficial owner (at the time of such individual's appointment as an Independent Director or at any time thereafter while serving as an Independent Director) of any of the outstanding common shares or membership interest of Seller, Factoring, Provider, or any of their respective Subsidiaries or Affiliates, having general voting rights. "LIBO Rate" means the rate per annum equal to the sum of (i) (a) the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars appearing on Reuters Screen FRBD as of 11:00 a.m. (London time) two Business Days prior to the first day of the relevant Tranche Period, and having a maturity equal to such Tranche Period, provided that, (1) if Reuters Screen FRBD is not available to the Agent for any reason, the applicable LIBO Rate for the relevant Tranche Period shall instead be the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars as reported by any other generally recognized financial information service as of 11:00 a.m. (London time) two Business Days prior to the first day of such Tranche Period, and having a maturity equal to such Tranche Period, and (2) if no such British Bankers' Association Interest Settlement Rate is available to the Agent, the applicable LIBO Rate for the relevant Tranche Period shall instead be the rate determined by the Agent to be the rate at which Calyon offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Tranche Period, in the approximate amount to be funded at the LIBO Rate and having a maturity equal to such Tranche Period, divided by (b) one minus the maximum aggregate reserve requirement (including all basic, supplemental, marginal or other reserves) which is imposed against the Agent in respect of Eurocurrency liabilities, as defined in Regulation D of the Board of Governors of the Federal Reserve System as in effect from time to time (expressed as a decimal), applicable to such Tranche Period plus (ii) .85% per annum. The LIBO Rate shall be rounded, if necessary, to the next higher 1/100 of 1%. "Liquidity Agreement" means the agreement entered into by Company with certain Financial Institutions for the purpose of providing liquidity with respect to the Capital funded by Company under this Agreement. "Liquidity Termination Date" has the meaning set forth in the Liquidity Agreement and shall initially be December 18, 2007. Exh. I-11 "Lock-Box" means each locked postal box with respect to which a bank who has executed a Collection Account Agreement has been granted exclusive access for the purpose of retrieving and processing payments made on the Receivables and which is listed on Exhibit IV. "Loss Horizon Ratio" means, for any calendar month, a fraction (expressed as a percentage) computed by dividing (i) the aggregate Outstanding Balance of all Receivables generated during the three (3) most recently ended calendar months by (ii) the aggregate Net Receivables Balance as at the last day of the most recently ended calendar month. "Loss Reserve" means, on any date, an amount equal to the product of (x) the greater of (i) 12% and (ii) the Loss Reserve Ratio then in effect times (y) the aggregate Net Receivables Balance as of the close of business on the immediately preceding Business Day. "Loss Reserve Ratio" means, as of any date, an amount calculated as follows: Loss Reserve Ratio = 2.25 x DPR x LHR, where DPR = the highest three month rolling average of the Default Proxy Ratio during the most recent twelve calendar months; and LHR = the Loss Horizon Ratio. "Loss-to-Liquidation Ratio" means, for any calendar month, a fraction (expressed as a percentage) equal to (i) the aggregate Outstanding Balance of all Receivables (without duplication and excluding the Deductions) which, as of the last day of such calendar month, remain unpaid for at least sixty-one (61) but less than ninety-one (91) days from the original due date plus the aggregate Outstanding Balance of all Receivables (without duplication) which, consistent with the Credit and Collection Policy, were or should have been written off the Seller's books as uncollectible and are less than sixty-one (61) days past due date during such period, divided by (ii) the aggregate amount of Collections during such calendar month. "Material Adverse Effect" means a material adverse effect on (i) the financial condition or operations of any Seller Party, Factoring, any Original Seller or Provider and its Subsidiaries, (ii) the ability of any Seller Party, Factoring, any Original Seller or Provider to perform such Person's obligations under any Transaction Documents, (iii) the legality, validity or enforceability of this Agreement or any other Transaction Document, (iv) any Purchaser's interest in the Receivables generally or in any significant portion of the Receivables, the Related Security or the Collections with respect thereto, or (v) the collectibility of the Receivables generally or of any material portion of the Receivables. "Monthly Report" means a report, in substantially the form of Exhibit VIII hereto (appropriately completed), furnished by the Servicer to the Agent pursuant to Section 8.5. "Monthly Reporting Date" means the fifteenth (15th) day of each month, or, if such day is not a Business Day, the next succeeding Business Day. Exh. I-12 "Net Receivables Balance" means, at any time, the aggregate Eligible Receivables Balance at such time reduced by the aggregate amount by which the Eligible Receivables Balance of each Obligor and its Affiliates exceeds the Concentration Limit for such Obligor. "Obligations" shall have the meaning set forth in Section 2.1. "Obligor" means a Person obligated to make payments pursuant to a Contract. "Original Seller" means each of Pactiv and E-Z Por Corporation, a Delaware corporation, or any other Subsidiary or Affiliate of Pactiv approved in writing by the Agent from time to time. "Outstanding Balance" of any Receivable at any time means the then outstanding principal balance thereof. "Pactiv" means Pactiv Corporation, a Delaware corporation. "Pactiv Loan Agreement" means that certain Credit Agreement, dated as of April 19, 2006, among Pactiv Corporation (formerly known as Tenneco Packaging Inc.), Bank of America, N.A., as Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent and Letter of Credit issuer, and the other financial institutions party thereto. "Participant" has the meaning set forth in Section 12.2. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Pooled Commercial Paper" means Commercial Paper notes of Company subject to any particular pooling arrangement by Company, but excluding Commercial Paper issued by Company for a tenor and in an amount specifically requested by any Person in connection with any agreement effected by Company. "Potential Amortization Event" means an event which, with the passage of time or the giving of notice, or both, would constitute an Amortization Event. "Proposed Reduction Date" has the meaning set forth in Section 1.3. "Pro Rata Share" means, for each Financial Institution, a percentage equal to (i) the Commitment of such Financial Institution, divided by (ii) the aggregate amount of all Commitments of all Financial Institutions hereunder, adjusted as necessary to give effect to the application of the terms of the Liquidity Agreement. "Provider" means Pactiv in its capacity as "Provider" under either the Servicer Performance Undertaking or the Factoring Performance Undertaking, as applicable. "Purchase Date" means each day on which the Seller sells Purchaser Interests to the Company or to the Financial Institutions under this Agreement. Exh. I-13 "Purchase Limit" means $130,000,000. "Purchase Notice" has the meaning set forth in Section 1.2. "Purchase Price" means, with respect to any Incremental Purchase of a Purchaser Interest, the amount paid to Seller for such Purchaser Interest which shall not exceed the least of (i) the amount requested by Seller in the applicable Purchase Notice, (ii) the unused portion of the Purchase Limit on the applicable Purchase Date and (iii) the excess, if any, of the Net Receivables Balance (less the Aggregate Reserves) on the applicable Purchase Date over the aggregate outstanding amount of Aggregate Capital determined as of the date of the most recent Monthly Report. "Purchasers" means Company and each Financial Institution. "Purchaser Interest" means, at any time, an undivided percentage ownership interest (computed as set forth below) associated with a designated amount of Capital, selected pursuant to the terms and conditions hereof in (i) each Receivable arising prior to the time of the most recent computation or recomputation of such undivided interest, (ii) all Related Security with respect to each such Receivable, and (iii) all Collections with respect to, and other proceeds of, each such Receivable. Each such undivided percentage interest shall equal: C -------- NRB - AR where: C = the Capital of such Purchaser Interest. AR = the Aggregate Reserves. NRB = the Net Receivables Balance. Such undivided percentage ownership interest shall be initially computed on its Purchase Date. Thereafter, until the Amortization Date, each Purchaser Interest shall be automatically recomputed (or deemed to be recomputed) on each day prior to the Amortization Date. The variable percentage represented by any Purchaser Interest as computed (or deemed recomputed) as of the close of the business day immediately preceding the Amortization Date shall remain constant at all times thereafter. "Purchasing Financial Institution" has the meaning set forth in Section 12.1(b). "Receivable" means all indebtedness and other obligations owed to Seller, Factoring, or an Original Seller other than an Excluded Receivable (at the time it arises, and before giving effect to any transfer or conveyance under the Transfer Agreements, the Receivables Sale Agreement or hereunder) or in which Seller, Factoring or an Original Seller has a security interest or other interest, including, without limitation, any indebtedness, obligation or interest constituting an account, chattel paper, instrument or general intangible, arising in connection with the sale of goods or the rendering of services by an Original Seller, and further includes, Exh. I-14 without limitation, the obligation to pay any Finance Charges with respect thereto. Indebtedness and other rights and obligations arising from any one transaction, including, without limitation, indebtedness and other rights and obligations represented by an individual invoice, shall constitute a Receivable separate from a Receivable consisting of the indebtedness and other rights and obligations arising from any other transaction; provided further, that any indebtedness, rights or obligations referred to in the immediately preceding sentence shall be a Receivable regardless of whether the account debtor or Seller treats such indebtedness, rights or obligations as a separate payment obligation. Receivables Sale Agreement" means that certain Receivables Sale Agreement, dated as of December 28, 2000, between Factoring and Seller, as the same may be amended, restated or otherwise modified from time to time. "Records" means, with respect to any Receivable, all Contracts and other documents, books, records and other information (including, without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) relating to such Receivable, any Related Security therefor and the related Obligor. "Reduction Notice" has the meaning set forth in Section 1.3. "Regulatory Change" has the meaning set forth in Section 10.2(a). "Reinvestment" has the meaning set forth in Section 2.2. "Related Security" means, with respect to any Receivable: (i) all of Seller's interest in the inventory and goods (including returned or repossessed inventory or goods), if any, the sale, financing or lease of which by an Original Seller gave rise to such Receivable, and all insurance contracts with respect thereto, (ii) all other security interests or liens and property subject thereto from time to time, if any, purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise, together with all financing statements and security agreements describing any collateral securing such Receivable, (iii) all guaranties, letters of credit, insurance and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to the Contract related to such Receivable or otherwise, (iv) all service contracts and other contracts and agreements associated with such Receivable, (v) all Records related to such Receivable, Exh. I-15 (vi) all of Seller's right, title and interest in, to and under the Receivables Sale Agreement and each Transfer Agreement in respect of such Receivable and all of Seller's right, title and interest in, to and under the Factoring Performance Undertaking, and (vii) all proceeds of any of the foregoing. "Required Financial Institutions" means, at any time, Financial Institutions with Commitments in excess of 66-2/3% of the Purchase Limit. "Required Notice Period" means the number of days required notice set forth below applicable to the Aggregate Reduction indicated below:
Aggregate Reduction Required Notice Period - ------------------- ---------------------- <=$100,000,000 three Business Days >$100,000,000 five Business Days
"Restricted Junior Payment" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of capital stock of Seller now or hereafter outstanding, except a dividend payable solely in shares of that class of stock or in any junior class of stock of Seller, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of capital stock of Seller now or hereafter outstanding, (iii) any payment or prepayment of principal of, premium, if any, or interest, fees or other charges on or with respect to, and any redemption, purchase, retirement, defeasance, sinking fund or similar payment and any claim for rescission with respect to the Subordinated Loans (as defined in the Receivables Sale Agreement), (iv) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of capital stock of Seller now or hereafter outstanding, and (v) any payment of management fees by Seller (except for reasonable management fees to the Provider or its Affiliates in reimbursement of actual management services performed). "Seller" has the meaning set forth in the preamble to this Agreement. "Seller Parties" has the meaning set forth in the preamble to this Agreement. "Servicer" means at any time the Person (which may be the Agent) then authorized pursuant to Article VIII to service, administer and collect Receivables. "Servicer Performance Undertaking" means that certain Servicer Performance Undertaking, dated as of December 28, 2000, by Provider in favor of the Agent, as the same may be amended, restated or otherwise modified from time to time. "Servicing Fee" has the meaning set forth in Section 8.6. Exh. I-16 "Servicing Reserve" means on any date, an amount equal to the sum of (a) the accrued and unpaid Servicing Fee through the next Settlement Date plus (b) an amount determined in accordance with the following formula: 2.25 multiplied by the Servicing Fee percentage (1%), multiplied by Days Sales Outstanding, divided by 360, multiplied by the Outstanding Balance of all Receivables on such date. "Settlement Date" means (A) the third (3rd) Business Day immediately following each Monthly Reporting Date in respect of each Purchaser Interest of Company, and (B) the last day of the relevant Tranche Period in respect of each Purchaser Interest of the Financial Institutions. "Settlement Period" means (A) in respect of each Purchaser Interest of Company, the immediately preceding Accrual Period, and (B) in respect of each Purchaser Interest of the Financial Institutions, the entire Tranche Period of such Purchaser Interest. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, association, limited liability company, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of Seller. "Terminating Tranche" has the meaning set forth in Section 4.3(b). "Tranche Period" means, with respect to any Purchaser Interest held by a Financial Institution: (a) if Yield for such Purchaser Interest is calculated on the basis of the LIBO Rate, a period of one, two, three or six months, or such other period as may be mutually agreeable to the Agent and Seller, commencing on a Business Day selected by Seller or the Agent pursuant to this Agreement. Such Tranche Period shall end on the day in the applicable succeeding calendar month which corresponds numerically to the beginning day of such Tranche Period, provided, however, that if there is no such numerically corresponding day in such succeeding month, such Tranche Period shall end on the last Business Day of such succeeding month; or (b) if Yield for such Purchaser Interest is calculated on the basis of the Base Rate, a period commencing on a Business Day selected by Seller and agreed to by the Agent, provided no such period shall exceed one month. If any Tranche Period would end on a day which is not a Business Day, such Tranche Period shall end on the next succeeding Business Day, provided, however, that in the case of Tranche Periods corresponding to the LIBO Rate, if such next succeeding Business Day falls in a new month, such Tranche Period shall end on the immediately preceding Business Day. In the case of any Tranche Period for any Purchaser Interest which commences before the Amortization Date and would otherwise end on a date occurring after the Amortization Date, such Tranche Exh. I-17 Period shall end on the Amortization Date. The duration of each Tranche Period which commences after the Amortization Date shall be of such duration as selected by the Agent. "Transaction Documents" means, collectively, this Agreement, each Purchase Notice, the Receivables Sale Agreement, each Transfer Agreement, each Collection Account Agreement, the Servicer Performance Undertaking, the Factoring Performance Undertaking, the Fee Letter, the Subordinated Note (as defined in the Receivables Sale Agreement) and all other instruments, documents and agreements executed and delivered in connection herewith. "Transfer Agreement" means each of (i) those certain Receivables Sale Agreements, dated as of the date hereof, between each Original Seller and Factoring, and (ii) each other Receivables Sale Agreement entered into from time to time between an Original Seller, approved by the Agent, and Factoring, in form and substance satisfactory to the Agent (as the same may be amended, restated or otherwise modified from time to time). "UCC" means the Uniform Commercial Code as from time to time in effect in the specified jurisdiction. "Yield" means (i) for each respective Tranche Period relating to Purchaser Interests of the Financial Institutions, an amount equal to the product of the applicable Discount Rate for each Purchaser Interest multiplied by the Capital of such Purchaser Interest for each day elapsed during such Tranche Period, annualized on either a 360 day basis (with respect to Purchaser Interests for which the Discount Rate is the LIBO Rate) or a 365 day basis (with respect to Purchaser Interests for which the Discount Rate is the Base Rate) and (ii) for each respective Accrual Period relating to Purchaser Interests of the Company which are not funded with Pooled Commercial Paper, an amount equal to the product of the applicable CP Rate for each Purchaser Interest multiplied by the Capital of such Purchaser Interest for each day elapsed during such Accrual Period, annualized on a 360 day basis. "Yield Reserve" means, on any date, an amount equal to (a) the sum of the accrued and unpaid Yield through the next Settlement Date plus (b) an amount determined in accordance with the following formula: the Base Rate on such date multiplied by 2.25, multiplied by Days Sales Outstanding, divided by 360, multiplied by the outstanding Capital on such date. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the State of Illinois, and not specifically defined herein, are used herein as defined in such Article 9. Exh. I-18 EXHIBIT II FORM OF PURCHASE NOTICE [Date] Calyon New York Branch, as Agent 1301 Avenue of the Americas New York, NY 10019 Attention: __________________ Re: PURCHASE NOTICE Ladies and Gentlemen: Reference is hereby made to the Receivables Purchase Agreement, dated as of December 21, 2006, by and among Pactiv RSA LLC, a Delaware limited liability company (the "Seller"), Pactiv Factoring LLC, as Servicer, the Financial Institutions, Atlantic Asset Securitization LLC ("Company"), and Calyon New York Branch, as Agent (the "Receivables Purchase Agreement"). Capitalized terms used herein shall have the meanings assigned to such terms in the Receivables Purchase Agreement. The Agent is hereby notified of the following Incremental Purchase: Purchase Price: $ __________________________________ Date of Purchase: __________________________________ Requested Discount Rate: [LIBO Rate] [Base Rate] [CP Rate]
Please credit the Purchase Price in immediately available funds to our Facility Account [and then wire-transfer the Purchase Price in immediately available funds on the above-specified date of purchase to: [Account Name] [Account No.] Please advise [Name] at telephone no (__) _________________ if Company will not be making this purchase. In connection with the Incremental Purchase to be made on the above listed "Date of Purchase" (the "Purchase Date"), the Seller hereby certifies that the following statements are true Exh. II-1 on the date hereof, and will be true on the Purchase Date (before and after giving effect to the proposed Incremental Purchase): (i) the representations and warranties of the Seller set forth in Section 5.1 of the Receivables Purchase Agreement are true and correct on and as of the Purchase Date as though made on and as of such date; (ii) no event has occurred and is continuing, or would result from the proposed Incremental Purchase, that will constitute an Amortization Event or a Potential Amortization Event; (iii) the Facility Termination Date has not occurred, the Aggregate Capital does not exceed the Purchase Limit and the aggregate Purchaser Interests do not exceed 100%; and (iv) the amount of Aggregate Capital is $_________ after giving effect to the Incremental Purchase to be made on the Purchase Date. Very truly yours, PACTIV RSA LLC By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- Exh. II-2 EXHIBIT III Principal Place of Business/Location of Books and Records Pactiv RSA LLC 1900 West Field Court Lake Forest, Illinois 66045 Federal Employer Identification Number 36-4402361 Organizational Identification Number 3289115 Pactiv Factoring LLC 1900 West Field Court Lake Forest, Illinois 66045 Federal Employer Identification Number 36-4402363 Organizational Identification Number 32286671 Exh. III-1 EXHIBIT IV Collection Account Banks and Addresses Bank One, N.A. 1 Bank One Plaza Chicago, IL 60670 Attn: Loretta McCarthy Facsimile No. 312-928-0338 Banc One National Processing Corporation 1 Bank One Plaza Chicago, IL 60670 Attn: Loretta McCarthy Facsimile No. 312-928-0338 Collection Accounts Numbers ZBA # 10-44536 ZBA # 10-60193 ZBA # 10-44502 ZBA # 11-32331 ZBA # 10-44452 ZBA # 10-44452 Lock-Box Account Numbers 905863 730109 730114 100954 100815 905960 Addresses of Lock-Boxes P.O. Box 905863 Charlotte, NC 28217-5863 P.O. Box 730109 Dallas, TX 75229-0109 Exh. IV-1 EXHIBIT V FORM OF COMPLIANCE CERTIFICATE To: Calyon, NA (Main Office Chicago), as Agent This Compliance Certificate is furnished pursuant to that certain Receivables Purchase Agreement, dated as of December 21, 2006, among Pactiv RSA LLC (the "Seller"), Pactiv Factoring LLC (the "Servicer"), the Purchasers party thereto and Calyon New York Branch, as agent for such Purchasers (the "Agreement"). THE UNDERSIGNED HEREBY CERTIFIES THAT: (1) I am the duly elected ________________________________ of Seller. (2) I have reviewed the terms of the Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of Seller and its Subsidiaries during the accounting period covered by the attached financial statements. (3) The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes an Amortization Event or Potential Amortization Event, as each such term is defined under the Agreement, during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth in paragraph 5 below. (4) Schedule I attached hereto sets forth financial data and computations evidencing the compliance with certain covenants of the Agreement, all of which data and computations are true, complete and correct. (5) Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which Seller has taken, is taking, or proposes to take with respect to each such condition or event: ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ______________________ The foregoing certifications, together with the computations set forth in Schedule I hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this [__] day of [____________], [_____]. ---------------------------------------- Name: ---------------------------------- Exh. V-1 SCHEDULE I TO COMPLIANCE CERTIFICATE A. Schedule of Compliance as of __________, ____. Unless otherwise defined herein, the terms used in this Compliance Certificate have the meanings ascribed thereto in the Agreement. This schedule relates to the month ended: ___________________ Exh. V-2 EXHIBIT VI FORM OF COLLECTION ACCOUNT AGREEMENT [Date] Name and Address of Bank Re: Pactiv Corporation/Pactiv Factoring LLC/Pactiv RSA LLC Ladies and Gentlemen: Reference is hereby made to each of the departmental post office boxes listed on Schedule 1 hereto (each, a "Lock-Box") of which one or more of you has exclusive control for the purpose of receiving mail and processing payments therefrom pursuant to the Lock-Box Agreement dated [__________] originally by and between Pactiv Corporation and you (the "Service Agreement"). You hereby confirm your agreement to perform the services described therein. Among the services you have agreed to perform therein, is to endorse all checks and other evidences of payment received in each of the Lock-Boxes, and credit such payments to the accounts listed on Schedule 1 hereto (the "Lock-Box Accounts"). Any references to "you" or 'your' in this letter agreement shall mean JPMorgan Chase Bank, N.A. as Lock-Box Bank. Pactiv Corporation (the "Company") hereby informs you that, pursuant to that certain Receivables Transfer Agreement, dated as of December 28, 2000, as amended to date, between the Company and Pactiv Factoring LLC, the Company has transferred all of its right, title and interest in and to, and exclusive ownership and control of, the Lock-Box and the Lock-Box Accounts to Pactiv Factoring LLC. Pactiv Factoring LLC hereby informs you that pursuant to that certain Receivables Sale Agreement, dated as of December 28, 2000, as amended to date, between Pactiv Factoring LLC and Pactiv RSA LLC (the "Seller"), Pactiv Factoring LLC has transferred all of its right, title and interest in and to, and exclusive ownership and control of, the Lock-Box and the Lock-Box Accounts to the Seller. The Company, Pactiv Factoring LLC and the Seller have previously requested that the name of the Lock-Box Accounts be changed to PACTIV RSA LLC. Each of the Company, Pactiv Factoring LLC and the Seller hereby irrevocably instructs you, and you hereby agree, that upon receiving notice from Calyon New York Branch, as Agent, in the form attached hereto as Annex A: (i) the name of the Lock-Box Accounts will be changed to the Agent (or any designee of the Agent), and the Agent will have exclusive ownership of and access to the Lock-Boxes and the Lock-Box Accounts, and none of the Company, the Seller, nor any of their respective affiliates will have any control of the Lock-Boxes or the Lock-Box Accounts or any access thereto, (ii) you will either continue to send the funds from the Lock-Boxes to the Lock-Box Accounts, or will redirect the funds as the Agent may otherwise request, (iii) you will transfer monies on deposit in the Lock-Box Accounts, at any time, as directed by the Agent, (iv) all services to be performed by you under the Service Agreement will be performed on behalf of the Agent, and (v) all correspondence or other mail Exh. VI-1 which you have agreed to send to the Company or the Seller will be sent to the Agent at the following address: Calyon New York Branch, as Agent 1301 Avenue of the Americas New York, NY 10019-6022 Attention: Debt Capital Markets - Liquid Assets Securitization Moreover, upon such notice, the Agent will have all rights and remedies given to the Company (and the Seller, as the Company's assignee) under the Service Agreement. The Company agrees, however, to continue to pay all fees and other assessments due thereunder at any time. You hereby acknowledge that monies deposited in the Lock-Box Accounts or any other account established with you by the Agent for the purpose of receiving funds from the Lock-Boxes are subject to the liens of the Agent, and will not be subject to deduction, set-off, banker's lien or any other right you or any other party may have against the Company or the Seller except that you may debit the Lock-Box Accounts for any items deposited therein that are returned, charged-back any reversals, cancellations of payment orders and other electronic transfers that are otherwise not collected and for all charges, fees, commissions and expenses incurred by you in providing services hereunder, all in accordance with your customary practices for the charge back of returned items and expenses. You will be liable only for direct damages in the event you fail to exercise ordinary care. You shall be deemed to have exercised ordinary care if your action or failure to act is in conformity with general banking usages or is otherwise a commercially reasonable practice of the banking industry. You shall not be liable for any special, indirect or consequential damages, even if you have been advised of the possibility of these damages. The Seller and the Agent acknowledge and agree that you have no knowledge of (and are not required to know) the terms and provisions of the separate agreements referred to in paragraph 2 above and other related documentation or whether any actions by Agent (including without limitation the sending of notice in the form attached hereto as Annex A) or Seller are permitted or a breach thereunder or consistent or inconsistent therewith. The parties acknowledge that you may assign or transfer your rights and obligations hereunder to a wholly-owned subsidiary of[____________________]. The Seller agrees to indemnify you for, and hold you harmless from, all claims, damages, losses, liabilities and expenses, including legal fees and expenses, resulting from or with respect to this letter agreement and the administration and maintenance of the Lock-Box Accounts and the services provided hereunder, including, without limitation: (a) any action taken, or not taken, by you in regard thereto in accordance with the terms of this letter agreement, (b) the breach of any representation or warranty made by the Seller pursuant to this letter agreement, (c) any item, including, without limitation, any automated clearinghouse transaction, which is returned for any reason ( a "Returned Item"), and (d) any failure of the Seller to pay any invoice or charge to you for services in respect to this letter agreement and the Lock-Box Accounts or any amount owing to you from the Seller with respect thereto or to the Exh. VI-2 service provided hereunder. The Agent agrees to indemnify you for and hold you harmless from any Returned Item incurred in or after you receive a notice in the form attached hereto as Annex A that the Agent will have exclusive ownership of the Lock-Boxes and the Lock-Box Account or any interpleader proceeding related thereto. THIS LETTER AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER WILL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. The parties hereto acknowledge and agree that this letter agreement is intended to be an agreement within the meaning of Section 9-304(b)(1) of the Uniform Commercial Code in effect in the State of New York and that the State of New York shall be deemed to be the jurisdiction of the Lock-Box Bank for purposes of any matter in respect of the Lock-Box Account relating to or arising under Section 9-304(b)(1) of the Uniform Commercial Code as is in effect from time to time in the State of New York. This letter agreement may be executed in any number of counterparts and all of such counterparts taken together will be deemed to constitute one and the same instrument. This letter agreement contains the entire agreement between the parties, and may not be altered, modified, terminated or amended in any respect, nor may any right, power or privilege of any party hereunder be waived or released or discharged, except upon execution by all parties hereto of a written instrument to all parties so providing. You may terminate this letter agreement upon the sending of at least thirty (30) days advance written notice to the other parties and transfer of the Lock-Boxes to another bank selected by the Agent and the Seller. In the event that any provision in this letter agreement is in conflict with, or is inconsistent with, any provision of the Service Agreement, this letter agreement will exclusively govern and control. Each party agrees to take all actions reasonably requested by any other party to carry out the purposes of this letter agreement or to preserve and protect the rights of each party hereunder. Exh. VI-3 Please indicate your agreement to the terms of this letter agreement by signing in the space provided below. This letter agreement will become effective immediately upon execution of a counterpart of this letter agreement by all parties hereto. Very truly yours, PACTIV CORPORATION By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- PACTIV FACTORING LLC By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- PACTIV RSA LLC By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- Acknowledged and agreed to as of [______________] Name of Bank By: --------------------------------- Name: ------------------------------- Title: ------------------------------ CALYON NEW YORK BRANCH, as Agent By: --------------------------------- Name: ------------------------------- Title: ------------------------------ Exh. VI-4 ANNEX A FORM OF NOTICE [On letterhead of the Agent] [Date] Name and Address of Bank Re: Pactiv Corporation/Pactiv Factoring LLC/Pactiv RSA LLC Ladies and Gentlemen: We hereby notify you that we are exercising our rights pursuant to that certain collection account agreement, dated [___________] (the "Collection Account Agreement") among Pactiv Corporation, Pactiv Factoring LLC and Pactiv RSA LLC, you and us, to have the name of, and to have exclusive ownership and control of, Accounts no. [____________] identified in the Collection Account Agreement (the "Lock-Box Accounts") maintained with you, transferred to us. The Lock-Box Accounts will henceforth be a zero-balance account, and funds deposited in the Lock-Box Accounts should be sent at the end of each day to account no. _______________ in the name of __________ at Calyon New York Branch in New York, NY REFERENCE: PACTIV RSA LLC, OR AS OTHERWISE DIRECTED BY THE UNDERSIGNED. You have further agreed to perform all other services you are performing under the "Service Agreement" (as defined in the Letter Agreement) on our behalf. We appreciate your cooperation in this matter. Very truly yours, CALYON NEW YORK BRANCH, as Agent By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- A-1 SCHEDULE 1 PACTIV CORPORATION
LOCKBOX ACCOUNTS LOCKBOX # LOCKBOX ADDRESS - ---------------- --------- ---------------
S-1 EXHIBIT VII Corporate Policy Manual (PACTIV LOGO) Advanced Packaging Solutions SUBJECT: Credit and Collections POLICY NO.: 1.1.3v1 Administration and Accounting SCOPE: Pactiv Corporation Trade Accounts DATE ISSUED: January 6, 2003 Receivable BODY: 1.0 PURPOSE: The purpose of this policy is to document the Pactiv Corporation requirements for credit and collections administration and accounting. 2.0 :REVISION HISTORY:
Revision Date Revision Number Change Reference Section(s) - ------------- --------------- ----------------- -------------------- 11/31/2002 NA Original Document Entire Document
3.0 PERSONS AFFECTED: 3.1 Inclusions: All Pactiv Corporation operating units, affiliates, and subsidiaries. 3.2 Exclusions: None 4.0 POLICY: 4.1 The policy of Pactiv Corporation is to ensure that all reasonable efforts are made to collect amounts owed the Corporation by trade customers, and to properly record in the Corporation's accounting records the accounts receivable and bad debts position of the Company in each accounting period. In this regard, each customer of the Corporation shall be dealt with equally and impartially, in compliance with all applicable laws and regulations and in accordance with good credit practice. 4.2 The Manager, Credit and Collections, working under the direction of the VP, Finance and Controller, will administer the Corporation's Credit and Collections Policy. All personnel of the Corporation engaged in credit and collections activities, regardless of where they are located and whether or not they report directly to the Manager, Credit and Collections, are considered credit and collections employees for the purposes of this Policy and are bound by its requirements. 4.3 The Manager, Credit and Collections will develop, document, and have properly approved credit procedures as required to implement the Corporation's Credit and Collections Policy in North America. Pactiv units and affiliates outside North America will also develop such procedures which will be as aligned with North American procedures as possible, taking into account local statutory and legal requirements and information system capabilities. Approval of all such procedures will include that of the VP, Finance and Controller and the Pactiv Legal Department (or it's designated outside legal counsel). 4.4 Finance Directors of Pactiv units and affiliates located outside North America will designate an individual employed in the finance function to administer this policy and related procedures for their respective business units. While these Finance Directors will retain ultimate responsibility for compliance, they and their designated credit administration personnel will solicit and receive guidance from the Manager, Credit and Collections as required. Specifically, those requirements of the Manager, Credit and Collections set forth in sections 4.6 through 4.8 below will be carried out by the Finance Directors and their designees outside of North America. Exh. VII-1 4.5 The Manager, Credit and Collections, will periodically conduct credit reviews of all Corporate business units and affiliates to ensure that they are in compliance with this Policy and related procedures. 4.6 The Manager, Credit and Collections will determine for each customer, according to established Procedures and properly approved Limits of Authority, whether and in what amounts credit will be extended, whether or not credit will be reduced or revoked, and what collection practices will be employed. Marketing, Sales, or other operating personnel do not have the authority to make such credit decisions without the approval of the Manager, Credit and Collections. The Manager, Credit and Collections will consult with appropriate Marketing, Sales, or Operating Managers in the course of credit and bad debt administration activities as required, including determination of credit terms. 4.7 The Manager, Credit and Collections will determine when an accounts receivable shall be deemed a bad debt and what collection practices shall be employed to attempt collection, in accordance with established Pactiv Procedures, including Limits of Authority. 4.8 The Manager, Credit and Collections will communicate the status of trade receivables, including current bad debts and bad debts history, on a monthly basis. Reports will be provided to the VP, Finance and Controller, to the Director, Corporate Finance, and to the senior financial manager of each Pactiv business unit (VP, Finance, controller, or chief accountant, as appropriate), and to such business unit managers as appropriate. 4.9 The Director, Corporate Finance will ensure that the status of the Corporation's trade receivables and bad debts is properly accounted for each month, in accordance with Generally Accepted Accounting Principles and utilizing a process which has the concurrence of the Corporation's external auditors. 5.0 :DEFINITIONS: 5.1 Bad Debt - an amount owed the Corporation but deemed uncollectable due to insolvency, bankruptcy, disappearance of the customer, or for similar reasons. 5.2 Accounts Receivable - amounts owed the Corporation resulting from the sale of products or services to third parties. Sales to affiliated parties are excluded from this definition. 6.0 RESPONSIBILITIES: 6.1 The VP, Finance and Controller (Controller) is responsible for approving and ensuring Credit Management compliance with the Credit and Collections Policy and related procedures. 6.2 The Manager, Credit and Collections is responsible for administering all aspects of Pactiv Corporation's Credit and Collections Policy and related procedures within North America, and for providing guidance when necessary to Pactiv units and affiliates outside North America. 6.3 Finance Directors (FD's) and other direct reports of the Controller are responsible for ensuring their staffs comply with the requirements of this policy and related procedures. 6.4 Finance Directors of units located outside North America are responsible for administering this Policy and related procedures in their respective business units. They are also responsible for seeking and implementing the advice of the Manager, Credit and Collections, when questions arise concerning the application of this Policy or the implementation of sound credit practices in their businesses. 6.5 The Director, Corporate Finance is responsible for ensuring that Pactiv's accounts receivable and bad debts are properly accounted for in each accounting period. 7.0 :PROCEDURE: Not Applicable Exh. VII-2 EXHIBIT VIII FORM OF MONTHLY REPORT [In addition to such other information as may be included on this exhibit, each Monthly Report should set forth the following with respect to the related Calculation Period (as defined in the Receivables Sale Agreement): (i) the aggregate Outstanding Balance of Receivables created and conveyed by Factoring to Seller in purchases pursuant to the Receivables Sale Agreement during such Calculation Period, as well as the Net Receivables Balance included therein, (ii) the aggregate purchase price payable to Factoring in respect of such purchases, specifying the Discount Factor (as defined in the Receivables Sale Agreement) in effect for such Calculation Period and the aggregate Purchase Price Credits (as defined in the Receivables Sale Agreement) deducted in calculating such aggregate purchase price, (iii) the aggregate amount of funds received by the Servicer during such Calculation Period which are to be applied as Reinvestments, (iv) the increase or decrease in the amount outstanding under the Subordinated Note (as defined in the Receivables Sale Agreement) as of the end of such Calculation Period after giving effect to the application of funds toward the aggregate purchase price and the restrictions on Subordinated Loans (as defined in the Receivables Sale Agreement) set forth in Section 1.2(a)(ii) of the Receivables Sale Agreement, and (v) the amount of any capital contribution made by Factoring to Seller as of the end of such Calculation Period pursuant to Section 1.2(b) of the Receivables Sale Agreement.] The above is a true and accurate accounting pursuant to the terms of the Receivables Purchase Agreement, dated as of December 21, 2006 (the "Agreement"), by and among Pactiv RSA LLC, Pactiv Factoring LLC, Atlantic Asset Securitization LLC and Calyon New York Branch, as Agent, and I have no knowledge of the existence of any conditions or events which constitute an Amortization Event or Potential Amortization Event, as each such term is defined under the Agreement, during or at the end of the accounting period covered by this monthly report or as of the date of this certificate, except as set forth below. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- Company Name: -------------------------- Date: ---------------------------------- Exh. VIII-1 SCHEDULE A COMMITMENTS OF FINANCIAL INSTITUTIONS
Financial Institution Commitment - --------------------- ------------ Calyon New York Branch $130,000,000
Sch. A-1 SCHEDULE B DOCUMENTS TO BE DELIVERED TO THE AGENT ON OR PRIOR TO THE INITIAL PURCHASE Sch. B-1 SCHEDULE C EQUIVALENT LONG TERM RATINGS Moody's Investors Service, Inc.
EQUIVALENT LONG- SHORT-TERM RATING TERM RATING - ----------------- ---------------- P-1 Aaa P-1 Aa1 P-1 Aa2 P-1 Aa3 P-1 A1 P-2 A2 P-2 A3 P-2 Baa1 P-3 Baa2 P-3 Baa3 Not Prime < Baa3
Standard & Poors Ratings Group
EQUIVALENT LONG- SHORT-TERM RATING TERM RATING - ----------------- ---------------- A-1 AAA A-1 AA+ A-1 AA A-1 AA - A-1 A+ A-2 A A-2 A - A-2 BBB+ A-3 BBB A-3 BBB - Unrated < BBB -
Sch. C-1 EX-21 4 c12792exv21.txt SUBSIDIARIES . . . PACTIV CORPORATION SUBSIDIARIES AND AFFILIATES AS OF DECEMBER 31, 2006 PACTIV CORPORATION (DELAWARE) 798795 Ontario Limited (Ontario) ......................................... 100 Pactiv Canada, Inc. (Ontario) ....................................... 100 Central de Bolsas (Mexico) ............................................... 99.99 Pactiv Corporation owns > 99.99%; Pactiv International Holdings, Inc., owns < 0.01%) Subsidiaries of Central de Bolsas CJA Linea 4, S.A. de C.V. ...................................... 99.98 (Central de Bolsas owns 99.98%; Pactiv International Holdings, Inc., owns 0.02%) Grupo Corporativo Jaguar, S.A. de C.V. ......................... 99.99 (Central de Bolsas owns > 99.99%; CJA Linea 4, S.A. de C.V. owns < 0.01%) R.H. Jaguar, S.A. de C.V. ...................................... 98 (Central de Bolsas owns 98%; Servicios Industriales Jaguar, S.A. de C.V. owns 2%) Servicios Industriales Jaguar, S.A. de C.V. .................... 99.99 (Central de Bolsas owns > 99.99%; CJA Linea 4, S.A. de C.V. owns < 0.01%) Servicio Terrestre Jaguar, S.A. de C.V. ........................ 99.99 (Central de Bolsas owns > 99.99%; CJA Linea 4, S.A. de C.V. owns < 0.01%) Counce Finance Corporation (Delaware) .................................... 100 E-Z Por Corporation (Delaware) ........................................... 100 EKCO Products, Inc. (Illinois) ........................................... 100 Montana Industries, Inc. (Delaware) ...................................... 100 Newspring Canada, Inc. (Ontario) ......................................... 100 Newspring Industrial Corp. (New Jersey) .................................. 100 Pactiv Asia Corporation (Delaware) ....................................... 100 Pactiv Asia PTE Ltd. (Singapore) ......................................... 100 Subsidiaries of Pactiv Asia PTE Ltd Pactiv (Dongguan) Packaging Co., Ltd. (Peoples Republic of China) ... 51 (Pactiv Asia PTE Co. Ltd. owns 51%; Dongya Packaging (Dongguan) Co. Ltd., an unaffiliated company, owns 49%) Zhejing Zhongbao Packaging (Peoples Republic of China) .............. 62.5 (Pactiv Asia PTE Co. Ltd. owns 62.5%; non-affiliates own 37.5%) Subsidiaries of Zhejing Zhongbao Packaging Suzhou Pactiv Packaging (China) ..................................... 100 Pactiv Business Services Holdings LLC (Delaware) ......................... 100 Pactiv Business Services LLC (Delaware) ............................. 100 Pactiv Chile Holdings Inc. (Delaware) .................................... 100 Pactiv CPI Holding Company (Delaware) .................................... 100 Pactiv Deutschland Holdinggesellschaft mbH (Germany) ..................... 100 Subsidiaries of Pactiv Deutschland Holdinggesellschaft mbH Omni-Pac Ekco GmbH &Co. KG Verpackungsmittel (Germany) ........................................................... 100 (Pactiv Deutschland Holdinggesellschaft mbH is the Limited Partner; Omni-Pac Ekco Verpackungsmittel Verwaltungsgesellschaft mbH is the General Partner)
1 Subsidiaries of Omni-Pac Ekco Gmbh & Co. KG Verpackungsmittel Omni-Pac Poland SP Z.O.O. (Poland) ............................. 100 Omni-Pac Ekco Verpackungsmittel Verwaltungsgesellschaft mbH (Germany) ........................................................... 100 Omni-Pac GmbH & Co. KG Verpackungsmittel (Germany) .................. 100 (Pactiv Deutschland Holdinggesellschaft mbH is the Limited Partner; Omni-Pac Verpackungsmittel Verwaltungsgesellschaft mbH is the General Partner) Subsidiaries of Omni-Pac Gmbh & Co. KG Verpackungsmittel Omni-Pac ApS (Denmark) .................................... 100 Omni-Pac A.B. (Sweden) .................................... 100 Omni-Pac Verpackungsmittel Verwaltungsgesellschaft mbH (Germany) ........................................................... 100 Subsidiaries of Omni-Pac Verpackungsmittel Verwaltungsgesellschaft mbh Omni-Pac GmbH & Co. KG Verpackungsmittel (Germany) ............. 0 (Pactiv Deutschland Holdinggesellschaft mbH is the Limited Partner; Omni-Pac Verpackungsmittel Verwaltungsgesellschaft mbH is the General Partner) Subsidiaries of Omni-Pac Gmbh & Co. KG Verpackungsmittel Omni-Pac ApS (Denmark) .................................... 100 Omni-Pac A.B. (Sweden) .................................... 100 Pactiv Europe B.V. (Netherlands) ......................................... 100 Pactiv International Finance B.V.(1) ................................ 100 Pactiv Factoring LLC (Delaware) .......................................... 100 Pactiv RSA LLC (Delaware) ........................................... 100 Pactiv Forest Products GmbH (Germany) .................................... 100 Pactiv Germany Holdings Inc. (Delaware) .................................. 100 Pactiv Hungary Holdings Inc. (Delaware) .................................. 100 Pactiv International Business Development Limited (Delaware) .......................................................... 100 Pactiv International Holdings Inc. (Delaware) ............................ 100 Subsidiaries of Pactiv International Holdings Inc. Central de Bolsas (Mexico) .......................................... < .01 (Pactiv Corporation owns > 99.99%; Pactiv International Holdings, Inc., owns < 0.01%) Ha'Lakoach Ha'Neeman H' Sheeshim Ou'Shenayim Ltd. (Israel) ............................................................ 100 Pactiv de Mexico, S. de R.L. C.V. (Mexico) .......................... 99.99 (Pactiv International Holdings Inc. owns > 99.99%; Pactiv Corporation owns < 0.01%) Subsidiaries of Pactiv de Mexico, S. de R.L. C.V. Servicios de Integrales de Operacion S.A. de C.V. .............. 99.99 (Pactiv de Mexico, S. de R.L. C.V. owns > 99.99%; Pactiv Corporation owns < 0.01%) Pactiv Irish Holding Company Limited (Ireland)(2) ........................ 100 Pactiv Irish Finance Company (Ireland)(3) ...................... 100 Pactiv Leasing Company (Delaware) ........................................ 100 Pactiv Management Company LLC (Delaware) ................................. 100 Pactiv de Mexico, S. de R.L. C.V. (Mexico) ............................... 0.01 (Pactiv Corporation owns < 0.01%; Pactiv International Holdings Inc. owns > 99.99%) Pactiv NHC Inc. (Nevada) .................................................. 100 Pactiv Retail Receivables Company (Delaware) .............................. 100
- ---------- (1)In dissolution. (2)In dissolution. (3)In dissolution. 2 Pactiv Romania Holdings Inc. (Delaware) ................................ 100 Pactiv Sales Company LLC (Delaware) .................................... 100 PCA West Inc. (Delaware) ............................................... 100 Coast-Packaging Company (California General Partnership) ...................................................... 50 (PCA West Inc. owns 50%, as General Partner; J.G. Haddy Sales Company, an unaffiliated company, owns 50%, as General Partner) PT Properties LLC (Delaware) ........................................... 100 Tenneco Inc. (Nevada)(4) ............................................... 100 The Baldwin Group Ltd. (United Kingdom) ................................ 100 Subsidiaries of The Baldwin Group Ltd. J & W Baldwin (Holdings) Ltd. (United Kingdom) .................... 100 Subsidiaries of J&W Baldwin (Holdings) Ltd. Alpha Products (Bristol) Limited (United Kingdom) ................................................ 100 Baldwin Packaging Limited (United Kingdom) .............. > 99.99 (J&W Baldwin (Holdings) Ltd. owns > 99.99%; The Baldwin Group, Ltd. owns < 0.01%) Subsidiaries of Baldwin Packaging Limited J&W Baldwin (Manchester) Limited (United Kingdom) ........................................... > 99.99 (Baldwin Packaging Limited owns > 99.99%; The Baldwin Group, Ltd. owns < 0.01%) Jiffy Rugated Products Limited (United Kingdom) ........................................... > 99.99 (Baldwin Packaging Limited owns > 99.99%; The Baldwin Group, Ltd. owns < 0.01%) Brucefield Plastics Limited (Scotland) .................. 100 Coastal Packaging Ltd. (United Kingdom) ................. 100 Pactiv (Caerphilly) Limited (United Kingdom) ............ 100 Pactiv (Films) Limited (United Kingdom) ................. 100 Pactiv (Livingston) Limited (United Kingdom) ............ 100 Pactiv (Stanley) Limited (United Kingdom) ............... 100 Pactiv Packaging Limited (United Kingdom) ................................................ > 99.99 (J&W Baldwin (Holdings) Ltd. owns > 99.99%; The Baldwin Group, Ltd. owns < 0.01%) Pentland Packaging Limited (Scotland) ................... 99.99 (J&W Baldwin (Holdings) Ltd. owns 99.99%; The Baldwin Group, Ltd. owns 0.01%) Polbeth Packaging (Corby) Limited (Scotland) ............ 100 Prempack Limited (United Kingdom) ....................... 100 R&H Robinson (Sheffield) Ltd. (United Kingdom) ........................................ 100 J&W Baldwin (Manchester) Limited (United Kingdom) .......................................................... < 0.01 (The Baldwin Group Ltd. owns less than 0.01%; Baldwin Packaging Limited owns > 99.99%) Jiffy Rugated Products Limited (United Kingdom) ................... < 0.01 (The Baldwin Group, Ltd. owns less than 0.01%; Baldwin Packaging Limited owns > 99.99%) Omni-Pac UK Limited (United Kingdom) .............................. 100 Pactiv Packaging Limited (United Kingdom) ......................... < 0.01 (The Baldwin Group Ltd. owns less than 0.01%; J&W Baldwin
- ---------- (4)In dissolution. 3 (Holdings) Limited owns > 99.99%) Pentland Packaging Limited (Scotland) ......................... .... < 0.01 (The Baldwin Group Ltd. owns less than 0.01%; Baldwin Packaging Limited owns > 99.99%) Pactiv Limited (United Kingdom) .................................... 100 The Corinth and Counce Railroad Company (Mississippi) ...................................................... 100 Valdosta Southern Railroad Company (Florida) ....................... 100
4 EX-23.1 5 c12792exv23w1.txt CONSENT ERNST & YOUNG LLP EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements, Form S-8 No. 333-101121 pertaining to the Pactiv Corporation 2002 Incentive Compensation Plan, Form S-8 No. 333-33484, pertaining to the Pactiv Corporation Employee Stock Purchase Plan, Form S-8 No. 333-90333, pertaining to Tenneco Packaging Inc. Thrift Plan for Hourly Employees of Tenneco Packaging and Tenneco Packaging Thrift Plan, of our reports dated February 28, 2007, with respect to the consolidated financial statements and schedule of Pactiv Corporation, Pactiv Corporation management's assessment of effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Pactiv Corporation, included in the Annual Report (Form 10-K) for the year ended December 31, 2006. /s/ ERNST & YOUNG LLP Chicago, Illinois February 28, 2007 EX-24 6 c12792exv24.txt POWERS OF ATTORNEY PACTIV CORPORATION POWER OF ATTORNEY The undersigned does hereby appoint Joseph E. Doyle, as his true and lawful attorney, to execute in his name, place and stead, the Pactiv Corporation Annual Report on Form 10-K for the year ended December 31, 2006 and any and all amendments to said Annual Report on Form 10-K, and instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Such attorney shall have the power to act hereunder and shall have full power and authority to do and perform, in the name on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney. IN TESTIMONY THEREOF, the undersigned has executed this instrument this 1st day of March, 2007. /s/ LARRY D. BRADY --------------------------------- Larry D. Brady PACTIV CORPORATION POWER OF ATTORNEY The undersigned does hereby appoint Joseph E. Doyle, as his true and lawful attorney, to execute in his name, place and stead, the Pactiv Corporation Annual Report on Form 10-K for the year ended December 31, 2006 and any and all amendments to said Annual Report on Form 10-K, and instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Such attorney shall have the power to act hereunder and shall have full power and authority to do and perform, in the name on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney. IN TESTIMONY THEREOF, the undersigned has executed this instrument this 1st day of March, 2007. /s/ ROBERT J. DARNALL --------------------------------- Robert J. Darnall PACTIV CORPORATION POWER OF ATTORNEY The undersigned does hereby appoint Joseph E. Doyle, as his true and lawful attorney, to execute in his name, place and stead, the Pactiv Corporation Annual Report on Form 10-K for the year ended December 31, 2006 and any and all amendments to said Annual Report on Form 10-K, and instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Such attorney shall have the power to act hereunder and shall have full power and authority to do and perform, in the name on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney. IN TESTIMONY THEREOF, the undersigned has executed this instrument this 1st day of March, 2007. /s/ MARY R. HENDERSON --------------------------------- Mary R. (Nina) Henderson PACTIV CORPORATION POWER OF ATTORNEY The undersigned does hereby appoint Joseph E. Doyle, as his true and lawful attorney, to execute in his name, place and stead, the Pactiv Corporation Annual Report on Form 10-K for the year ended December 31, 2006 and any and all amendments to said Annual Report on Form 10-K, and instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Such attorney shall have the power to act hereunder and shall have full power and authority to do and perform, in the name on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney. IN TESTIMONY THEREOF, the undersigned has executed this instrument this 1st of March, 2007. /s/ ROGER B. PORTER --------------------------------- Roger B. Porter PACTIV CORPORATION POWER OF ATTORNEY The undersigned does hereby appoint Joseph E. Doyle, as his true and lawful attorney, to execute in his name, place and stead, the Pactiv Corporation Annual Report on Form 10-K for the year ended December 31, 2006 and any and all amendments to said Annual Report on Form 10-K, and instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Such attorney shall have the power to act hereunder and shall have full power and authority to do and perform, in the name on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney. IN TESTIMONY THEREOF, the undersigned has executed this instrument this 1st day of March, 2007. /s/ K. DANE BROOKSHER --------------------------------- K. Dane Brooksher PACTIV CORPORATION POWER OF ATTORNEY The undersigned does hereby appoint Joseph E. Doyle, as his true and lawful attorney, to execute in his name, place and stead, the Pactiv Corporation Annual Report on Form 10-K for the year ended December 31, 2006 and any and all amendments to said Annual Report on Form 10-K, and instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Such attorney shall have the power to act hereunder and shall have full power and authority to do and perform, in the name on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney. IN TESTIMONY THEREOF, the undersigned has executed this instrument this 1st day of March, 2007. /s/ NORMAN H. WELSEY --------------------------------- Norman H. Wesley PACTIV CORPORATION POWER OF ATTORNEY The undersigned does hereby appoint Joseph E. Doyle, as his true and lawful attorney, to execute in his name, place and stead, the Pactiv Corporation Annual Report on Form 10-K for the year ended December 31, 2006 and any and all amendments to said Annual Report on Form 10-K, and instruments necessary or incidental in connection therewith, and to file the same with the Securities and Exchange Commission. Such attorney shall have the power to act hereunder and shall have full power and authority to do and perform, in the name on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or necessary to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorney. IN TESTIMONY THEREOF, the undersigned has executed this instrument this 1st day of March, 2007. /s/ N. THOMAS LINEBARGER --------------------------------- N. Thomas Linebarger EX-31.1 7 c12792exv31w1.txt CERTIFICATION EXHIBIT 31.1 -- RULE 13A-14(A)/15D-14(A) CERTIFICATION I, Richard L. Wambold, the Chief Executive Officer of Pactiv Corporation (the "company"), certify that: 1. I have reviewed this report on Form 10-K of Pactiv Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 1, 2007 /s/ RICHARD L. WAMBOLD - --------------------------------------------- Richard L. Wambold Principal Executive Officer EX-31.2 8 c12792exv31w2.txt CERTIFICATION EXHIBIT 31.2 -- RULE 13A-14(A)/15D-14(A) CERTIFICATION I, Andrew A. Campbell, the Chief Financial Officer of Pactiv Corporation (the "company"), certify that: 1. I have reviewed this report on Form 10-K of Pactiv Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 1, 2007 /s/ ANDREW A. CAMPBELL - --------------------------------------------- Andrew A. Campbell Principal Financial Officer EX-32.1 9 c12792exv32w1.txt CERTIFICATION EXHIBIT 32.1 -- SECTION 1350 CERTIFICATION I, Richard L. Wambold, certify that: (1) the Form 10-K of Pactiv Corporation for the period ended December 31, 2006, (the "Report") fully complies with the requirements of sec.13(a) or sec.15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Pactiv Corporation for the period then ended. /s/ RICHARD L. WAMBOLD - ------------------------------------------------------ Richard L. Wambold Chairman, President, and Chief Executive Officer March 1, 2007 - ------------------------------------------------------ Date This certification accompanies this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 10 c12792exv32w2.txt CERTIFICATION EXHIBIT 32.2 -- SECTION 1350 CERTIFICATION I, Andrew A. Campbell, certify that: (1) the Form 10-K of Pactiv Corporation for the period ended December 31, 2006, (the "Report") fully complies with the requirements of sec.13(a) or sec.15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Pactiv Corporation for the period then ended. /s/ ANDREW A. CAMPBELL - ------------------------------------------------------ Andrew A. Campbell Senior Vice President and Chief Financial Officer March 1, 2007 - ------------------------------------------------------ Date This certification accompanies this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----