-----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, T2txenvh9soaN1VeItm9gVAxWspaIjTR/MODQteQMwLry/ZVP4QiqYQ5aY6PHYxO 7DPX99OlnbWSuCP6oYcn1Q== 0000950137-99-003572.txt : 19991018 0000950137-99-003572.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950137-99-003572 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19991004 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENNECO PACKAGING INC CENTRAL INDEX KEY: 0001089976 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS FOAM PRODUCTS [3086] IRS NUMBER: 362552989 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-82923 FILM NUMBER: 99722811 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 S-4/A 1 AMENDMENT #4 TO FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1999 REGISTRATION NO. 333-82923 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 4 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ TENNECO PACKAGING INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3086 36-2552989 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) CLASSIFICATION) NUMBER)
1900 WEST FIELD COURT LAKE FOREST, ILLINOIS 60045 847-482-2000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) KARL A. STEWART VICE PRESIDENT AND SECRETARY TENNECO INC. 1275 KING STREET GREENWICH, CONNECTICUT 06831 (203) 863-1000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: JERRY J. BURGDOERFER, ESQ. GERARD M. MEISTRELL, ESQ. JENNER & BLOCK CAHILL GORDON & REINDEL ONE IBM PLAZA 80 PINE STREET CHICAGO, ILLINOIS 60611 NEW YORK, NEW YORK 10005 (312) 222-9350 (212) 701-3000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the effective date of this registration statement and all other conditions to the exchange offers described in the enclosed prospectus have been satisfied or waived. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number or the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS DOCUMENT IS NOT COMPLETE AND MAY BE CHANGED. TENNECO MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS DOCUMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS AND CONSENT SOLICITATION (Subject to Completion; Dated October 4, 1999) $1,176,484,000 TENNECO PACKAGING INC. Exchange Offers and Consent Solicitation Outstanding Debt Securities of Tenneco Inc. (to be renamed Tenneco Automotive Inc.) exchanged for New Debt Securities of Tenneco Packaging Inc. (to be renamed)
Principal Amount of New Securities Per $1,000 of Original Securities: -------------------------------------------- Aggregate If Tender is Made If Tender is Made Principal Description of Tenneco's Description of Tenneco Packaging's Before Consent After Consent Amount Original Securities New Securities Solicitation Expires Solicitation Expires* - ------------ ---------------------------------- ---------------------------------- -------------------- --------------------- $299,690,000 6.70% Notes due 2005 7.20% Notes due 2005 $1,000 $980 $276,794,000 7.45% Debentures due 2025 7.95% Debentures due 2025 $1,000 $980 $100,000,000 7 1/2% Notes due 2007 8% Notes due 2007 $1,000 $980 $300,000,000 7 5/8% Debentures due June 15, 8 1/8% Debentures due June 15, $1,000 $980 2017 2017 $200,000,000 7 7/8% Debentures due 2027 8 3/8% Debentures due 2027 $1,000 $980
- --------------- * The valid tender must also be received before the applicable exchange offer expires. Tenneco will only issue new securities with principal amounts of $1,000 or integral multiples of $1,000. Tenneco will: (1) aggregate the new securities to which a tendering registered holder would otherwise be entitled; (2) round this amount down to the nearest $1,000 and issue new securities to that holder in the rounded amount; and (3) compensate that holder for this rounding by paying cash in an amount equal to the principal amount of the fractional new security. Each of the exchange offers expires at 5:00 p.m., New York City time, on , 1999, unless extended. The consent solicitation expires at 5:00 p.m., New York City time, on , 1999, unless extended. - - Tenneco intends to spin-off Tenneco Packaging after the exchange offers. - - Your tender is an automatic consent to amend the terms of the original securities, as described in this document. - - Tenneco expects that any original securities outstanding after the exchange offers and spin-off will not maintain investment-grade ratings. - - Tenneco expects the new securities to have an investment-grade rating. - - Your right to withdraw tendered securities is limited, as described in this document. - - Your exchange should not be taxable for U.S. federal income tax purposes, except for any accrued interest or cash received in lieu of a fractional interest in new securities. - - The new securities will not be listed on any securities exchange or market. See "Risk Factors," beginning on page 24, for a description of factors that you should consider in evaluating the exchange offers and consent solicitation. --------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this document. Any representation to the contrary is a criminal offense. --------------------- The dealer managers for the exchange offers and consent solicitation are: MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON , 1999 3 TABLE OF CONTENTS SUMMARY..................................................... 4 RISK FACTORS................................................ 24 Risk Factors if You Exchange.............................. 24 Risk Factors if You Do Not Exchange....................... 27 Risks Factors Relating to the Spin-off.................... 32 FORWARD-LOOKING STATEMENTS.................................. 34 WHERE YOU CAN FIND MORE INFORMATION......................... 35 INCORPORATION OF INFORMATION BY REFERENCE................... 35 THE EXCHANGE OFFERS AND CONSENT SOLICITATION................ 37 Terms of the Exchange Offers.............................. 37 The Consent Solicitation.................................. 38 Expiration Time; Early Exchange Time; Extensions; Termination; Amendments................................ 38 Effect of Tender.......................................... 40 Acceptance of Consents and Original Securities; Delivery of Exchange Consideration.............................. 40 Procedures for Tendering Original Securities and Giving Consents............................................... 41 Conditions to the Exchange Offers and Consent Solicitation........................................... 45 Withdrawal Rights......................................... 46 Dealer Managers........................................... 47 Exchange Agent............................................ 47 Information Agent......................................... 47 Trustee................................................... 48 Fees and Expenses......................................... 48 MARKET AND TRADING INFORMATION.............................. 48 ACCOUNTING TREATMENT OF THE EXCHANGE OFFERS................. 48 THE PROPOSED AMENDMENTS..................................... 49 Elimination of Operating Covenants........................ 49 Waiver.................................................... 50 DESCRIPTION OF THE NEW SECURITIES........................... 52 General................................................... 52 New Securities............................................ 52 Some Important Covenants of Packaging..................... 52 Consolidation, Merger and Sale of Assets.................. 54 Events of Default......................................... 55 Modification of the New Indenture......................... 55 Defeasance and Covenant Defeasance........................ 56 The New Trustee........................................... 56 Book-Entry System......................................... 57 Physical Securities....................................... 58 Payment................................................... 58 THE SPIN-OFF................................................ 59 Reasons for the Spin-off.................................. 59 Manner of Spin-off........................................ 59 Corporate Restructuring Transactions...................... 59
------------------------ THIS DOCUMENT INCORPORATES BY REFERENCE IMPORTANT BUSINESS AND FINANCIAL INFORMATION ABOUT TENNECO INC. AND TENNECO PACKAGING INC. THAT IS NOT PRESENTED IN OR DELIVERED WITH THIS DOCUMENT. THIS INFORMATION, EXCLUDING EXHIBITS TO THE INFORMATION UNLESS THE EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE INFORMATION, IS AVAILABLE WITHOUT CHARGE TO ANY HOLDER OR BENEFICIAL OWNER OF ORIGINAL SECURITIES UPON WRITTEN OR ORAL REQUEST TO KARL A. STEWART, VICE PRESIDENT AND SECRETARY, TENNECO INC., 1275 KING STREET, GREENWICH, CONNECTICUT, 06831, TELEPHONE NUMBER (203) 863-1000. IN ORDER TO OBTAIN TIMELY DELIVERY, HOLDERS OF ORIGINAL SECURITIES MUST REQUEST THIS INFORMATION NO LATER THAN , 1999. Notwithstanding any disclosure to the contrary in documents incorporated by reference, no safe harbor protection under Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934 extends to forward-looking statements that appear in this document directly or by incorporation. 2 4 TABLE OF CONTENTS Debt Realignment.......................................... 60 Relationship Between Automotive and Packaging After the Spin-off............................................... 61 Conditions to the Spin-off................................ 65 Amendment or Termination of the Distribution Agreement.... 65 DESCRIPTION OF PACKAGING.................................... 66 General................................................... 66 Capitalization............................................ 66 New Financing............................................. 67 Unaudited Pro Forma Combined Financial Statements of Packaging.............................................. 69 Supplemental Financial Information of Packaging........... 75 Combined Selected Financial Data of Packaging............. 76 Industry Overview and Key Terms........................... 79 Products and Markets...................................... 80 Growth Strategy........................................... 81 Marketing, Distribution and Customers..................... 84 Analysis of Revenues...................................... 85 Competition............................................... 85 International............................................. 85 Properties................................................ 86 Raw Materials............................................. 86 Environmental Regulation.................................. 86 Other..................................................... 87 Legal Proceedings......................................... 87 Containerboard Packaging Interest......................... 88 Management................................................ 89 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 98 Principal Stockholders.................................... 115 DESCRIPTION OF TENNECO AFTER THE SPIN-OFF/AUTOMOTIVE........ 116 Capitalization............................................ 116 Unaudited Pro Forma Consolidated Financial Statements of Tenneco................................................ 117 Supplemental Financial Information of Tenneco............. 123 Tenneco and Consolidated Subsidiaries Selected Financial Data................................................... 125 Overview of Automotive Parts Industry..................... 129 Analysis of Automotive's Revenues......................... 129 Emissions Control Systems................................. 131 Ride Control Systems...................................... 132 Sales and Marketing....................................... 133 Manufacturing and Engineering............................. 133 Industry Trends........................................... 134 Business Strategy......................................... 137 Properties................................................ 139 Legal and Environmental Proceedings....................... 140 Strategic Acquisitions and Alliances...................... 140 Other..................................................... 141 Management After the Spin-off............................. 142 New Financing............................................. 151 U.S. FEDERAL INCOME TAX CONSEQUENCES........................ 153 Tax Considerations if You Exchange........................ 153 Tax Considerations if You Do Not Exchange................. 155 Backup Withholding........................................ 155 LEGAL MATTERS............................................... 155 EXPERTS..................................................... 156 INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE OF THE BUSINESSES OF TENNECO PACKAGING........................... F-1
3 5 SUMMARY Tenneco is offering to exchange Packaging's new securities listed in the table below for Tenneco's original securities listed in the table below and is soliciting consents with respect to the original securities on the terms and conditions described in this document and the accompanying letter of consent/ transmittal. The following is a brief summary of the information included in this document and may not contain all of the information that is important to you. You should carefully read and review this entire document and the other documents to which it refers to fully understand the terms of the new securities, exchange offers and consent solicitation. You should rely only on the information contained or incorporated by reference in this document. Tenneco and Packaging have not authorized anyone to provide you with information different from that contained in this document or incorporated by reference into this document. The exchange offers and consent solicitation are not being made to, and Tenneco will not accept tenders for exchange from, holders of outstanding original securities in any jurisdiction in which the exchange offers or consent solicitation, or the acceptance thereof, would not be in compliance with the securities or blue sky laws of that jurisdiction. Unless the context otherwise requires, in this document: - "Tenneco" refers to Tenneco Inc., a Delaware corporation, and its subsidiaries. Tenneco is currently engaged in the automotive, packaging and administrative services businesses, but plans to spin-off the packaging and administrative services businesses to its stockholders. When the spin-off is completed, Tenneco will be engaged in only its automotive business. - "Packaging" refers to Tenneco Packaging Inc., a Delaware corporation and those companies that will be its subsidiaries when the spin-off is completed. Packaging will be renamed in connection with the spin-off. - "Automotive" refers to Tenneco Inc. and those companies that will be its subsidiaries when the spin-off is completed, which will own and operate its automotive business. When the spin-off is completed, Tenneco will be renamed Tenneco Automotive Inc. THE EXCHANGE OFFERS AND CONSENT SOLICITATION THE EXCHANGE OFFERS: For each $1,000 principal amount of original securities validly tendered and accepted for exchange, Tenneco is offering (1) $1,000 principal amount of the corresponding series of Packaging's new securities for holders who validly tender their original securities before the consent solicitation expires, as shown in the applicable column of the table below, or (2) $980 principal amount of the corresponding series of Packaging's new securities for holders who validly tender their original securities after the consent solicitation expires but before the applicable exchange offer expires, as shown in the applicable column of the table below. Notwithstanding the foregoing, Tenneco will only issue new securities with principal amounts of $1,000 or integral multiples of $1,000. Tenneco will: (1) aggregate the new securities to which a tendering registered holder would otherwise be entitled; (2) round this amount down to the nearest $1,000 and issue new securities to that holder in the rounded amount; and (3) compensate that holder for this rounding by paying cash in an amount equal to the principal amount of the fractional new security. See "The Exchange Offers and Consent Solicitation -- Terms of the Exchange Offers" beginning on page 37. For these purposes, a registered holder includes a participant in The Depository Trust Company with new securities credited directly to its account. See "The Exchange Offers and Consent Solicitation -- Procedures for Tendering Original Securities and Giving Consents" beginning on page 41. 4 6
AGGREGATE PRINCIPAL DESCRIPTION OF TENNECO'S DESCRIPTION OF TENNECO CUSIP NO.* AMOUNT ORIGINAL SECURITIES PACKAGING'S NEW SECURITIES - ---------- ------------ ---------------------------------- ---------------------------------- 88037 EAA9 $299,690,000 6.70% Notes due 2005 7.20% Notes due 2005 88037 EAB7 $276,794,000 7.45% Debentures due 2025 7.95% Debentures due 2025 88037 OBQ3 $100,000,000 7 1/2% Notes due 2007 8% Notes due 2007 88037 EAH4 $300,000,000 7 5/8% Debentures due June 15, 8 1/8% Debentures due June 15, 2017 2017 88037 OBR1 $200,000,000 7 7/8% Debentures due 2027 8 3/8% Debentures due 2027 PRINCIPAL AMOUNT OF NEW SECURITIES PER $1,000 OF ORIGINAL SECURITIES: --------------------------- IF TENDER IS IF TENDER IS MADE BEFORE MADE AFTER CONSENT CONSENT SOLICITATION SOLICITATION CUSIP NO.* EXPIRES EXPIRES* - ---------- ------------ ------------ 88037 EAA9 $1,000 $980 88037 EAB7 $1,000 $980 88037 OBQ3 $1,000 $980 88037 EAH4 $1,000 $980 88037 OBR1 $1,000 $980
- --------------- * The terms of the exchange offers shall not be affected by any defect in or omission of CUSIP numbers. ** The valid tender must also be received before the applicable exchange offer expires. See description above regarding payment of cash in lieu of a fractional interest in new securities. IMPORTANT DATES AND OTHER INFORMATION: The following timeline summarizes important dates for the exchange offers and consent solicitation. You should read this timeline in conjunction with the rest of this document, which describes, among other things, Tenneco's right to extend, amend and/or terminate any of the exchange offers and the consent solicitation. Information concerning the exchange offers will be available on MCM "CorporateWatch" Service on Telerate pages 64165, 64166 and 64167 and Bloomberg pages MCM7890, MCM7891 and MCM7892. TIMELINE GRAPH SHOWING: - - COMMENCEMENT DATE - Tenneco begins the exchange offers and consent solicitation - - WITHDRAWAL TIME - You may not withdraw tendered securities after the first to occur of: - the consent solicitation expiration, or - 5:00 p.m., New York City time, on the date Tenneco publicly announces it has received the required consents - - CONSENT SOLICITATION EARLY EXCHANGE TIME - Consent solicitation expires; you must tender before 5:00 p.m., New York City time, to be eligible to receive $1,000 principal amount of new securities for each $1,000 principal amount of applicable original securities - - EXCHANGE OFFER EXPIRATION TIME - Exchange offers expire; you must tender before 5:00 p.m., New York City time, to be eligible to participate in the exchange offers - - ACCEPTANCE DATE - Tenneco accepts for exchange original securities that are validly tendered and not withdrawn - - ISSUANCE/EXCHANGE DATE - Packaging's new securities are issued in exchange for Tenneco's original securities; the exchange agent delivers new securities, any applicable accrued interest and any applicable cash for fractional new securities - --------------- * May be extended as described in this document. 5 7 CONCURRENT CASH TENDER OFFERS: Tenneco is also making cash tender offers and a consent solicitation for all series of its public debt not subject to the exchange offers. Tenneco will commence these tender offers at the same time as the exchange offers, and expects to complete the tender and exchange offers at substantially the same time. The securities subject to these cash tender offers total $1,283,364,000 in aggregate principal amount. Tenneco will offer to pay cash for those securities accepted in the tender offers at either (1) a fixed price or (2) a price determined two business days before the tender offer expires based on the yield to maturity of a reference U.S. Treasury Security plus a fixed spread, depending on the series of debt. Holders will be required to consent to the proposed amendments in order to tender their securities. The price Tenneco offers will include a premium for those holders who tender securities before the related consent solicitation expires. THE CONSENT SOLICITATION: Tenneco is soliciting consents from the holders of original securities to amendments to the original debtholder contract under which Tenneco issued those securities, commonly referred to as an indenture. These proposed amendments will eliminate the restrictions on Tenneco's operations currently included in this original indenture. See "The Proposed Amendments" beginning on page 49. If you want to exchange your original securities, you will be required to consent to the proposed amendments. YOUR PROPER TENDER OF ORIGINAL SECURITIES USING ONE OF THE PROCEDURES DESCRIBED IN THIS DOCUMENT WILL CONSTITUTE YOUR AUTOMATIC CONSENT TO THE PROPOSED AMENDMENTS AND TO THE EXECUTION OF A SUPPLEMENT TO THE ORIGINAL INDENTURE TO EFFECT THE PROPOSED AMENDMENTS. REQUIRED CONSENTS: The aggregate principal amount of securities outstanding under the original indenture is $2,459,848,000, consisting of $1,176,484,000 of original securities that are subject to the exchange offers and $1,283,364,000 of other debt securities that are subject to Tenneco's concurrent cash tender offers. To amend the original indenture, Tenneco must receive consents from the registered holders of at least a majority of that amount, voting as a single class. In addition to the consent solicitation described in this document, Tenneco is soliciting consents to the proposed amendments in connection with its concurrent cash tender offers. ACCORDINGLY, TENNECO COULD RECEIVE THE REQUIRED CONSENTS IN CONNECTION WITH THE TENDER OFFERS WITHOUT REGARD TO THE RESULTS OF THE EXCHANGE OFFERS. See "The Exchange Offers and Consent Solicitation -- The Consent Solicitation" beginning on page 38. Tenneco may receive the required consents before the exchange offers expire. The proposed amendments will not take effect, however, unless Tenneco accepts for exchange or purchase debt securities issued under the original indenture that represent at least the required consents, whether tendered in the exchange offers or cash tender offers. See "The Proposed Amendments" beginning on page 49. 6 8 PURPOSE OF THE EXCHANGE OFFERS AND CONSENT SOLICITATION: Tenneco intends to spin-off Packaging to its public stockholders. Upon completion of the spin-off, Packaging will become an independent, publicly held company engaged in Tenneco's current packaging businesses. At that time, Tenneco's sole remaining business will be its current automotive business. See "The Spin- off" beginning on page 59. The exchange offers are one component of a plan to realign Tenneco's debt before the spin-off. As part of this debt realignment, Tenneco is also making the cash tender offers described above. See "The Spin-off -- Debt Realignment" beginning on page 60. The purpose of the exchange offers is to acquire all of Tenneco's outstanding original securities. The purpose of the consent solicitation is to eliminate the restrictions on Tenneco's operations currently included in the original indenture. This includes eliminating a covenant that might, if held to apply to the spin-off, otherwise require Packaging to become the obligor of the original securities. Tenneco and Packaging believe the application of that covenant is uncertain in these circumstances. See "The Proposed Amendments" beginning on page 49. RISKS IF YOU EXCHANGE: An investment in the new securities involves risks. See "Risk Factors -- Risks if You Exchange" beginning on page 24. These risks include: - Once the spin-off is completed, Packaging will have fewer assets and less revenues and cash flows than Tenneco currently does. - Tenneco and Packaging cannot assure you that the new securities will have or maintain an investment-grade rating. - A liquid trading market may not develop for the new securities, which could adversely affect their value. RISKS IF YOU DO NOT EXCHANGE: You could suffer adverse consequences if you choose not to tender your original securities. See "Risk Factors -- Risk Factors if You Do Not Exchange" beginning on page 27. These adverse consequences include: - The operating restrictions presently included in the original indenture will no longer apply. This will permit Tenneco, which at that time will consist solely of its Automotive business, to make new borrowings in connection with the spin-off that are secured by its assets, including the capital stock of its various subsidiaries. This will allow the lenders to enforce their rights by taking control of the assets and/or subsidiaries. As a result, any original securities that remain outstanding after the spin-off will effectively rank behind these new borrowings with regard to payment. - Once the spin-off is completed, Automotive will have a substantial amount of debt. This may adversely affect its ability to meet its payment obligations to you under the original securities if you do not exchange. 7 9 - Tenneco expects that the original securities will not maintain an investment-grade rating after the exchange offers and spin-off. This could adversely affect their value. - Tenneco expects the original securities to have a limited trading market after the exchange offers. This could also adversely affect their value. EXPIRATION OF THE EXCHANGE OFFERS: Each exchange offer will expire at 5:00 p.m., New York City time, on , , 1999, unless extended by Tenneco in its sole discretion or terminated at an earlier time. EXPIRATION OF THE CONSENT SOLICITATION: The consent solicitation will expire at 5:00 p.m., New York City time, on , , 1999, unless extended by Tenneco in its sole discretion or terminated at an earlier time. WITHDRAWAL RIGHTS: You may withdraw your tender of original securities for exchange any time before the withdrawal time described below by following the procedures described in this document. A valid withdrawal of original securities will also revoke the related consent. You may not revoke a consent without withdrawing the related original securities. See "The Exchange Offers and Consent Solicitation -- Withdrawal Rights" beginning on page 46. In general, you may not withdraw tendered original securities after the withdrawal time unless the related exchange offer is terminated without any original securities being accepted for exchange. Subject to applicable law, this is true even if Tenneco waives any condition to the exchange offers or extends any exchange offer or the consent solicitation. If, however, after the withdrawal time Tenneco reduces the principal amount of original securities subject to any exchange offer, or Tenneco reduces the consideration offered in that exchange offer, then the original securities tendered in that exchange offer may be validly withdrawn for the following ten business days. As used in this document, the term "withdrawal time" refers to the earlier of -- - the expiration of the consent solicitation, and - 5:00 p.m., New York City time, on the date that Tenneco publicly announces that it has received the required consents. A public announcement shall be deemed to have been made as and when Tenneco issues a press release to the Dow Jones News Service indicating receipt of the required consents. CONDITIONS TO THE EXCHANGE OFFERS AND CONSENT SOLICITATION: The exchange offers and consent solicitation are subject to satisfaction or Tenneco's waiver of several conditions, including: - the receipt of the required consents; - any and all conditions to Tenneco's cash tender offers; and - any and all conditions to each other component of the debt realignment, and any and all material conditions, other than completion of the debt realignment, to the spin-off. 8 10 See "The Exchange Offers and Consent Solicitation -- Conditions to the Exchange Offers and Consent Solicitation" beginning on page 45. Because the exchange offers are part of the realignment of Tenneco's total debt before the spin-off, Tenneco plans to complete the exchange offers before to the spin-off. See "-- The Spin-off." Tenneco expects, however, to complete the spin-off within one business day after the exchange offers expire, or as soon thereafter as practicable. For this reason, Tenneco has conditioned the exchange offers on the satisfaction of all material conditions to the spin-off, other than completion of the debt realignment. See "The Spin-off -- Debt Realignment" beginning on page 60. HOW TO TENDER YOUR ORIGINAL SECURITIES AND GIVE CONSENTS: For a description of how to tender your original securities and give consents, see "The Exchange Offers -- Procedures for Tendering Original Securities and Giving Consents" beginning on page 41. THERE ARE NO GUARANTEED DELIVERY PROCEDURES. YOU MUST COMPLETE THE PROCEDURES FOR TENDERING ORIGINAL SECURITIES DESCRIBED IN THIS DOCUMENT BEFORE THE CONSENT SOLICITATION OR EXCHANGE OFFERS EXPIRE, AS APPLICABLE. For more information, you should contact the information agent or dealer managers at their addresses on the back cover of this document, or consult your broker, dealer, commercial bank or trust company for assistance. ACCEPTANCE OF ORIGINAL SECURITIES; DELIVERY OF EXCHANGE CONSIDERATION: Upon the terms and subject to the conditions of the exchange offers and applicable law, Tenneco will (1) accept for exchange original securities validly tendered before the applicable expiration time, and not properly withdrawn, and then (2) pay for accepted original securities by delivering new securities in book-entry form, plus cash for any applicable accrued interest and fractional interest in new securities, to the exchange agent on the next New York Stock Exchange trading day. The date new securities are delivered to the exchange agent is referred to in this document as their issuance date. NEW SECURITIES WILL BE ISSUED ONLY IN BOOK-ENTRY FORM THROUGH THE DEPOSITORY TRUST COMPANY. THIS MEANS THAT YOU WILL NOT RECEIVE CERTIFICATES FOR ANY OF YOUR NEW SECURITIES. If you plan to tender original securities which are not held through DTC, you are urged to contact a custodian that can hold securities through DTC to arrange delivery of the new securities on your behalf. This custodian should also provide you with the required DTC participant and account information that you will be required to submit in the accompanying letter of consent/transmittal. The exchange agent will deliver new securities in book-entry form, plus cash for any applicable accrued interest and fractional interest in new securities, to exchanging holders on the issuance date for those new securities or as soon thereafter as practicable. 9 11 ACCRUED INTEREST ON ORIGINAL SECURITIES; INTEREST ON NEW SECURITIES: Tenneco will pay accrued but unpaid interest on original securities exchanged through the date Tenneco accepts them for exchange. If, however, Tenneco accepts for exchange any particular series of original securities after an interest record date for that series and on or before the related interest payment date, accrued but unpaid interest will instead be paid to the holder of those original securities as of the record date, if different from the tendering holder. See "The Exchange Offers and Consent Solicitation -- Terms of the Exchange Offers" beginning on page 37. Interest on the new securities will accrue from, and including, their issuance date. WAIVERS; EXTENSIONS; AMENDMENTS: Tenneco expressly reserves the right to: - terminate any or all of the exchange offers or the consent solicitation upon the failure of any of the conditions to the exchange offers and consent solicitation; - waive any condition to any of the exchange offers or the consent solicitation; - extend the expiration of any of the exchange offers or the consent solicitation; - amend the terms of any of the exchange offers or the consent solicitation; and - not accept original securities as a result of an invalid tender, withdrawal or the occurrence of other events described in this document. If Tenneco makes a material change to the terms of or information concerning the exchange offers or consent solicitation, including any waiver of a material condition, Tenneco and Packaging will, to the extent required by law: (1) amend and recirculate this document; and (2) extend the expiration of the exchange offers and/or consent solicitation. See "The Exchange Offers and Consent Solicitation -- Expiration Time; Early Exchange Time; Extensions; Termination; Amendments" beginning on page 38. TAX CONSEQUENCES: Tenneco intends the exchange offers to be part of a tax-free reorganization under the Internal Revenue Code of 1986, as amended. You should generally not have income tax liability if you exchange original securities for new securities, except on any accrued but unpaid interest and except with respect to cash received in lieu of a fractional interest in new securities. You should also not have income tax liability in connection with the exchange offers if your original securities are not exchanged. See "U.S. Federal Income Tax Consequences" beginning on page 153 for circumstances in which all or part of your exchange could be taxable. NO RECOMMENDATION: Tenneco and Packaging are not, and no other person acting on behalf of either of them, is making any recommendation about 10 12 tendering original securities in the exchange offers or providing consents to the proposed amendments. NO DISSENTERS' RIGHTS: You will not have any right to dissent and receive an appraisal of your original securities in connection with the exchange offers or consent solicitation. EXCHANGE AGENT: The Chase Manhattan Bank is the exchange agent that will receive tenders of original securities on Tenneco's behalf and distribute any payments made. INFORMATION AGENT: Georgeson Shareholder Communications Inc. is the information agent that you may contact for assistance or additional copies of this document. DEALER MANAGERS: Morgan Stanley Dean Witter and Credit Suisse First Boston are acting as dealer managers for the exchange offers. \ 11 13 TERMS OF THE NEW SECURITIES The terms of the new securities will be substantially identical to the current terms of the original securities except that (a) Packaging will issue the new securities, and (b) the interest rate on each series of new securities will be higher than the interest rate on the corresponding series of original securities. See "Description of the New Securities" beginning on page 52. ISSUER: Tenneco Packaging Inc., which will be renamed. If you exchange your original securities for new securities, you will be entitled to look only to Packaging's businesses and operations for the payment of principal and interest, rather than to the consolidated operations of Tenneco, which included both Packaging and Automotive. See "Risk Factors -- Risk Factors if You Exchange" beginning on page 24. RANKING: The new securities will be senior unsecured obligations of Packaging. This means they will rank equally in right of payment with all existing and future unsecured and unsubordinated debt of Packaging and effectively junior to any secured debt of Packaging. In connection with the spin-off, Packaging will be making borrowings under new credit facilities that will rank equally in right of payment with the new securities. See "Description of Packaging -- Unaudited Pro Forma Combined Financial Statements of Packaging." Packaging currently has no debt securities outstanding that are senior or junior to the new securities. NEW SECURITIES:
SERIES OF NEW SECURITIES INTEREST PAYMENT DATES ------------------------ ---------------------- 7.20% Notes due 2005 June 15 and December 15 7.95% Debentures due 2025 June 15 and December 15 8% Notes due 2007 April 15 and October 15 8 1/8% Debentures due June 15, 2017 June 15 and December 15 8 3/8% Debentures due 2027 April 15 and October 15
LISTING: The new securities will not be listed on any domestic or international securities exchange or market. BASIC PACKAGING COVENANTS: Packaging will issue the new securities under a new indenture with The Chase Manhattan Bank, as trustee. The new indenture will restrict Packaging's ability to: - borrow money that is secured by liens on principal manufacturing or research and development facilities or on the capital stock of subsidiaries; - sell all or substantially all of its assets or merge with another person; and - sell and then take an immediate lease back of principal manufacturing or research and development facilities. These restrictions are subject to important exceptions described under the heading "Description of the New Securities" beginning on page 52. 12 14 THE COMPANIES TENNECO BEFORE THE SPIN-OFF Tenneco is a global manufacturing company whose major businesses currently consist of (a) Automotive -- the manufacture and sale of automotive emissions control and ride control products and systems, and (b) Packaging -- the manufacture and sale of specialty packaging and consumer products for the foodservice, consumer, protective, flexible and institutional/industrial markets. Tenneco's headquarters are located at 1275 King Street, Greenwich, Connecticut, 06831, and its telephone number at that location is (203) 863-1000. For further information about Tenneco, see "Where You Can Find More Information" on page 35 and "Incorporation of Information by Reference" beginning on page 35. Tenneco was incorporated in 1996 under the name "New Tenneco Inc." as a wholly owned subsidiary of the company then known as Tenneco Inc. At that time, the company's major businesses were shipbuilding, energy, automotive and packaging. On December 11, 1996, the former Tenneco completed the transfer of its automotive and packaging businesses to the current Tenneco, and spun off the current Tenneco to its public stockholders. In connection with that spin-off, the former Tenneco also spun off its shipbuilding division to its public stockholders and the remaining energy company was acquired by El Paso Natural Gas Company. Unless the context otherwise requires, for periods prior to December 11, 1996, the term "Tenneco" also refers to the company formerly known as Tenneco. PACKAGING Packaging is a global supplier of specialty packaging and consumer products, with 1998 revenues of approximately $2.8 billion. Packaging operates 89 manufacturing facilities throughout the world and employs over 15,000 people. Packaging is currently owned by Tenneco and will become an independent, publicly traded company upon completion of the spin-off. Packaging manufactures and sells plastic, aluminum and paper-based consumer products, such as disposable tableware, plastic food storage bags and plastic trash bags. Packaging sells these products under such recognized brand names as Hefty(R), Baggies(R), Hefty One-Zip(R) and E-Z Foil(R). Packaging also offers food/foodservice packaging products such as molded fiber cartons, foam meat trays and plastic, pressed paperboard and aluminum containers for frozen food, bakery and deli applications. Its products also include sponge-like foam and other packaging to protect and cushion a variety of goods during storage and shipment and flexible plastic bags for medical, pharmaceutical, chemical, hygiene and industrial applications. When the spin-off is completed, Packaging will own Tenneco's administrative services operations, but is currently analyzing its alternatives with respect to these operations. See "Description of Packaging -- Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 98. Packaging also owns a 43% common equity interest in a joint venture that operates Packaging's former containerboard packaging business. Containerboard is material derived primarily from wood pulp and recycled paper that is used to make cartons, boxes and other containers. The joint venture manufactures containerboard, as well as corrugated containers and lumber and related wood products. The joint venture had 1998 pro forma revenues of $1.57 billion. Packaging plans to sell its interest in this containerboard joint venture and expects the sale to be completed before the spin-off. See "Description of Packaging -- Unaudited Pro Forma Combined Financial Statements of Packaging" beginning on page 69. Packaging's headquarters are located at 1900 West Field Court, Lake Forest, Illinois 60045, and its telephone number at that location is (847) 482-2000. For more information about Packaging, see "Description of Packaging" beginning on page 66. TENNECO AFTER THE SPIN-OFF/AUTOMOTIVE When the spin-off is completed, Tenneco's remaining operations will consist solely of Automotive. Automotive is a worldwide manufacturer and marketer of automotive emissions control and ride control products and systems for vehicle manufacturers and the repair and replacement market, or aftermarket. With 1998 revenues of approximately $3.2 billion, approximately 23,500 employees worldwide and 106 13 15 facilities in 25 countries, Automotive is a global business that sells its products in over 100 countries. Automotive manufactures and markets its emissions control products primarily under the Walker(R) brand name and its ride control products primarily under the Monroe(R) brand name. Among its products are Sensa-Trac(R) shock absorbers and weight bearing struts, Rancho(R) ride control products, Walker Quiet-Flow(TM) mufflers and DynoMax(R) performance mufflers, Walker(R) and Gillet(TM) exhaust systems and Monroe Clevite(TM) elastomeric vibration control components. Automotive's headquarters are located at 500 North Field Drive, Lake Forest, Illinois 60045, and its telephone number at that location is (847) 482-5000. For more information about Automotive, see "Description of Tenneco After the Spin-off/Automotive" beginning on page 116. THE SPIN-OFF The spin-off of Packaging is the final step in the transformation of Tenneco from a highly diversified industrial corporation to independent companies focused on their core businesses. In July 1998, Tenneco's board of directors authorized management to develop a broad range of strategic alternatives which could result in the separation of its automotive, paperboard packaging and specialty packaging businesses. Earlier this year, Tenneco separated the paperboard packaging business from the rest of its operations. First, Packaging contributed its containerboard packaging business, which constituted the majority of its paperboard packaging segment, to a new joint venture for approximately $2 billion plus a 45% common equity interest. Packaging currently plans to sell its remaining interest in this joint venture, which is now 43% due to subsequent equity issuances to management, through an initial registered public offering. Second, Packaging sold the balance of its paperboard packaging business, the folding carton business, for $72.5 million. The cash proceeds of these transactions were used to repay a portion of Tenneco's short-term debt. The spin-off will complete the separation of Tenneco's businesses and create two independent, public companies -- Automotive and Packaging. Tenneco's Board of Directors has determined that the spin-off is in the best interests of Tenneco's stockholders because divergent industry trends increasingly require Tenneco's packaging and automotive businesses to pursue different strategies. The spin-off is designed to separate Tenneco's packaging business from its automotive business, which have distinct financial, investment and operating characteristics, so that each can adopt strategies and pursue objectives appropriate to its specific needs. The following describes the principal transactions that Tenneco and Packaging will undertake to complete the spin-off. The spin-off is subject to a number of conditions, including completion of the corporate restructuring transactions and debt realignment. See "The Spin-off" beginning on page 59. - Corporate Restructuring Transactions. As Tenneco is currently organized, ownership of its subsidiaries is based on geographic location and tax considerations rather than on the businesses in which the subsidiaries are involved. Therefore, Tenneco will need to restructure the ownership of its existing businesses before the spin-off so that the assets, liabilities and operations of (a) its packaging business and administrative services operations will be owned directly and indirectly by Packaging and (b) its automotive business will be owned directly and indirectly by Tenneco and its non-packaging subsidiaries. See "The Spin-off -- Corporate Restructuring Transactions" beginning on page 59. - Debt Realignment. Tenneco's historical practice has been to incur debt for its consolidated group at the parent-company level or at a limited number of its subsidiaries, rather than at the operating-company level, and to manage centrally various cash functions. Therefore, before the spin-off, Tenneco will realign substantially all of its existing debt through some combination of tender offers, exchange offers, prepayments and other refinancings. The purpose is to allocate this debt between Automotive and Packaging before the companies are separated. The exchange offers and Tenneco's cash tender offers are components of this debt realignment. Tenneco also expects to repay other non-public debt and to repurchase subsidiary preferred stock. To finance the cash tender offers and other cash payments, Packaging and Automotive will each make borrowings under new credit 14 16 facilities and Automotive expects to issue new senior subordinated debt. See "The Spin-off -- Debt Realignment" beginning on page 60. If the debt realignment and spin-off had occurred on June 30, 1999, Packaging would have had debt for money borrowed of about $2.2 billion and Automotive would have had debt for money borrowed of about $1.7 billion on a pro forma basis. This pro forma debt amount for Packaging does not reflect the application of any proceeds from Packaging's planned sale of its remaining interest in the containerboard joint venture. See "Description of Packaging -- Unaudited Pro Forma Combined Financial Statements of Packaging" beginning on page 69 and "Description of Tenneco After the Spin-off/Automotive -- Unaudited Pro Forma Consolidated Financial Statements of Tenneco" beginning on page 117. - Distribution of Packaging Common Stock. Tenneco will complete the spin-off by distributing all Packaging common stock to the holders of Tenneco common stock at a ratio of one share of Packaging common stock for each share of Tenneco common stock. The spin-off is conditioned on Tenneco's receipt, and the continued effectiveness, of a determination that the spin-off will be tax-free to Tenneco and its stockholders. Tenneco received a letter ruling from the Internal Revenue Service to that effect on August 20, 1999. 15 17 SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA OF PACKAGING The following summary combined financial data as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997, and 1996, were derived from the audited Combined Financial Statements of The Businesses of Tenneco Packaging. The following summary combined financial data as of December 31, 1996, 1995, and 1994, and for the years ended December 31, 1995 and 1994, are unaudited and were derived from Tenneco's accounting records. The following summary combined financial data as of and for each of the six months ended June 30, 1999 and 1998 were derived from the unaudited Combined Financial Statements of The Businesses of Tenneco Packaging. In the opinion of Packaging's management, the summary combined financial data of Packaging as of December 31, 1996, 1995, and 1994, and for the years ended December 31, 1995 and 1994, and as of and for the six months ended June 30, 1999 and 1998, include all adjusting entries, consisting only of normal recurring adjustments, necessary to present fairly the information set forth. You should not regard the results of operations for the six months ended June 30, 1999 as indicative of the results that may be expected for the full year. The following summary unaudited pro forma combined financial data as of and for the six months ended June 30, 1999, and for the year ended December 31, 1998, reflect the effects of: - the debt realignment; and - the spin-off of Packaging and related transactions. The unaudited pro forma combined statement of income data have been prepared as if these transactions occurred on January 1, 1998; the unaudited pro forma combined balance sheet data have been prepared as if these transactions occurred on June 30, 1999. The summary unaudited pro forma combined financial data are not necessarily indicative of what Packaging's results of operations would have been had these transactions described above actually been consummated on the dates assumed and are not necessarily indicative of the results of operations for any future period. Packaging's debt balances in the summary unaudited pro forma combined financial data do not reflect the application of any proceeds from Packaging's planned sale of its remaining interest in its containerboard joint venture. Packaging expects the sale to be completed before the spin-off, with the net proceeds used to retire the Tenneco debt that would otherwise be allocated to Packaging in the debt realignment. If the sale occurs after the spin-off, the net proceeds will be used to retire Packaging debt. There is other information Packaging believes is relevant to understanding its results of operations following the spin-off. These items relate to corporate overhead costs incurred by Tenneco and its administrative services operations that Packaging expects will differ for it following the spin-off. For further information you should see "Description of Packaging -- Supplemental Financial Information of Packaging" beginning on page 75. You should read all of this information in conjunction with the following each of which is included elsewhere in this document: - Unaudited Pro Forma Combined Financial Statements of Packaging on page 69; - Combined Selected Financial Data of Packaging on page 76; - Management's Discussion and Analysis of Financial Condition and Results of Operations of Packaging on page 98; and - Combined Financial Statements and Schedule of the Businesses of Tenneco Packaging on page F-1. (continued on next page) 16 18
Years Ended December 31, ----------------------------------------------------- Pro Forma 1998 1998(a) 1997(a) 1996(a) --------- ------- ------- ------- (Dollars in millions except per share amounts) STATEMENT OF INCOME DATA(b): Net sales and operating revenues -- Specialty............. $ 2,785 $ 2,785 $ 2,553 $ 1,987 Other................. 6 6 10 -- ----------- ----------- ----------- ----------- Total............... $ 2,791 $ 2,791 $ 2,563 $ 1,987 =========== =========== =========== =========== Income from continuing operations before interest expense, income taxes, and minority interest -- Specialty............. $ 328 $ 328 $ 308 $ 249 Other(c).............. (40) (45) (2) (15) ----------- ----------- ----------- ----------- Total............... 288 283 306 234 Interest expense(d)....... 164 133 124 102 Income tax expense (benefit)............... 57 67 75 67 Minority interest......... 1 1 1 -- ----------- ----------- ----------- ----------- Income (loss) from continuing operations... 66 82 106 65 Income (loss) from discontinued operations, net of income tax(e).... NA 57 21 71 Extraordinary loss, net of income tax(f)........... NA -- -- (2) Cumulative effect of changes in accounting principles, net of income tax(g)........... NA -- (38) -- ----------- ----------- ----------- Net income (loss)......... NA $ 139 $ 89 $ 134 =========== =========== =========== Average number of shares of common stock outstanding(h) -- Basic..................... 168,505,573 168,505,573 170,264,731 169,609,373 Diluted................... 168,834,531 168,834,531 170,801,636 170,526,112 Earnings (loss) per average share of common stock(h)-- Basic: Continuing operations... $ .39 $ .49 $ .63 $ .38 Discontinued operations(e)......... NA .34 .12 .42 Extraordinary loss(f)... NA -- -- (.01) Cumulative effect of changes in accounting principles(g)......... NA -- (.23) -- ----------- ----------- ----------- $ .83 $ .52 $ .79 =========== =========== =========== Diluted: Continuing operations... $ .39 $ .49 $ .63 $ .38 Discontinued operations(e)......... NA .34 .12 .42 Extraordinary loss(f)... NA -- -- (.01) Cumulative effect of changes in accounting principles(g)......... NA -- (.23) -- ----------- ----------- ----------- $ .83 $ .52 $ .79 =========== =========== =========== BALANCE SHEET DATA(b): Net assets of discontinued operations(e)........... NA $ 366 $ 423 $ 459 Total assets.............. NA 4,798 4,618 4,028 Short-term debt(d)........ NA 595 158 123 Long-term debt(d)......... NA 1,312 1,492 1,073 Debt allocated to discontinued operations(d)........... NA 548 473 394 Minority interest......... NA 14 15 -- Combined equity........... NA 1,776 1,839 1,843 Six Months Years Ended December 31, Ended June 30, ------------------------- --------------------------------------- Pro Forma 1995 1994 1999 1999(a) 1998(a) ---- ---- --------- ------- ------- (Dollars in millions except per share amounts) STATEMENT OF INCOME DATA(b): Net sales and operating revenues -- Specialty............. $ 845 $ 636 $ 1,404 $ 1,404 $ 1,361 Other................. -- -- -- -- 10 ----------- ----------- ----------- ----------- ----------- Total............... $ 845 $ 636 $ 1,404 $ 1,404 $ 1,371 =========== =========== =========== =========== =========== Income from continuing operations before interest expense, income taxes, and minority interest -- Specialty............. $ 39 $ 68 $ 190 $ 190 $ 175 Other(c).............. (6) 17 (43) (46) (2) ----------- ----------- ----------- ----------- ----------- Total............... 33 85 147 144 173 Interest expense(d)....... 91 48 81 68 67 Income tax expense (benefit)............... (3) 19 20 24 37 Minority interest......... -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations... (55) 18 46 52 69 Income (loss) from discontinued operations, net of income tax(e).... 224 75 NA (163) 37 Extraordinary loss, net of income tax(f)........... -- -- NA (7) -- Cumulative effect of changes in accounting principles, net of income tax(g)........... -- -- NA (32) -- ----------- ----------- ----------- ----------- Net income (loss)......... $ 169 $ 93 NA $ (150) $ 106 =========== =========== =========== =========== Average number of shares of common stock outstanding(h) -- Basic..................... 172,764,198 162,307,189 166,937,362 166,937,362 169,341,555 Diluted................... 173,511,654 162,912,425 167,319,412 167,319,412 169,936,676 Earnings (loss) per average share of common stock(h)-- Basic: Continuing operations... $ (.32) $ .11 $ .28 $ .31 $ .41 Discontinued operations(e)......... 1.30 .46 NA (.98) .22 Extraordinary loss(f)... -- -- NA (.04) -- Cumulative effect of changes in accounting principles(g)......... -- -- NA (.19) -- ----------- ----------- ----------- ----------- $ .98 $ .57 $ (.90) $ .63 =========== =========== =========== =========== Diluted: Continuing operations... $ (.32) $ .11 $ .28 $ .31 $ .41 Discontinued operations(e)......... 1.29 .46 NA (.98) .22 Extraordinary loss(f)... -- -- NA (.04) -- Cumulative effect of changes in accounting principles(g)......... -- -- NA (.19) -- ----------- ----------- ----------- ----------- $ .97 $ .57 $ (.90) $ .63 =========== =========== =========== =========== BALANCE SHEET DATA(b): Net assets of discontinued operations(e)........... $ 393 $ 236 $ 133 $ 133 $ 382 Total assets.............. 3,358 1,630 4,749 4,486 4,788 Short-term debt(d)........ 205 49 1,010(i) 367 335 Long-term debt(d)......... 880 478 1,186(i) 1,494 1,488 Debt allocated to discontinued operations(d)........... 369 285 -- -- 479 Minority interest......... -- -- 14 14 15 Combined equity........... 1,531 703 1,286 1,340 1,829
(continued on next page) 17 19
Years Ended December 31, ----------------------------------------------------- Pro Forma 1998 1998(a) 1997(a) 1996(a) --------- ------- ------- ------- (Dollars in millions except per share amounts) STATEMENT OF CASH FLOWS DATA(b): Net cash provided (used) by operating activities............ NA $ 577 $ 405 $ 263 Net cash provided (used) by investing activities............ NA (514) (654) (669) Net cash provided (used) by financing activities............ NA (67) 239 399 Capital expenditures for continuing operations............ NA (194) (229) (216) OTHER DATA: EBITDA(j)................. $ 463 $ 458 $ 469 $ 365 Ratio of earnings to fixed charges(k).............. 1.68 1.99 2.31 2.15 Six Months Years Ended December 31, Ended June 30, ------------------------- --------------------------------------- Pro Forma 1995 1994 1999 1999(a) 1998(a) ---- ---- --------- ------- ------- (Dollars in millions except per share amounts) STATEMENT OF CASH FLOWS DATA(b): Net cash provided (used) by operating activities............ $ 479 $ 283 NA $ (45) $ 288 Net cash provided (used) by investing activities............ (1,791) (146) NA (866) (221) Net cash provided (used) by financing activities............ 1,327 (142) NA 920 (66) Capital expenditures for continuing operations............ (265) (134) NA (75) (101) OTHER DATA: EBITDA(j)................. $ 78 $ 121 $ 241 $ 238 $ 261 Ratio of earnings to fixed charges(k).............. NM 1.72 1.74 2.00 2.45
- ------------------------- (a) For a discussion of the significant items affecting comparability of the financial information for the years ended December 31, 1998, 1997, and 1996, and for the six months ended June 30, 1999 and 1998, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Packaging included elsewhere in this document. (b) During the periods presented, Packaging completed numerous acquisitions, the most significant of which were the acquisitions of Mobil Plastics for $1.3 billion in late 1995, Amoco Foam Products for $310 million in August 1996, and the protective and flexible packaging business of N.V. Koninklijke KNP BT for $380 million in April 1997. See Note 6 to the Combined Financial Statements of The Businesses of Tenneco Packaging. See also "Description of Packaging -- Growth Strategy" and "Description of Packaging -- Management's Discussion and Analysis of Financial Condition and Results of Operations." (c) Historical and pro forma income from continuing operations before interest expense, income taxes and minority interest for "Other" includes costs which were incurred by Tenneco's corporate and administrative services operations which were not allocated to Tenneco's operating segments. Because these functions will be a part of Packaging upon the spin-off, they are included in Packaging's historical combined financial statements. Packaging expects its costs for these functions will differ following the spin-off. See "Supplemental Financial Information of Packaging" included elsewhere in this document for further information. (d) Tenneco's historical practice has been to incur indebtedness for its consolidated group at the parent company level or at a limited number of subsidiaries, rather than at the operating company level, and to centrally manage various cash functions. Accordingly, historical amounts include debt and related interest expense allocated to Packaging from Tenneco based on the portion of Tenneco's investment in Packaging which Tenneco deemed to be debt. This allocation is generally based upon the ratio of Packaging's net assets to Tenneco's consolidated net assets plus debt. An allocation of debt and its related interest expense has also been made to Packaging's discontinued operations based on the ratio of the discontinued operations' net assets to Packaging's combined net assets plus debt. Management believes that the allocation of corporate debt and related interest expense for the historical periods is reasonable. This historical allocation, however, is not indicative of the total amount of debt that Packaging will have upon completion of the debt realignment or of the debt and interest that may be incurred by Packaging as a separate public entity. See "Combined Financial Statements of The Businesses of Tenneco Packaging" included elsewhere in this document. (e) Discontinued operations for the periods presented consist of Packaging's paperboard packaging segment, which was discontinued in June 1999 following the decision to sell Packaging's remaining common equity interest in its containerboard joint venture. Loss from discontinued operations for the six months ended June 30, 1999 includes an after-tax loss of $178 million, or $1.07 per diluted common share, resulting from the contribution of Packaging's containerboard assets to the containerboard joint venture. See Note 7 to the Combined Financial Statements of The Businesses of Tenneco Packaging included elsewhere in this document. (f) Represents Packaging's costs related to prepayment of debt. See Note 7 to the Combined Financial Statements of The Businesses of Tenneco Packaging included elsewhere in this document. (g) In 1999, Packaging implemented the American Institute of Certified Public Accountants Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." In 1997, Packaging implemented the Financial Accounting Standards Board's Emerging Issues Task Force Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation." See Note 3 to the Combined Financial Statements of The Businesses of Tenneco Packaging included elsewhere in this document for additional information regarding changes in accounting principles. (h) In the spin-off, Tenneco stockholders will receive one share of Packaging common stock for each share of Tenneco common stock outstanding. Accordingly, basic and diluted earnings per share for Packaging were calculated using Tenneco's historical weighted average shares outstanding and weighted average shares outstanding adjusted to include estimates of additional shares that would be issued if potentially dilutive common shares had been issued, respectively. (continued on next page) 18 20 (i) Packaging's pro forma debt balances reflect debt allocated to Packaging in the debt realignment before application of any proceeds from Packaging's planned sale of its remaining interest in its containerboard joint venture. Packaging expects the sale to be completed before the spin-off, with the net proceeds used to retire the Tenneco debt that would otherwise be allocated to Packaging in the debt realignment. If the sale occurs after the spin-off, the net proceeds will be used to retire Packaging debt. See "Description of Packaging -- Unaudited Pro Forma Combined Financial Statements of Packaging." (j) EBITDA represents income from continuing operations before interest expense, income taxes, minority interest and depreciation and amortization. EBITDA is not a calculation based upon generally accepted accounting principles. The amounts included in the EBITDA calculation, however, are derived from amounts included in the Combined Statements of Income of The Businesses of Tenneco Packaging or Unaudited Pro Forma Combined Statements of Income of Packaging included elsewhere in this document. EBITDA should not be considered as an alternative to net income or operating income as an indicator of the operating performance of Packaging, or as an alternative to operating cash flows as a measure of liquidity. Packaging has reported EBITDA because it believes EBITDA is a measure commonly reported and widely used by investors and other interested parties as an indicator of a company's ability to incur and service debt. Packaging believes EBITDA assists investors in comparing a company's performance on a consistent basis without regard to depreciation and amortization, which can vary significantly depending upon accounting methods, particularly when acquisitions are involved, or nonoperating factors. However, the EBITDA measure presented in this document may not always be comparable to similarly titled measures reported by other companies due to differences in the components of the calculation. (k) For purposes of computing this ratio, earnings generally consist of income from continuing operations before income taxes and fixed charges, excluding capitalized interest. Fixed charges consist of interest expense, the portion of rental expense considered representative of the interest factor and capitalized interest. The historical ratios are based upon the amount of interest expense on corporate debt allocated to Packaging by Tenneco as discussed in (d) above. The pro forma ratios are derived from the Unaudited Pro Forma Combined Financial Statements of Packaging included elsewhere in this document. For the year ended December 31, 1995, earnings were inadequate to cover fixed charges by $59 million. 19 21 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA OF TENNECO The following summary consolidated financial data as of and for each of the fiscal years in the five years ended December 31, 1998 were derived from the audited financial statements of Tenneco and its consolidated subsidiaries. The following summary consolidated financial data as of and for each of the six months ended June 30, 1999 and 1998 were derived from the unaudited condensed financial statements of Tenneco and its consolidated subsidiaries. In the opinion of Tenneco's management, the summary consolidated historical financial data of Tenneco as of and for the six months ended June 30, 1999 and 1998 include all adjusting entries, consisting only of normal recurring adjustments, necessary to present fairly the information set forth. You should not regard the results of operations for the six months ended June 30, 1999 as indicative of the results that may be expected for the full year. The following summary unaudited pro forma consolidated financial data set forth below as of and for the six months ended June 30, 1999, and for the year ended December 31, 1998, reflect the effects of: - the debt realignment; - the spin-off of Packaging and related transactions; and - the April 1999 contribution of Packaging's containerboard assets to a new joint venture and the June 1999 sale of Packaging's folding carton assets. These two transactions are reflected only in the pro forma balance sheet data since they were completed before the date of the pro forma balance sheet. The unaudited pro forma consolidated statement of income data have been prepared as if these transactions occurred January 1, 1998; the unaudited pro forma consolidated balance sheet data have been prepared as if the debt realignment, spin-off and related transactions occurred on June 30, 1999. The summary unaudited pro forma consolidated financial data are not necessarily indicative of what Tenneco's results of operations would have been had these transactions described above actually been consummated on the dates assumed and are not necessarily indicative of the results of operations for any future period. There is other information Tenneco believes is relevant to understanding its results of operations following the spin-off. These items relate to corporate overhead costs incurred by Tenneco and its administrative services operations that Tenneco expects will differ following the spin-off. For further information you should see "Description of Tenneco After the Spin-off/Automotive -- Supplemental Financial Information of Tenneco" beginning on page 123. You should read all of this information in conjunction with the: - Unaudited Pro Forma Consolidated Financial Statements of Tenneco beginning on page 117 of this document; and - Management's Discussion and Analysis of Financial Condition and Results of Operations of Tenneco and the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for the year ended December 31, 1998, and for the six months ended June 30, 1999, each of which are contained in the Tenneco Current Report on Form 8-K, dated August 20, 1999. The Form 8-K is incorporated by reference into this document. See "Where You Can Find More Information" and "Incorporation of Information By Reference" on page 35 of this document. (continued on next page) 20 22
YEARS ENDED DECEMBER 31, --------------------------------------- PRO FORMA 1998 1998(A) 1997(A) ----------- ------- ------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) STATEMENT OF INCOME DATA(b): Net sales and operating revenues from continuing operations................... $ 3,237 $ 3,237 $ 3,226 =========== =========== =========== Income from continuing operations before interest expense, income taxes, and minority interest -- Automotive.............................. $ 248 $ 248 $ 407 Other................................... (26) (21) (12) ----------- ----------- ----------- Total................................. 222 227 395 Interest expense(c)........................ 161 69 58 Income tax expense (benefit)............... (26) 13 80 Minority interest.......................... -- 29 23 ----------- ----------- ----------- Income (loss) from continuing operations... 87 116 234 Income (loss) from discontinued operations, net of income tax(d)...................... NA 139 127 Extraordinary loss, net of income tax(e)... NA -- -- Cumulative effect of changes in accounting principles, net of income tax(f).......... NA -- (46) ----------- ----------- Net income (loss).......................... NA 255 315 Preferred stock dividends.................. NA -- -- ----------- ----------- Net income (loss) to common stock.......... NA $ 255 $ 315 =========== =========== Average number of shares of common stock outstanding-- Basic................................... 168,505,573 168,505,573 170,264,731 Diluted................................. 168,834,531 168,834,531 170,801,636 Earnings (loss) per average share of common stock-- Basic: Continuing operations................. $ .52 $ .69 $ 1.37 Discontinued operations(d)............ NA .83 .75 Extraordinary loss(e)................. NA -- -- Cumulative effect of changes in accounting principles(f)............ NA -- (.27) ----------- ----------- NA $ 1.52 $ 1.85 =========== =========== Diluted: Continuing operations................. $ .52 $ .68 $ 1.36 Discontinued operations(d)............ NA .83 .75 Extraordinary loss(e)................. NA -- -- Cumulative effect of changes in accounting principles(f)............ NA -- (.27) ----------- ----------- NA $ 1.51 $ 1.84 =========== =========== Cash dividends per common share............ NA $ 1.20 $ 1.20 BALANCE SHEET DATA(b): Net assets of discontinued operations(d)........................... NA $ 1,739 $ 1,771 Total assets.............................. NA 4,759 4,682 Short-term debt(c)........................ NA 304 75 Long-term debt(c)......................... NA 671 713 Debt allocated to discontinued operations(c)........................... NA 2,456 2,123 Minority interest......................... NA 407 408 Shareowners' equity....................... NA 2,504 2,528 STATEMENT OF CASH FLOWS DATA(b) Net cash provided (used) by operating activities.............................. NA $ 532 519 Net cash used by investing activities..... NA (754) (887) Net cash provided (used) by financing activities.............................. NA 216 354 Capital expenditures for continuing operations.............................. NA (195) (221) OTHER DATA: EBITDA(g)................................. $ 372 $ 377 $ 505 Ratio of earnings to fixed charges(h)..... 1.36 2.16 4.80 YEARS ENDED DECEMBER 31, --------------------------------------- 1996(A) 1995 1994 ------- ---- ---- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) STATEMENT OF INCOME DATA(b): Net sales and operating revenues from continuing operations................... $ 2,980 $ 2,479 $ 1,989 =========== =========== =========== Income from continuing operations before interest expense, income taxes, and minority interest -- Automotive.............................. $ 249 $ 240 $ 223 Other................................... (7) 8 7 ----------- ----------- ----------- Total................................. 242 248 230 Interest expense(c)........................ 60 44 33 Income tax expense (benefit)............... 79 91 52 Minority interest.......................... 21 23 -- ----------- ----------- ----------- Income (loss) from continuing operations... 82 90 145 Income (loss) from discontinued operations, net of income tax(d)...................... 564 645 307 Extraordinary loss, net of income tax(e)... (236) -- (5) Cumulative effect of changes in accounting principles, net of income tax(f).......... -- -- (39) ----------- ----------- ----------- Net income (loss).......................... 410 735 408 Preferred stock dividends.................. 12 12 60 ----------- ----------- ----------- Net income (loss) to common stock.......... $ 398 $ 723 $ 348 =========== =========== =========== Average number of shares of common stock outstanding-- Basic................................... 169,609,373 172,764,198 162,307,189 Diluted................................. 170,526,112 173,511,654 162,912,425 Earnings (loss) per average share of common stock-- Basic: Continuing operations................. $ .49 $ .52 $ .90 Discontinued operations(d)............ 3.25 3.67 1.52 Extraordinary loss(e)................. (1.39) -- (.03) Cumulative effect of changes in accounting principles(f)............ -- -- (.24) ----------- ----------- ----------- $ 2.35 $ 4.19 $ 2.15 =========== =========== =========== Diluted: Continuing operations................. $ .49 $ .52 $ .89 Discontinued operations(d)............ 3.23 3.65 1.52 Extraordinary loss(e)................. (1.38) -- (.03) Cumulative effect of changes in accounting principles(f)............ -- -- (.24) ----------- ----------- ----------- $ 2.34 $ 4.17 $ 2.14 =========== =========== =========== Cash dividends per common share............ $ 1.80 $ 1.60 $ 1.60 BALANCE SHEET DATA(b): Net assets of discontinued operations(d)........................... $ 1,883 $ 1,469 $ 700 Total assets.............................. 4,653 3,635 2,315 Short-term debt(c)........................ 74 109 31 Long-term debt(c)......................... 639 469 303 Debt allocated to discontinued operations(c)........................... 1,590 1,454 813 Minority interest......................... 304 301 301 Shareowners' equity....................... 2,646 3,148 2,900 STATEMENT OF CASH FLOWS DATA(b) Net cash provided (used) by operating activities.............................. 253 1,443 450 Net cash used by investing activities..... (685) (1,162) (113) Net cash provided (used) by financing activities.............................. 147 (356) (151) Capital expenditures for continuing operations.............................. (188) (208) (114) OTHER DATA: EBITDA(g)................................. $ 336 $ 331 $ 282 Ratio of earnings to fixed charges(h)..... 2.33 2.62 5.36 SIX MONTHS ENDED JUNE 30, --------------------------------------- PRO FORMA 1999 1999(A) 1998(A) ----------- ------- ------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) STATEMENT OF INCOME DATA(b): Net sales and operating revenues from continuing operations................... $ 1,657 $ 1,657 $ 1,664 =========== =========== =========== Income from continuing operations before interest expense, income taxes, and minority interest -- Automotive.............................. $ 156 $ 156 $ 219 Other................................... (7) (4) (12) ----------- ----------- ----------- Total................................. 149 152 207 Interest expense(c)........................ 80 42 30 Income tax expense (benefit)............... 28 44 55 Minority interest.......................... -- 13 16 ----------- ----------- ----------- Income (loss) from continuing operations... 41 53 106 Income (loss) from discontinued operations, net of income tax(d)...................... NA (111) 106 Extraordinary loss, net of income tax(e)... NA (7) -- Cumulative effect of changes in accounting principles, net of income tax(f).......... NA (134) -- ----------- ----------- Net income (loss).......................... NA (199) 212 Preferred stock dividends.................. NA -- -- ----------- ----------- Net income (loss) to common stock.......... NA $ (199) $ 212 =========== =========== Average number of shares of common stock outstanding-- Basic................................... 166,937,362 166,937,362 169,341,555 Diluted................................. 167,319,412 167,319,412 169,936,676 Earnings (loss) per average share of common stock-- Basic: Continuing operations................. $ .25 $ .32 $ .62 Discontinued operations(d)............ NA (.67) .63 Extraordinary loss(e)................. NA (.04) -- Cumulative effect of changes in accounting principles(f)............ NA (.80) -- ----------- ----------- $ (1.19) $ 1.25 =========== =========== Diluted: Continuing operations................. $ .25 $ .32 $ .62 Discontinued operations(d)............ NA (.67) .63 Extraordinary loss(e)................. NA (.04) -- Cumulative effect of changes in accounting principles(f)............ NA (.80) -- ----------- ----------- $ (1.19) $ 1.25 =========== =========== Cash dividends per common share............ NA $ .60 $ .60 BALANCE SHEET DATA(b): Net assets of discontinued operations(d)........................... -- $ 1,421 $ 1,793 Total assets.............................. 3,192 4,416 4,829 Short-term debt(c)........................ -- 206 168 Long-term debt(c)......................... 1,673 832 747 Debt allocated to discontinued operations(c)........................... -- 1,861 2,302 Minority interest......................... 17 411 407 Shareowners' equity....................... 659 2,122 2,559 STATEMENT OF CASH FLOWS DATA(b) Net cash provided (used) by operating activities.............................. NA $ (181) $ 178 Net cash used by investing activities..... NA (976) (314) Net cash provided (used) by financing activities.............................. NA 1,170 125 Capital expenditures for continuing operations.............................. NA (70) (80) OTHER DATA: EBITDA(g)................................. $ 220 $ 223 $ 279 Ratio of earnings to fixed charges(h)..... 1.56 2.28 3.82
(continued on next page) 21 23 - ------------------------- Note: The Financial Statements of Tenneco Inc. and Consolidated Subsidiaries referred to in the following notes are included in and incorporated by reference from the Tenneco Current Report on Form 8-K dated August 20, 1999. They cover the three years ended December 31, 1998 and the six months ended June 30, 1999 and 1998. (a) For a discussion of the significant items affecting comparability of the financial information for the years ended December 31, 1998, 1997, and 1996, and for the six months ended June 30, 1999 and 1998, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Tenneco's Current Report on Form 8-K dated August 20, 1999. (b) During the periods presented, Tenneco completed numerous acquisitions. The most significant acquisition was Automotive's acquisition of Clevite for $328 million in July 1996. See Notes to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information. See also "Description of Tenneco After the Spin-off/Automotive -- Strategic Acquisitions and Alliances" included elsewhere in this document. (c) Debt amounts for 1998, 1997, and 1996, and for June 30, 1998, are net of allocations of corporate debt to the net assets of Tenneco's discontinued specialty packaging and paperboard packaging segments. Debt amounts for June 30, 1999, are net of allocations of corporate debt to the net assets of Tenneco's discontinued specialty packaging segment. Debt amounts for 1995 and 1994 are net of allocations of corporate debt to the net assets of Tenneco's discontinued specialty packaging, paperboard packaging, energy and shipbuilding segments. Interest expense for all periods is net of interest expense allocated to income from discontinued operations. These allocations of debt and related interest expense are based on the ratio of Tenneco's investment in the specialty packaging, paperboard packaging, energy and shipbuilding segments' respective net assets to Tenneco's consolidated net assets plus debt. See Notes to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information. The pro forma debt balances reflect Tenneco's debt after allocation of a portion of its debt to Packaging in connection with the spin-off. See "The Spin-off" and "Description of Tenneco After the Spin-off/Automotive -- Unaudited Pro Forma Consolidated Financial Statements of Tenneco" included elsewhere in this document. (d) Discontinued operations reflected in the above periods consist of Tenneco's (1) specialty packaging segment, which was discontinued in August 1999, (2) paperboard packaging segment, which was discontinued in June 1999, (3) energy and shipbuilding segments, which were discontinued in December 1996, (4) farm and construction equipment segment, which was discontinued in March 1996, and (5) chemicals and brakes operations, which were discontinued during 1994. See Notes to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information. (e) Represents Tenneco's costs related to prepayment of debt, including the 1996 loss recognized in the realignment of Tenneco's consolidated debt preceding its 1996 corporate reorganization and the 1999 loss recognized in connection with the contribution of the containerboard assets to a new joint venture. See the Notes to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. (f) In 1999, Tenneco implemented the American Institute of Certified Public Accountants Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." In addition, effective January 1, 1999, Tenneco changed its method of accounting for customer acquisition costs from a deferral method to an expense-as-incurred method. In 1997, Tenneco implemented the Financial Accounting Standards Board's Emerging Issues Task Force Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation." In 1994, Tenneco adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." See the Notes to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information regarding changes in accounting principles. (g) EBITDA represents income from continuing operations before interest expense, income taxes, minority interest and depreciation and amortization. EBITDA is not a calculation based upon generally accepted accounting principles. The amounts included in the EBITDA calculation, however, are derived from amounts included in the consolidated historical or pro forma statements of income data. EBITDA should not be considered as an alternative to net income or operating income as an indicator of the operating performance of Tenneco, or as an alternative to operating cash flows as a measure of liquidity. Tenneco has reported EBITDA because it believes EBITDA is a measure commonly reported and widely used by investors and other interested parties as an indicator of a company's ability to incur and service debt. Tenneco believes EBITDA assists investors in comparing a company's performance on a consistent basis without regard to depreciation and amortization, which can vary significantly depending upon accounting methods (particularly when acquisitions are involved) or nonoperating factors. However, the EBITDA measure presented in this document may not always be comparable to similarly titled measures reported by other companies due to differences in the components of the calculation. (h) For purposes of computing this ratio, earnings generally consist of income from continuing operations before income taxes and fixed charges excluding capitalized interest. Fixed charges consist of interest expense, preferred stock dividend requirements of subsidiaries, the portion of rental expense considered representative of the interest factor, and capitalized interest. For purposes of computing these ratios, preferred stock dividends are included in the calculations on a pre-tax basis. The pro forma ratios are derived from the Unaudited Pro Forma Consolidated Financial Statements of Tenneco included elsewhere in this document. 22 24 RECENT DEVELOPMENTS PACKAGING Tenneco currently expects that operating income from its Packaging business for the third quarter of 1999 will be approximately $15 million below operating income from this business for the third quarter of 1998. Based on Packaging's forecast of resin costs and pricing actions, Packaging's management expects the negative impact on margin from increased resin costs to begin to be offset sometime in the fourth quarter of 1999. During the third quarter of 1999, Packaging also incurred increased advertising and promotional expenditures to meet competitive market initiatives in its consumer business. Packaging's management is evaluating Packaging's strategy in light of its competitive position as a new stand-alone public company and, as part of this evaluation, is analyzing its business operations and assets. Specifically, the evaluation includes a review of Packaging's strategic and competitive position in market segments and operations where results are not meeting management's expectations. Although plans are still being developed and have not been finalized or approved, potential options could include the disposition, restructuring or rationalization of assets and operations. Packaging expects to complete its evaluation in the fourth quarter of 1999. Based on its continuing analysis, Packaging has revised its original estimate of the potential charge it could expect to take upon final approval of the plan. Packaging currently estimates that its evaluation could result in an aggregate pre-tax charge of up to approximately $175 million, of which approximately 10% could be cash. AUTOMOTIVE Tenneco currently expects that operating income from the Automotive business for the third quarter of 1999 will be $20 to $25 million below operating income from this business for the third quarter of 1998. Also, Tenneco's third quarter income from continuing operations is expected to include additional tax costs of $15 to $20 million related to repatriation of overseas earnings in connection with the spin-off. This repatriation allows Tenneco to leverage its overseas operations, creating interest deductions in foreign tax jurisdictions. Automotive's management expects that revenues from its North American original equipment business will continue to improve in the third quarter based on a strong vehicle build in the original equipment market, especially in the light truck market. In the North American aftermarket, revenues are expected to be lower than in the third quarter of 1998 due primarily to declining exhaust replacement rates. The favorable impacts of Automotive's earlier restructuring efforts in its North American aftermarket operations are expected to fully offset the negative impact on operating income caused by the weakness in aftermarket exhaust sales. Automotive's European operations are expected to be negatively impacted by higher costs, primarily relating to a first quarter 1999 change in accounting for platform start-up costs from a capitalization to an expense basis, changes in the mix of its revenues in the original equipment market to lower margin business and softness in ride control aftermarket sales due primarily to an increase in private label and non-premium product business. The South American operations continue to be negatively impacted by the troubled economic conditions in Brazil and Argentina and currency weakness. Automotive has initiated an action plan which includes management changes, brand repositioning and new product offerings. For example, Automotive plans to introduce a new premium shock absorber product for the aftermarket in November 1999, and plans expanded introductions of Mega-Flow(TM) heavy duty mufflers and its recreational vehicle shock line. Automotive is also evaluating a supplemental restructuring plan which could involve the closure of additional manufacturing and distributions facilities in North America and Europe. If the plan is approved, it could result in a third or fourth quarter pre-tax charge of $45 to $55 million, of which approximately 50-60% could be cash. 23 25 RISK FACTORS You should carefully consider the following risk factors, in addition to the other information contained in this document, before deciding to tender original securities for exchange in the exchange offers. When you evaluate the forward-looking statements in this document, you should carefully consider the factors discussed below and the cautionary statements referred to in "Forward-Looking Statements." Neither Tenneco nor Packaging makes any representation as to the future value of either the new securities or the original securities. RISK FACTORS IF YOU EXCHANGE RISKS RELATING TO THE NEW SECURITIES HOLDERS OF PACKAGING'S NEW SECURITIES WILL BE SUBJECT TO RISK BECAUSE PACKAGING WILL INITIALLY HAVE LESS REVENUES, CASH FLOWS AND ASSETS TO HELP IT SATISFY ITS DEBT OBLIGATIONS THAN TENNECO CURRENTLY DOES. Once the spin-off is completed, Packaging will have fewer assets and less revenues and cash flows than Tenneco, the obligor of the original securities, currently does. Tenneco is engaged in the automotive, packaging and administrative services businesses. Packaging, however, will be engaged only in Tenneco's current packaging and administrative services businesses. The cash flows and assets of Tenneco's automotive business will not be available to satisfy Packaging's obligations under its new securities. Tenneco will not guarantee the new securities, and holders who receive new securities in exchange for original securities will no longer be creditors of Tenneco. See "The Spin-off." PACKAGING CANNOT ASSURE YOU THAT ITS NEW SECURITIES WILL HAVE OR MAINTAIN INVESTMENT-GRADE RATINGS, AND A REDUCTION IN THE NEW SECURITIES' RATINGS WOULD ADVERSELY AFFECT THEIR VALUE. Packaging expects that, based on and subject to discussions with debt rating agencies, its new securities will have an investment-grade rating that will be at the lower end of the possible investment grade ratings. However, Packaging cannot assure you that the new securities will actually have or be able to maintain these ratings. The failure of the new securities to have an investment-grade rating, or a reduction in the rating of the new securities, would have an adverse effect on their value. A LIQUID TRADING MARKET FOR PACKAGING'S NEW SECURITIES MAY NOT DEVELOP AND THE MARKET PRICE OF THE NEW SECURITIES COULD BE ADVERSELY AFFECTED. There is no established trading market for Packaging's new securities. A liquid trading market may not develop for the new securities, which would adversely impact their market price. Packaging does not intend to apply for listing of the new securities on the NYSE or any other securities exchange, or for quotation through the National Association of Securities Dealers Automated Quotation System. The liquidity of any market and the market price for the new securities will depend on, among other things: (a) the number of holders of the new securities; (b) Packaging's performance; (c) the market for similar securities; and (d) the interest of securities dealers in making a market in the new securities. Even if a market for the new securities does develop, the new securities may trade at a discount, depending on the factors described above. UNDER SPECIFIED CIRCUMSTANCES, YOUR EXCHANGE OF TENNECO'S ORIGINAL SECURITIES FOR PACKAGING'S NEW SECURITIES WILL BE TAXABLE. Counsel to Tenneco is of the opinion that your exchange of original securities for Packaging's new securities should be tax-free for U.S. federal income tax purposes, except for any accrued interest and except with respect to cash received in lieu of a fractional interest in new securities. If, however, the spin-off does not qualify as tax-free for specified reasons, you will recognize gain or loss as a result of your receipt of Packaging's new securities in the exchange offers. You will also recognize this gain or loss if either Tenneco's original securities or Packaging's new securities do not qualify as "securities" for U.S. federal income tax purposes. In addition, a portion of the new securities could be treated as a consent payment, resulting in ordinary income to you. See "-- Risk Factors Related to the Spin-off" for a 24 26 description of circumstances under which the spin-off may not qualify as a tax-free distribution. See also "U.S. Federal Income Tax Consequences." THERE ARE GENERALLY NO TERMS OF THE NEW SECURITIES THAT WILL PROTECT OR COMPENSATE YOU IN THE EVENT OF A HIGHLY LEVERAGED OR SIMILAR TRANSACTION INVOLVING PACKAGING. There will be no covenants or other provisions in the terms of the new securities providing for a put or increased interest or that would otherwise provide you with additional compensation or protection in the event of a recapitalization transaction, a change of control or a highly leveraged transaction involving Packaging, except that the terms of the new securities will provide that Packaging may not merge or consolidate with any other person or entity, or sell, lease or convey all or substantially all of its assets to any person or entity, unless specified conditions are satisfied. These conditions are limited and relate generally to the assumption of the obligations by the surviving or successor entity under the new securities and the absence of defaults. For a description of these conditions, see "Description of the New Securities -- Consolidation, Merger and Sale of Assets." RISKS RELATING TO PACKAGING'S BUSINESS THE CYCLICAL DEMAND FOR PACKAGING PRODUCTS COULD ADVERSELY AFFECT ITS OPERATING RESULTS BECAUSE LESS DEMAND FOR PACKAGING'S PRODUCTS COULD REDUCE PACKAGING'S PROFITABILITY. Demand for Packaging's products is cyclical in nature because it follows the demand for the goods that are packaged with its products or the demand for services such as construction. Accordingly, Packaging's demand is subject to general economic conditions that affect demand in the durable goods, consumer, building, construction and automotive markets. Growth in the economy generally stimulates demand for these products or services, while a weakening economy tends to decrease demand. Consequently, adverse economic conditions could have a material adverse effect on Packaging's operating results because less demand for Packaging's products would reduce Packaging's profitability. VOLATILE RAW MATERIAL PRICES COULD ADVERSELY AFFECT PACKAGING'S OPERATING RESULTS BECAUSE HIGHER COSTS TO MANUFACTURE ITS PRODUCTS WOULD LIKELY REDUCE PACKAGING'S PROFITABILITY. Plastic resins, aluminum rollstock, linerboard and recycled fiber are the basic raw materials used in the manufacture of most of Packaging's products. The costs of these materials may be volatile and are a function of, among other things, the manufacturing capacity for those materials and the costs of their components. If Packaging fails to obtain price increases for its products in a timely manner following a raw material cost increase, reduces its product prices without a corresponding reduction in raw material costs or is unable to renegotiate favorable raw material supply contracts, Packaging's operating results could be adversely affected because higher costs to manufacture its products would likely reduce Packaging's profitability. See "Summary -- Recent Developments -- Packaging." PACKAGING CANNOT ASSURE YOU THAT IT WILL SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES OR THAT FUTURE ACQUISITIONS WILL NOT ADVERSELY AFFECT ITS OPERATING RESULTS AND FINANCIAL CONDITION. Packaging's growth strategy contemplates further acquisitions of specialty packaging and consumer products businesses, as well as related businesses. Pursuing an acquisition strategy could adversely affect Packaging's operating results and financial condition because of: - unanticipated liabilities; - the diversion of management attention; - increased goodwill amortization; - higher interest costs; and - dependence on retaining or hiring and training key personnel and integrating the acquired business. 25 27 See "Description of Packaging -- Growth Strategy." IF PACKAGING DOES NOT ADAPT TO TECHNOLOGICAL ADVANCES IN ITS INDUSTRY AS QUICKLY AS ITS COMPETITORS, ITS OPERATING RESULTS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED BY HIGHER OVERHEAD AND MANUFACTURING COSTS AND REDUCED APPEAL OF ITS PRODUCTS. Packaging competes in markets and industries that require sophisticated manufacturing systems and other advanced technology to deliver state-of-the-art specialty packaging solutions. These systems and technologies will have to be refined and updated as the underlying technologies advance. Packaging cannot assure you that, as systems and technologies become outdated, Packaging will be able to replace them, to replace them as quickly as its competitors or to develop and market new and better products in the future. Higher overhead and manufacturing costs due to a failure to update and improve processes could limit Packaging's ability to compete favorably as to price. In addition, Packaging's failure to make technological advances could adversely affect its ability to provide attractive packaging solutions for customers. IF NOT FULLY RESOLVED, THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT PACKAGING'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Many computer software systems, as well as some hardware and equipment utilizing date-sensitive data, were designed to use two-digit date fields. Consequently, these systems, hardware and equipment will not be able to recognize dates properly beyond the year 1999. If Packaging is unable to complete on a timely and cost-efficient basis the remediation or replacement of critical systems or equipment not yet in compliance, or develop alternative procedures, or if Packaging's major suppliers, financial institutions or others with whom it conducts business are unsuccessful in implementing timely solutions, Year 2000 issues could have a material adverse effect on Packaging's financial condition and its results of operations. This adverse effect could result from interruptions in Packaging's ability to manufacture its products, process and ship orders and properly bill and collect accounts receivable. For more information, see "Description of Packaging -- Management's Discussion and Analysis of Financial Condition and Results of Operations." PACKAGING CANNOT ASSURE YOU THAT IT WILL BE ABLE TO SUCCESSFULLY TRANSITION TO AN INDEPENDENT PUBLIC COMPANY. Upon completion of the spin-off, Packaging's major operations will consist of Tenneco's packaging business. Packaging has never operated as a stand-alone company and historically has been able to rely, to some degree, on the earnings, assets and cash flow of Tenneco's other businesses for capital requirements and certain administrative services. Accordingly, Packaging's pro forma combined financial statements included in this document may not necessarily reflect the results of operations and financial condition that would have been achieved if Packaging had operated independently during the periods presented. PACKAGING IS SUBJECT TO RISKS RELATED TO ITS INTERNATIONAL OPERATIONS. Packaging has manufacturing and distribution facilities in many countries, principally in North America and Europe. For 1998, about 21% of Packaging's revenues were derived from its international operations. International operations are subject to various risks which could have a material adverse effect on those operations or Packaging's as a whole, including: - exposure to local economic conditions; - exposure to local political conditions, including the risk of seizure of assets by a foreign government; - currency exchange rate fluctuations; - controls on the repatriation of cash; and - export and import restrictions. 26 28 RISK FACTORS IF YOU DO NOT EXCHANGE RISKS RELATING TO THE ORIGINAL SECURITIES THAT REMAIN OUTSTANDING WHEN THE SPIN-OFF IS COMPLETED, ANY OF TENNECO'S ORIGINAL SECURITIES NOT EXCHANGED WILL BE UNSECURED AND EFFECTIVELY RANK BEHIND NEW AUTOMOTIVE SECURED BORROWINGS, WHICH COULD LIMIT THEIR COLLECTIBILITY IN THE EVENT OF BANKRUPTCY. The new borrowings to be made by Automotive in connection with the spin-off will be secured by a substantial amount of Automotive's assets, including by stock pledges and/or guarantees of various Automotive subsidiaries. See "Description of Tenneco After the Spin-off/Automotive -- New Financing." The original securities that remain outstanding after the exchange offers and spin-off are not and will not be supported by similar security. Because this security will allow the lenders to enforce their rights directly against the subsidiaries or by taking control of Automotive's assets, original securities that remain outstanding after the exchange offers will be structurally subordinated to the rights of the lenders for Automotive's new borrowings. In other words, the original securities will rank behind these borrowings as to payment. This could limit their collectibility in the event of bankruptcy. TENNECO EXPECTS THAT THE ORIGINAL SECURITIES WILL NOT MAINTAIN INVESTMENT-GRADE RATINGS AFTER THE EXCHANGE OFFERS AND SPIN-OFF, AND THAT THEIR VALUE COULD BE ADVERSELY AFFECTED. Tenneco expects that the ratings of the original securities that remain outstanding after the exchange offers and spin-off will be lower than the current ratings of the original securities and will not be investment-grade. Any reduction in the rating of these securities could adversely affect their value. TENNECO EXPECTS THAT A LIMITED TRADING MARKET FOR THE ORIGINAL SECURITIES WILL EXIST AFTER THE EXCHANGE OFFERS AND THAT THE VALUE OF THESE SECURITIES COULD BE ADVERSELY AFFECTED. Tenneco expects that a limited trading market will exist for the original securities that remain outstanding after the exchange offers. A limited trading market could adversely affect the liquidity, market value and price volatility of these securities. Tenneco expects the market for these securities to become more limited because there will be fewer holders and a smaller outstanding principal amount available for trading. In addition, some of the original securities are listed on the NYSE. Under current NYSE rules, debt securities may be delisted if the aggregate market value or principal amount of publicly held debt securities is less than $1 million. Tenneco plans to apply for delisting of any original securities that remain outstanding after the exchange offers. These factors could further reduce the trading market for these securities. WHEN THE SPIN-OFF IS COMPLETED, YOUR CREDIT RISK COULD INCREASE IF YOU DO NOT TENDER BECAUSE AUTOMOTIVE WILL HAVE A SUBSTANTIAL AMOUNT OF DEBT. THIS DEBT COULD ADVERSELY AFFECT AUTOMOTIVE'S OPERATING FLEXIBILITY AND PUT IT AT A COMPETITIVE DISADVANTAGE. When the spin-off is completed, Tenneco -- in other words, Automotive -- will have a substantial amount of debt. Tenneco expects that Automotive would have had indebtedness for money borrowed of $1.7 billion at June 30, 1999 if the spin-off had occurred on that date. See "Description of Tenneco After the Spin-off/Automotive -- Unaudited Pro Forma Consolidated Financial Statements of Tenneco." Automotive's substantial debt after the spin-off could have adverse consequences for Automotive and increase your credit risk if you do not tender in the exchange offers. These consequences may include: - making it more difficult for Automotive to satisfy its obligations under the original securities; - making it more difficult for Automotive to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes; - requiring a substantial portion of Automotive's cash flow to be dedicated to debt service payments instead of other purposes; 27 29 - increasing Automotive's vulnerability to general adverse economic and industry conditions; - limiting Automotive's financial flexibility in planning for and reacting to changes in the industry in which it competes; - placing Automotive at a disadvantage as compared to less leveraged competitors; and - limiting Automotive's ability to borrow additional funds and increasing the cost of borrowing. After the spin-off, Automotive's ability to pay principal and interest on the original securities and satisfy its other debt service obligations will depend on its future operating performance. If Automotive is unable to generate sufficient cash flow or make future borrowings, it may be unable to service its debt or to fund its other liquidity needs. AUTOMOTIVE'S OPERATIONS AFTER THE SPIN-OFF MAY BE SUBSTANTIALLY RESTRICTED BY THE TERMS OF ITS DEBT, WHICH COULD ADVERSELY AFFECT AUTOMOTIVE AND INCREASE YOUR CREDIT RISK IF YOU DO NOT TENDER IN THE EXCHANGE OFFERS. The agreements governing the new borrowings that Automotive will be making in connection with the spin-off will include a number of significant financial and other restrictive covenants. These covenants could adversely affect Automotive, and adversely affect holders of original securities remaining after the exchange offers, by limiting Automotive's ability to plan for or react to market conditions or to meet its capital needs. Tenneco expects that these covenants will, among other things, restrict Automotive's ability to: - - dispose of assets; - - incur liens, guarantees or additional debt; - - engage in sale-leaseback transactions; - - pay dividends or make distributions; - - enter into investments or acquisitions; - - engage in transactions with affiliates; - - repurchase or redeem capital stock; and - - engage in mergers or consolidations. IF YOU DO NOT TENDER, THE PROPOSED AMENDMENTS COULD INCREASE YOUR CREDIT RISK BY ELIMINATING OPERATING RESTRICTIONS CONTAINED IN THE ORIGINAL INDENTURE. Original securities not purchased in the exchange offers will remain outstanding after the spin-off as obligations of Tenneco -- in other words, Automotive. If the required consents are received and the proposed amendments take effect, the original indenture will be amended to eliminate the restrictions on Automotive's operations. Further, because more than a majority of the aggregate principal amount of debt securities outstanding under the indenture are subject to Tenneco's concurrent cash tender offers, Tenneco could receive the required consents in connection with the cash tender offers without regard to the results of the exchange offers. Any actions that Automotive may take as a result of these amendments could increase your credit risk or otherwise adversely affect your interests if you do not tender. This is because the original indenture, as amended, will continue to govern the terms of all of the original securities that remain outstanding after the exchange offers. For example, the proposed amendments will permit the spin-off of Packaging without compliance with a covenant that might, if held to apply to the spin-off, require Packaging to become the obligor of Tenneco's original securities. Tenneco and Packaging believe the application of this covenant is uncertain in these circumstances. The proposed amendments will also allow Automotive to make new borrowings in connection with the spin-off that are secured by Automotive's assets. For a description of the proposed amendments, see "The Proposed Amendments." AUTOMOTIVE MAY BE ADVERSELY AFFECTED IF IT IS UNABLE TO COMPLY WITH FINANCIAL COVENANTS IN ITS NEW FINANCING ARRANGEMENTS BECAUSE IT COULD BE REQUIRED TO REPAY BORROWINGS EARLY. The new borrowings Automotive will be making in connection with the spin-off will require it to comply with many specified financial ratios. Automotive's failure to comply with these financial ratios 28 30 could result in an event of default which, if not cured or waived, could result in Automotive being required to repay these borrowings before their due date. If Automotive were unable to make this repayment or otherwise refinance these borrowings, the lenders could foreclose on Automotive's assets that secure these borrowings. If Automotive were able to refinance these borrowings on less favorable terms, Automotive's results of operations and financial condition could be adversely impacted by increased costs and rates. DESPITE ITS DEBT LEVELS AFTER THE SPIN-OFF, AUTOMOTIVE MAY STILL BE ABLE TO INCUR SIGNIFICANTLY MORE DEBT. Despite the restrictions and limitations described above, Automotive may be able to incur significant additional indebtedness after the spin-off. The new credit facility Automotive has entered into in connection with the debt realignment is expected to permit additional borrowings of approximately $377 million after the spin-off, based on Automotive's expected level of drawings under the facility at the spin-off date, and the indenture governing the subordinated debt Automotive will issue in connection with the spin-off will also permit Automotive to incur additional indebtedness in specified circumstances. If new debt is added to Automotive's debt levels after the spin-off, the related risks that Automotive faces could increase. AFTER THE SPIN-OFF, AUTOMOTIVE WILL INITIALLY HAVE LOWER REVENUES, CASH FLOW AND ASSETS TO HELP IT SATISFY ITS DEBT OBLIGATIONS THAN TENNECO CURRENTLY DOES. Upon the spin-off, Automotive will have fewer assets and less revenues than Tenneco currently does. Tenneco, the obligor under the original securities, currently has an automotive and packaging business and administrative services operations. When the spin-off is completed, however, Automotive will be engaged only in Tenneco's current automotive business. The cash flow and assets of Tenneco's packaging business and administrative services operations will not be available to satisfy obligations under the original securities that remain outstanding. See "The Spin-off." RISKS RELATING TO AUTOMOTIVE'S BUSINESS CONSOLIDATION AMONG AUTOMOTIVE PARTS CUSTOMERS AND SUPPLIERS COULD MAKE IT MORE DIFFICULT FOR AUTOMOTIVE TO COMPETE FAVORABLY. Automotive's financial condition and results of operations could be adversely affected because the customer base for automotive parts is consolidating in both the original equipment market and aftermarket. As a result, Automotive is competing for business from fewer customers. Due to the cost focus of these major customers, Automotive has been, and expects to continue to be, required to reduce prices. Automotive cannot be certain that it will be able to generate cost savings and operational improvements in the future that are sufficient to offset price reductions required by existing customers and necessary to win additional business. Furthermore, the trend towards consolidation among automotive parts suppliers is resulting in fewer, larger suppliers who benefit from purchasing and distribution economies of scale. If Automotive cannot achieve cost savings and operational improvements sufficient to allow it to compete favorably in the future with these larger companies, its financial condition and results of operations could be adversely affected due to a reduction of, or inability to increase, sales. See "Description of Tenneco After the Spin-off/ Automotive -- Industry Trends." AUTOMOTIVE IS DEPENDENT ON ITS LARGE CUSTOMERS FOR FUTURE REVENUES. Automotive depends on major vehicle manufacturers for a substantial portion of its net sales. For example, during 1998 Ford and DaimlerChrysler accounted for 12.8% and 10.9% of Automotive's net sales, respectively. The loss of all or a substantial portion of Automotive's sales to any of its large volume customers could have a material adverse effect on Automotive's financial condition and results of operations by reducing cash flows and Automotive's ability to spread costs over a larger revenue base. Automotive may make fewer sales to these customers for a variety of reasons, including: (1) loss of awarded business; (2) reduced or delayed customer requirements; or (3) strikes or other work stoppages 29 31 affecting production by the customers. See "Description of Tenneco After the Spin-off/Automotive -- Analysis of Automotive's Revenues." AUTOMOTIVE MAY NOT BE ABLE TO SUCCESSFULLY RESPOND TO THE CHANGING DISTRIBUTION CHANNELS FOR AFTERMARKET PRODUCTS. Major automotive aftermarket retailers, such as AutoZone and Advance Auto Parts, are attempting to increase their commercial sales by selling directly to automotive parts installers in addition to individual consumers. These installers have historically purchased from their local warehouse distributors and jobbers, who are Automotive's more traditional customers. Tenneco cannot assure you that Automotive will be able to maintain or increase aftermarket sales through increasing its sales to retailers. Furthermore, because of the cost focus of major retailers, Automotive has been, and expects to continue to be, required to offer price concessions. Automotive's failure to maintain or increase aftermarket sales, or to offset the impact of any reduced sales or pricing through cost improvements, could have an adverse impact on its business and operating results. AUTOMOTIVE MAY BE UNABLE TO COMPETE FAVORABLY IN THE HIGHLY COMPETITIVE AUTOMOTIVE PARTS INDUSTRY. The automotive parts industry is highly competitive. Although the overall number of competitors has decreased due to ongoing industry consolidation, Automotive faces significant competition within each of its major product areas. The principal competitive factors are price, quality, service, product performance, design and engineering capabilities, new product innovation and timely delivery. For more information about the automotive parts industry, see "Description of Tenneco After the Spin-off/Automotive -- Overview of Automotive Parts Industry." Tenneco cannot assure you that Automotive will be able to continue to compete favorably in this competitive market or that increased competition will not have a material adverse effect on Automotive's business by reducing Automotive's ability to increase or maintain sales or profit margins. AUTOMOTIVE MAY BE UNABLE TO REALIZE ITS BUSINESS STRATEGY OF IMPROVING OPERATING PERFORMANCE. Automotive has either implemented or plans to implement several important strategic initiatives designed to improve its operating performance. The failure to achieve the goals of these initiatives could have a material adverse effect on Automotive's business, particularly since Automotive relies on these initiatives to offset pricing pressures from its customers, as described above. Tenneco cannot assure you that Automotive will be able to successfully implement or realize the expected benefits of any of these initiatives or that Automotive will be able to sustain improvements made to date. See "Description of Tenneco After the Spin-off/Automotive -- Business Strategy." AUTOMOTIVE IS SUBJECT TO RISKS RELATED TO ITS INTERNATIONAL OPERATIONS. Automotive has manufacturing and distribution facilities in many countries, principally in North America, Europe and Latin America, and sells its products worldwide. For 1998, about 48% of Automotive's revenues were derived from its operations outside North America. International operations are subject to various risks which could have a material adverse effect on those operations or Automotive's business as a whole, including: - exposure to local economic conditions; - exposure to local political conditions, including the risk of seizure of assets by foreign government; - currency exchange rate fluctuations; - controls on the repatriation of cash; and - export and import restrictions. 30 32 AUTOMOTIVE MAY BE UNABLE TO REALIZE SALES REPRESENTED BY ITS AWARDED BUSINESS. The realization of future sales from awarded business is inherently subject to a number of important risks and uncertainties, including as to the number of vehicles that Automotive's vehicle manufacturer customers will actually produce, the timing of that production and the mix of options that Automotive's vehicle manufacturer customers and consumers may choose. In addition, Automotive's customers generally have the right to replace Automotive with another supplier at any time for a variety of reasons. Accordingly, Automotive cannot assure you that it will in fact realize any or all of the future sales represented by its awarded business. EXCHANGE RATE FLUCTUATIONS COULD CAUSE A DECLINE IN AUTOMOTIVE'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS. As a result of its international operations, Automotive generates a significant portion of its net sales and incurs a significant portion of its expenses in currencies other than the U.S. dollar. To the extent Automotive is unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in that currency could have a material adverse effect on Automotive's business. For example, where Automotive has significantly more costs than revenues generated in a foreign currency, it is subject to risk if that foreign currency appreciates against the U.S. dollar because this appreciation effectively increases its costs in that country. Automotive generally seeks to mitigate the effect of exchange rate fluctuations through the use of foreign currency borrowings and derivative financial instruments, but cannot assure you that it will be successful in these efforts. The financial condition and results of operations of some of Automotive's operating entities are reported in foreign currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in Automotive's consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies will have a negative impact on Automotive's reported revenues and operating profit while depreciation of the U.S. dollar against these foreign currencies will have a positive effect on reported revenues and operating profit. Automotive does not generally seek to mitigate this translation effect through the use of derivative financial instruments. For more information about the impact of exchange rate fluctuations on Tenneco and Automotive, see "Management's Discussion and Analysis of Financial Conditions and Results of Operations" of Tenneco included in Tenneco's Current Report on Form 8-K dated August 20, 1999, which is incorporated by reference in this document. THE CYCLICALITY OF AUTOMOTIVE PRODUCTION AND SALES COULD CAUSE A DECLINE IN AUTOMOTIVE'S FINANCIAL CONDITION AND RESULTS. A decline in automotive sales and production would likely cause a decline in Automotive's sales to vehicle manufacturers, and could result in a decline in Automotive's results of operations and financial condition. The automotive industry has been characterized historically by periodic fluctuations in overall demand for vehicles due to, among other things, changes in general economic conditions and consumer preferences. These fluctuations generally result in corresponding fluctuations in demand for Automotive's products. The highly cyclical nature of the automotive industry presents a risk that is outside Automotive's control and that cannot be accurately predicted. LONGER PRODUCT LIVES OF AUTOMOTIVE PARTS ARE ADVERSELY AFFECTING AFTERMARKET DEMAND FOR SOME OF AUTOMOTIVE'S PRODUCTS. The average useful life of automotive parts has been steadily increasing in recent years due to innovations in products and technologies. The longer product lives allow vehicle owners to replace parts of their vehicles less often. As a result, a portion of sales in the aftermarket has been displaced. Additional increases in the average useful lives of automotive parts are likely to adversely affect the demand for Automotive's aftermarket products. Aftermarket sales represented approximately 39% of Automotive's net sales for 1998. See "Description of Tenneco After the Spin-off/Automotive -- Industry Trends." 31 33 THE HOURLY WORKFORCE IN THE AUTOMOTIVE INDUSTRY IS HIGHLY UNIONIZED AND AUTOMOTIVE'S BUSINESS COULD BE ADVERSELY AFFECTED BY LABOR DISRUPTIONS. Substantially all of the hourly employees of North American vehicle manufacturers are represented by the United Automobile, Aerospace and Agricultural Implement Workers of America under collective bargaining agreements. In addition, vehicle manufacturers and their employees in other countries are also subject to labor agreements. A work stoppage or strike at the production facilities of a significant customer, at Automotive's facilities or at a significant supplier could have an adverse impact on Automotive by disrupting demand for Automotive's products and/or Automotive's ability to manufacture its products. The contracts between the UAW and each of General Motors Corporation and Ford Motor Corporation expired in September 1999. The UAW has reached a tentative agreement on a four-year contract with General Motors Corporation. The contract between the UAW and Ford Motor Company has been extended pending ongoing negotiations between the UAW and Ford. Automotive cannot assure you that work stoppages or strikes will not occur as part of these contract negotiations. AUTOMOTIVE MAY INCUR MATERIAL PRODUCT WARRANTY COSTS. From time to time, Automotive receives product warranty claims from its customers. Vehicle manufacturers are increasingly requiring their outside suppliers to guarantee or warrant their products and to bear the costs of repair and replacement of these products under new vehicle warranties. Automotive cannot assure you that costs associated with providing product warranties will not be material. TENNECO CANNOT ASSURE YOU THAT AUTOMOTIVE WILL BE ABLE TO SUCCESSFULLY TRANSITION TO AN INDEPENDENT PUBLIC COMPANY. Upon completion of the spin-off, Tenneco's major operations will consist solely of Automotive. Automotive has never operated as a stand-alone company and has historically been able to rely, to some degree, on the earnings, assets and cash flow of Packaging's business for capital requirements and some administrative services. Accordingly, the pro forma consolidated financial statements for Tenneco included in this document may not necessarily reflect the results of operations and financial condition that would have been achieved if Automotive had operated independently during the periods presented. IF NOT FULLY RESOLVED, THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT AUTOMOTIVE'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Many computer software systems, as well as some hardware and equipment utilizing date-sensitive data, were designed to use two-digit date fields. Consequently, these systems, hardware and equipment will not be able to recognize dates properly beyond the year 1999. If Automotive is unable to complete on a timely and cost-efficient basis the remediation or replacement of critical systems or equipment not yet in compliance, or develop alternative procedures, or if Automotive's major suppliers, financial institutions or others with whom it conducts business are unsuccessful in implementing timely solutions, Year 2000 issues could have a material adverse effect on Automotive's financial condition and results of operations. This adverse effect could result from interruptions in Automotive's ability to manufacture its products, process and ship orders, and properly bill and collect accounts receivable. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Tenneco's Current Report in Form 8-K dated August 20, 1999. RISK FACTORS RELATING TO THE SPIN-OFF IF THE SPIN-OFF DOES NOT QUALIFY AS TAX-FREE, AUTOMOTIVE AND PACKAGING COULD BE ADVERSELY AFFECTED BY THE RESULTING CORPORATE TAX LIABILITY. If the spin-off does not qualify as a tax-free distribution for U.S. federal income tax purposes, then, in general, a very substantial corporate tax would be payable by the consolidated tax group of which Tenneco is the common parent. Each member of Tenneco's consolidated group, including Packaging, would be 32 34 severally liable for that tax. Packaging and Automotive will enter into a tax sharing agreement in connection with the spin-off regarding the allocation and, in some circumstances, sharing of that potential tax liability between them. See "The Spin-off -- Relationship Between Automotive and Packaging After the Spin-off." If the spin-off did not qualify as a tax-free distribution, the resulting tax liability would have a material adverse effect on the financial condition and, as such, business of Packaging and/or Automotive. Tenneco has received a letter ruling from the Internal Revenue Service to the effect that, among other things, the spin-off will qualify as a tax-free distribution and accordingly will not be taxable to Tenneco or its stockholders. The ruling is based upon various factual representations and assumptions. If any of those factual representations and assumptions were untrue or incomplete in a material respect, or the facts upon which that ruling is based are materially different from the facts at the time of the spin-off, the spin-off could become taxable to Tenneco or its stockholders. If the spin-off does not qualify as tax- free for these reasons, your exchange of original securities for new securities would become taxable for U.S. federal income tax purposes. See "-- Risk Factors if You Exchange." Furthermore, if the spin-off otherwise qualifies as a tax-free distribution but there is a change in control of Packaging or Automotive that is considered part of a plan or a series of transactions related to the spin-off, Tenneco -- which after the spin-off will be Automotive -- would incur a very substantial tax liability on the distribution of Packaging common stock to its stockholders. Packaging would be responsible for this resulting tax liability in the case of a Packaging change of control, and Automotive would be responsible for this resulting tax liability in the case of an Automotive change of control. In these circumstances, however, securityholders of Automotive and Packaging would not recognize gain or loss as a result of the spin-off. See "U.S. Federal Income Tax Consequences." PACKAGING AND AUTOMOTIVE COULD BE ADVERSELY AFFECTED IF THE SPIN-OFF, THE CORPORATE RESTRUCTURING TRANSACTIONS OR THE DEBT REALIGNMENT ARE NOT VALID UNDER FRAUDULENT TRANSFER OR LEGAL DIVIDEND STATUTES. In connection with the spin-off, Tenneco will undertake numerous corporate restructuring transactions and realign its debt, which, along with the spin-off, are subject to federal and state fraudulent conveyance laws. Under these laws, if a court determines that one of the parties to these transactions did not receive fair consideration and, at the time, was insolvent, had unreasonably small capital or was unable to pay its debts as they came due, the court could reverse the transactions or the spin-off or impose liability on the parties. The resulting complications and costs could have a material adverse effect on Packaging and Automotive. In addition, the corporate restructuring transactions, debt realignment and spin-off are subject to state corporate distribution statutes. For example, under Delaware law, a corporation may only pay dividends to its stockholders either: (1) out of its surplus, calculated as net assets minus capital; or (2) if there is no surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year, subject to some restrictions. Although all distributions are intended to be made entirely from surplus, Tenneco and Packaging cannot assure you that a court will not later determine that the spin-off, one or more of the corporate restructuring transactions or the debt realignment was unlawful under state corporate law. This could allow the court to reverse the transactions. The resulting complications and costs could have a material adverse effect on Packaging and Automotive. 33 35 FORWARD-LOOKING STATEMENTS This document contains forward-looking statements. The words "will," "may," "designed to," "outlook," "believes," "should," "anticipates," "plans," "expects," "intends" and "estimates," and similar expressions, identify these forward-looking statements. These forward-looking statements are contained principally under the headings "Summary," "Risk Factors," "The Spin-off," "Description of Packaging" and "Description of Tenneco After the Spin-off/Automotive." Although Tenneco and Packaging believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, these expectations may not prove to be correct. Because these forward-looking statements are also subject to risks and uncertainties, actual results may differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include those described in "Risk Factors," as well as: - general economic, business and market conditions; - operating hazards associated with the Packaging or Automotive business; - changes in automobile manufacturers' actual and forecasted requirements for Automotive's products; - labor disruptions at Packaging, Automotive or any of their significant customers or suppliers; - customer acceptance of new products; - capital availability or costs, including changes in interest rates or market perceptions of Packaging or Automotive; - changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies; - the impact of laws and regulations, including environmental laws and regulations; and - the occurrence or non-occurrence of circumstances beyond the control of Tenneco or Packaging. 34 36 WHERE YOU CAN FIND MORE INFORMATION Packaging has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 covering the offering of the new securities. Packaging has also filed with the Commission a registration statement under the Securities Exchange Act of 1934 covering its common stock, which will be distributed to Tenneco stockholders in the spin-off. This document does not contain all of the information included in these registration statements and their associated exhibits and schedules. For more information about Packaging and the new securities, you should read these registration statements and their associated exhibits and schedules. This document summarizes provisions of contracts and other documents that it refers you to. If Packaging has filed any contract or other document as an exhibit to the registration statement covering the new securities, you should read the exhibit for a more complete understanding of the contract or document involved. Each statement in this document summarizing the provisions of a contract or other document is qualified in all respects by reference to the actual document. Tenneco files annual, quarterly and other reports, proxy statements and other information with the SEC. Following the spin-off, Packaging also will file periodic reports, proxy statements and other information with the SEC. You may read and copy Tenneco's and Packaging's filings with the SEC at the public reference rooms at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may also obtain copies of those filings at prescribed rates by (a) calling the SEC at 1-800-SEC-0330, or (b) writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also access the filings electronically on the SEC's website at http://www.sec.gov. Because Tenneco's common stock is listed on the New York, Chicago and Pacific Stock Exchanges, you may review reports and other information concerning Tenneco at these exchanges. Application will be made to list Packaging's common stock on the NYSE, and you may review reports and other information concerning Packaging at the NYSE, 20 Broad Street, New York, New York 10005. In addition, Tenneco maintains a website where you can find information about Tenneco, Packaging and Automotive at http://www.tenneco.com. INCORPORATION OF INFORMATION BY REFERENCE The SEC allows "incorporation by reference" of information filed with the SEC into this document. This means that Tenneco and Packaging can disclose important information to you by referring you to those documents. The information incorporated by reference is considered part of this prospectus, except that information filed in later-dated documents will automatically update and supersede the information contained in earlier-dated documents. The following documents filed with the Commission by Tenneco, File No. 1-12387, or Packaging, File No. 1-15157, as applicable, are incorporated by reference into this document and shall be deemed to be a part hereof: (a) Tenneco's Annual Report on Form 10-K for the fiscal year ended December 31, 1998; (b) Tenneco's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999 and Quarterly Report on Form 10, for the fiscal quarter ended June 30, 1999, as amended; (c) Tenneco's Definitive Proxy Statement for the Annual Meeting of Stockholders held on May 11, 1999 and the Special Meeting of Stockholders to be held on October 25, 1999; (d) Tenneco's Current Report on Form 8-K dated April 12, 1999; (e) Tenneco's Current Report on Form 8-K dated July 14, 1999; 35 37 (f) Tenneco's Current Report on Form 8-K dated August 20, 1999, which includes financial and other information that supersedes the comparable information in Tenneco's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, Tenneco's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1999 and June 30, 1999 and Tenneco's Current Report on Form 8-K dated July 14, 1999; (g) Tenneco's Current Report on Form 8-K dated October 4, 1999, as amended; and (h) All documents subsequently filed by Tenneco or Packaging pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this document and prior to the termination of the offering of the new securities. Notwithstanding any disclosure to the contrary in documents incorporated by reference, no safe harbor protection under Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934 extends to forward-looking statements that appear in this document directly or by incorporation. 36 38 THE EXCHANGE OFFERS AND CONSENT SOLICITATION Tenneco is offering to exchange Packaging's new securities for any and all of Tenneco's original securities that are validly tendered before the applicable expiration time and not withdrawn. The terms and conditions of these exchange offers are described in this document and in the accompanying letter of consent/transmittal. Concurrently with the exchange offers, Tenneco is soliciting consents from the holders of the original securities to the proposed amendments to the original indenture. Tenneco will accept tenders of original securities only in principal amounts of $1,000 or integral multiples of $1,000. If you hold original securities, you may participate in the exchange offers by following the procedures described in this document. If you tender original securities, you will be required, as a condition to a valid tender, to consent to the proposed amendments with respect to the original securities you tendered. Your proper tender of original securities will constitute your automatic consent to the proposed amendments and to the execution of a supplement to the original indenture to effect the proposed amendments. See "-- The Consent Solicitation." TERMS OF THE EXCHANGE OFFERS Subject to the terms and conditions described in this document and in the accompanying letter of consent/transmittal, for each $1,000 principal amount of original securities validly tendered and accepted for exchange, Tenneco is offering (1) $1,000 principal amount of the corresponding new securities if for holders who validly tender their original securities before the consent solicitation expires, as shown in the applicable column of the table below, or (2) $980 principal amount of the corresponding new securities for holders who validly tender their original securities after the consent solicitation expires but before the applicable exchange offer expires, as shown in the applicable column of the table below. Notwithstanding the foregoing, Tenneco will only issue new securities with principal amounts of $1,000 or integral multiples of $1,000. Tenneco will: (1) aggregate the new securities to which a tendering registered holder would otherwise be entitled; (2) round this amount down to the nearest $1,000 and issue new securities to that holder in the rounded amount; and (3) compensate that holder for this rounding by paying cash in an amount equal to the principal amount of the fractional new security.
AGGREGATE PRINCIPAL DESCRIPTION OF DESCRIPTION OF TENNECO CUSIP NO.* AMOUNT TENNECO'S ORIGINAL SECURITIES PACKAGING'S NEW SECURITIES - ---------- --------- ----------------------------- -------------------------- 88037 EAA9 $299,690,000 6.70% Notes due 2005 7.20% Notes due 2005 88037 EAB7 $276,794,000 7.45% Debentures due 2025 7.95% Debentures due 2025 88037 OBQ3 $100,000,000 7 1/2% Notes due 2007 8% Notes due 2007 88037 EAH4 $300,000,000 7 5/8% Debentures due June 15, 8 1/8% Debentures due June 15, 2017 2017 88037 OBR1 $200,000,000 7 7/8% Debentures due 2027 8 3/8% Debentures due 2027 PRINCIPAL AMOUNT OF NEW SECURITIES PER $1,000 OF ORIGINAL SECURITIES: ------------------------------------- IF TENDER IS MADE IF TENDER IS MADE BEFORE CONSENT AFTER CONSENT SOLICITATION SOLICITATION CUSIP NO.* EXPIRES EXPIRES* - ---------- ----------------- ----------------- 88037 EAA9 $1,000 $ 980 88037 EAB7 $1,000 $ 980 88037 OBQ3 $1,000 $ 980 88037 EAH4 $1,000 $ 980 88037 OBR1 $1,000 $ 980
- --------------- * The terms of the exchange offers shall not be affected by any defect in or omission of CUSIP numbers. ** The valid tender must be received before the applicable exchange offer expires. See description above regarding payment of cash in lieu of a fractional interest in new securities. In each case, Tenneco will pay accrued but unpaid interest on the original securities exchanged in the exchange offers through the date Tenneco accepts them for exchange. In general, this payment will be made to the holder who tendered the original securities. If, however, Tenneco accepts for exchange any series of original securities on or before an interest payment date for that series but after the record date for that interest payment date, Tenneco will pay the accrued but unpaid interest to the holder of those original securities as of that record date, if different from the holder who tenders. Interest will cease to accrue on original securities exchanged in the exchange offers from and after the date Tenneco accepts them. Interest on the new securities will accrue at the applicable rate from and including their issuance date. 37 39 Tenneco reserves the right, in its sole discretion, to purchase or make offers to purchase any original securities that remain outstanding after the exchange offers on terms that could differ from the terms of the exchange offers. Tenneco will not make any purchase or offer except in accordance with applicable law. After the exchange offers, Tenneco will extinguish the original securities accepted by it for exchange. THE CONSENT SOLICITATION As part of the exchange offers, Tenneco is soliciting consents to proposed amendments to the original indenture under which Tenneco issued the original securities. Tenneco is making the consent solicitation on the terms and subject to the conditions described in this document. See "The Proposed Amendments." YOUR VALID TENDER OF ORIGINAL SECURITIES BEFORE THE EARLY EXCHANGE TIME WILL CONSTITUTE AN AUTOMATIC CONSENT TO THE PROPOSED AMENDMENTS WITH RESPECT TO THOSE ORIGINAL SECURITIES. YOU MAY NOT DELIVER CONSENTS WITHOUT TENDERING YOUR ORIGINAL SECURITIES AND YOU MAY NOT REVOKE CONSENTS WITHOUT WITHDRAWING THE RELATED ORIGINAL SECURITIES FROM THE EXCHANGE OFFERS. SEE "-- WITHDRAWAL RIGHTS." To amend the original indenture, Tenneco must receive consents from the registered holders of at least a majority in aggregate principal amount of all series of outstanding securities issued under the original indenture, excluding securities held at the time by Tenneco or its affiliates, voting as a single class. The aggregate principal amount of securities outstanding under the original indenture is $2,459,848,000, which comprises $1,176,484,000 of original securities that are subject to the exchange offers and $1,283,364,000 of other debt securities that are subject to Tenneco's concurrent cash tender offers. Tenneco is making the cash tender offers by means of a separate offer to purchase and consent solicitation document. To participate in the cash tender offers, holders will be required to consent to the proposed amendments. Tenneco will make no separate payments for consents received in the consent solicitation. If the proposed amendments to the original indenture become effective, they will bind all original securities that remain outstanding after the exchange offers, even if the holder of those securities did not consent to the proposed amendments. Accordingly, you could suffer adverse consequences if you choose not to tender your original securities. See "Risk Factors -- Risk Factors if You Do Not Exchange." EXPIRATION TIME; EARLY EXCHANGE TIME; EXTENSIONS; TERMINATION; AMENDMENTS Each of the exchange offers will commence at 9:00 a.m., New York City time, on , 1999 and will expire at 5:00 p.m., New York City time, , 1999, unless Tenneco extends any exchange offer in its sole discretion. As used in this document, the term "expiration time" refers to 5:00 p.m., New York City time, on , 1999 or, if an exchange offer is extended, the latest date and time to which that exchange offer is extended. Each exchange offer is subject to Tenneco's right, in its sole discretion, to the extent that it is legally permitted to do so, to terminate or amend any exchange offer at any time as discussed below. The consent solicitation will expire at 5:00 p.m., New York City time, on , 1999, unless Tenneco extends the consent solicitation in its sole discretion. As used in this document, the term "early exchange time" refers to 5:00 p.m., New York City time, on , 1999 or, if extended, the latest date and time to which the consent solicitation is extended. The consent solicitation is subject to Tenneco's right, in its sole discretion, to the extent that it is legally permitted to do so, to terminate or amend the consent solicitation at any time as discussed below. 38 40 Tenneco expressly reserves the right, in its sole discretion, subject to applicable law, at any time or from time to time, to: - terminate any of the exchange offers or the consent solicitation and not accept for exchange any original securities if any of the conditions provided below under "-- Conditions to the Exchange Offers and Consent Solicitation" are not satisfied and are not waived by Tenneco; - waive any condition to any exchange offer and accept all original securities previously tendered for exchange pursuant to that exchange offer or waive any condition to the consent solicitation; - extend the expiration time of any of the exchange offers or the early exchange time and retain all original securities tendered in that exchange offer, subject, however, to any withdrawal rights of holders, as described under "-- Withdrawal Rights;" - amend any exchange offer in any respect until the original securities are accepted for exchange; - amend the consent solicitation in any respect until the withdrawal time; and/or - not accept original securities tendered pursuant to an exchange offer at any time before the expiration time for that exchange offer as a result of an invalid tender, withdrawal or the occurrence of other events as described herein. The exchange agent may retain your tendered original securities if Tenneco (a) extends any exchange offer or the consent solicitation, (b) delays the acceptance of original securities for exchange, or (c) is unable to accept original securities for exchange pursuant to any exchange offer. You may not withdraw those original securities, except to the extent you are entitled to withdrawal rights as described under "-- Withdrawal Rights." However the exchange agent's right to retain your tendered securities in these circumstances is subject to Rule 14e-1(c) under the Securities Exchange Act of 1934. Rule 14e-1(c) requires that a bidder pay the consideration offered or return the securities deposited by or on behalf of holders of securities promptly after the termination or withdrawal of a tender offer. Tenneco can extend, terminate or amend any of the exchange offers or the consent solicitation by giving written or oral notice to the exchange agent, which will be followed as promptly as practicable by a public announcement. In the case of an extension, a public announcement will be issued before 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration time of the exchange offer(s) being extended or the previously scheduled early exchange time, as applicable. Tenneco will have no obligation to publish, advertise or otherwise communicate a public announcement regarding extension, amendment or termination other than by making a release to the Dow Jones News Service or otherwise as required by law. All original securities tendered pursuant to an exchange offer before any extension and not subsequently withdrawn will remain subject to that exchange offer. The terms of any extension or amendment of any exchange offer or the consent solicitation may vary from the original exchange offers and consent solicitation depending on factors such as prevailing interest rates and the principal amount of original securities previously tendered. If Tenneco amends the terms of any exchange offer before its expiration time, the amendment will apply to all original securities of the same series tendered pursuant to that exchange offer but will not, unless expressly provided, apply to any other exchange offer. Tenneco does not presently intend to change the consideration currently offered. If Tenneco makes a material change in the terms of any exchange offer or the information concerning any exchange offer or waives any condition of any exchange offer that results in a material change to the circumstances of that exchange offer, Tenneco will circulate additional exchange offer materials if and to the extent required by applicable law. In those circumstances, Tenneco will also extend the exchange offer if and to the extent required by applicable law in order to permit holders of the original securities subject to that exchange offer adequate time to consider the additional materials. If Tenneco makes a material change in the terms of the consent solicitation or the information concerning the consent solicitation or waives any condition of the consent solicitation that results in a material change to the circumstances of the consent solicitation, Tenneco will circulate additional consent solicitation materials if and to the extent required by applicable law. In those circumstances, Tenneco will 39 41 also extend the consent solicitation if and to the extent required by applicable law to allow holders of the original securities adequate time to consider the additional materials. If any material change occurs after the withdrawal time, Tenneco may decide to re-solicit consents. If Tenneco decreases the principal amount of original securities sought in any exchange offer or increases or decreases the consideration offered to holders of original securities subject to any exchange offer, Tenneco will, to the extent required by applicable law, cause that exchange offer to be extended so that it remains open at least ten business days from the date that Tenneco first publishes, sends or gives notice of the change. For purposes of this paragraph, "business day" has the meaning set forth in Rule 14d-1(e)(6) under the Securities Exchange Act of 1934. The minimum period that an exchange offer or the consent solicitation must remain open following any other material change in the terms of or information concerning the exchange offer or consent solicitation depends upon the facts and circumstances, including the relative materiality of those terms or information. EFFECT OF TENDER Your tender of original securities in the exchange offers will constitute a binding agreement between you and Tenneco upon the terms and subject to the conditions of the exchange offers described in this document and the accompanying letter of consent/transmittal. Your tender of original securities will also constitute your agreement to deliver to Tenneco good and marketable title to the tendered original securities free and clear of all liens, charges, adverse claims, encumbrances, interests and restrictions of any kind. ACCEPTANCE OF CONSENTS AND ORIGINAL SECURITIES; DELIVERY OF EXCHANGE CONSIDERATION Tenneco will purchase by accepting for exchange and will promptly pay for all original securities validly tendered and not withdrawn or, if withdrawn, validly retendered, in the exchange offers and the consent solicitation. This purchase and payment will be made only upon the terms and subject to the conditions of each exchange offer, the consent solicitation, the terms and conditions of any extension or amendment and applicable law. Tenneco will make payment for the original securities by depositing with the exchange agent: (1) new securities in book-entry form, as described below; (2) cash to be paid for any fractional interest in new securities; and (3) cash for the payment of any applicable accrued but unpaid interest on original securities. The exchange agent will act as agent for the tendering holders for the purpose of receiving payments and/or new securities from Tenneco and then transmitting payments and/or new securities to or at the direction of those holders. New securities will be issued and delivered only in book-entry form through The Depository Trust Company to the DTC account of the exchanging holder or the exchanging holder's custodian. You must specify on the accompanying letter of consent/transmittal the DTC participant and account information to which your new securities should be delivered. For purposes of the exchange offers, Tenneco will be deemed to have accepted tendered original securities for exchange when Tenneco gives oral or written notice of acceptance to the exchange agent. For purposes of the consent solicitation, consents received by the exchange agent will be deemed to have been accepted when (1) Tenneco and the trustee under the original indenture execute the supplemental indenture containing the proposed amendments, which is expected to occur promptly after the withdrawal time, and (2) Tenneco has accepted the tendered original securities underlying those consents for exchange in the exchange offer. Subject to Rule 14e-1(c) under the Securities Exchange Act of 1934, Tenneco may delay acceptance of original securities tendered for exchange or payment for original securities accepted for exchange if any of the conditions of the exchange offers are not satisfied or waived or in order to comply, in whole or in part, with applicable law. Tenneco may do this in its sole discretion. Tenneco will pay for original securities accepted for exchange only after the exchange agent receives, at its address on the back cover page of this document: (1) certificates for all physically delivered original securities in proper form for transfer or confirmation of a book-entry transfer of original securities into the exchange agent's account at DTC according to the procedures described in this document; (2) a properly completed and duly executed 40 42 letter of consent/transmittal or properly transmitted "agent's message," as described below; and (3) any other documents required by the accompanying letter of consent/transmittal, in each case together with any applicable signature guarantees. IN NO EVENT WILL INTEREST ACCRUE OR BE PAID TO HOLDERS BY REASON OF ANY DELAY ON THE PART OF THE EXCHANGE AGENT IN MAKING PAYMENTS TO HOLDERS. INTEREST ON THE ORIGINAL SECURITIES WILL CEASE TO ACCRUE ON AND AFTER THE ISSUANCE DATE FOR THE RELATED NEW SECURITIES. If Tenneco does not accept any of your tendered original securities for exchange, or if you submit to the exchange agent original securities in a principal amount greater than the principal amount indicated as being tendered, Tenneco will issue to you an original security for the principal amount not accepted for exchange or tendered. Tenneco will issue the original security in the same form as it was originally tendered. Tenneco will do this without expense to you as promptly as practicable following the expiration or termination of the exchange offers. Tenneco may transfer or assign, in whole at any time or in part from time to time, to one or more of its affiliates, the right to acquire original securities tendered in any exchange offer. No transfer or assignment will relieve Tenneco of its obligations under that exchange offer or prejudice your rights to receive new securities and any applicable accrued interest in exchange for original securities validly tendered and accepted for exchange in that exchange offer. PROCEDURES FOR TENDERING ORIGINAL SECURITIES AND GIVING CONSENTS If you hold original securities and wish to receive $1,000 principal amount of applicable new securities for each $1,000 principal amount of original securities, you must validly tender your original securities using the procedures described in this document and in the accompanying letter of consent/transmittal before the early exchange time. Your proper tender of original securities will constitute your automatic consent to the proposed amendments. If you hold original securities and wish to receive $980 principal amount of applicable new securities for each $1,000 principal amount of original securities, you must validly tender your original securities using the procedures described in this document and in the accompanying letter of consent/transmittal after the early exchange time, but before the applicable expiration time. See "Terms of the Exchange Offers" for a description of how Tenneco will pay cash in lieu of interests in new securities of less than $1,000. Only registered holders are authorized to tender their original securities and consent to the proposed amendments. The procedures by which original securities may be tendered and consents given by beneficial owners that are not registered holders will depend upon the manner in which the original securities are held, as described below. TENDER OF ORIGINAL SECURITIES HELD THROUGH A NOMINEE. If you are a beneficial owner of original securities that are held of record by a custodian bank, depositary, broker, trust company or other nominee and you wish to tender original securities, you should contact the record holder promptly and instruct the record holder to tender the original securities and deliver a consent on your behalf using one of the procedures described in this document. A letter of instructions is contained in the solicitation materials provided with this document which you may use to instruct the record holder to tender original securities and deliver consent. TENDER OF ORIGINAL SECURITIES HELD WITH DTC. Pursuant to authority granted by DTC, if you are a DTC participant that has original securities credited to your DTC account and thereby held of record by DTC's nominee, you may directly tender those original securities and deliver consents as if you were the record holder. Because of this, references in this document to registered or record holders include DTC participants with original securities credited to their accounts. Within two business days after the date of this document, the exchange agent will establish accounts with respect to the original securities at DTC for purposes of the exchange offers. Any participant in DTC may tender original securities and deliver consents by: - effecting a book-entry transfer of all original securities to be tendered in the exchange offers into the account of The Chase Manhattan Bank, as exchange agent, at DTC, using DTC's procedures for transfer; and 41 43 - either (1) effecting an agent's message, as described below, or (2) completing and signing the accompanying letter of consent/transmittal according to the instructions and delivering it, together with any signature guarantees and other required documents, to the exchange agent at its address on the back cover page of this document. Timely book-entry delivery requires receipt by the exchange agent of a book-entry confirmation confirming the book-entry transfer of original securities into the exchange agent's account at DTC. The book-entry confirmation must be received by the exchange agent before (1) the early exchange time to receive $1,000 principal amount of applicable new securities for each $1,000 principal amount of original securities, or (2) the applicable expiration time to receive $980 principal amount of applicable new securities for each $1,000 principal amount of original securities, subject to the provisions for paying cash in lieu of fractional interests in new securities. Even if delivery of original securities is effected through book-entry transfer into the exchange agent's account at DTC, an agent's message or a completed letter of consent/transmittal or a facsimile thereof, together with any required signature guarantees and other required documents, must be delivered or transmitted to and received by the exchange agent at its address on the back cover page of this document before (1) the early exchange time to receive $1,000 principal amount of applicable new securities for each $1,000 principal amount of original securities, or (2) the applicable expiration time to receive $980 principal amount of applicable new securities for each $1,000 principal amount of original securities, subject to the provisions regarding payment of cash in lieu of fractional interests in new securities. See "Terms of the Exchange Offers" for a description of how Tenneco will pay cash in lieu of interests in new securities of less than $1,000. A tender of original securities for exchange will not be considered valid until these items are received by the exchange agent. Delivery of a letter of consent/transmittal or other documents to DTC will not be considered a valid delivery to the exchange agent. If a holder tenders after the early exchange time, the holder could become entitled to a cash payment in lieu of any fractional interest in new securities. Because Tenneco will aggregate the new securities to which a tendering registered holder is entitled before making any such cash payment, registered holders should in that case submit a separate tender for each of their beneficial owners. THIS SHOULD BE DONE ONLY IF A TENDER IS BEING MADE AFTER THE EARLY EXCHANGE TIME. The exchange agent and DTC have confirmed that the exchange offers are eligible for DTC's Automated Tender Offer Program. Accordingly, DTC participants may electronically transmit their acceptance of any exchange offer and thereby provide consent to the proposed amendments with respect to the original securities tendered, by causing DTC to transfer original securities to the exchange agent using DTC's Automated Tender Offer Program procedures for transfer. DTC will then send an agent's message to the exchange agent. This electronic acceptance will be in lieu of completing, signing and delivering the letter of consent/transmittal. An "agent's message" is a message which states that DTC has received an express acknowledgment from a DTC participant tendering original securities that the participant has received and agrees to be bound by the terms of the letter of consent/transmittal and that Tenneco may enforce the agreement against the participant. The agent's message is transmitted by DTC to, and received by, the exchange agent and forms a part of the book-entry confirmation. All of the original securities held through DTC have been issued in the form of global notes registered in the name of Cede & Co., DTC's nominee. Upon consummation of the exchange offers, the aggregate principal amounts of these global notes will be reduced to represent the aggregate principal amount of original securities not tendered and accepted. TENDER OF ORIGINAL SECURITIES HELD IN PHYSICAL FORM. If you hold original securities in physical form, you must comply with the following instructions to tender original securities in the exchange offers: - complete and sign the accompanying letter of consent/transmittal according to its instructions; and - deliver the following to the exchange agent at the address on the back cover page of this document before the early exchange time or expiration time, as applicable -- (1) a properly completed and duly executed letter of consent/transmittal or a facsimile thereof, with any required signature 42 44 guarantees, (2) any other documents required by the letter of consent/transmittal, and (3) the original securities in physical form suitable for transfer. To validly tender original securities that are not registered in your name, you must follow special instructions described below under "-- Proper Execution and Delivery of Letters of Consent/Transmittal." LETTERS OF CONSENT/TRANSMITTAL AND PHYSICAL SECURITIES MUST BE SENT ONLY TO THE EXCHANGE AGENT. DO NOT SEND LETTERS OF CONSENT/TRANSMITTAL OR PHYSICAL SECURITIES TO TENNECO, PACKAGING, THE INFORMATION AGENT, DTC OR THE DEALER MANAGERS. THE EXCHANGE OFFERS AND CONSENT SOLICITATION DO NOT PROVIDE FOR THE TENDERING OF ORIGINAL SECURITIES OR THE DELIVERY OF CONSENTS BY USE OF A NOTICE OF GUARANTEED DELIVERY. PROPER EXECUTION AND DELIVERY OF LETTERS OF CONSENT/TRANSMITTAL. If you wish to participate in the exchange offers or consent solicitation, delivery of your original securities, signature guarantees and the other required documents are your responsibility. Delivery is not complete until the required items are actually received by the exchange agent. If you mail these items, Tenneco recommends that you (1) use registered mail with return receipt requested, properly insured, and (2) mail the required items sufficiently in advance of the early exchange time or expiration time, as desired, to allow enough time to ensure timely delivery. Except as otherwise provided below, all signatures on a letter of consent/transmittal or a notice of withdrawal must be guaranteed by a recognized participant in the Securities Transfer Agents Medallion Program, the NYSE Medallion Signature Program or the Stock Exchange Medallion Program. Signatures on a letter of consent/transmittal need not be guaranteed if: - the letter of consent/transmittal is signed by the registered physical holder(s) of the original securities or by a participant in DTC whose name appears on a security position listing as the owner of the original securities and the holder(s) have not completed the portion entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of consent/transmittal; or - the original securities are tendered for the account of an "eligible institution." See Instruction 2 in the letter of consent/transmittal. An "eligible institution" is one of the following firms or other entities identified in Rule 17Ad-15 under the Securities Exchange Act of 1934, as the terms are defined in the Rule: (a) a bank; (b) a broker, dealer, municipal securities dealer, municipal securities broker, government securities dealer or government securities broker; (c) a credit union; (d) a national securities exchange, registered securities association or clearing agency; or (e) a savings institution. If the letter of consent/transmittal is signed by the registered holder(s) of original securities tendered, the signature(s) must correspond with the name(s) as written on the face of the original securities without alteration, enlargement or any change whatsoever. If any of the original securities tendered are held by two or more registered holders, all of the registered holders must sign the letter of consent/transmittal. If any of the original securities are registered in different names on different original securities, the holders must complete, sign and submit as many separate letters of consent/transmittal as there are different registrations of certificates. In the following cases, the certificates for original securities that are tendered must be endorsed or accompanied by an appropriate instrument of transfer, signed exactly as the name of the registered owner appears on the certificates, with the signatures on the certificates or instruments of transfer guaranteed: - if new securities issued in the exchange offers are to be registered in the name of, or payments are to be made to, a person other than the person whose signature is on the letter of consent/ transmittal; - if original securities that are not exchanged are to be returned to a person other than the registered owner; or - if a letter of consent/transmittal is signed by a person other than the registered holder(s) of the original securities tendered. 43 45 In addition, a tender of original securities before the early exchange time by someone other than the registered holder must be accompanied by either a valid proxy of, or a consent signed by, the registered holder(s). This is because original securities may not be tendered before the early exchange time without also delivering a consent with respect to those original securities, and only registered holders are entitled to deliver consents. The signature on the proxy or consent must be guaranteed. Tenneco will not accept any alternative, conditional, irregular or contingent tenders. By executing the letter of consent/transmittal or facsimile thereof or transmitting an agent's message, you waive any right to receive any notice of the acceptance of your original securities for exchange. You should indicate in the applicable box in the letter of consent/transmittal the name and address to which payments, certificates evidencing original securities for amounts not exchanged or not tendered are to be issued or sent, if different from yours. To issue securities in a different name, the exchange agent must receive the employer identification or social security number of the new person named and a Substitute Form W-9 for this new person must be completed. If you do not give these instructions, payments and original securities not exchanged will be delivered to the registered holder of original securities tendered at the address listed in the register maintained by the trustee for those original securities. In the case of original securities tendered by book-entry transfer into the exchange agent's account at DTC, the original securities will be credited to the account maintained at DTC from which the original securities were delivered. DETERMINATION OF VALIDITY. Tenneco will determine, in its sole discretion, all questions as to the validity, form, eligibility, time of receipt, acceptance and withdrawal of tendered original securities using the procedures described above. Tenneco's determination will be final and binding. Tenneco reserves the absolute right to reject any or all tenders of original securities determined by it not to be in proper form or the acceptance of which may be unlawful in the opinion of counsel for Tenneco. Tenneco also reserves the absolute right, in its sole discretion, subject to applicable law, to waive any defects or irregularities of any tender of original securities, whether or not similar defects or irregularities are waived in the case of other tendered securities. Tenneco's interpretation of the terms and conditions of the exchange offers, including the instructions in the letter of consent/transmittal, will be final and binding. Tenneco, the exchange agent, the information agent, DTC and the dealer managers are not under any duty to notify you of defects in your tender and will not be liable if they fail to so notify you. Unless waived, you must cure any irregularities in your tender within the time Tenneco determines. Your tender of original securities will not be considered valid until those irregularities have been cured or waived. The exchange agent will return any original securities that are not properly tendered if the irregularities have not been cured or waived. The original securities will be returned to you, unless otherwise provided in the letter of consent/transmittal, as soon as practicable following the applicable expiration time. TRANSFER TAXES. Tenneco will pay all transfer taxes, if any, applicable to the transfer and sale of original securities to Tenneco in the exchange offers. If transfer taxes are imposed for any other reason, the amount of those transfer taxes, whether imposed on the registered holder or any other persons, will be payable by the tendering holder. Other reasons transfer taxes could be imposed include: (a) if substitute original securities for original securities not exchanged are to be delivered to, or new securities or substitute original securities are to be registered or issued in the name of, any person other than the registered holder of the original securities tendered, or (b) if tendered original securities are registered in the name of any person other than the person signing the letter of consent/transmittal. If satisfactory evidence of payment of or exemption from those transfer taxes is not submitted with the letter of consent/transmittal, the amount of those transfer taxes will be billed directly to the tendering holder. BACKUP U.S. FEDERAL INCOME TAX WITHHOLDING. U.S. federal income tax law requires that a holder of original securities that are accepted for exchange provide the exchange agent, as payer, with the holder's correct taxpayer identification number or otherwise establish a basis for an exemption from backup U.S. federal income tax withholding. In the case of a holder who is an individual, other than a resident alien, this identification number is his or her social security number. For holders other than individuals, the identification number is an employer identification number. Exempt holders, including, among others, all corporations and certain foreign individuals, are not subject to these backup withholding and reporting 44 46 requirements. If you do not provide the exchange agent with your correct taxpayer identification number or an adequate basis for an exemption, you may be subject to backup withholding on payments made in exchange for any original securities and a penalty imposed by the IRS. Backup withholding is not an additional federal income tax. Rather, the amount of tax withheld will be credited against the federal income tax liability of the holder subject to backup withholding. If withholding results in an overpayment of taxes, you may obtain a refund from the IRS. You should consult with a tax advisor regarding qualifications for exemption from backup withholding and the procedure for obtaining the exemption. To prevent backup withholding, you must provide your correct taxpayer identification number by completing the IRS Substitute Form W-9 provided in the letter of consent/transmittal and provide either (a) your correct taxpayer identification number and other information under penalties of perjury, or (b) an adequate basis for an exemption. For a discussion of other federal income tax consequences of the exchange offers, see "U.S. Federal Income Tax Consequences." CONDITIONS TO THE EXCHANGE OFFERS AND CONSENT SOLICITATION Notwithstanding any other provision, extension or amendment of the exchange offers or consent solicitation, and in addition to, and not in limitation of, Tenneco's rights to extend or amend any exchange offer or the consent solicitation at any time in its sole discretion, Tenneco will not be required to accept, exchange or make any payment for any original securities tendered for exchange and may terminate any exchange offer and the consent solicitation if, at or before the applicable expiration time: - Tenneco does not receive the required consents or Tenneco and the trustee under the original indenture have not executed and delivered the supplemental indenture providing for the proposed amendments in the manner described in this document; - all conditions to Tenneco's concurrent cash tender offers have not been satisfied; - any condition to any other component of the debt realignment remains unsatisfied; - any material condition to the spin-off of Packaging remains unsatisfied, other than completion of the debt realignment; - any action has been taken or threatened, or any statute, rule, regulation, judgment, order, stay, decree or injunction has been promulgated, enacted, entered, enforced or deemed applicable to the spin-off or any transaction undertaken in connection with the spin-off, including the debt realignment, exchange offers and cash tender offers (collectively, the "transactions"), by or before any court or governmental, regulatory or administrative agency or authority or tribunal, domestic or foreign, which either: -- challenges the making of any of these transactions or could reasonably be expected to directly or indirectly prohibit, prevent, restrict or delay consummation of any of these transactions or otherwise adversely affects in any material manner any component of these transactions; or -- could reasonably be expected to materially adversely affect the business, financial condition, income, operations, properties, assets, liabilities or prospects of Tenneco and its subsidiaries, taken as a whole, or Packaging and its subsidiaries, taken as a whole, in each case before and after giving effect to these transactions, or Automotive and its subsidiaries, taken as a whole, or materially impair the contemplated benefits of any of these transactions to Tenneco and/or Packaging; - any event affecting the business or financial affairs of Tenneco or any of its subsidiaries has occurred or is likely to occur that could reasonably be expected to prohibit, prevent, restrict or delay consummation of any of the transactions described in the preceding paragraph, or that will, or is reasonably likely to, materially impair the contemplated benefits of any of these transactions to Tenneco or Packaging, or could reasonably be expected to be material to holders of original securities in determining whether to accept the exchange offers or consent solicitation; 45 47 - there has occurred: -- any general suspension of or limitation on trading in securities on the NYSE or in the over-the-counter market, whether or not mandatory; -- a material impairment in the trading market for debt securities; -- a declaration of a banking moratorium or any suspension of payments in respect of banks by federal or state authorities in the United States, whether or not mandatory; -- a commencement or escalation of a war, armed hostilities or other national or international crisis directly or indirectly relating to the United States; -- any limitation, whether or not mandatory, by any governmental authority on, or other event having a reasonable likelihood of affecting, the extension of credit by banks or other lending institutions in the United States; or -- any significant adverse change in United States securities or financial markets generally or the material acceleration or worsening of an adverse change in the United States securities or financial markets which existed at the time of the exchange offers; or - the trustee under the original indenture has either: -- objected to or taken any action that could reasonably be expected to adversely affect the consummation of the spin-off or any other transaction undertaken in connection with the spin-off or Tenneco's ability to effect the proposed amendments; -- taken any action that challenges the validity or effectiveness of the procedures used by Tenneco in soliciting the consents to the proposed amendments, including the form thereof; or -- taken any action that challenges the validity or effectiveness of the procedures used by Tenneco in making or completing the exchange offers or concurrent cash tender offers. Tenneco's concurrent cash tender offers are subject to substantially the same conditions as the exchange offers. Because the exchange offers are part of the realignment of Tenneco's total debt before the spin-off, Tenneco plans to complete the exchange offers before the spin-off. See "The Spin-off." Tenneco expects, however, to complete the spin-off within one business day after the exchange offers expire, or as soon thereafter as practicable. For this reason, Tenneco has conditioned the exchange offers on the satisfaction of all material conditions to the spin-off, other than completion of the debt realignment. Further, Tenneco has conditioned the exchange offers on the satisfaction of all conditions to the other components of the debt realignment. See "The Spin-off -- Debt Realignment. The foregoing conditions are for the sole benefit of Tenneco and may be waived by Tenneco, in whole or in part. Tenneco will determine whether the foregoing conditions have been satisfied, on the basis of the standards described above. Any determination made by Tenneco concerning an event, development or circumstance described or referred to above will be final and binding on all parties. WITHDRAWAL RIGHTS Subject to applicable law, you may withdraw tenders of original securities and revoke the related consents at any time before the withdrawal time, but not after, except as otherwise described below. A valid withdrawal of tendered original securities made before the withdrawal time is an automatic revocation of the related consent. If, after the withdrawal time, Tenneco reduces the principal amount of original securities subject to any exchange offer or reduces the consideration offered in any exchange offer, then original securities previously tendered in that exchange offer may be validly withdrawn for ten business days after the date that Tenneco first publishes or sends notice to holders of the reduction. In addition, you may validly withdraw tenders of original securities if the related exchange offer is terminated without any original securities being accepted for exchange. 46 48 For a withdrawal to be effective, (a) the exchange agent must receive a written notice of withdrawal at its address on the back cover of this document, or (b) the appropriate procedures of DTC's Automated Tender Offer Program must be complied with. Any notice of withdrawal must: - specify the name of the person who deposited the original securities to be withdrawn; - identify the original securities to be withdrawn, including the certificate number or numbers and principal amount of those original securities; - be signed by the holder in the same manner as the signature on the letter of consent/transmittal by which those original securities were tendered, including any required signature guarantees, or be accompanied by a bond power in the name of the person withdrawing the tender, in satisfactory form as determined by Tenneco in its sole discretion, duly executed by the registered holder, with the signature guaranteed; - specify the name in which those original securities are to be registered, if different from the person who tendered those original securities using the instruments of transfer; and - if original securities have been tendered using the procedures for book-entry transfer described above, specify the name and number of the account at DTC to be credited with the withdrawn original securities and otherwise comply with the DTC procedures. A purported notice of withdrawal which lacks any of the required information will not be an effective withdrawal of a previous tender. Any permitted withdrawals may not be rescinded, and any original securities withdrawn will not be considered validly tendered for purposes of the exchange offer. However, withdrawn securities may again be tendered by completing the procedures for tendering before the early exchange time or expiration time, as applicable. Any tendered original securities that are withdrawn will be returned to you free of charge as soon as practicable after withdrawal. If your original securities were tendered by book-entry transfer into the exchange agent's account at DTC, the original securities will be credited to an account maintained with DTC for the original securities as soon as practicable after withdrawal. TENNECO WILL DETERMINE, IN ITS SOLE DISCRETION, ALL QUESTIONS AS TO THE VALIDITY OF NOTICES OF WITHDRAWAL, INCLUDING TIME OF RECEIPT. TENNECO'S DETERMINATION WILL BE FINAL AND BINDING. NONE OF TENNECO, PACKAGING, THE EXCHANGE AGENT, DTC, THE DEALER MANAGERS AND ANY OTHER PERSON ARE UNDER ANY DUTY TO NOTIFY YOU OF ANY DEFECTS OR IRREGULARITIES IN ANY NOTICE OF WITHDRAWAL. NONE OF THEM WILL BE LIABLE TO YOU IF THEY FAIL TO NOTIFY YOU OF ANY DEFECTS OR IRREGULARITIES IN A NOTICE OF WITHDRAWAL. DEALER MANAGERS Tenneco and Packaging have engaged Morgan Stanley Dean Witter and Credit Suisse First Boston to act as dealer managers in connection with the exchange offers and to provide financial advisory services to Tenneco and Packaging in connection with the exchange offers. If you have questions concerning the terms of the exchange offers or consent solicitation, you may contact the dealer managers at the addresses and telephone numbers on the back cover page of this document. Tenneco and Packaging have agreed to pay the dealer managers customary fees for their services, including reasonable out-of-pocket expenses and fees and expenses of legal counsel. Tenneco and Packaging have agreed to indemnify the dealer managers against specified liabilities, including specified liabilities under the federal securities laws. The dealer managers have provided in the past, and currently are providing, other investment banking and financial advisory services to Tenneco and its affiliates. Morgan Stanley Dean Witter and Credit Suisse First Boston are also acting as dealer managers in connection with Tenneco's cash tender offers. 47 49 EXCHANGE AGENT The Chase Manhattan Bank has been appointed as exchange agent for the exchange offers. You and your broker, dealer, commercial bank, trust company or other nominee should send letters of consent/ transmittal and all correspondence in connection with the exchange offers to the exchange agent at the address and telephone numbers on the back cover page of this document. If you have questions concerning tender procedures, you should contact the exchange agent at the address and telephone number on the back cover page of this document for instructions. INFORMATION AGENT Georgeson Shareholder Communications Inc. has been appointed as information agent for the exchange offers. You may direct requests for assistance or additional copies of this document or the letter of consent/transmittal to the information agent at the address and telephone number on the back cover page of this document. You may also contact your broker, dealer, commercial bank or trust company for assistance concerning the exchange offers. TRUSTEE The Chase Manhattan Bank is serving as the trustee under the original indenture and will also serve as the trustee for the new securities. All deliveries, correspondence and questions sent or presented to the trustee relating to the exchange offers should be directed to the trustee at 55 Water Street, Room 234, North Building, New York, New York 10041. Tenneco and Packaging maintain, or may, in the future, maintain, normal banking relationships with The Chase Manhattan Bank in the ordinary course of business. FEES AND EXPENSES Tenneco will pay the exchange agent, the information agent and the trustee under the original indenture reasonable and customary fees for their services and will reimburse them for their reasonable out-of-pocket expenses in connection with their services. Tenneco will also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this document and related materials to the beneficial owners of original securities, and in handling or forwarding tenders for their customers. All these fees and expenses will be paid by Tenneco, subject to the allocation of consolidated Tenneco debt contemplated by the debt realignment. See "The Spin-off--Debt Realignment." MARKET AND TRADING INFORMATION In general, there has been limited trading of the original securities and any trading, to the extent it occurs, has taken place primarily in the over-the-counter market. Prices and trading volumes of the original securities in the over-the-counter market are not regularly reported and can be difficult to monitor. Quotations for securities that are not widely traded, such as the original securities, may differ from actual trading prices and should be viewed as approximations. YOU ARE URGED TO OBTAIN THE BEST AVAILABLE INFORMATION REGARDING THE MARKET PRICES OF THE ORIGINAL SECURITIES FROM YOUR BROKER, DEALER, COMMERCIAL BANK OR TRUST COMPANY. ACCOUNTING TREATMENT OF THE EXCHANGE OFFERS Packaging expects it will record the new securities based on the net carrying amount of Tenneco's original securities, since the new securities are not expected to be "substantially different" from Tenneco's original securities. Accordingly, no accounting gain or loss is expected to be recognized by Packaging on the exchange, except for transaction costs. The new securities would be considered "substantially different" if the present values of the cash flows, including principal and interest, under the terms of the new securities are at least 10% different from the present value of the remaining cash flows under the original securities. 48 50 THE PROPOSED AMENDMENTS To tender original securities for exchange in the exchange offers, you must consent to the proposed amendments to the original indenture. The proposed amendments constitute a single proposal and a tendering holder must consent to the proposed amendments as an entirety, and may not consent selectively with respect to some of the proposed amendments. The proposed amendments will be included in a supplement to the original indenture that will be signed by Tenneco and the trustee on or promptly following Tenneco's receipt of the required consents and the withdrawal time. Accordingly, Tenneco expects to sign the supplemental indenture before the exchange offers expire. The proposed amendments will not take effect, however, until Tenneco accepts for exchange or purchase debt securities issued under the original indenture that represent at least the required consents, whether tendered in the exchange offers or Tenneco's cash tender offers. See "The Exchange Offers and Consent Solicitation -- The Consent Solicitation." As described below, a limited waiver of some provisions of the original indenture will apply between the time Tenneco executes the supplemental indenture and the time it closes on the exchange and cash tender offers. This waiver will terminate if the proposed amendments do not take effect. ELIMINATION OF OPERATING COVENANTS The following is a brief description of the proposed amendments to the original indenture. The summaries are qualified in their entireties by reference to the full and complete terms of the original indenture, as well as the proposed supplemental indenture, copies of which can be obtained without charge from the information agent. A copy of the original indenture and proposed supplemental indenture is also exhibit 10.3 and 10.4, respectively, to the registration statement of which this document is a part. These proposed amendments may have adverse consequences for you if you do not participate in the exchange offers. See "Risk Factors -- Risk Factors if You Do Not Exchange." The proposed amendments would eliminate the following restrictive operating covenants contained in the original indenture.
SECTION OF ORIGINAL INDENTURE TITLE AND DESCRIPTION OF SECTION - ------------------ -------------------------------- Section 3.6 Negative Pledge; Limitation on Sale and Leaseback Transactions. Provides that the issuer, Tenneco Inc., will not issue, assume, incur or guarantee, and will not permit any restricted subsidiary to issue, assume, incur or guarantee, any debt upon any principal manufacturing property. A restricted subsidiary is generally any subsidiary that operates a principal manufacturing property. A principal manufacturing property is generally any U.S. manufacturing plant or research and development facility, unless the issuer's Board of Directors determines that plant or facility is not of material importance. Also provides that the issuer will not, and will not permit any restricted subsidiary to, enter into any arrangement with any person or entity providing for the leasing of any principal manufacturing property, where the property has been or is to be sold or transferred by the issuer or the restricted subsidiary with the intention of taking back a lease on the property.
49 51
SECTION OF ORIGINAL INDENTURE TITLE AND DESCRIPTION OF SECTION - ------------------ -------------------------------- Section 9.1 Covenant Not to Merge, Consolidate, Sell or Convey Property Except Under Certain Conditions. Provides that the issuer will not merge or consolidate with any other person or entity or sell, lease or convey all or substantially all of its assets unless (a) the issuer is the continuing corporation, or the successor or transferee corporation is organized under United States law and expressly assumes the payment of principal and interest on all securities and coupons outstanding under the original indenture and the performance and observance of all covenants and conditions of the original indenture, by supplemental indenture, and (b) the issuer or the successor or transferee is not, immediately after giving effect to the transaction, in default in the performance of any of those covenants or conditions. Section 9.2 Successor Corporation Substituted. Describes the substitution of the successor or transferee corporation for the issuer under the original indenture in the event of any consolidation, merger, sale, lease or conveyance described in Section 9.2 of the original indenture. Section 9.3 Opinion of Counsel Delivered to Trustee. Provides that the trustee may receive an opinion of counsel as conclusive evidence that any consolidation, merger, sale, lease or conveyance described in Section 9.1 of the original indenture, and any substitution of the successor or transferee corporation for the issuer under Section 9.2 of the original indenture, complies with the applicable provisions.
The proposed amendments would also eliminate any references in the original indenture and the original securities to the sections specified above, including any sentences or provisions that refer or give effect exclusively to the sections specified above. The proposed amendments would also eliminate any defined terms in the original indenture that are used solely in those deleted sentences, provisions, sections or subsections. The text of the proposed amendments is set forth in Annex A. WAIVER To avoid the possibility of a default under the original indenture in connection with the spin-off and the transactions that will be undertaken to complete the spin-off, a waiver of the covenants to be eliminated by the proposed amendments will take effect immediately upon the execution of the supplemental indenture as described above. If, however, securities representing at least the required consents are not accepted for exchange or purchase, as the case may be, because the related exchange offers, cash tender offers or consent solicitation are terminated or withdrawn, the proposed amendments will not become operative. In this event, the waiver will also cease to be operative as to any transactions that occurred during the period the waiver was in effect. The text of the waiver is set forth in Annex A. The waiver will give Tenneco flexibility by allowing it, to the extent necessary, to begin to consummate various pre-spin-off transactions before the exchange and tender offers are completed. Tenneco believes this is important in facilitating its plan to complete the spin-off within one business day after it accepts securities tendered in the tender and/or exchange offers, or as soon thereafter as practicable. Based on the timing of the consent solicitation expiration, the waiver will take effect at least five business days prior to the acceptance of any securities in the tender and/or exchange offers. For example, the waiver will allow Tenneco to begin taking the steps necessary to grant security interests in substantially all of Automotive's domestic assets to the lenders under the new senior secured credit facility Tenneco has entered into in connection with the debt realignment. See "Risk Factors -- Risk Factors if 50 52 You Do Not Exchange" and "The Spin-off -- Debt Realignment." Absent the waiver, these security interests would not be permitted under the original indenture unless and until the proposed amendments took effect upon the acceptance of securities in the tender and/or exchange offers. If the waiver ceases to be operative, Tenneco plans to unwind any such transactions completed in reliance on the waiver. 51 53 DESCRIPTION OF THE NEW SECURITIES The new securities will be issued under an indenture between Packaging and The Chase Manhattan Bank, as the new trustee, as supplemented by supplemental indentures providing for the terms of the new securities. This indenture, as it may be further amended or supplemented from time to time, is referred to in this document as the "new indenture." The terms of the new securities will include those stated in the new indenture and those made a part of the new securities by reference to the Trust Indenture Act of 1939. A copy of the new indenture, including the forms of supplemental indentures providing for the new securities, are filed as exhibit 4.1 and exhibits 4.5 through 4.9, respectively, to the registration statement in which this document is included. The following summaries of provisions of the new indenture do not include all of the information included in the new indenture and may not cover information that you may find important. Accordingly, these summaries are subject to, and qualified in their entirety by reference to, the detailed provisions of the new indenture. You should read the new indenture carefully and in its entirety because the new indenture, and not this description, will define your rights as a holder of new securities. You may obtain a copy of the new indenture by request directed to Tenneco's address included on page 2 of this document. As used under this caption, the term "debt securities" means all evidences of indebtedness for money borrowed which may be issued under the new indenture and the term "Packaging" refers only to Tenneco Packaging Inc., and not any of its subsidiaries. GENERAL The new indenture will not limit the amount of debt securities that may be issued and will provide that debt securities may be issued under the new indenture from time to time in one or more series. The debt securities will be unsubordinated and unsecured obligations of Packaging and will rank equally with all other unsubordinated and unsecured obligations of Packaging. This would include, for example, accounts payable to suppliers and other general creditors of Packaging. In addition, the new indenture will generally not limit the amount of other indebtedness or securities that Packaging or its subsidiaries may issue. However, the issuance, assumption or guarantee of specified secured debt will be subject to the restrictions described under "-- Some Important Covenants of Packaging." There are no provisions of the new indenture that will afford holders of new securities protection in the event of a highly leveraged transaction involving Packaging. NEW SECURITIES NEW 7.20% NOTES DUE 2005 The new 7.20% Notes due 2005 constitute a series of new securities under the new indenture, which is limited to $299,690,000 aggregate principal amount. The new 7.20% Notes due 2005 will mature on December 15, 2005. Each new 7.20% Note due 2005 will bear interest from the date of issue at the rate of 7.20% per annum, payable semi-annually on June 15 and December 15 of each year, beginning December 15, 1999. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Interest will be payable generally to the persons in whose names the new 7.20% Notes due 2005 are registered at the close of business on the May 31 or November 30 record date preceding the June 15 or December 15 interest payment date. The new 7.20% Notes due 2005 will be redeemable in whole or in part, at the option of Packaging, at any time, at a redemption price equal to the greater of (1) 100% of their principal amount and (2) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield plus 10 basis points. In each case, Packaging will pay accrued and unpaid interest to the date of redemption. 52 54 "Treasury Yield" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the new 7.20% Notes due 2005 that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the new 7.20% Notes due 2005. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing appointed by the new trustee. "Comparable Treasury Price" means, with respect to any redemption date: (1) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:00 p.m. Quotations for U.S. Government Securities" or (2) if such release (or any successor release) is not published or does not contain such prices on such business day, (a) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (b) if the new trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the new trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the new trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Lehman Brothers Inc. and Salomon Smith Barney Inc.; provided however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), Packaging shall substitute therefor another Primary Treasury Dealer. Holders of new 7.20% Notes due 2005 to be redeemed will receive notice by first-class mail at least 30 and not more than 60 days prior to the date fixed for redemption. NEW 7.95% DEBENTURES DUE 2025 The new 7.95% Debentures due 2025 constitute a series of new securities under the new indenture, which series is limited to $276,794,000 aggregate principal amount. The new 7.95% Debentures due 2025 will mature on December 15, 2025. Each new 7.95% Debenture due 2025 will bear interest from the date of issue at the rate of 7.95% per annum, payable semi-annually on June 15 and December 15 of each year, beginning December 15, 1999. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Interest will be payable generally to the persons in whose names the new 7.95% Debentures due 2025 are registered at the close of business on the May 31 or November 30 record date preceding the June 15 or December 15 interest payment date. The new 7.95% Debentures due 2025 are not redeemable at the option of Packaging prior to maturity. There is no provision for a sinking fund for the new 7.95% Debentures due 2025. NEW 8% NOTES DUE 2007 The new 8% Notes due 2007 constitute a series of new securities under the new indenture, which is limited to $100,000,000 aggregate principal amount. The new 8% Notes due 2007 will mature on April 15, 53 55 2007. Each new 8% Note due 2007 will bear interest from the date of issue at the rate of 8% per annum, payable semi-annually on April 15 and October 15 of each year, beginning April 15, 2000. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Interest will be payable generally to the persons in whose names the new 8% Notes due 2007 are registered at the close of business on the April 1 or October 1 record date preceding the April 15 or October 15 interest payment date. The new 8% Notes due 2007 will be redeemable in whole or in part, at the option of Packaging, at any time, at a redemption price equal to the greater of (1) 100% of their principal amount and (2) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield plus 10 basis points. In each case, Packaging will pay accrued and unpaid interest to the date of redemption. "Treasury Yield" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the new 8% Notes due 2007 that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the new 8% Notes due 2007. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing appointed by the new trustee. "Comparable Treasury Price" means, with respect to any redemption date, (1) the average of the applicable Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (2) if the new trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the new trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the new trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Lehman Brothers, Inc. and Salomon Smith Barney Inc.; provided however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), Packaging shall substitute therefor another Primary Treasury Dealer. Holders of new 8% Notes due 2007 to be redeemed will receive notice by first-class mail at least 30 and not more than 60 days prior to the date fixed for redemption. NEW 8 1/8% DEBENTURES DUE JUNE 15, 2017 The new 8 1/8% Debentures due June 15, 2017 constitute a series of new securities under the new indenture, which is limited to $300,000,000 aggregate principal amount. The new 8 1/8% Debentures due June 15, 2017 will mature on June 15, 2017. Each new 8 1/8% Debenture due June 15, 2017 will bear interest from the date of issue at the rate of 8 1/8% per annum, payable semi-annually on June 15 and December 15 of each year, beginning December 15, 1999. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Interest will be payable generally to the persons in whose names the new 8 1/8% Debentures due June 15, 2017 are registered at the close of business on the June 1 or December 1 record date preceding the June 15 or December 15 interest payment date. 54 56 The new 8 1/8% Debentures due June 15, 2017 will be redeemable in whole or in part, at the option of Packaging, at any time, at a redemption price equal to the greater of (1) 100% of their principal amount and (2) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield plus 20 basis points. In each case, Packaging will pay accrued and unpaid interest to the date of redemption. "Treasury Yield" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the new 8 1/8% Debentures due June 15, 2017 that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the new 8 1/8% Debentures due June 15, 2017. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing appointed by the new trustee. "Comparable Treasury Price" means, with respect to any redemption date, (1) the average of the applicable Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (2) if the new trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the new trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the new trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Lehman Brothers, Inc. and Salomon Smith Barney Inc.; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), Packaging shall substitute therefor another Primary Treasury Dealer. Holders of new 8 1/8% Debentures due June 15, 2017 to be redeemed will receive notice by first-class mail at least 30 and not more than 60 days prior to the date fixed for redemption. NEW 8 3/8% DEBENTURES DUE 2027 The new 8 3/8% Debentures due 2027 constitute a series of new securities under the new indenture, which is limited to $200,000,000 aggregate principal amount. The new 8 3/8% Debentures due 2027 will mature on April 15, 2027. Each new 8 3/8% Debentures due 2027 will bear interest from the date of issue at the rate of 8 3/8% per annum, payable semi-annually on April 15 and October 15 of each year, beginning April 15, 2000. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Interest will be payable generally to the persons in whose names the new 8 3/8% Debentures due 2027 are registered at the close of business on the April 1 or October 1 record date preceding the April 15 or October 15 interest payment date. The new 8 3/8% Debentures due 2027 will be redeemable in whole or in part, at the option of Packaging, at any time, at a redemption price equal to the greater of (1) 100% of their principal amount and (2) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 55 57 30-day months) at the Treasury Yield plus 25 basis points. In each case, Packaging will pay accrued and unpaid interest to the date of redemption. "Treasury Yield" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the new 8 3/8% Debentures due 2027 that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the new 8 3/8% Debentures due 2027. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing appointed by the new trustee. "Comparable Treasury Price" means, with respect to any redemption date, (1) the average of the applicable Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (2) if the new trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the new trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the new trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Lehman Brothers, Inc. and Salomon Smith Barney Inc.; provided however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), Packaging shall substitute therefor another Primary Treasury Dealer. Holders of new 8 3/8% Debentures due 2027 to be redeemed will receive notice by first-class mail at least 30 and not more than 60 days prior to the date fixed for redemption. SOME IMPORTANT COVENANTS OF PACKAGING Negative Pledge. The new indenture will provide that Packaging will not, and will not permit any restricted subsidiary to, issue, assume, incur or guarantee specified types of secured debt without providing that the outstanding debt securities be secured equally and ratably with that secured debt. A restricted subsidiary is generally defined as a subsidiary that operates a principal manufacturing property, as described below. The restriction applies to any debt secured by a mortgage, pledge, lien or other encumbrance on any principal manufacturing property of Packaging or any restricted subsidiary or on any shares of capital stock or debt of any restricted subsidiary. A principal manufacturing property is generally defined as any U.S. manufacturing plant or testing or research and development facility, unless Packaging's Board of Directors determines that the manufacturing, testing, research and development activities performed at that plant or facility are not of material importance. This restriction will not apply if, after giving effect to the contemplated transaction, the aggregate amount of all such secured debt incurred after the initial date of the new indenture, together with all Attributable Debt, as defined below, of Packaging and its subsidiaries in respect of specified sale and leaseback transactions involving principal manufacturing properties, would not exceed 15% of the Consolidated Net Tangible Assets, as defined below, of Packaging and its consolidated subsidiaries. This restriction will also not apply in the case of: (a) the creation of encumbrances on any principal manufacturing property acquired after the initial date of the new indenture to secure payment of all or any part of the purchase price of that 56 58 property or construction of fixed improvements on that property before, at the time of or within 180 days after the latest of the acquisition, completion of construction or commencement of commercial operation of that property, or existing encumbrances on any principal manufacturing property acquired by Packaging or a restricted subsidiary, so long as the encumbrance does not apply to any improved property previously owned by Packaging or a restricted subsidiary and so long as the amount of debt secured by the encumbrance does not exceed 100% of the lesser of the cost or fair value of the property, (b) encumbrances on any principal manufacturing property of a corporation that is merged into or consolidated with Packaging or a restricted subsidiary or substantially all of the assets of which are acquired by Packaging or a restricted subsidiary; (c) encumbrances on any principal manufacturing property in favor of governmental bodies to secure partial, progress, advance or other payments under any contract or statute, or to secure any debt incurred or guaranteed for the purpose of financing all or any part of the cost of acquiring, constructing or improving the property subject to those encumbrances; (d) encumbrances on particular property to secure or provide funds for all or any part of the cost of exploration, drilling, mining, development, maintenance or operation of that property intended to obtain or increase the production of specified natural resources from that property; (e) encumbrances securing debt owed by a restricted subsidiary to Packaging or another restricted subsidiary; (f) encumbrances on any principal manufacturing property of Packaging or a restricted subsidiary that were in existence on the initial date of the new indenture; (g) specified extensions, renewals or replacements of encumbrances described above; and (h) Permitted Mortgages, as defined below. These covenants are contained in Section 3.6(a) of the new indenture. The new indenture will not restrict the incurrence of unsecured debt by Packaging or any of its subsidiaries. Restrictions on Sale and Leaseback Transactions. The new indenture will prohibit Packaging and any restricted subsidiary from entering into any sale and leaseback transaction involving any principal manufacturing property that has been or is to be sold or transferred by Packaging or any restricted subsidiary, unless: (a) Packaging or the restricted subsidiary would be entitled to create secured debt on that property, as described in clauses (a)-(h) under "-- Negative Pledge," in an amount equal to the Attributable Debt with respect to the sale and leaseback transaction, without equally and ratably securing all outstanding debt securities under the new indenture; (b) since the date of the new indenture and during the period 12 months before and ending 12 months after a sale and leaseback transaction, Packaging or the restricted subsidiary makes expenditures for principal manufacturing properties in an amount equal to the net proceeds of the sale and leaseback transaction and elects to designate that amount as a credit against the sale and leaseback transaction; or (c) to the extent not credited as described above, Packaging applies an amount equal to the Attributable Debt with respect to the sale and leaseback transaction to the retirement of long-term consolidated debt. See Section 3.6(c) of the new indenture. This restriction will not apply to any sale and leaseback transaction (a) between Packaging and a restricted subsidiary or between restricted subsidiaries, (b) involving the taking back of a lease for a period of three years or less, or (c) if, after giving effect to a sale and leaseback transaction, permitted secured debt, plus Attributable Debt of Packaging and its subsidiaries in respect of sale and leaseback transactions involving principal manufacturing properties, 57 59 would not exceed 15% of the Consolidated Net Tangible Assets of Packaging and its consolidated subsidiaries. There will be no covenants or other provisions in the new indenture providing for a put or increased interest or that would otherwise provide holders of new securities with additional protection in the event of a recapitalization transaction, a change of control of Packaging or a highly leveraged transaction. The following terms which are used in the new indenture have the meanings described below: "Attributable Debt" means the total net amount of the rent required to be paid during the remaining term of any lease, discounted at the weighted average rate per year then borne by the outstanding debt securities. "Consolidated Net Tangible Assets" means the total assets shown on the consolidated balance sheet of Packaging and its consolidated subsidiaries for the most recent fiscal quarter, after deducting the amount of all current liabilities and intangible assets. "Permitted Mortgage" means: (a) any governmental, mechanics', materialmen's, carriers' or similar lien created in the ordinary course of business which is not yet due or which is being contested in good faith by appropriate proceedings and any undetermined lien which is incidental to construction; (b) any right reserved to, or vested in, any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or by any provision of law, to purchase or recapture or to designate a purchaser of, any property; (c) any lien of taxes and assessments which is (1) for the current year, or (2) not at the time delinquent or (3) delinquent but the validity of which is being contested at the time by Packaging or any Subsidiary in good faith; (d) any lien arising from or in connection with a conveyance by Packaging or any subsidiary of any production payment with respect to oil, gas, natural gas, carbon dioxide, sulphur, helium, coal, metals, minerals, steam, timber or other natural resources; (e) any lien to secure obligations imposed by statute or governmental regulations; or (f) any lien of, or to secure performance of, leases, other than leases relating to a sale and leaseback transaction. These definitions are included in Section 1.1 of the new indenture. CONSOLIDATION, MERGER AND SALE OF ASSETS Section 9.1 of the new indenture will provide that Packaging may not merge or consolidate with any other person or entity, or sell, lease or convey all or substantially all of its assets to any person or entity, unless (a) either Packaging is the continuing entity or the successor, transferee or lessee is a corporation organized under the laws of the United States, any State or the District of Columbia and expressly assumes Packaging's obligations under the debt securities and new indenture, and (b) immediately after giving effect to the transaction, Packaging or the successor, transferee or lessee is not in default of any of those obligations. Section 9.2 of the new indenture will also provide that any successor, transferee or lessee corporation in one of those transactions be substituted for Packaging under the new indenture and the debt securities. 58 60 EVENTS OF DEFAULT Any one of the following will constitute an "event of default" under the new indenture with respect to debt securities of any series: (a) Packaging's failure to pay any interest on that series when due and continuance of that default for 30 days; (b) Packaging's failure to pay principal of that series when due; (c) in general, Packaging's failure to observe or perform any of its other covenants in the new indenture for 60 days after written notice as provided in the new indenture, unless the default is expressly covered by another provision of the new indenture; (d) events of bankruptcy, insolvency or reorganization of Packaging; or (e) any other event of default provided in the supplemental indenture with respect to debt securities of that series. If any event of default occurs and is continuing, either the new trustee or the holders of at least 25% in aggregate principal amount of the outstanding debt securities of each affected series, voting as a single class, may by written notice declare the principal amount of and accrued interest on all the debt securities of each affected series to be due and payable immediately. Events of bankruptcy, insolvency and reorganization are deemed to affect all outstanding debt securities. If the debt securities of an affected series are original issue discount debt securities, only that portion of the principal amount as is specified in the terms of that series may be declared due and payable. The holders of a majority in aggregate principal amount of outstanding debt securities of that series may, under limited circumstances, rescind and annul that acceleration. The events of default are described in Section 5.1 of the new indenture. Under the new indenture, the new trustee will generally be required to give the holders of affected debt securities notice of known defaults within 90 days after the default, unless the default is cured. Except in the case of a payment default, however, the new trustee may withhold the notice in the interests of the holders of the affected series of debt securities. See Section 5.11 of the new indenture. The new indenture will provide that the holders of a majority in aggregate principal amount of the outstanding debt securities of each series affected, with all those series voting as a single class, may direct the time, method and place of conducting any proceeding for any remedy available to the new trustee for such series, or exercising any trust or power conferred on the new trustee. See Section 5.9 of the new indenture. In general, the holders of a majority in aggregate principal amount outstanding of all series of debt securities with respect to which an event of default has occurred, voting as a single class, may waive any event of default with respect to that series. This majority action cannot, however, waive defaults under specified covenants related to the payment terms of the debt securities. See Section 5.10 of the new indenture. The new indenture will require Packaging to file annually with the new trustee a certificate as to Packaging's compliance with all conditions and covenants of the new indenture. See Section 3.5 of the new indenture. MODIFICATION OF THE NEW INDENTURE The new indenture will permit Packaging and the new trustee to enter into one or more supplemental indentures without the consent of the holders of any debt securities in order: (a) to transfer or pledge any property to the new trustee as security for the debt securities; (b) to substitute a permitted successor corporation for Packaging; (c) to add to the Packaging's covenants further covenants or provisions to protect the holders of debt securities; 59 61 (d) to establish the form or terms of debt securities; (e) to provide for successor trustees; or (f) to cure any ambiguity, correct any defective provisions or to make any other provisions as Packaging determines necessary or desirable, as long as the action does not adversely affect the interests of any holder of debt securities of any series. See Section 8.1 of the new indenture. The new indenture will also permit Packaging and the new trustee, with the consent of the holders of a majority in aggregate principal amount of the outstanding series of debt securities affected, voting as one class, to execute supplemental indentures that change the terms of the new indenture or modify the rights of debt holders. However, without the consent of the holder of each affected debt security, this majority action cannot: (a) extend the time for payment of principal or interest on any debt security; (b) reduce the principal of, or the rate of interest on, any debt security; (c) reduce the amount of premium, if any, payable upon the redemption of any debt security; (d) reduce the amount of principal payable upon acceleration of the maturity of any original issue discount security; (e) change the currency or currency unit in which any debt security or any premium or interest is payable; (f) impair the right to institute suit for the enforcement of any payment on or relating to any debt security; or (g) reduce the percentage consent required to modify or amend the new indenture. See Section 8.2 of the new indenture. DEFEASANCE AND COVENANT DEFEASANCE The new indenture will allow Packaging to deposit funds in trust and as a result either (a) be discharged from all obligations under the debt securities of any series, except for limited administrative obligations ("defeasance"), or (b) be released from complying with specified covenants of the indenture, including those described under "-- Some Important Covenants of Packaging" and "-- Consolidation, Merger and Sale of Assets" ("covenant defeasance"). For defeasance or covenant defeasance with respect to any series of debt, Packaging must deposit, in trust with the new trustee, money or U.S. government obligations that through the payment of interest and principal according to their terms will provide money in an amount sufficient to make all payments on that series of debt when they are due. If the defeasance is to occur at least one year before the debt securities become due and payable or are to be redeemed, the defeasance may only be established if Packaging delivers an opinion of counsel stating that the holders of the debt securities will not have a taxable event for federal income tax purposes as a result of the defeasance. In addition, the opinion of counsel must be based upon a ruling of the IRS or a change in applicable federal income tax law occurring after the date of the new indenture. See Article 10 of the new indenture. THE NEW TRUSTEE The Chase Manhattan Bank will be the new trustee under the new indenture. The Chase Manhattan Bank will also serve as the initial paying agent and registrar of the new securities. Packaging may also maintain banking and other commercial relationships with the new trustee in the ordinary course of business. 60 62 BOOK-ENTRY SYSTEM Packaging will initially issue the new securities in the form of one or more global securities that will be deposited with DTC and registered in the name of Cede & Co., DTC's nominee. Accordingly, beneficial interests in the global securities will be shown on, and transfer will be effected only through, records maintained by DTC and its participants. You may hold beneficial interests in the global securities directly through DTC if you have an account with DTC or indirectly through an organization which has an account with DTC. Unless and until it is exchanged in whole or in part for new securities of that series in definitive form, a global security may not be transferred except as a whole to a nominee of DTC for that global security, or by a nominee of DTC to DTC or another nominee of DTC, or by DTC or any such nominee to a successor depository or a nominee of a successor depository. DTC has advised Packaging that DTC is a limited-purpose trust company organized under the Banking Law of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold the securities of institutions that have accounts with DTC ("participants") and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, eliminating the need for physical movement of securities certificates. DTC's participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. Access to DTC's book-entry system is also available to others, such as banks, brokers, dealers, and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly (collectively, the "indirect participants"). Packaging expects that upon the deposit of the global securities with DTC, DTC will credit on its book-entry registration and transfer system the principal amount of new securities represented by those global securities to the accounts of direct participants. Ownership of beneficial interests in the global securities will be limited to direct participants or persons that may hold interests through direct participants. Ownership of beneficial interests in the global securities will be shown on, and the transfer of those ownership interests will be effected only through, records maintained by DTC, with respect to direct participants' interest, the direct participants and the indirect participants, with respect to the owners of beneficial interests in the global securities other than direct participants. The laws of some jurisdictions may require that purchasers of securities take physical delivery of the securities in definitive form. These limits and laws may impair your ability to transfer or pledge beneficial interests in the global securities. So long as DTC or a nominee of DTC is the registered holder and owner of the global securities, DTC or the nominee, for all purposes will be considered the sole owner or holder of the global securities under the new indenture. Except as described below, owners of a beneficial interest in the global securities will not be entitled to have the new securities represented by the global securities registered in their names, will not receive or be entitled to receive physical delivery of certified new securities, and will not be considered to be the owner or holder of any new securities represented by the global securities. Accordingly, each person owning a beneficial interest in the global securities must rely on the procedures of DTC and, if a person is not a direct participant in the book-entry registration and transfer system of DTC, on the procedures of the direct participant through which that person owns its interest, to exercise any rights of an owner or holder of the new securities. Packaging will make principal and interest payments on the new securities registered in the name of DTC's nominee to DTC's nominee as the registered owner of the global securities. Under the terms of the new securities, Packaging and the new trustee will treat the persons in whose names the new securities are registered as the owners of those new securities for the purpose of receiving payment of principal and interest on those new securities and for all other purposes. Therefore, Packaging, the new trustee and any paying agent will not have any direct responsibility or liability for the payment of principal or interest on the new securities to owners of beneficial interests in the global securities. Packaging expects that DTC will, upon receipt of any payment of principal or interest, credit direct participants' accounts on the payment date according to their respective holdings of beneficial interests in 61 63 the global securities as shown on DTC's records. Payments by direct and indirect participants to owners of beneficial interests in the global securities will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of the direct and indirect participants. These payments by direct and indirect participants will not be the responsibility of DTC, the new trustee, or Packaging, subject to any statutory requirements that may be in effect. Neither Packaging, the new trustee, any paying agent nor the registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the global securities, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Although DTC has agreed to the procedures described above in order to facilitate transfers of interests in the global securities among participants of DTC, it is under no obligation to perform or continue to perform these procedures, and these procedures may be discontinued at any time. None of Packaging, the new trustee, the registrar, or any paying agent for the exchange securities will have any responsibility or liability for the performance by DTC or its direct or indirect participants of their respective obligations under the rules and procedures governing their operations. PHYSICAL SECURITIES Following initial issuance, you may obtain physical new securities in exchange for global securities in denominations of $1,000 and integral multiples of $1,000 if: (1) DTC notifies Packaging that it is unwilling or unable to continue as depositary for the global securities or if at any time DTC ceases to be a clearing agency registered under the Exchange Act and a successor depositary is not appointed by Packaging within 90 days of that notice; or (2) Packaging in its discretion at any time determines not to have all of the new securities represented by the global securities. Subject to the above, the global securities are not exchangeable, except for global securities of the same aggregate denomination to be registered in the name of DTC or its nominee. PAYMENT Packaging will pay principal of and interest on new securities represented by a global security in accordance with the applicable requirements of DTC for the global securities. The payment of principal of and interest on any other new securities will be made at the office or agency of Packaging maintained for that purpose or, at Packaging's option, by mailing a check to the holder's registered address. 62 64 THE SPIN-OFF Before the spin-off, Tenneco and Packaging will enter into a distribution agreement to establish the terms of the spin-off and govern various aspects of the post-spin-off relationship between Packaging and Tenneco, which will be Automotive after the spin-off. In addition, Automotive and Packaging will enter into ancillary agreements to facilitate further the separation of Tenneco's automotive and packaging businesses and to govern additional aspects of the ongoing relationship between Packaging and Automotive. REASONS FOR THE SPIN-OFF The spin-off is designed to separate Tenneco's packaging business from its automotive business, each of which have distinct financial, investment and operating characteristics, so that each can adopt strategies and pursue objectives appropriate to its specific needs. The spin-off will: - enable each company to concentrate its attention and financial resources on its own core business and provide independent access to capital markets; - permit investors to make more focused investment decisions based on the specific attributes of each of the two businesses and enhance the likelihood that each company will achieve appropriate market valuation; and - facilitate employee compensation programs custom-tailored to the operations of each business, including an employee stock ownership plan for Automotive and stock-based and other incentive programs, which will more directly reward employees of each business based on the success of that business. MANNER OF SPIN-OFF According to the distribution agreement, the Tenneco board of directors will formally declare the dividend necessary to effect the spin-off. At that time, the Tenneco board of directors will also set the effective date of the spin-off and the date and time for determination of those Tenneco stockholders entitled to participate in the spin-off. Subject to the conditions described below, on the spin-off date, those same Tenneco stockholders will each receive one share of Packaging common stock for each share of Tenneco common stock they owned as of that determination time. CORPORATE RESTRUCTURING TRANSACTIONS Before the spin-off, Tenneco will effect various corporate restructuring transactions designed to restructure its existing businesses so that, in general, the assets, liabilities and operations of (a) its packaging business and administrative services operations, will be owned and operated, directly or indirectly, by Packaging and (b) its automotive business will be owned and operated, directly and indirectly, by Tenneco and its non-packaging subsidiaries. Packaging's assets upon completion of these corporate restructuring transactions generally will be: - those assets related to the conduct of Tenneco's past and current packaging businesses and administrative services operations, as reflected on the unaudited pro forma combined balance sheet of Packaging as of June 30, 1999 which will be attached to the distribution agreement as an exhibit; - those assets that were acquired after June 30, 1999 and are of a nature or type that would have been included on Packaging's June 30, 1999 pro forma balance sheet had they been acquired earlier; and - all rights expressly allocated to Packaging and its subsidiaries under the distribution agreement or any of the ancillary agreements. 63 65 Automotive's assets upon completion of these corporate restructuring transactions generally will be: - all of Tenneco's assets not expressly allocated to Packaging or its subsidiaries as described above. Packaging's liabilities generally will include: - those liabilities related to the Packaging assets described above and the current and past conduct of Tenneco's packaging businesses and administrative services operations; - liabilities for possible violations of securities laws in connection with the spin-off related to disclosures or omissions regarding Packaging's business, results of operations, prospects or management; and - those other liabilities expressly allocated to Packaging or its subsidiaries under the distribution agreement or any ancillary agreement. Automotive's liabilities generally will include: - those liabilities related to the automotive assets described above and the current and past conduct of Tenneco's automotive business; - liabilities for possible violations of securities laws in connection with the spin-off related to disclosures or omissions regarding Automotive's business, results of operations, prospects or management; - those liabilities expressly allocated to Automotive or its subsidiaries under the distribution agreement or any ancillary agreement; and - all other liabilities of Tenneco or any of its subsidiaries which do not constitute Packaging liabilities. In addition, Packaging and Automotive will each be responsible for one-half of any third-party liability imposed on either party that is both (1) related to the transactions undertaken as part of the spin-off, such as the debt realignment, and (2) based on a claim (a) under Delaware corporate law, such as a claim for a breach of fiduciary duties, or (b) under applicable securities laws, but only to the extent the alleged violation is not specifically related to disclosures or omissions about either party's business operations as provided by such party. DEBT REALIGNMENT After the spin-off, Automotive and Packaging each will, in general, be responsible for the debts, liabilities and obligations related to the business or businesses that it owns and operates following completion of the corporate restructuring transactions. See "-- Corporate Restructuring Transactions." Tenneco's historical practice, however, has been to incur debt for its consolidated group at the parent-company level or at a limited number of subsidiaries, rather than at the operating-company level, and to centrally manage various cash functions. Accordingly, the distribution agreement will provide for the realignment of Tenneco's debt before the spin-off. The purpose of this debt realignment is to allocate the debt between Packaging and Automotive before the companies are separated. The exchange offers and cash tender offers are components of this debt realignment. The specific goal of the debt realignment will be to reach approximately the allocation between Packaging and Automotive of Tenneco's debt at the time of the spin-off, after giving effect to the repurchase of subsidiary preferred stock and payment of transaction fees and expenses, that is reflected in the June 30, 1999 pro forma balance sheets of Packaging and Tenneco included elsewhere in this document. See "Description of Packaging -- Unaudited Pro Forma Combined Financial Statements of Packaging" and "Description of Tenneco After the Spin-off/Automotive -- Unaudited Pro Forma Consolidated Financial Statements of Tenneco." These pro forma balance sheets will also be attached to 64 66 the distribution agreement as exhibits. Packaging and Automotive will agree in the distribution agreement to use their respective reasonable commercial efforts to achieve this relative allocation. If the debt realignment and spin-off had occurred on June 30, 1999, Packaging would have had pro forma debt for money borrowed of about $2.2 billion and Automotive would have had pro forma debt for money borrowed of about $1.7 billion. The pro forma debt amount for Packaging does not reflect the application of any proceeds from its planned sale of its containerboard joint venture interest, which is not part of the debt realignment. If this sale is completed before the spin-off, the net proceeds will be used to retire the Tenneco debt that otherwise would be allocated to Packaging in the debt realignment. If the sale occurs after the spin-off, the net proceeds will be used to retire Packaging debt. See "Description of Packaging -- Unaudited Pro Forma Combined Financial Statements of Packaging" and "Description of Tenneco After the Spin-off/Automotive -- Unaudited Pro Forma Consolidated Financial Statements of Tenneco." The debt realignment is expected to be accomplished through some combination of tender offers, exchange offers, prepayments and other refinancings. In addition to the exchange offers described in this document, Tenneco expects to undertake the following as part of the debt realignment: (1) Tenneco will offer to purchase for cash approximately $1,283 million of its public debt pursuant to the cash tender offers; (2) Tenneco will repay in cash other existing non-public debt; and (3) Tenneco will repurchase outstanding subsidiary preferred stock. These payments are expected to be financed by (a) internally generated cash, (b) borrowings by Automotive under a new credit facility and new subordinated debt financing to be issued by Automotive in connection with the spin-off and (c) borrowings by Packaging under one or more new credit facilities entered into by Packaging in connection with the spin-off. See "Description of Packaging -- New Financing" and "Description of Tenneco After the Spin-off/ Automotive -- New Financing." Accordingly, after giving effect to the debt realignment and the spin-off, Automotive will be responsible for all of Tenneco's existing public debt that remains outstanding and any borrowings under the new Automotive credit facility and subordinated debt financing described above. Packaging will be responsible for the new securities and any borrowings under the new Packaging credit facilities described above. Completion of the debt realignment is a condition to Tenneco's obligation to complete the spin-off, although Tenneco may substitute one or more different financing transactions for any of the components of the debt realignment described above. RELATIONSHIP BETWEEN AUTOMOTIVE AND PACKAGING AFTER THE SPIN-OFF Below are summary descriptions of the distribution agreement and principal ancillary agreements that Automotive and Packaging will enter into in connection with the spin-off. These agreements are intended to facilitate the separation of Tenneco's packaging business from its automotive business and to facilitate the operation of each of Automotive and Packaging as separate companies. DISTRIBUTION AGREEMENT In addition to providing for the terms of the spin-off and the various actions to be taken before the spin-off, the distribution agreement will contain other provisions governing the relationship between Automotive and Packaging before and after the spin-off. Responsibility for Liabilities. The distribution agreement will provide that after the spin-off date: (a) Automotive will assume, pay, perform and discharge its allocated liabilities according to their terms, and (b) Packaging will assume, pay, perform and discharge its allocated liabilities according to their terms. See "-- Corporate Restructuring Transactions." The distribution agreement will provide for cross-indemnities so that: (a) Automotive must indemnify Packaging and its respective subsidiaries, directors, officers, employees and agents, and other related parties, against all losses arising out of or in connection with Automotive's allocated liabilities or the breach of the distribution agreement or any ancillary agreement by Automotive; and (b) Packaging must indemnify Automotive and its respective subsidiaries, directors, officers, employees and agents, and other related parties, against all losses arising out of or in 65 67 connection with Packaging's allocated liabilities or the breach of the distribution agreement or any ancillary agreement by Packaging. Further Assurances. Automotive and Packaging will each agree to use all reasonable efforts to take all action reasonably necessary or advisable to consummate the transactions contemplated by and carry out the purposes of the distribution agreement. Information Sharing. The distribution agreement will provide for the transfer and sharing of books and records between Automotive and Packaging and will grant each party access to specified information in the other's possession, subject to confidentiality requirements and legal privilege issues. Intercompany Accounts. According to the distribution agreement, in general all intercompany receivables, payables and loans between Tenneco's automotive business, on the one hand, and its packaging business and administrative services operations, on the other hand, will be settled, capitalized or converted into ordinary trade obligations as of the close of business on the spin-off date. Further, all intercompany agreements between these businesses, other than those contemplated in connection with the spin-off, will be terminated. Expenses. Tenneco will use a portion of the funds borrowed by Tenneco and Packaging as part of the debt realignment to fund the payment of fees, costs and expenses associated with the spin-off. Accordingly, the allocation of debt described above under "-- Debt Realignment" includes additional debt incurred to fund these fees, costs and expenses. Under the distribution agreement, other specified fees, costs and expenses related to the spin-off but not funded in connection with the debt realignment will be shared equally by Tenneco and Packaging. All other fees, costs and expenses will be paid by the party incurring such fees, costs or expenses. Directors. When the spin-off is completed, Packaging and Automotive will share four common directors, Dana G. Mead, Paul T. Stecko, Mark Andrews and Roger B. Porter. Each company will adopt policies and procedures for its board of directors to limit the involvement of Messrs. Mead, Stecko, Andrews and Porter in situations that could give rise to potential conflicts of interest, including requesting them to abstain from voting as a director of either Packaging or Automotive on matters which present a conflict of interest between the companies. Tenneco and Packaging believe that the number of these conflict situations will be minimal. HUMAN RESOURCES AGREEMENT The human resources agreement to be entered into between Automotive and Packaging will govern labor, employment, compensation and benefit matters in connection with the spin-off. Under the human resources agreement, after the spin-off date, each of Automotive and Packaging will: - continue employment of each of their respective retained employees, subject to their rights to terminate employees, with the same compensation as before the spin-off date; - continue to honor all related existing collective bargaining agreements in accordance with their terms; - recognize related incumbent labor organizations, subject to their rights to seek changes in their relationships with the organizations; and - continue sponsorship of hourly employee benefit plans in accordance with their terms. Packaging will become the sponsor of the Tenneco Retirement Plan and of the Tenneco Thrift Plan and Tenneco Thrift Plan for Hourly Employees (collectively the "Tenneco Thrift Plan") on the spin-off date. Automotive will establish one or more thrift plans similar to the Tenneco Thrift Plan to which the account balances of retained and former employees of Automotive in the Tenneco Thrift Plan will be transferred. The benefits accrued by Automotive employees in the Tenneco Retirement Plan will be frozen as of the last day of the calendar month including the spin-off date, and Packaging will amend the Tenneco Retirement Plan to provide that all benefits accrued through that day by Automotive employees 66 68 are fully vested and non-forfeitable. Generally, each of Automotive and Packaging will retain liabilities with respect to benefits accrued by its current and former employees under the Tenneco Inc. Supplemental Executive Retirement Plan and with respect to the welfare benefits of its current and former employees and their dependents. In addition, as of the spin-off date, Packaging will succeed to sponsorship of the Tenneco Inc. Deferred Compensation Plan; participation by current and former employees of Automotive in that plan will be discontinued, and Automotive will succeed to liabilities with respect to its current and former employees under that plan. Under the human resources agreement, Tenneco common stock options held by Packaging employees will be replaced by options to purchase shares of Packaging common stock on terms economically equivalent to the old Tenneco options. Tenneco common stock options held by Automotive employees will be adjusted to maintain equivalent economic terms to the options outstanding immediately prior to the spin-off. TAX SHARING AGREEMENT The tax sharing agreement to be entered into between Automotive and Packaging will provide for the allocation of tax liabilities between the parties arising before, as a result of and after the spin-off. As a general rule, Automotive will be liable for all taxes not specifically allocated to Packaging under the terms of the tax sharing agreement. Generally, Packaging will be liable for taxes imposed exclusively on Packaging and its affiliates engaged in the packaging and administrative services businesses (the "Packaging group"). In the case of U.S. federal income taxes imposed on the combined activities of Automotive and the Packaging group, Packaging will generally be liable to Automotive for federal income taxes attributable to the activities of the Packaging group. Liability for foreign income taxes and non-income taxes will generally be allocated to the legal entity on which the taxes are imposed. In the case of state income taxes imposed on the combined activities of the business groups, Packaging will generally be liable for the tax that would be imposed if the Packaging group had filed combined returns for its group. In general, and except as provided below, any taxes imposed on or resulting from any or all of the spin-off, the corporate restructuring transactions and the debt realignment ("transaction taxes") will be the responsibility of the legal entity on which the taxes are imposed. However, if any transaction taxes arise due to any action taken or permitted by Automotive or Packaging that is inconsistent with any representations or warranties made in connection with the IRS letter ruling requested and received by Tenneco in connection with the spin-off, that entity, either Automotive or Packaging, will be responsible for the resulting tax liability. Additionally, if any transaction taxes arise under Section 355(e) of the Internal Revenue Code of 1986, as amended (the "Code"), as a result of a 50% ownership shift, as defined below, then the resulting corporate tax burden will be borne by the entity, either Automotive or Packaging, that experienced the 50% ownership shift. Any income tax liability that results from the spin-off, corporate restructuring transactions or debt realignment, but which is not due to either a 50% ownership shift or an action that is inconsistent with the tax treatment contemplated in the IRS letter ruling request, will be shared equally by Automotive and Packaging. Section 355(e) of the Code, which was enacted in 1997, generally provides that a company that distributes shares of a subsidiary in a spin-off that is otherwise tax-free will incur federal income tax liability if 50% or more, by vote or value, of the capital stock of either the company making the distribution or the spun-off subsidiary is acquired (a "50% ownership shift") by one or more persons acting together pursuant to a plan or series of related transactions that includes the spin-off. This provision can be triggered by certain reorganizations involving the acquisition of the assets of the company making the distribution or the spun-off subsidiary. There is a presumption that any 50% ownership shift that occurs within two years before or after the spin-off is pursuant to a plan that includes the spin-off. However, the presumption may be rebutted by establishing that the spin-off and the acquisitions are not part of a plan or series of related transactions. Each of Automotive and Packaging will agree not to take or permit actions inconsistent or partially inconsistent with the IRS letter ruling request on or before the period ending two calendar years from the date of the spin-off, unless the action has been consented to by the other. These agreements could restrict 67 69 the ability of Automotive or Packaging to engage in certain corporate transactions, redeem stock, dispose of assets except in the ordinary course of business or be the target of an acquisition transaction during that period. TRANSITION SERVICES AGREEMENT Tenneco's administrative services operations currently provide a number of services to Tenneco's operating units. These services include (1) financial accounting services; (2) employee benefits administration for all major salaried and hourly benefit plans; (3) human resources and payroll services; (4) mainframes and distributed systems operations; (5) telecommunications and network operations and management; (6) help desk support; and (7) disaster recovery support. When the spin-off is complete, Tenneco's administrative services operations will be a part of Packaging. Accordingly, Automotive and Packaging will enter into a transition services agreement under which Packaging will continue to provide Automotive with specified administrative services for a term to be determined before the spin-off. Because Automotive will retain a portion of the administrative support for Tenneco's European operations, however, Automotive will also agree to provide Packaging with specified administrative services for its European operations for an initial period of six months beginning on the date of the spin-off. After the initial six-month period, Packaging may elect to have Automotive continue to provide specified services for up to six months on a month-to-month basis. The price for all services will be negotiated between the parties and be based on the full cost for the services. INSURANCE AGREEMENT The insurance agreement to be entered into between Automotive and Packaging will provide for the separation and administration of existing insurance programs and the purchase of "run-off " policies for fiduciaries and directors and officers. In general, the insurance agreement will provide that Packaging and Automotive will obtain coverage for the period ending in December 1996 through Tenneco's pre-existing policies. For the period between December 1996 and the spin-off, Automotive and Packaging will obtain coverage through Tenneco's existing policies plus supplemental coverage to be purchased by Tenneco. Tenneco also will purchase "run-off" insurance policies that remain in effect for seven years and provide coverage for acts prior to the spin-off by directors, officers and fiduciaries of benefit and pension plans. Packaging and Automotive will each be responsible for administering their respective insurance programs after the spin-off and for purchasing insurance as necessary to cover their respective losses arising after the spin-off. The insurance agreement also allocates responsibility for the payment of premiums and deductibles, and the distribution of insurance proceeds. TRADEMARK TRANSITION LICENSE AGREEMENT After the spin-off, Automotive or one of its subsidiaries will hold the rights to various trademarks, servicemarks, tradenames and similar intellectual property, including rights in the marks "Tenneco," "Ten" and "Tenn" alone and in combination with other terms and/or symbols and variations thereof (collectively, the "Trademarks"), in the United States and throughout the world. In connection with the spin-off, Packaging will enter into a trademark transition license agreement with Automotive. Under this agreement, Automotive or one of its subsidiaries will grant to Packaging and its subsidiaries a limited, royalty-free license to use the Trademarks with respect to packaging businesses, subject to quality standards and other conditions. The license will expire (1) 60 days after the spin-off, with respect to the use of the Trademarks in corporate names, (2) 9 months after the spin-off, with respect to stationery and similar supplies in inventory and (3) 18 months after the spin-off, with respect to signage. 68 70 CONDITIONS TO THE SPIN-OFF The spin-off is conditioned on, among other things, formal declaration of the spin-off by the Tenneco Board of Directors. Other conditions to the spin-off will include: - execution and delivery of the ancillary agreements and completion of various pre-spin-off transactions, such as the corporate restructuring transactions and the debt realignment; - a determination to the effect that for federal income tax purposes, (1) the spin-off will be tax-free to Tenneco and its stockholders under Section 355(a) and Section 361(c)(1) of the Internal Revenue Code of 1986, and (2) specified internal restructuring transactions involving Tenneco or its subsidiaries to be effected by the corporate restructuring transactions will also be tax-free; - approval for listing on the NYSE of the Packaging common stock; - registration of the Packaging common stock under the Exchange Act; - receipt of all material consents to the corporate restructuring transactions, the spin-off and transactions contemplated in the distribution agreement; and - the absence of any prohibition of the spin-off by any law or governmental authority. Tenneco received an IRS letter ruling on August 20, 1999 that satisfied the tax-related condition described above. Even if all the conditions to the spin-off are satisfied, Tenneco has reserved the right to amend or terminate the distribution agreement and the related transactions before the spin-off. The Tenneco board of directors has not attempted to identify or establish objective criteria for evaluating the particular types of events or conditions that would cause the Tenneco Board of Directors to consider amending or terminating the spin-off. See "-- Relationship Between Automotive and Packaging After the Spin-off -- Distribution Agreement." Although the conditions described above may be waived by Tenneco to the extent permitted by law, the Tenneco board of directors presently has no intention to proceed with the spin-off unless each of these conditions is satisfied. AMENDMENT OR TERMINATION OF THE DISTRIBUTION AGREEMENT Before the spin-off, the distribution agreement may be amended or terminated by Tenneco in its discretion. After the spin-off, the distribution agreement may be amended or terminated only by a written agreement signed by Automotive and Packaging. Some amendments or terminations after the spin-off will also require the consent of third-party beneficiaries to the extent that the distribution agreement has expressly guaranteed them rights. 69 71 DESCRIPTION OF PACKAGING GENERAL Packaging is a global supplier of specialty packaging and consumer products with 1998 revenues of approximately $2.8 billion. Packaging operates 89 manufacturing facilities throughout the world and employs over 15,000 people. Packaging is currently owned by Tenneco and will be an independent, publicly traded company upon completion of the spin-off. See "The Spin-off." CAPITALIZATION The following table sets forth the unaudited historical capitalization of Packaging as of June 30, 1999, and unaudited pro forma capitalization of Packaging as of June 30, 1999, after giving effect to the debt realignment and the spin-off and related transactions, each as if they occurred on that date. The pro forma capitalization reflects debt allocated to Packaging in the debt realignment before application of any proceeds from Packaging's planned sale of its remaining interest in its containerboard joint venture. You should read this table in conjunction with the "Combined Financial Statements of The Businesses of Tenneco Packaging" and related notes, the "Unaudited Pro Forma Combined Financial Statements of Packaging" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Packaging, each contained elsewhere in this document.
PACKAGING ------------------------ JUNE 30, 1999 ------------------------ HISTORICAL PRO FORMA ---------- --------- (IN MILLIONS) Short-term debt: Allocated from Tenneco.................................... $ 358(a) $ -- Borrowings under new Packaging credit facilities.......... -- 1,001 Other..................................................... 9 9 ------ ------ 367 1,010(b) ------ ------ Long-term debt: Allocated from Tenneco.................................... 1,474(a) -- New securities............................................ -- 1,166(c) Other..................................................... 20 20 ------ ------ 1,494 1,186(b) ------ ------ Total debt.................................................. 1,861 2,196(b) ------ ------ Minority interest........................................... 14 14 ------ ------ Common stock................................................ -- 2 Paid-in capital............................................. -- 1,284 Retained earnings........................................... -- -- Combined equity............................................. 1,340 -- ------ ------ Total equity......................................... 1,340 1,286 ------ ------ Total capitalization........................................ $3,215 $3,496 ====== ======
- ------------------------- (a) Represents debt allocated to Packaging from Tenneco based on the portion of Tenneco's investment in Packaging which Tenneco deemed to be debt. This allocation is generally based on the ratio of Packaging's net assets to Tenneco's consolidated net assets plus debt. Tenneco's historical practice has been to incur debt for its consolidated group at the parent company level or at a limited number of subsidiaries, rather than at the operating company level, and to centrally manage various cash functions. Management believes that the historical allocation of corporate debt is reasonable. This historical allocation, however, is not indicative of the total amount of debt that Packaging will have upon completion of the debt realignment, or of the debt that may be incurred by Packaging as a separate public entity. (b) Represents debt allocated to Packaging in the debt realignment before application of any proceeds from Packaging's planned sale of its remaining interest in its containerboard joint venture. Packaging expects the sale to be completed before the spin-off, with the net proceeds used to retire the Tenneco debt that would otherwise be allocated to Packaging in the debt realignment. If the sale occurs after the spin-off, the net proceeds will be used to retire Packaging debt. (c) Represents the $1,176 million aggregate principal amount of new securities assumed to be exchanged pursuant to the exchange offers, which will be recorded based on the net carrying amount of the original securities upon consummation of the exchange offers. At this time, Packaging and Tenneco cannot determine the ultimate amount of original securities that will be exchanged, and that amount could vary significantly. The pro forma capitalization assumes that 100% of the original securities are tendered before the early exchange time and exchanged for new securities in the exchange offers and that such new securities are not "substantially different" from the original securities. See "Accounting Treatment of the Exchange Offers." 70 72 NEW FINANCING In connection with the spin-off, Packaging has entered into the following credit facilities: (1) a $750 million long-term revolving senior credit facility; and (2) a $250 million 364-day revolving senior credit facility. Packaging may also enter into a $1.5 billion term loan facility in connection with the spin-off, as described below. A definitive agreement for the $1.5 billion term loan facility has not been completed. Accordingly, the terms of the $1.5 billion term loan are preliminary and may change as a result of the negotiation of a definitive agreement. Initial borrowings under one or more of these facilities are expected to occur on or shortly before the spin-off. See "The Spin-off -- Debt Realignment" for a description of how Packaging intends to use the proceeds of the initial borrowings. $750 MILLION LONG-TERM SENIOR REVOLVING CREDIT FACILITY Packaging has entered into a senior credit facility with a syndicate, or group, of banks and other financial institutions. This facility is a revolving credit facility of up to $750 million, which will terminate on September 29, 2004. Part of the total facility will be a swingline facility of up to $50 million, from only one lender in the group, which provides for borrowings to be made on shorter notice than for the other loans. The proceeds of the loans made under this facility will be used by Packaging for refinancing existing indebtedness of Tenneco or its subsidiaries, including Packaging, as part of the debt realignment, for working capital and for other general corporate purposes. Maturity. This senior credit facility provides that all amounts outstanding at the termination of the facility in 2004 will become due then. Prior to that date, funds may be borrowed, repaid, and reborrowed, without premium or penalty. Covenants. This facility will require Packaging to maintain compliance with the following financial tests: - minimum interest coverage ratio, which is the ratio of consolidated earnings before interest expense, income taxes, minority interest, depreciation and amortization ("EBITDA") to consolidated cash interest expense, as of the last day of any fiscal period; and - maximum total debt to EBITDA ratio, which is the ratio of Packaging's indebtedness, less certain exclusions, to EBITDA. The senior credit facility imposes prohibitions and limitations that are customary for similar facilities and transactions, including, among other things, on Packaging's ability to incur specified liens, incur subsidiary indebtedness, dispose of all or substantially all of its assets, and discontinue its primary businesses. Interest. At Packaging's option, borrowings under this facility, except for competitive bid loans and swingline facility loans, will bear interest at a floating rate based on LIBOR, adjusted for reserve requirements, plus a specified margin, or based on a specified prime or reference rate plus a specified margin. Each competitive bid loan will bear interest at the rate quoted in the respective bid. Each swingline loan is expected to bear interest at a minimum rate, which may be negotiated higher, based on the higher of a specified prime or reference rate and the federal funds rate plus an applicable margin. $250 MILLION 364 DAY SENIOR REVOLVING CREDIT FACILITY Packaging has entered into an additional revolving credit facility of up to $250 million. This senior credit facility will terminate on September 27, 2000, 364 days after its signing date, and all amounts outstanding at termination to become due then. 71 73 Initial borrowings will occur under this facility at the same time as under Packaging's $750 million Long-Term Senior Revolving Facility described above or thereafter during its term, and that proceeds of the loans will be used for the same purposes as the Long-Term Facility. The financial tests, prohibitions and limitations, interest rates and other material terms of this facility are the same as for the Long-Term Facility. $1.5 BILLION TERM LOAN FACILITY A lender has committed to provide Packaging up to $1.5 billion of term loan financing which Packaging intends to use in the event it does not sell its containerboard joint venture interest before the spin-off for general corporate and other purposes. Although the terms of this financing have not been finalized, Packaging expects that borrowings under this facility would be due 18 months after funding and bear interest at a floating rate based on LIBOR, adjusted for reserve requirements, plus a specified margin, or based on a specified prime or reference rate plus a specific margin, at Packaging's option. Packaging expects this financing would include covenants similar to those described above for the revolving credit facilities. 72 74 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF PACKAGING The following Unaudited Pro Forma Combined Balance Sheet of Packaging as of June 30, 1999, and the Unaudited Pro Forma Combined Statements of Income for the six months ended June 30, 1999 and the year ended December 31, 1998, reflect the effects of: - the debt realignment; and - the spin-off of Packaging and the related transactions. The Unaudited Pro Forma Combined Balance Sheet has been prepared as if these transactions occurred on June 30, 1999; the Unaudited Pro Forma Combined Statements of Income have been prepared as if these transactions occurred as of January 1, 1998. The Unaudited Pro Forma Combined Financial Statements are not necessarily indicative of the results that would have actually occurred if these transactions had been consummated as of June 30, 1999 or January 1, 1998, or results which may be attained in the future. The Unaudited Pro Forma Combined Financial Statements were derived from the historical Combined Financial Statements of The Businesses of Tenneco Packaging included elsewhere in this document. Net assets included in these historical financial statements that are not already owned directly or indirectly by Packaging will be transferred to Packaging before the spin-off as part of the corporate restructuring transactions. The accounting for the transfer of assets and liabilities pursuant to the corporate restructuring transactions represents a reorganization of companies under common control and, accordingly, all assets and liabilities are reflected at their historical cost in Packaging's historical combined financial statements. The pro forma adjustments, as described in the Notes to the Unaudited Pro Forma Combined Financial Statements, are based upon available information and upon certain assumptions that management believes are reasonable. Packaging's pro forma debt and interest expense balances do not give effect to the application of any proceeds from Packaging's planned sale of its remaining interest in the joint venture. Packaging expects the sale to be completed before the spin-off, with the net proceeds used to retire the Tenneco debt that would otherwise be allocated to Packaging in the debt realignment. If the sale does not occur before the spin-off, the net proceeds will be used to retire Packaging debt. You should also read the Combined Financial Statements of The Businesses of Tenneco Packaging, and related notes, included elsewhere in this document. 73 75 PACKAGING UNAUDITED PRO FORMA COMBINED BALANCE SHEET JUNE 30, 1999 (IN MILLIONS)
PRO FORMA ADJUSTMENTS ----------------------------- SPIN-OFF PACKAGING PACKAGING DEBT AND RELATED PRO FORMA HISTORICAL REALIGNMENT TRANSACTIONS COMBINED ASSETS ---------- ----------- ------------ --------- Current assets: Cash and temporary cash investments............................................. $ 18 $ -- $ -- $ 18 Receivables............................................... 375 -- 119(b) 494 Inventories............................................... 447 -- -- 447 Prepayments and other..................................... 72 -- -- 72 ------ ------ ------- ------ Total current assets.................................. 912 -- 119 1,031 Plant, property, and equipment, net......................... 1,495 -- -- 1,495 Goodwill and intangibles, net............................... 1,028 -- -- 1,028 Other assets and deferred charges........................... 918 59(a) 85(c) 1,062 Net assets of discontinued operations................................................ 133 -- -- 133 ------ ------ ------- ------ Total assets.......................................... $4,486 $ 59 $ 204 $4,749 ====== ====== ======= ====== LIABILITIES AND EQUITY Current liabilities: Short-term debt........................................... $ 367 $ 643(a) $ -- $1,010(e) Trade payables............................................ 357 -- -- 357 Other current liabilities................................. 336 -- -- 336 ------ ------ ------- ------ Total current liabilities............................. 1,060 643 -- 1,703 Long-term debt.............................................. 1,494 (308)(a) -- 1,186(e) Deferred income taxes....................................... 380 (52)(a) 34(c) 362 Other liabilities and deferred credits...................... 198 -- -- 198 Minority interest........................................... 14 -- -- 14 Equity: Combined equity........................................... 1,340 (224)(a) 119(b) -- 51(c) (1,286)(d) Common stock.............................................. -- -- 2(d) 2 Paid-in capital........................................... -- -- 1,284(d) 1,284 Retained earnings......................................... -- -- --(d) -- ------ ------ ------- ------ Total liabilities and equity.......................... $4,486 $ 59 $ 204 $4,749 ====== ====== ======= ======
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements. 74 76 PACKAGING UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME SIX MONTHS ENDED JUNE 30, 1999 (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS -------------------------- SPIN-OFF PACKAGING PACKAGING DEBT AND RELATED PRO FORMA HISTORICAL REALIGNMENT TRANSACTIONS COMBINED ---------- ----------- ------------ --------- REVENUES Net sales and operating revenues.......... $ 1,404 $-- $-- $ 1,404 Other income, net......................... (18) -- -- (18) ------------ --- --- ------------ 1,386 -- -- 1,386 ------------ --- --- ------------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)........................... 924 -- -- 924 Engineering, research, and development.... 18 -- -- 18 Selling, general, and administrative...... 206 -- (3)(c) 203 Depreciation and amortization............. 94 -- -- 94 ------------ --- --- ------------ 1,242 -- (3) 1,239 ------------ --- --- ------------ INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST.............. 144 -- 3 147 Interest expense............................ 68 13(f) -- 81(e)(f) Income tax expense.......................... 24 (5)(g) 1(g) 20 Minority interest........................... -- -- -- -- ------------ --- --- ------------ INCOME FROM CONTINUING OPERATIONS........... $ 52 $(8) $ 2 $ 46(e) ============ === === ============ EARNINGS PER SHARE Average shares of common stock -- Basic................................ 166,937,362 166,937,362 Diluted.............................. 167,319,412 167,319,412 Income from continuing operations Basic................................ $ .31 $ .28 Diluted.............................. $ .31 $ .28
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements. 75 77 PACKAGING UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1998 (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS --------------------------- SPIN-OFF PACKAGING PACKAGING DEBT AND RELATED PRO FORMA HISTORICAL REALIGNMENT TRANSACTIONS COMBINED ---------- ----------- ------------ --------- REVENUES Net sales and operating revenues..... $ 2,791 $ -- $ -- $ 2,791 Other income, net.................... (3) -- -- (3) ------------ ---- ---- ------------ 2,788 -- -- 2,788 ------------ ---- ---- ------------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)......... 1,870 -- -- 1,870 Engineering, research, and development....................... 33 -- -- 33 Selling, general, and administrative.................... 427 -- (5)(c) 422 Depreciation and amortization........ 175 -- -- 175 ------------ ---- ---- ------------ 2,505 -- (5) 2,500 ------------ ---- ---- ------------ INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST......... 283 -- 5 288 Interest expense....................... 133 31(f) -- 164(e)(f) Income tax expense..................... 67 (12)(g) 2(g) 57 Minority interest...................... 1 -- -- 1 ------------ ---- ---- ------------ INCOME FROM CONTINUING OPERATIONS...... $ 82 $(19) $ 3 $ 66(e) ============ ==== ==== ============ EARNINGS PER SHARE Average shares of common stock -- Basic........................... 168,505,573 168,505,573 Diluted......................... 168,834,531 168,834,531 Income from continuing operations -- Basic........................... $ .49 $ .39 Diluted......................... $ .49 $ .39
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements. 76 78 PACKAGING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (a) To reflect debt allocated to Packaging in the debt realignment. The adjustment to equity reflects the net impact of the debt realignment, the recording of debt issue costs and deferred income taxes related to the exchange offers and other transaction costs. Pro forma long-term debt includes $1,166 million of new securities, $1,176 million aggregate principal amount, assumed to be exchanged in the exchange offers, and $20 million of long-term debt of Packaging subsidiaries. Pro forma short-term debt includes $1,001 million borrowed under Packaging's new credit facilities to be entered into as part of this debt realignment and $9 million of short-term debt of Packaging subsidiaries. At this time, Packaging and Tenneco cannot determine the ultimate amount of the original securities which will be exchanged into new securities, and this amount could vary significantly. These pro forma adjustments assume that 100% of the original securities subject to the exchange offers will be tendered before the early exchange time and exchanged for new securities and the new securities will be recorded at the net carrying amount of the original securities. In other words, the new securities are assumed not to be "substantially different." See "Accounting Treatment of the Exchange Offers". The results of the exchange offers could vary based on a number of factors, including the timing and level of acceptance of the exchange offers, the interest rate of the exchanged securities and whether the exchanges will be considered extinguishments for accounting purposes. Based on current interest rate markets, Packaging expects that the exchange offers will not be extinguishments for accounting purposes. Therefore, Packaging does not expect to recognize an extraordinary loss attributable to the debt exchange. Other costs, including transaction costs related to the spin-off and contractual employment obligations, are expected to be incurred by Packaging in connection with the corporate restructuring transactions and the spin-off which Packaging estimates will be approximately $70 million after-tax. The effects on Packaging's debt of these costs has been reflected in this pro forma adjustment. However, these charges have not been included in the unaudited pro forma combined statement of income. (b) To reflect the purchase of Packaging accounts receivable at fair value which had previously been sold to a third party. (c) To reflect the transfer to Packaging of prepaid pension costs attributable to Automotive employees and the corresponding reduction in net periodic pension costs and the increase in prepaid pension cost attributable to the curtailment of the pension benefits related to Automotive employees. Automotive employees will no longer participate in the Tenneco Retirement Plan following the spin-off and Packaging will become the sponsor of this plan. These prepaid pension costs will be transferred to Packaging in connection with the corporate restructuring transactions. Packaging estimates that a curtailment gain of approximately $30 million will be recognized relating to the freezing of Automotive employees' pension benefits in connection with the spin-off. This gain has not been included in the unaudited pro forma combined statements of income. (d) To reflect the spin-off of Packaging common stock to holders of Tenneco common stock at an exchange ratio of one share of Packaging common stock for each share of Tenneco common stock. (e) The Packaging pro forma debt balances do not give effect to the application of any proceeds from the planned sale of Packaging's remaining interest in Packaging's containerboard joint venture. Packaging expects the sale to be completed before the spin-off, with the proceeds used to repay the Tenneco debt that would otherwise be allocated to Packaging in the debt realignment. If the sale occurs after the spin-off, the net proceeds will be used to retire Packaging debt. In September 1999, the joint venture, Packaging Corporation of America, filed a registration statement for Packaging to sell its interest in a registered public offering. Based on indications of value in that registration statement, estimated net proceeds ranging from $525 million to $600 million are anticipated to be received from the sale of Packaging's remaining interest in its containerboard joint venture. For each $50 million of after-tax proceeds received from the sale, pro forma interest expense would be reduced by 77 79 PACKAGING NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED) approximately $3 million on an annual basis and pro forma income from continuing operations would be increased by approximately $2 million on an annual basis, or $0.01 per diluted common share. (f) To reflect the adjustment to interest expense from the allocation of Tenneco debt to Packaging in the debt realignment as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 1999 1998 ---------------- ------------ (IN MILLIONS) Interest expense on historical debt(1)....... $(68) $(133) Interest expense on the new securities(2).... 46 93 Interest expense on Packaging's new credit facilities(3).............................. 31 63 Amortization of debt financing costs(4)...... 4 8 ---- ----- Adjustment to interest expense............... $ 13 $ 31 ==== =====
------------------------ (1) Weighted average outstanding debt and average annual effective interest rates were $1,836 million and 7.3% for the six months ended June 30, 1999, and $1,900 million and 7.0% for the year ended December 31, 1998. (2) Weighted average outstanding debt and average annual effective interest rate for the new securities were assumed to be approximately $1,166 million and 7 7/8% for the six months ended June 30, 1999 and the year ended December 31, 1998. (3) Weighted average outstanding debt and average annual effective rate for Packaging's new credit facilities were assumed to be $1,001 million and 6 1/4% for the six months ended June 30, 1999 and the year ended December 31, 1998. (4) Represents the amortization of deferred debt financing costs. A 1/8% change in the assumed interest rates would change annual pro forma interest expense by approximately $3 million, before the effect of income taxes. (g) To reflect the income tax expense effects of pro forma adjustments at an assumed statutory tax rate of 40%. 78 80 SUPPLEMENTAL FINANCIAL INFORMATION OF PACKAGING RESULTS OF OPERATIONS Packaging's historical and pro forma earnings before interest expense, income taxes, and minority interest ("EBIT") are shown in the following table:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1998 JUNE 30, 1999 ----------------- ---------------- (MILLIONS) Historical EBIT............................................. $283 $144 Pro forma EBIT.............................................. $288 $147
These historical and pro forma results include certain items that Packaging believes require additional explanation. These items include costs which Tenneco incurred at the corporate level but did not fully allocate to its operating divisions, such as administrative services, corporate overhead, and costs related to Tenneco's operation as a public company. Because these functions will become part of Packaging following the spin-off, these costs have been included in Packaging's historical and pro forma EBIT. These items also included a restructuring charge recorded in the fourth quarter of 1998. The following information discusses these items in detail and their financial impact on Packaging's EBIT.
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1998 JUNE 30, 1999 ----------------- ---------------- (MILLIONS) - Restructuring charge -- Packaging recorded a restructuring charge in the fourth quarter of 1998 designed to reduce administrative and operational costs. Refer to Note 4, "Restructuring and Other Charges," on page F-14 of The Combined Financial Statements of the Businesses of Tenneco Packaging for further information.................................. $32 $29 - Restructuring savings -- The portion of the restructuring plan designed to reduce operational costs is expected to result in lower costs of sales. See "Restructuring and Other Charges" in Packaging's Management's Discussion and Analysis for a discussion of expected savings from restructuring............... $13 $ 6 - Corporate overhead reductions -- Packaging's smaller, less complex corporate structure is expected to result in corporate overhead costs that are lower by approximately $12 million than Tenneco incurred historically. Also, Packaging's EBIT includes costs associated with Tenneco's administrative services operations. Although the administrative services operations provide a number of services to Tenneco's operating units, some of these corporate level costs were not previously allocated to Tenneco's operating segments. Had all the administrative services operations costs been allocated based on a usage charge, Packaging estimates that approximately $28 million would have been billed to Automotive for 1998. See page F-11, "General and Administrative Expenses" in Note 3 to the Combined Financial Statements of the Businesses of Tenneco Packaging.... $40 $20
79 81 COMBINED SELECTED FINANCIAL DATA OF PACKAGING The following combined selected financial data as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997, and 1996, were derived from the audited Combined Financial Statements of The Businesses of Tenneco Packaging. The following combined selected financial data as of December 31, 1996, 1995, and 1994, and for the years ended December 31, 1995 and 1994, are unaudited and were derived from Tenneco's accounting records. The following combined selected financial data as of and for each of the six months ended June 30, 1999 and 1998 were derived from the unaudited Combined Financial Statements of The Businesses of Tenneco Packaging. In the opinion of Packaging's management, the combined selected financial data of Packaging as of December 31, 1996, 1995, and 1994, and for the years ended December 31, 1995 and 1994, and as of and for the six months ended June 30, 1999 and 1998, include all adjusting entries, consisting only of normal recurring adjustments, necessary to present fairly the information set forth. You should not regard the results of operations for the six months ended June 30, 1999 as indicative of the results that may be expected for the full year. There is other information Packaging believes is relevant to understanding its results of operations following the spin-off. These items relate to corporate overhead incurred by Tenneco and its administrative services operations that Packaging expects will differ following the spin-off. For further information you should see "Supplemental Financial Information of Packaging" included elsewhere in this document. You should read all of this information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Packaging and the Combined Financial Statements of The Businesses of Tenneco Packaging, and related notes, included elsewhere in this document.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ 1998(a) 1997(a) 1996(a) 1995 1994 ------- ------- ------- ---- ---- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) STATEMENTS OF INCOME DATA(b): Net sales and operating revenues -- Specialty............. $ 2,785 $ 2,553 $ 1,987 $ 845 $ 636 Other................. 6 10 -- -- -- ------------ ------------ ------------ ------------ ------------ Total............... $ 2,791 $ 2,563 $ 1,987 $ 845 $ 636 ============ ============ ============ ============ ============ Income from continuing operations before interest expense, income taxes, and minority interest -- Specialty............. $ 328 $ 308 $ 249 $ 39 $ 68 Other(c).............. (45) (2) (15) (6) 17 ------------ ------------ ------------ ------------ ------------ Total............... 283 306 234 33 85 Interest expense(d)....... 133 124 102 91 48 Income tax expense (benefit)............... 67 75 67 (3) 19 Minority interest......... 1 1 -- -- -- ------------ ------------ ------------ ------------ ------------ Income (loss) from continuing operations... 82 106 65 (55) 18 Income (loss) from discontinued operations, net of income tax(e).... 57 21 71 224 75 Extraordinary loss, net of income tax(f)........... -- -- (2) -- -- Cumulative effect of changes in accounting principles, net of income tax(g)........... -- (38) -- -- -- ------------ ------------ ------------ ------------ ------------ Net income (loss)......... $ 139 $ 89 $ 134 $ 169 $ 93 ============ ============ ============ ============ ============ (continued on next page) SIX MONTHS ENDED JUNE 30, --------------------------- 1999(a) 1998(a) ------- ------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) = STATEMENTS OF INCOME DATA(b): Net sales and operating revenues -- Specialty............. $ 1,404 $ 1,361 Other................. -- 10 ------------ ------------ Total............... $ 1,404 $ 1,371 ============ ============ Income from continuing operations before interest expense, income taxes, and minority interest -- Specialty............. $ 190 $ 175 Other(c).............. (46) (2) ------------ ------------ Total............... 144 173 Interest expense(d)....... 68 67 Income tax expense (benefit)............... 24 37 Minority interest......... -- -- ------------ ------------ Income (loss) from continuing operations... 52 69 Income (loss) from discontinued operations, net of income tax(e).... (163) 37 Extraordinary loss, net of income tax(f)........... (7) -- Cumulative effect of changes in accounting principles, net of income tax(g)........... (32) -- ------------ ------------ Net income (loss)......... $ (150) $ 106 ============ ============
80 82
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------ 1998(a) 1997(a) 1996(a) 1995 1994 ------- ------- ------- ---- ---- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) Average number of shares of common stock outstanding(h) -- Basic..................... 168,505,573 170,264,731 169,609,373 172,764,198 162,307,189 Diluted................... 168,834,531 170,801,636 170,526,112 173,511,654 162,912,425 Earnings (loss) per average share of common stock(h) -- Basic: Continuing operations... $ .49 $ .63 $ .38 $ (.32) $ .11 Discontinued operations(e)......... .34 .12 .42 1.30 .46 Extraordinary loss(f)... -- -- (.01) -- -- Cumulative effect of changes in accounting principles(g)......... -- (.23) -- -- -- ------------ ------------ ------------ ------------ ------------ $ .83 $ .52 $ .79 $ .98 $ .57 ============ ============ ============ ============ ============ Diluted: Continuing operations... $ .49 $ .63 $ .38 $ (.32) $ .11 Discontinued operations(e)......... .34 .12 .42 1.29 .46 Extraordinary loss(f)... -- -- (.01) -- -- Cumulative effect of changes in accounting principles(g)......... -- (.23) -- -- -- ------------ ------------ ------------ ------------ ------------ $ .83 $ .52 $ .79 $ .97 $ .57 ============ ============ ============ ============ ============ BALANCE SHEET DATA(b): Net assets of discontinued operations(e)........... $ 366 $ 423 $ 459 $ 393 $ 236 Total assets.............. 4,798 4,618 4,028 3,358 1,630 Short-term debt(d)........ 595 158 123 205 49 Long-term debt(d)......... 1,312 1,492 1,073 880 478 Debt allocated to discontinued operations(d)........... 548 473 394 369 285 Minority interest......... 14 15 -- -- -- Combined equity........... 1,776 1,839 1,843 1,531 703 STATEMENT OF CASH FLOWS DATA(b): Net cash provided (used) by operating activities.............. $ 577 $ 405 $ 263 $ 479 $ 283 Net cash provided (used) by investing activities.............. (514) (654) (669) (1,791) (146) Net cash provided (used) by financing activities.............. (67) 239 399 1,327 (142) Capital expenditures for continuing operations... (194) (229) (216) (265) (134) OTHER DATA: EBITDA(i)................. $ 458 $ 469 $ 365 $ 78 $ 121 Ratio of earnings to fixed charges(j).............. 1.99 2.31 2.15 NM 1.72 SIX MONTHS ENDED JUNE 30, --------------------------- 1999(a) 1998(a) ------- ------- (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) Average number of shares of common stock outstanding(h) -- Basic..................... 166,937,362 169,341,555 Diluted................... 167,319,412 169,936,676 Earnings (loss) per average share of common stock(h) -- Basic: Continuing operations... $ .31 $ .41 Discontinued operations(e)......... (.98) .22 Extraordinary loss(f)... (.04) -- Cumulative effect of changes in accounting principles(g)......... (.19) -- ------------ ------------ $ (.90) $ .63 ============ ============ Diluted: Continuing operations... $ .31 $ .41 Discontinued operations(e)......... (.98) .22 Extraordinary loss(f)... (.04) -- Cumulative effect of changes in accounting principles(g)......... (.19) -- ------------ ------------ $ (.90) $ .63 ============ ============ BALANCE SHEET DATA(b): Net assets of discontinued operations(e)........... $ 133 $ 382 Total assets.............. 4,486 4,788 Short-term debt(d)........ 367 335 Long-term debt(d)......... 1,494 1,488 Debt allocated to discontinued operations(d)........... -- 479 Minority interest......... 14 15 Combined equity........... 1,340 1,829 STATEMENT OF CASH FLOWS DATA(b): Net cash provided (used) by operating activities.............. $ (45) $ 288 Net cash provided (used) by investing activities.............. (866) (221) Net cash provided (used) by financing activities.............. 920 (66) Capital expenditures for continuing operations... (75) (101) OTHER DATA: EBITDA(i)................. $ 238 $ 261 Ratio of earnings to fixed charges(j).............. 2.00 2.45
- ------------------------- (a) For a discussion of the significant items affecting comparability of the financial information for the years ended December 31, 1998, 1997, and 1996, and for the six months ended June 30, 1999 and 1998, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of Packaging" included elsewhere in this document. (b) During the periods presented, Packaging completed numerous acquisitions, the most significant of which were the acquisitions of Mobil Plastics for $1.3 billion in late 1995, Amoco Foam Products for $310 million in August 1996, and the protective and flexible packaging business of N.V. Koninklijke KNP BT for $380 million in April 1997. See Note 6 to the Combined Financial Statements of The Businesses of Tenneco Packaging. See also, "Description of Packaging -- Growth Strategy" and "Description of Packaging -- Management's Discussion and Analysis of Financial Condition and Results of Operations." (c) Income from continuing operations before interest expense, income taxes and minority interest for "Other" includes costs which were incurred by Tenneco's corporate and administrative services operations which were not allocated to Tenneco's operating segments. Because these functions will be a part of Packaging upon the spin-off, they are included in Packaging's historical (continued on next page) 81 83 combined financial statements. Packaging expects its costs for these functions will differ following the spin-off. See "Supplemental Financial Information of Packaging" included elsewhere in this document for further information. (d) Tenneco's historical practice has been to incur indebtedness for its consolidated group at the parent company level or at a limited number of subsidiaries, rather than at the operating company level, and to centrally manage various cash functions. Accordingly, historical amounts include debt and related interest expense allocated to Packaging from Tenneco based on the portion of Tenneco's investment in Packaging which Tenneco deemed to be debt. This allocation is generally based upon the ratio of Packaging's net assets to Tenneco's consolidated net assets plus debt. An allocation of debt and its related interest expense has also been made to Packaging's discontinued operations based on the ratio of the discontinued operations' net assets to Packaging's combined net assets plus debt. Management believes that the historical allocation of corporate debt and interest expense is reasonable. This historical allocation is not, however, indicative of the total amount of debt that Packaging will have upon completion of the debt realignment or of the debt and interest that may be incurred by Packaging as a separate public entity. See the Combined Financial Statements of The Businesses of Tenneco Packaging included elsewhere in this document. (e) Discontinued operations for the periods presented consist of Packaging's paperboard packaging segment, which was discontinued in June 1999 following the decision to sell Packaging's remaining interest in Packaging's containerboard joint venture. Loss from discontinued operations for the six months ended June 30, 1999 included an after-tax loss of $178 million, or $1.07 per diluted common share, resulting from the contribution of Packaging's containerboard assets to the joint venture. See Note 7 to the Combined Financial Statements of the Businesses of Tenneco Packaging included elsewhere in this document. (f) Represents Packaging's costs related to prepayment of debt. See Note 7 to the Combined Financial Statements of The Businesses of Tenneco Packaging included elsewhere in this document. (g) In 1999, Packaging implemented the American Institute of Certified Public Accountants Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities." In 1997, Packaging implemented the Financial Accounting Standards Board's Emerging Issues Task Force Issue No. 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation." See Note 3 to the Combined Financial Statements of The Businesses of Tenneco Packaging included elsewhere in this document for additional information regarding changes in accounting principles. (h) In the spin-off, Tenneco stockholders will receive one share of Packaging common stock for each share of Tenneco common stock outstanding. Accordingly, basic and diluted earnings per share for Packaging were calculated using Tenneco's historical weighted average shares outstanding and weighted average shares outstanding adjusted to include estimates of additional shares that would be issued if potentially dilutive common shares had been issued, respectively. (i) EBITDA represents income from continuing operations before interest expense, income taxes, minority interest and depreciation and amortization. EBITDA is not a calculation based upon generally accepted accounting principles. The amounts included in the EBITDA calculation, however, are derived from amounts included in the Combined Statements of Income of The Businesses of Tenneco Packaging included elsewhere in this document. EBITDA should not be considered as an alternative to net income or operating income as an indicator of the operating performance of Packaging, or as an alternative to operating cash flows as a measure of liquidity. Packaging has reported EBITDA because it believes EBITDA is a measure commonly reported and widely used by investors and other interested parties as an indicator of a company's ability to incur and service debt. Packaging believes EBITDA assists investors in comparing a company's performance on a consistent basis without regard to depreciation and amortization, which can vary significantly depending upon accounting methods (particularly when acquisitions are involved) or nonoperating factors. However, the EBITDA measure presented in this document may not always be comparable to similarly titled measures reported by other companies due to differences in the components of the calculation. (j) For purposes of computing this ratio, earnings generally consist of income from continuing operations before income taxes and fixed charges excluding capitalized interest. Fixed charges consist of interest expense, the portion of rental expense considered representative of the interest factor and capitalized interest. The historical ratios are based upon the amount of interest expense on corporate debt allocated to Packaging by Tenneco as discussed in (d) above. For the year ended December 31, 1995, earnings were inadequate to cover fixed charges by $59 million. 82 84 INDUSTRY OVERVIEW AND KEY TERMS Many of the markets Packaging serves are growing faster than the overall United States gross domestic product. Most of our revenue comes from products made from different types of plastics, with the balance coming from paper and aluminum products. According to A.C. Neilsen, the unit volume growth trend as of June 12, 1999 for the zippered food storage bag market is 6% per year. Additionally, unit volume in the market for foam disposable foodservice packaging is projected to grow 6-7% annually for the next five years, according to a study prepared by a market research group. Several markets within the protective packaging industry are growing 6-8% per year in sales according to U.S. Industry and Trade Outlook '99. Specialty packaging is an industry term which generally refers to packaging used by commercial customers that is designed and manufactured for a specific application or product. Examples include: - rigid, clear plastic containers used in supermarkets to display bakery goods; - sponge-like foam plastic packaging used to cushion and protect computers, TVs and stereos; and - flexible plastic bags used for sterile intravenous fluid delivery. The specialty packaging industry may be divided into sub-categories based on the characteristics of the packaging, the industry in which the packaging is used, or the primary function of the packaging. Examples include flexible packaging, foodservice packaging and protective packaging. Individual packaging products may fall into more than one sub-category of specialty packaging. Protective packaging is the industry term used to describe specialty packaging that satisfies the protection and transportation needs of commercial customers. Protective packaging is designed and manufactured to ensure the integrity and safety of the customer's product from the point it leaves the manufacturing floor until it reaches its final destination. Flexible packaging is an industry term used to describe the sub-category of specialty packaging for customers whose products or distribution channels require a custom-designed flexible plastic package. Food/foodservice packaging describes specialty packaging designed and manufactured for customers in the food industry. This includes customers who process and prepare food for consumption, known as food packers and processors. It also includes other customers in the food distribution channel such as wholesalers and supermarkets. Specialty packaging generally is constructed from plastic or paper which is engineered, designed and manufactured to meet the customer's specific need in a particular product or application. The basic raw materials used to make plastic specialty packaging are different types of plastics obtained from chemical companies, often in pelletized form, known as plastic resins. Plastic resins come in three general forms based on their chemical composition: polyolefins, polystyrenes and polyvinyl chloride. Polyolefins include polyethylene and polypropylene. The plastic resins are subjected to various manufacturing processes that result in intermediate forms of the plastic. It may be solid or a sponge-like material called foam. Depending on its thickness, the material may be called film, sheet or plank. The plastic films, sheets and planks are then combined, shaped and cut to produce different specialty packaging: - polypropylene medical bags -- layered plastic films combined to produce plastic bags that hold fluid for intravenous delivery; - printed barrier films -- flexible printed packaging designed to protect a wide range of products from chemicals to foods; - modified atmosphere packaging -- packaging that is principally used with foods to preserve freshness and designed to protect the contents from penetration by oxygen; - foam containers -- lightweight containers designed to package individual servings of food, often in the fast-food, take-out food, or other foodservice context; 83 85 - engineered foam plank and foam sheet -- packaging material of different shapes and thicknesses designed to protect and cushion goods, primarily while in transit; - polyethylene stretch film -- strong, puncture-resistant packaging used to contain and protect goods for transportation, often used to secure individual goods on pallets; and - polyolefin foam -- foam packaging that is stronger and more resilient than conventional plastic foam, may be formed into a soft, rubber-like material that is flexible, elastic and resilient. - converted protective packaging -- packaging designed and configured for a specific product application, such as the plastic foam used to secure home electronics inside the boxes in which they are shipped and foam pipe insulation. Many of Packaging's products are manufactured using paperboard or other materials created from wood pulp or recycled paper: - paperboard honeycomb -- paperboard box material designed and engineered using geometrically shaped paperboard between flat layers of linerboard to enhance the cushioning characteristics of the container; - customized packaging systems -- refers to paper or plastic packaging combined with a unique machine or device to package a specific product or type of products. - linerboard -- paperboard used for the flat outer face of containerboard packaging. - molded fiber -- a material created from recycled paper that may be formed into various shapes, such as egg cartons; - pressed paperboard -- plastic coated paperboard used to make food containers; and - dual-ovenable paperboard -- plastic coated paperboard that may be heated in either a microwave or a conventional oven. PRODUCTS AND MARKETS Packaging manufactures, markets and sells plastic and paper-based consumer products and food/foodservice packaging, as well as protective and flexible packaging. Approximately 80% of Packaging's revenue comes from products made from different types of plastics, with the balance from paper and aluminum products. CONSUMER PRODUCTS AND FOOD/FOODSERVICE PACKAGING Packaging manufactures, markets and sells consumer products, such as plastic storage bags for food and household items, plastic waste bags, foam and molded fiber disposable tableware and disposable aluminum cookware. Packaging sells many of these products under such recognized brand names as Hefty(R), Baggies(R), Hefty One-Zip(R), Kordite(TM) and E-Z Foil(R). These products are typically used by consumers in their homes, and Packaging markets and sells them through a variety of retailers, including supermarkets, mass merchandisers and other stores where consumers purchase household goods. Packaging's food packaging products protect food during distribution, assist retailers in merchandising food and help customers prepare and serve meals in their homes. For food processors, Packaging offers dual-ovenable paperboard products, molded fiber egg cartons, foam meat trays, aluminum containers and modified atmosphere packaging, which extends the shelf life of meat products. In addition, Packaging provides plastic zipper closures for a variety of flexible packaging applications. Packaging's food packaging products for supermarket in-store use include clear rigid display packaging used in produce, deli and bakery applications, microwaveable containers used for prepared, ready-to-eat meals, plastic foam trays for meat and produce, and bags for produce and bakery applications. For its foodservice customers, Packaging offers products that help merchandize and serve both on-premises and takeout meals. These products include tableware products, such as plates, bowls and cups, 84 86 and a broad line of takeout service containers made from clear plastic, microwaveable plastic, molded fiber, paperboard, foam and aluminum. PROTECTIVE AND FLEXIBLE PACKAGING Packaging manufactures, markets and sells protective packaging for use in the automotive, computer, electronic, furniture, durable goods, building and construction products industries. Packaging's sheet foams and air encapsulated bubble products, for example, are used for cushioning and surface protection. Its paperboard honeycomb and engineered foam plank products protect against shock, vibration and thermal damage. Packaging also offers other converted protective packaging products, including padded mailers, a variety of laminated protective coverings and customized packaging systems. Packaging's flexible packaging products provide a variety of cost-effective, efficient and attractive solutions for consumer, medical, pharmaceutical, chemical, hygiene and industrial applications. These products include liners for disposable diapers, wrap-around sleeves for glass and plastic bottles, polypropylene medical bags used for sterile intravenous fluid delivery, modified atmosphere films, stand-up pouches, food and hygiene packaging, and disposable surgical kits custom designed for specific procedures. Packaging also offers polyethylene stretch film, specialty aluminum materials and film and foam products for use in the construction industry. GROWTH STRATEGY Packaging has grown, and plans to continue to grow, by pursuing internal growth and strategic acquisitions. By pursuing this growth strategy, Packaging has increased the total revenues of its specialty packaging and consumer products business from $845 million in 1995 to approximately $2.8 billion in 1998. During this same period, its income from continuing operations from this business, before interest, income taxes and minority interest, increased from $39 million to $328 million, representing a compound annualized growth rate of 103%. See "-- Combined Selected Financial Data of Packaging." As a separate, publicly traded company, Packaging expects to have greater flexibility to pursue its growth strategy. The increased flexibility will come from greater focus on a single enterprise and the enhanced access to capital markets that comes from the ability of investors and lenders to analyze and understand a single business platform. Packaging expects growth opportunities will come from additional product development and expansion initiatives as well as additional strategic acquisitions, joint ventures and strategic alliances. INTERNAL GROWTH Since 1995, Packaging has executed a strategy that focuses its business on markets that have strong underlying growth characteristics and attractive margins. Packaging offers customers "material neutral" solutions. In other words, Packaging's goal is not to sell customers a particular product line. Rather, through its custom design centers and broad product line, Packaging strives to create the best packaging solutions for its customers, tailored precisely to their needs. With this approach and Packaging's worldwide geographical coverage, Packaging has become a primary supplier to national and international manufacturers and distributors and has developed long-term relationships with key players in the consolidating packaging and food service distribution sector. Packaging intends to use these relationships to quickly identify and focus on growth markets with attractive margins as they develop, which should expand its customer base and market share. Packaging seeks to add to its base business by developing new packaging solutions for markets where it believes its experience and familiarity give it a competitive advantage. In addition, Packaging grows market share for its existing products by taking advantage of (a) its broad product line of superior quality products and its long-term relationships with key manufacturers and distributors, (b) its product development and design services, (c) its investment in developing state-of-the-art service capabilities, and (d) its ongoing effort focused on reducing costs and improving the production of its operations. 85 87 Product Breadth/Relationships With Key Manufacturers and Distributors Packaging's ability to provide "one-stop shopping" through its broad product line is an important selling point with customers. In addition, Packaging has cultivated long-term relationships with key manufacturers and distributors who recognize Packaging's strong positions in multiple product categories. These relationships, coupled with Packaging's complete product line, are allowing Packaging to grow its market shares for existing products. For example, in foodservice packaging, Packaging holds the number one market share position in the United States and Canada with respect to four of its five main product categories, based on unit volume. Management estimates that products representing 80% of sales in Packaging's protective packaging business hold the number one or two market share position in North America, based on sales revenue. New Products/Design Services Packaging further fuels its internal growth by developing and commercializing proprietary new products and by designing value-added product-line extensions. In 1998, Packaging's consumer products and food/foodservice packaging business introduced over 80 new products and product-line extensions. In Packaging's protective and flexible packaging business, where custom design services drive revenues, it developed over 500 custom product applications in 1998. Packaging believes its new product innovation and design services will remain a key factor in driving future internal growth. - Consumer Products and Food/Foodservice Packaging. During the last twelve months, in its consumer products and food/foodservice packaging business, Packaging added jumbo two-gallon bags and sandwich bags to its existing Hefty One-Zip(R) quart and half-gallon food storage and freezer bag offerings. Packaging is also leveraging its patented One-Zip(R) closure system by expanding into other zipper closure applications, such as SlideRite(TM) retail packaging for baby wipes, fresh produce, supermarket deli bags and other recloseable flexible packaging. In the United States, Packaging has the leading market share with Hefty(R) disposable tableware, and its E-Z Foil(R) brand disposable aluminum cookware line leads its competition by a wide margin in both sales and market share. Packaging's new product innovations include ActiveTech(TM) packaging, a proprietary modified atmospheric package used by food processors for case-ready meat. ActiveTech(TM) packaging extends the shelf life of fresh, unfrozen red meat in a package that maintains the appearance of freshly packaged meat. - Protective and Flexible Packaging. In Packaging's protective and flexible packaging business, new protective packaging products include engineered foams, and Profiles(R), a foam-based material used in various markets, such as building products and furniture, and custom designed to provide many benefits, including insulation, cushioning and surface protection. Recent flexible packaging innovations include high-end graphic stand-up pouches for soups and detergents and Propyflex(R) medical bags for fluids. Propyflex(R), a non-polyvinyl chloride barrier film, satisfies the requirements for flexibility and transparency even after sterilization and provides a cost-effective packaging by eliminating the need for secondary wrap. State-of-the-Art Service Capabilities To further take advantage of its broad product line offering and strong alignment with national distributors, Packaging has developed and implemented its Customer Linked Manufacturing system. CLM is a state-of-the-art production planning and order fulfillment system which enables Packaging's customers to do business easily and efficiently. CLM eliminates costs from the entire supply chain and provides both its customers and Packaging with a competitive advantage. Productivity/Cost Reduction Packaging's strong focus on improving productivity and reducing costs in its manufacturing and logistics operations is key to supporting the growth of its base business. For example, the unit manufacturing costs have continuously declined, net of inflation, for some of Packaging's products, such as 86 88 its foam products, rigid display packaging and performance films. This has allowed Packaging to maintain or improve its profit margins. STRATEGIC ACQUISITIONS Strategic acquisitions have been, and will continue to be, an important element of Packaging's overall growth strategy. Management has a proven record of identifying and acquiring businesses and rapidly integrating them into one of Packaging's business groups. Packaging pursues acquisitions that offer synergies through, among other things, rationalizing product lines, reconfiguring and upgrading manufacturing capabilities and reducing operating, selling, distribution, purchasing and administrative costs. Packaging also pursues acquisitions that strengthen its brand presence and expand its product offerings and markets. Consumer Products and Food/Foodservice Packaging. Packaging plans to grow its consumer products and food/foodservice packaging business by acquiring similar businesses whose products and markets will complement Packaging's. Packaging will focus on acquiring specialized engineering and manufacturing capabilities that augment and enhance its existing processes and allow it to produce top-quality products efficiently. Since the beginning of 1995, its consumer products and food/foodservice packaging business has grown through the following acquisitions: - In 1995, Packaging more than doubled its sales with the acquisition of Mobil Plastics. This acquisition expanded its product offerings to include foam containers, meat and poultry trays, disposable plates and bowls, polyethylene film products, produce bags and stretch film, as well as the well-known consumer products Baggies(R) food bags and Hefty(R) waste bags and tableware. This acquisition also added state-of-the-art manufacturing capabilities and new product technologies, including the One-Zip(R) closure system. - In August 1996, Packaging acquired Amoco Foam Products Company, which enhanced its distribution capabilities and market coverage, especially among food processors. Amoco Foam's product portfolio included foam tableware, hinged lid containers, food trays and residential and commercial insulation products. - In September 1998, Packaging augmented its dual-ovenable paperboard manufacturing capacity by acquiring a Champion International facility in Belvidere, Illinois. As a result, Packaging has the capability to manufacture this product, which may be heated in a conventional or a microwave oven, for a broad spectrum of uses in various products. Protective and Flexible Packaging. Packaging intends to continue its global growth strategy of acquiring custom engineering and design capabilities that will provide multi-material packaging solutions to markets with strong underlying growth characteristics. Management estimates that this strategy has made it one of the largest producers of protective packaging in the United States. Since the beginning of 1995, Packaging's protective and flexible packaging business has grown through the following acquisitions: - In 1995, continuing its growth strategy of acquiring specialty packaging applications, Packaging entered the protective packaging sector by buying Hexacomb, a manufacturer of paperboard honeycomb products. - In 1997, Packaging acquired the protective and flexible packaging businesses of KNP BT, which operated in Europe and North America. With this acquisition, Packaging entered the European protective and flexible packaging markets and enhanced its global specialty packaging position. This acquisition also broadened the scope of its protective packaging business to include sheet foam, engineered foam and air encapsulated bubble and mailer applications. Packaging also acquired two honeycomb plants in 1997. - In April 1998, Packaging acquired Richter Manufacturing, a West Coast manufacturer and distributor of protective packaging products. This acquisition expanded the geographical coverage of its North American protective packaging operation. 87 89 - In December 1998, Packaging acquired the foam packaging assets of Sentinel Products, a North American producer of specialty polyolefin foams. This acquisition further diversified its protective packaging product offering and increased its manufacturing capacity. Packaging also formed a global joint venture, Sentinel Polyolefin LLC, with Sentinel to produce and market chemically blown polyolefin foam applications in a wide variety of non-packaging markets, including the automotive, sports and leisure, medical and adhesive tape markets. MARKETING, DISTRIBUTION AND CUSTOMERS Packaging's sales and marketing staff of 500 people is organized along three main product groups: consumer products, foodservice and supermarket products, and protective and flexible packaging products. The consumer product group sells waste bags, food storage bags, disposable plates and bowls and disposable aluminum cookware primarily to grocery stores and mass merchandisers. These products are sold through a direct sales force and a national network of brokers and manufacturers' representatives. The foodservice, supermarket and food packer and processor sales organizations sell a broad array of disposable, rigid and flexible packaging made from plastic, aluminum, molded fiber and pressed paperboard materials. The products include disposable plates and bowls, carry-out containers, rigid display containers, microwavable and dual-ovenable food containers, food and specialty retail bags and foil wrap. Packaging's foodservice and supermarket sales are made primarily through a network of independent distributors. Food packer and processor sales are made primarily direct to large processors, with some sales through distributors. The protective and flexible packaging group sells to distributors, fabricators and directly to end-users worldwide. No material portion of Packaging's business is dependent upon a single customer or even a few customers, and no one customer accounted for more than 10% of Packaging's aggregate net sales for the fiscal year ended December 31, 1998. In general, the backlog of orders is not significant or material to an understanding of Packaging's business. 88 90 ANALYSIS OF REVENUES The following tables set forth for each of the years 1996 through 1998, and for the six months ended June 30, 1999, information relating to Packaging's sales from continuing operations:
NET SALES (MILLIONS) ------------------------------------------- SIX MONTHS YEAR ENDED DECEMBER 31, ENDED -------------------------- JUNE 30, 1999 1998 1997 1996 ------------- ---- ---- ---- Disposable plastic, fiber, and aluminum packaging products.............................................. $1,038 $2,126 $2,105 $1,862 Plastic and fiber protective/flexible packaging products.............................................. 311 607 399 78 Other................................................... 55 52 49 47 ------ ------ ------ ------ Total.............................................. $1,404 $2,785 $2,553 $1,987 ====== ====== ====== ======
PERCENTAGE OF NET SALES ---------------------------------------------- SIX MONTHS YEAR ENDED DECEMBER 31, ENDED -------------------------- JUNE 30, 1999 1998 1997 1996 ------------- ---- ---- ---- TOTAL SALES Disposable plastic, fiber, and aluminum packaging products.............................................. 74% 76% 83% 94% Plastic and fiber protective/flexible packaging products.............................................. 22 22 15 4 Other................................................... 4 2 2 2 --- --- --- --- Total.............................................. 100% 100% 100% 100% === === === === SALES BY GEOGRAPHIC AREA(a) United States........................................... 78% 80% 83% 89% European Union.......................................... 18 17 15 8 Canada.................................................. 2 1 1 2 Other areas............................................. 2 2 1 1 --- --- --- --- Total.............................................. 100% 100% 100% 100% === === === ===
- ------------------------- (a) See Note 14 to the Combined Financial Statements of The Businesses of Tenneco Packaging included elsewhere in this document for information about foreign and domestic operations. COMPETITION Packaging operates in markets that are highly competitive and faces substantial competition throughout all of its product lines from numerous global, national and regional companies, ranging from the largest packaging companies to small, emerging companies. Companies that compete with Packaging may have greater financial and other resources than it does, while others are significantly smaller with lower fixed costs and possibly greater operating flexibility. In addition to price, competition with respect to many of Packaging's products is based on quality, service supplier response time and timely and complete order fulfillment. In addition, other packaging producers supply alternative materials and structures and serve different geographic regions through various distribution channels. INTERNATIONAL Packaging operates facilities and sells products in countries throughout the world. As a result, Packaging is subject to risks associated with selling and operating in foreign countries, including devaluations and fluctuations in currency exchange rates, imposition of limitations on conversion of foreign currencies into U.S. dollars or remittance of dividends and other payments by foreign subsidiaries, impositions or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries, hyperinflation in foreign countries where Packaging does business, and imposition or increase of investment and other restrictions by foreign governments. 89 91 PROPERTIES HEADQUARTERS LOCATIONS Packaging leases its executive offices at 1900 West Field Court, Lake Forest, Illinois, 60045, and its telephone number at that address is (847) 482-2000. MANUFACTURING AND ENGINEERING FACILITIES In North America, Packaging operates 65 facilities in 18 states, Canada and Mexico. Plastic and aluminum disposable foodservice and consumer products, stretch films and building products are manufactured at 25 plants. The protective packaging operations convert paperboard into honeycomb products at 12 plants. An additional 13 plants apply extrusion, foaming and converting technologies to produce clear, foamed, flexible or rigid plastic protective packaging from polystyrene, polyolefins, such as polyethylene and polypropylene, and kraft papers. Molded fiber packaging is produced at seven locations, and an eighth location manufactures tooling for the molded fiber plants. Finally, ovenable paperboard products are manufactured at two facilities. A research and development center for food packaging and process development is located in a new facility in Canandaigua, New York. Design centers for protective and flexible packaging and process development are located in Buffalo Grove, Illinois, Grand Rapids and Troy, Michigan and Santa Fe Springs, California. In addition, Packaging participates in two North American joint ventures, Sentinel Polyolefin LLC and Tenneco Packaging de Mexico. Packaging owns 24 international manufacturing operations. Eleven protective packaging plants in Belgium, England, France, Germany, Italy, The Netherlands, Poland, Spain and Hungary make plastic air encapsulated bubble and foam sheet products, including mailers. Five flexible products plants in Egypt and Germany make high quality flexible films, bags, labels and pouches, printed and converted paper bags and disposable medical packaging. Omni-Pac is a European subsidiary operation that manufactures molded fiber and cushion packaging with manufacturing facilities in Elsfleth, Germany and Great Yarmouth, England. Packaging's Alupak operation in Belp, Switzerland produces smoothwall aluminum portion packs and specialty food packaging applications. Single-use thermoformed plastic food containers and films are manufactured at four facilities in England, Scotland and Wales. Packaging also has a wood products operation in Romania. In addition, Packaging operates or participates in several international joint ventures, including a folding carton plant in Dongguan, China, a recycling venture in Budapest, Hungary and a corrugated converting facility in Shaoxing, China. Packaging believes that substantially all of its plants and equipment are, in general, well maintained and in good operating condition. They are considered adequate for present needs, and as supplemented by planned construction, are expected to remain adequate for the near future. Packaging is of the opinion that Packaging, or its subsidiaries, has generally satisfactory title to the properties owned and used in its businesses, subject to liens for current taxes and easements, restrictions and other liens which do not materially detract from the value of the properties or Packaging's interest in the properties or the use of those properties in its businesses. RAW MATERIALS Plastic resins, such as polystyrene, polyethylene, polypropylene and polyvinyl chloride, aluminum rollstock, linerboard and recycled fiber constitute the principal raw materials used in the manufacture of most of Packaging's products. Generally, these raw materials are readily available from a wide variety of suppliers. The costs of these materials may be volatile, and are a function of, among other things, the manufacturing capacity for those materials and the costs of their components, which may also vary. Costs for Packaging's plastic resin and recycled fiber tend to fluctuate with economic factors which generally affect Packaging and its competitors. The availability of raw materials was adequate in 1998 and the first three months of 1999 and is expected to remain adequate throughout the remainder of 1999. ENVIRONMENTAL REGULATION The packaging industry, in general, and Packaging is subject to existing and potential federal, state, local and foreign legislation designed to reduce air emissions. In addition, various consumer and special 90 92 interest groups have lobbied from time to time for the implementation of these and other similar measures. Although Packaging believes that the legislation and regulations promulgated to date and the initiatives to date have not had a material adverse effect on Packaging, Packaging cannot assure you that any such future legislative or regulatory efforts or future initiatives would not have a material adverse effect on Packaging. OTHER As of July 1, 1999, Packaging employed approximately 15,000 people, 14% of whom were covered by collective bargaining agreements. Four of these agreements, covering a total of 247 employees, are scheduled for renegotiation before December 31, 1999. In Europe, approximately 2,240 employees are governed by works councils. Packaging regards its employee relations as generally satisfactory. Packaging owns a number of domestic and foreign patents and trademarks and other intellectual property relating to its products which are important to the manufacture, marketing and distribution of its products. In addition, Packaging's administrative services operations hold numerous software licenses and own computer equipment. Packaging's administrative services operations design, implement and administer administrative service programs and data processing, providing the following services: (a) financial accounting services; (b) employee benefits administration for all major salaried and hourly benefit plans; (c) human resources and payroll services; (d) mainframes and distributed systems operations; (e) telecommunications and network operations and management; (f) help desk support; and (g) disaster recovery support. After the spin-off, Packaging will continue to provide some of these services to Automotive. See "The Spin-off -- Relationship Between Automotive and Packaging After the Spin-off." Tenneco and Packaging are currently analyzing their alternatives with respect to those operations. See "-- Management's Discussion and Analysis of Financial Condition and Results of Operations." LEGAL PROCEEDINGS See "-- Management's Discussion and Analysis of Financial Condition and Results of Operations" for information about Packaging's potential environmental liability. In May 1999, Tenneco Inc., Tenneco Packaging Inc. and a number of containerboard manufacturers were named as defendants in a civil class action antitrust lawsuit pending in the United States District Court for the Eastern District of Pennsylvania. Tenneco Packaging Inc. also was named as a defendant in a related class action antitrust lawsuit. In re Linerboard Antitrust Litigation; Winoff v. Stone Container Corp., et al; General Refractories v. Stone Container Corp., et al. (MDL No. 1261; E. D. Penn.). The lawsuits allege that the defendants conspired to raise linerboard prices for corrugated containers and corrugated sheets, respectively, from October 1, 1993 through November 30, 1995, in violation of Section 1 of the Sherman Act. The lawsuits seek treble damages in an unspecified amount, plus attorney fees. Tenneco and Packaging believe that the allegations have no merit, are vigorously defending the claims, and believe the outcome of this litigation will not have a material adverse effect on Tenneco's or Packaging's financial position or results of operations. Under and in accordance with the distribution agreement, as between Tenneco and Packaging, Packaging is responsible for defending the claims and for any liability resulting from these actions. Packaging and its subsidiaries are parties to various other legal proceedings arising from their operations. Packaging believes that the outcome of these other proceedings, individually and in the aggregate, will not have a material adverse effect on its financial position or results of operations. 91 93 CONTAINERBOARD PACKAGING INTEREST On April 12, 1999, Packaging contributed all of its containerboard packaging business to a new joint venture, in which it now owns a 43% common equity interest. For a description of the contribution and Packaging's plans to sell its remaining joint venture interest in a registered public offering, see "--Unaudited Pro Forma Combined Financial Statements of Packaging" and "-- Management's Discussion and Analysis of Financial Condition and Results of Operations." For a description of the joint venture, see "Summary -- The Companies -- Packaging." Packaging Corporation of America manufactures corrugated containers, containerboard, and lumber and related wood products. It has four mills and 67 corrugated products facilities. It also participates in the wood products business and has access to approximately 950,000 acres of timberland in the United States through both owned and leased properties. Revenues from the containerboard business in 1998 were $1.57 billion. 92 94 MANAGEMENT BOARD OF DIRECTORS Upon completion of the spin-off, the Packaging Board of Directors will consist of six members. Each director will serve an annual term that will expire at the annual meeting of Packaging stockholders in each year and until his or her successor has been elected and qualified. Information concerning the individuals who will serve as directors of Packaging as of the date of the spin-off is provided below. DANA G. MEAD, CHAIRMAN OF THE BOARD -- Mr. Mead is currently the Chairman and Chief Executive Officer of Tenneco and has served as an executive officer of Tenneco since April 1992, when he joined Tenneco as Chief Operating Officer. Prior to joining Tenneco, Mr. Mead served as an Executive Vice President of International Paper Company, a manufacturer of paper, pulp, and wood products, from 1988, and served as Senior Vice President of that company from 1981. He is also a director of Packaging Corporation of America, Textron Inc., Zurich Allied AG, Pfizer Inc. and Newport News Shipbuilding Inc. Mr. Mead is 63 years old and has been a director of Tenneco since 1992. Upon completion of the spin-off, he will resign as Chief Executive Officer of Tenneco, but will continue, on a non-executive basis, as the Chairman of the Board of Automotive and Packaging through March 2000. MARK ANDREWS -- Mr. Andrews has been Chairman of Andrews Associates, Inc., a government consulting firm, since February 1987. From 1963 to 1980, he served in the U.S. House of Representatives, and from 1980 to 1986 he served in the U.S. Senate. He is also a director of Union Storage Co. Mr. Andrews is 73 and has been a director of Tenneco since 1987. Mr. Andrews will continue as a director of Automotive upon the spin-off. LARRY D. BRADY -- Mr. Brady was President of FMC Corporation, a producer of chemicals and machinery for industry, agriculture, and government, from 1993 to June 1999. In August 1999, he became the President and Chief Operating Officer of UNOVA, Inc., an industrial technologies company. Before 1993, Mr. Brady served in various executive capacities with FMC Corporation for more than five years. Mr. Brady is 56 years old and has been a director of Tenneco since January 1998. Mr. Brady will not be continuing as a director of Automotive after the spin-off. ROGER B. PORTER -- Mr. Porter is Director of the Center for Business and Government at Harvard University and is the IBM Professor of Business and Government. Mr. Porter has served on the faculty at Harvard University since 1977. Mr. Porter also held senior economic policy positions in the Ford, Reagan and Bush White Houses, serving as special assistant to the President and executive secretary of the Economic Policy Board from 1974 to 1977, as deputy assistant to the President and director of the White House Office of Policy Development from 1981 to 1985, and as assistant to the President for economic and domestic policy from 1989 to 1993. He is also a director of RightCHOICE Managed Care, Inc., National Life Insurance Company, and Zions Bancorporation. Mr. Porter is 53 years old and has been a director of the Tenneco since January 1998. He will continue as a director of Automotive upon the spin-off. PAUL T. STECKO -- Mr. Stecko became the Chief Executive Officer of Packaging Corporation of America, Packaging's containerboard joint venture, in connection with the April 1999 formation of that venture. From November 1998 to April 1999, Mr. Stecko served as President and Chief Operating Officer of Tenneco. From January 1997 to November 1998, Mr. Stecko served as Chief Operating Officer of Tenneco. From December 1993 through January 1997, Mr. Stecko served as Chief Executive Officer of Packaging. Prior to joining Tenneco, Mr. Stecko spent 16 years with International Paper Company. He is also a director of State Farm Mutual Insurance Company and the Chairman of the Board of Packaging Corporation of America. Mr. Stecko is 54 years old and has been a director of Tenneco since November 1998. He will continue as a director of Automotive upon the spin-off. RICHARD L. WAMBOLD -- Mr. Wambold will be the Chief Executive Officer of Packaging upon the spin-off and has been serving as its President since June 1999. From June 1997 to May 1999, he was Executive Vice President and General Manager of Packaging's specialty packaging and consumer products 93 95 units. Prior to joining Packaging in 1994, Mr. Wambold was Executive Vice President of Case Corporation's construction equipment and worldwide parts business. EXECUTIVE OFFICERS The following table provides information concerning the persons who will serve as executive officers of Packaging upon completion of the spin-off. Each of the named persons has been, or before the spin-off will be, elected to the office indicated opposite his name. The executive officers will serve at the discretion of Packaging's Board. Officers are elected at the annual meeting of directors held immediately following the annual meeting of shareowners.
AGE AT NAME JUNE 30, 1999 POSITION ---- ------------- -------- Richard L. Wambold............. 47 Chief Executive Officer Senior Vice President -- Protective and Flexible Paul J. Griswold............... 47 Packaging James V. Faulkner, Jr. ........ 55 Vice President and General Counsel James D. Morris................ 45 Vice President and GM Operations Vice President -- Supermarket and Foodservice Peter J. Lazaredes............. 48 Packaging Andrew A. Campbell............. 53 Vice President and Chief Financial Officer
RICHARD L. WAMBOLD -- See "-- Board of Directors," above, for information concerning Mr. Wambold. PAUL J. GRISWOLD -- Mr. Griswold was named Senior Vice President -- Protective and Flexible Packaging in May 1997. Since joining Packaging in 1994, he has held various senior management positions in Packaging's protective and flexible packaging units. With over 20 years of packaging-related experience, Mr. Griswold began his career at International Paper Company, holding positions in sales, marketing and operations, and was later Vice President, Packaging for Pepsi Cola International. JAMES V. FAULKNER, JR. -- Mr. Faulkner joined Packaging in 1995 as its Vice President and General Counsel. Prior to that he was Vice President -- Law for Tenneco. Mr. Faulkner began his legal career with Lord, Day & Lord and was later Associate General Counsel of Union Pacific Corporation and Senior Vice President of USPCI, a wholly owned subsidiary of Union Pacific. He has 25 years experience in staff and operational legal positions. JAMES D. MORRIS -- Mr. Morris will be Vice President and GM Operations upon the spin-off. Since 1995 he has held various senior management positions in Packaging's specialty packaging unit, including oversight of manufacturing, engineering and product development. He also has responsibility for the sales, marketing and business planning of the processor packer operations of the specialty packaging unit. Mr. Morris joined Packaging in connection with its 1995 acquisition of Mobil Plastics. He spent 20 years with Mobil in assignments which included manager of polyethylene manufacturing, regional manufacturing manager and plant manager. PETER J. LAZAREDES -- Mr. Lazaredes will be Vice President -- Supermarket and Foodservice Packaging upon the spin-off. Since 1996 he has held various senior management positions in Packaging's speciality packaging unit, including responsibility for the marketing and sales of rigid and flexible containers to the foodservice and institutional markets. Mr. Lazaredes joined Packaging in 1996 from Amoco Foam Products where he was General Manager of the tableware business unit from 1992. He spent 15 years with Amoco in sales and marketing positions for packaging, fabrics and fibers divisions. ANDREW A. CAMPBELL -- Mr. Campbell will be Vice President and Chief Financial Officer upon the spin-off. Since May 1999 he has served as Acting Chief Financial Officer and Financial Consultant of Foamex International Inc. Prior to that, he served as Executive Vice President, Finance and Administration and Chief Financial Officer of Dominick's Supermarkets Inc. from July 1998 to November 1998. Prior to that, Mr. Campbell had been Senior Vice President, Finance and Chief Financial Officer for 94 96 Safety Kleen Corporation from April 1997 to June 1998. Prior to that, Mr. Campbell was President of Duplex Products, Inc. from 1995 to May 1996 and Vice President, Finance and Chief Financial Officer of that company from November 1994 to 1995. STOCK OWNERSHIP OF MANAGEMENT The following table shows, as of June 30, 1999, the number of shares of Tenneco common stock beneficially owned by: (1) each person who will be a director of Packaging upon the spin-off; (2) each person who is named in the Summary Compensation Table for Packaging, below; and (3) all persons who will be directors or executive officers of Packaging upon the spin-off, as a group. The table also shows: (a) Tenneco common stock equivalents held by these directors and executive officers under benefit plans; and (b) the total number of shares of Tenneco common stock and common stock equivalents held. Upon the spin-off, holders of Tenneco common stock will receive one share of Packaging common stock for each share of Tenneco common stock held.
SHARES OF TENNECO TOTAL TENNECO TENNECO COMMON STOCK COMMON STOCK SHARES AND DIRECTORS OWNED(1)(2)(3) EQUIVALENTS(4) EQUIVALENTS - --------- -------------------- -------------- ------------- Mark Andrews......................... 14,155 1,600 15,755 Larry D. Brady....................... 2,000 3,381 5,381 Dana G. Mead......................... 765,821 44,737 810,558 Roger B. Porter...................... 2,000 3,420 5,420 Paul T. Stecko....................... 314,362 -- 314,362 Richard L. Wambold................... 90,872 -- 90,872 EXECUTIVE OFFICERS Paul J. Griswold..................... 34,574 -- 34,574 James V. Faulkner, Jr................ 22,086 -- 22,086 James D. Morris...................... 27,827 -- 27,827 Peter J. Lazaredes................... 17,147 -- 17,147 All executive officers and directors as a group......................... 1,290,844(5) 53,138 1,343,982(5)
- --------------- (1) Each director and executive officer has sole voting and investment power over the shares beneficially owned, or has the right to acquire shares as described in note (2) below, as set forth in this column, except for: (a) restricted shares; and (b) shares that executive officers and directors have the right to acquire pursuant to stock options. Generally, Tenneco restricted shares will be vested prior to the spin-off. In connection with the spin-off the Tenneco stock options held by the executive officers listed above will be replaced with Packaging stock options which have equivalent economic terms. Tenneco stock options held by directors will be replaced in the same manner, except that one-half of the options held by Messrs. Mead, Andrews and Porter will continue as Tenneco options, adjusted to maintain equivalent economic terms upon the spin-off, and options held by Mr. Stecko will terminate unless exercised prior to the spin-off. (2) Includes restricted shares. At June 30, 1999, Messrs. Andrews, Mead, Wambold, Griswold, Morris and Lazaredes held 6,547; 66,025; 15,000; 10,000; 5,000; and 5,000 restricted shares, respectively. Also includes shares that are subject to options which are exercisable within 60 days of June 30, 1999 for Messrs. Andrews, Brady, Mead, Porter, Stecko, Wambold, Griswold, Faulkner, Morris and Lazaredes to purchase 2,000; 2,000; 616,176; 2,000; 288,814; 49,077; 19,357; 19,312; 14,993; and 8,603 shares, respectively. (3) Less than one percent of the outstanding shares of Tenneco common stock. (4) Common stock equivalents are distributed in shares of Tenneco common stock or, in some circumstances, cash after the individual ceases to serve as a director or officer. Common stock equivalents held by directors who are not employees of Tenneco will be vested and distributed prior to the spin-off. Mr. Mead's stock equivalent units are credited to his account under the Tenneco Inc. Deferred Compensation Plan and are, therefore, already vested. (5) Includes 1,022,332 shares that are subject to options that are exercisable within 60 days of June 30, 1999, by all executive officers and directors as a group, and includes 107,572 restricted shares for all executive officers and directors as a group. COMMITTEES OF THE BOARD OF DIRECTORS The Packaging Board will establish three standing committees as permitted by its by-laws, which will have the following described responsibilities and authority: 95 97 The Audit Committee, comprised solely of outside directors, will have the responsibility, among other things, to: (1) recommend the selection of Packaging's independent public accountants; (2) review and approve the scope of the independent public accountants' audit activity and extent of non-audit services; (3) review with management and such independent public accountants the adequacy of Packaging's basic accounting system and the effectiveness of Packaging's internal audit plan and activities; (4) review with management and the independent public accountants Packaging's certified financial statements and exercise general oversight of Packaging's financial reporting process; and (5) review with Packaging litigation and other legal matters that may affect Packaging's financial condition and monitor compliance with Packaging's business ethics and other policies. The Compensation/Nominating/Governance Committee, comprised solely of outside directors, will have the responsibility, among other things, to: (1) establish the salary rate of officers and employees of Packaging and its subsidiaries; (2) examine periodically the compensation structure of Packaging; and (3) supervise the welfare and pension plans and compensation plans of Packaging. It will also have significant corporate governance responsibilities, among other things, to: (a) review and determine the desirable balance of experience, qualifications and expertise among members of the Packaging Board; (b) review possible candidates for membership on the Packaging Board and recommend a slate of nominees for election as directors at Packaging's annual stockholders' meeting; (c) review the function and composition of the other committees of the Packaging Board and recommend membership on these committees; and (d) review the qualifications and recommend candidates for election as officers of Packaging. The Three-year Independent Director Evaluation Committee, comprised solely of outside directors, will have the responsibility, among other things, to review Packaging's qualified offer rights plan, which will be adopted prior to the spin-off, at least every three years and, if it deems it appropriate, recommend that the full Packaging Board modify or terminate that plan. EXECUTIVE COMPENSATION The following table shows the compensation paid by Tenneco and/or its direct and indirect subsidiaries, including Packaging, for 1998 to: (1) the person who will become the Chief Executive Officer of Packaging upon the spin-off; and (2) each of the persons who will be included among the four most highly compensated executive officers of Packaging upon the spin-off, based on 1998 compensation, other than the Chief Executive Officer. The table shows the amounts paid to these persons for all services 96 98 provided to Tenneco and its subsidiaries, including Packaging. Mr. Campbell had no compensation from Tenneco and its subsidiaries prior to 1999. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION ----------------------- -------------------------------------- RESTRICTED OTHER ANNUAL STOCK ALL OTHER NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(2) AWARDS(3) OPTIONS(4) COMPENSATION(5) --------------------------- --------- -------- --------------- ---------- ---------- --------------- Richard L. Wambold......................... $355,472 $220,000 $152,685 $187,800 45,000 $11,643 Chief Executive Officer Paul J. Griswold........................... $275,500 $125,000 $ 31,165 $187,800 20,000 $ 9,812 Senior Vice President -- Protective and Flexible Packaging James V. Faulkner, Jr. .................... $266,568 $ 82,000 $ 25,760 -- 10,000 $17,674 Vice President and General Counsel James D. Morris............................ $206,004 $115,000 $ 29,405 $187,800 20,000 $14,139 Vice President and GM Operations Peter J. Lazaredes......................... $182,773 $ 73,000 $ 30,730 $177,800 20,000 $12,704 Vice President -- Supermarket and Foodservice Packaging
- --------------- (1) Includes base salary plus amounts paid in lieu of matching contributions to the Tenneco Thrift Plan. (2) Includes amounts attributable to: (a) the value of personal benefits provided by Tenneco to executive officers, such as the personal use of Tenneco-owned property and relocation expenses; (b) reimbursement for taxes; and (c) amounts paid as dividend equivalents on performance share equivalent units ("Dividend Equivalents"). The amount of each personal benefit that exceeds 25% of the estimated value of the total personal benefits provided by Tenneco, reimbursement for taxes, and amounts paid as Dividend Equivalents to the individuals named in the table for 1998 was as follows: $58,908 in relocation expenses, $47,171 for reimbursement of taxes, $15,600 in Dividend Equivalents and $30,000 perquisite allowance for Mr. Wambold; $342 for reimbursement of taxes, $10,320 in Dividend Equivalents and $20,000 perquisite allowance for Mr. Griswold; $5,760 in Dividend Equivalents and $20,000 perquisite allowance for Mr. Faulkner; $6,600 in Dividend Equivalents and $20,000 perquisite allowance for Mr. Morris; and $17,530 in relocation expenses, $1,200 in Dividend Equivalents and $12,000 perquisite allowance for Mr. Lazaredes. (3) Includes the dollar value of grants of restricted shares based on the price of Tenneco common stock on the date of grant. At December 31, 1998, Messrs. Wambold, Griswold, Faulkner, Morris and Lazaredes held 28,000; 18,600; 4,800; 10,500; and 6,000 restricted shares and/or performance share equivalent units, respectively. The value at December 31, 1998, based on a per share/ equivalent unit price of $34.063 on that date, of all restricted shares/performance units held was $953,764 for Mr. Wambold, $633,572 for Mr. Griswold, $163,502 for Mr. Faulkner, $357,662 for Mr. Morris and $204,378 for Mr. Lazaredes. Generally, restricted shares and performance share equivalent units will be vested prior to the spin-off. Dividends/Dividend Equivalents will be paid on the restricted shares/performance share equivalent units held by each individual. (4) In connection with the spin-off, the Tenneco stock options held by the persons listed above will be replaced with options to purchase Packaging common stock, the number and exercise price of which will be adjusted so that the new Packaging options have equivalent economic terms as the old Tenneco options. (5) Includes amounts attributable during 1998 to benefit plans of Tenneco as follows: (a) The amounts contributed pursuant to Tenneco's Thrift Plan for the accounts of Messrs. Wambold, Griswold, Faulkner, Morris and Lazaredes were $10,000; $6,650; $8,000; $10,000; and $10,000, respectively. (b) The dollar values paid by Tenneco for insurance premiums under the Tenneco group life insurance plan, including dependent life, for Messrs. Wambold, Griswold, Faulkner, Morris and Lazaredes were $1,643; $3,162; $9,674; $4,139 and $2,704, respectively. Packaging anticipates that, at the time of the spin-off, the annual salary of Messrs. Wambold and Griswold will be increased to $600,000 and $325,000, respectively, and that bonus targets after the spin-off will be adjusted and may result in higher bonuses for some or all of the persons named in the Summary Compensation Table. 97 99 Packaging also anticipates making a grant of stock options immediately following the spin-off. This grant is intended to represent a three-year award. Messrs. Wambold, Griswold, Faulkner, Morris and Lazaredes are expected to receive options to purchase 750,000, 300,000, 200,000, 200,000 and 200,000 shares of Packaging common stock, respectively. Packaging anticipates that in 2000, Messrs. Wambold, Griswold, Faulkner, Morris and Lazaredes will be granted 30,000, 15,000, 10,000, 10,000, and 10,000 performance share equivalent units, respectively. OPTIONS GRANTED IN 1998 The following table shows the number of options to purchase Tenneco common stock that were granted by Tenneco during 1998 to the persons named in the Summary Compensation Table above.
SHARES OF PERCENT OF COMMON TOTAL STOCK OPTIONS GRANTED UNDERLYING TO TENNECO OPTIONS EMPLOYEES EXERCISE EXPIRATION GRANT DATE NAME GRANTED(#)(1) IN 1998 (%) PRICE($)(2) DATE PRESENT VALUE(3) - ---- ------------- --------------- ----------- ---------- ---------------- Mr. Wambold..................... 45,000 2.6% $36.63 2008 $463,050 Mr. Griswold.................... 20,000 1.1% $36.63 2008 $205,800 Mr. Faulkner.................... 10,000 .5% $36.63 2008 $102,900 Mr. Morris...................... 20,000 1.1% $36.63 2008 $205,800 Mr. Lazaredes................... 10,000 .5% $36.63 2008 $102,900 10,000 .5% $37.31 2018 $104,500
- --------------- (1) In connection with the spin-off, the Tenneco stock options held by the persons listed above will be replaced with options to purchase Packaging common stock, the number and exercise price of which will be adjusted so that the new Packaging options have equivalent economic terms to the old Tenneco options. (2) All options were granted with exercise prices equal to 100% of the fair market value of a share of Tenneco common stock on the date of grant. (3) The Black-Scholes valuation was performed using the following assumptions: 25.6% volatility, 5.7% risk free interest rate, 3.2% expected dividend rate and 10 year option life. Mr. Lazaredes' option grant that expires in 2018 is valued assuming that such options are exercised by the 10th year. OPTIONS AT 1998 YEAR-END The following table shows the number of options to purchase Tenneco common stock held as of December 31, 1998 by the persons named in the Summary Compensation Table above. No Tenneco options were exercised in 1998, and there were no in-the-money options as of December 31, 1998.
TOTAL NUMBER OF UNEXERCISED OPTIONS HELD AT DECEMBER 31, 1998(1) ------------------------------- NAME EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- Mr. Wambold................................................. 29,820 107,023 Mr. Griswold................................................ 10,949 58,109 Mr. Faulkner................................................ 14,043 31,501 Mr. Morris.................................................. 6,662 48,330 Mr. Lazaredes............................................... 5,269 19,634
- --------------- (1) In connection with the spin-off, the Tenneco stock options held by the persons listed above will be replaced with options to purchase Packaging common stock, the number and exercise price of which will be adjusted so that the new Packaging options have equivalent economic terms to the old Tenneco options. LONG-TERM INCENTIVE PLAN PERFORMANCE SHARE EQUIVALENT UNIT AWARDS IN 1998 The following table shows information concerning performance-based awards made to the persons named in the Summary Compensation Table, above, during 1998 by Tenneco. 98 100
PERFORMANCE NUMBER OF OR OTHER ESTIMATED FUTURE PAYOUTS SHARES, UNITS PERIOD UNTIL UNDER NON-STOCK PRICE BASED PLANS(1) OR OTHER MATURATION OR --------------------------------------- NAME RIGHTS(1)(2) PAYOUT(3) THRESHOLD(4) TARGET(4) MAXIMUM(4) - ---- ------------- ------------- ------------ --------- ---------- Mr. Wambold.................. 6,500 4 years 25% 100% 150% Mr. Griswold................. 5,000 4 years 25% 100% 150% Mr. Faulkner................. 2,400 4 years 25% 100% 150% Mr. Morris................... 3,000 4 years 25% 100% 150% Mr. Lazaredes................ 1,000 4 years 25% 100% 150%
- --------------- (1) Estimated future payouts are based on earnings per share ("EPS") from continuing operations; however, generally, performance share equivalent units will be deemed to be earned at the target level and vested prior to the spin-off. (2) Each performance share equivalent unit represents one share of Tenneco's common stock that may be earned and the number of performance share equivalent units listed in this column represents the maximum number of performance share equivalent units that may be earned under this award. (3) Performance share equivalent units are earned at the rate of 25% per year based on achievement of annual EPS goals; however, generally performance share equivalent units will be deemed to be earned at the target level and vested prior to the spin-off. (4) Represents maximum performance share equivalent units earned where the goals were consistently within the indicated performance range on an individual year and accumulated four-year basis; however, generally performance share equivalent units will be deemed to be earned at the target level and vested prior to the spin-off. PENSION PLAN TABLE The following table shows the aggregate estimated annual benefits payable upon normal retirement pursuant to the Tenneco Retirement Plan and the Tenneco Inc. Supplemental Executive Retirement Plan to persons in specified remuneration and years of credited participation classifications. The Tenneco Retirement Plan will be assumed by Packaging in connection with the spin-off, and Packaging will adopt a supplemental executive retirement plan that is substantially identical to Tenneco's current plan.
YEARS OF CREDITED PARTICIPATION ------------------------------------------------------------------------- ANNUAL REMUNERATION 5 10 15 20 25 30 35 - ------------------- ------- -------- -------- -------- -------- -------- -------- $250,000............. $19,642 $ 39,285 $ 58,928 $ 78,571 $ 98,214 $117,857 $137,500 300,000............. 23,571 47,142 70,714 94,285 117,857 141,428 165,000 350,000............. 27,500 55,000 82,500 110,000 137,500 165,000 192,500 400,000............. 31,428 62,857 94,285 125,714 157,142 188,571 220,000 450,000............. 35,357 70,714 106,071 141,428 176,785 212,142 247,500 500,000............. 39,285 78,571 117,857 157,142 196,428 235,714 275,000 550,000............. 43,214 86,428 129,642 172,857 216,071 259,285 302,500 600,000............. 47,142 94,285 141,428 188,571 235,714 282,857 330,000 650,000............. 51,071 102,142 153,214 204,285 255,357 306,428 357,500 700,000............. 55,000 110,000 165,000 220,000 275,000 330,000 385,000
- --------------- (1) The benefits shown above are computed as a straight life annuity and are based on years of credited participation and the employee's average compensation, which is salary and bonus. These benefits are not subject to any deduction for Social Security or other offset amounts. The years of credited participation for Messrs. Wambold, Griswold, Faulkner, Morris and Lazaredes are 21, 4, 5, 24 and 18, respectively. See the Summary Compensation Table above for salary and bonus information for these individuals. (2) If Mr. Wambold completes five years of service in the period commencing January 1, 1997, he will be entitled to benefits commencing at age 55 determined by multiplying his average salary plus bonus, determined over a three-year period, by 25% plus 2.5% for each year of service in the period commencing January 1, 1997, up to a maximum of 50%. Mr. Faulkner is entitled to special early retirement benefits and, if he remains with Packaging through December 31, 2002, his benefit will be determined by adding three years of participation and age to his actual participation and age. COMPENSATION OF DIRECTORS Fee Structure. Following the spin-off, each director who is not also an employee of Packaging or its subsidiaries, an "outside director," will be paid a yearly retainer fee of $35,000 for service on the 99 101 Packaging Board of Directors. In general, 100% of that fee will be paid in the form of stock-settled common stock equivalents, as described below. A director may elect, however, to have up to 40%, or $14,000, of the fee paid in cash. These outside directors will also receive cash attendance fees and committee chair and membership fees, and reimbursement of their expenses for attending meetings of the Board of Directors. Outside directors will receive $1,000 for each meeting of the Board of Directors attended, and each one who serves as a Chairman of the Audit Committee or the Compensation/ Nominating/Governance Committee will be paid a fee of $7,000 per chairmanship. Outside directors who serve as members of these committees will be paid $4,000 per committee membership. Members of the Three-year Independent Director Evaluation Committee will receive $1,000 plus expenses for each meeting of that committee attended. Common Stock Equivalents/Options. As described above, all or a portion of an outside director's retainer fee will be paid in common stock equivalent units. These directors' stock equivalents will be payable in shares of Packaging's common stock after an outside director ceases to serve as a director of Packaging. Final distribution of these shares may be made either in a lump sum or in installments over a period of years. The directors' stock equivalents are issued at 100% of the fair market value on the date of the grant. Each outside director will also receive an annual grant of an option to purchase up to 3,000 shares of Packaging common stock as additional incentive compensation. Directors options: (a) will be granted with per share exercise prices equal to 100% of the fair market value of a share of Packaging common stock on the day the option is granted; (b) will have terms of ten years; and (c) will fully vest six months from the grant date. Once vested, the directors options will be exercisable at any time during the option term. Packaging expects that restricted shares of Tenneco common stock and directors' stock equivalents held by outside directors will be vested prior to the completion of the spin-off, and these directors will be paid an amount in cash to defray taxes incurred on that vesting. Deferred Compensation Plan. Packaging will have a voluntary deferred compensation plan for outside directors. Under this plan, an outside director may elect, prior to the commencement of the next calendar year, to have some or all of the cash portion, that is, up to 40% or $14,000, of his or her retainer fee and some or all of his or her meeting fees credited to a deferred compensation account. The plan will provide these directors with various investment options. The investment options will include stock equivalent units of Packaging common stock, which may be paid out in either cash or shares of Packaging's common stock. TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Packaging will maintain a key executive change-in-control severance benefit plan similar to the existing Tenneco plan and incorporating some provisions of the Tenneco benefits protection trust. The purpose of the plan is to enable Packaging to continue to attract, retain and motivate highly qualified employees by eliminating, to the maximum practicable extent, any concern on the part of those employees that their job security or benefit entitlements will be jeopardized by a "change-in-control" of Packaging, as that term will be defined in the plan. The plan will be designed to achieve this purpose through the provision of severance benefits for key employees and officers whose positions are terminated following a change-in-control, as provided in the plan. Under the plan, Packaging expects that Messrs. Wambold, Griswold, Faulkner, Morris and Lazaredes would have become entitled to receive payments from Packaging in the amount of $2,040,000, $1,305,000, $1,146,999, $1,115,001 and $999,000, respectively, had their positions been terminated on August 31, 1999 following a change-in-control, based on their current 1999 salaries of $450,000, $300,000, $285,000, $260,000 and $260,000, respectively. In addition, restricted shares held in the name of those individuals under the restricted stock plans Packaging will adopt would have automatically reverted to Packaging, and Packaging would have been obliged to pay those individuals the fair market value of the shares. Their performance share equivalent units would also have been fully vested and paid. The spin-off does not constitute a "change-in-control" of Tenneco or Packaging for purposes of the Tenneco or Packaging change-in-control severance benefit plans. The Tenneco benefits protection trust will be terminated prior to the spin-off. 100 102 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Upon the spin-off, Messrs. Wambold and Griswold will be granted Packaging restricted stock with a value on the grant date equal to the pre-spin-off value of 25,000 and 15,000 shares of Tenneco common stock, respectively. One-third of such restricted stock will vest each year following the spin-off, assuming that the grantee remains employed through that date. In connection with the spin-off, Mr. Mead will resign as Chief Executive Officer of Tenneco, and he is expected to enter into a revised agreement. Under that agreement, it is expected that: (1) Mr. Mead will be paid an amount equivalent to three times the total of his annual salary plus bonus; (2) if certain performance goals are met, he will be entitled to an adjusted target bonus for 1999 prorated through the date of his separation; (3) his stock options will be made exercisable, one-half will be replaced by Packaging options and one-half will continue as Automotive options (the number and exercise price of such options being determined under the generally applicable rules to be applied in connection with the spin-off and which maintain the economic equivalent of the currently outstanding options); (4) for purposes of Tenneco's Supplemental Executive Retirement Plan, he will be treated as though he had remained employed until age 65; and (5) he will be granted options to purchase up to 50,000 shares of Packaging common stock and options to purchase up to 50,000 shares of Automotive common stock at the time of the spin-off. Mr. Mead's agreement is with an entity which will be a subsidiary of Packaging after the spin-off and the expense associated therewith is included in the spin-off expenses and is part of the debt realignment. During 1999, Mr. Mead was indebted to an affiliate of Tenneco in connection with a relocation loan of approximately $400,000. In September 1999, that obligation was canceled. BENEFIT PLANS FOLLOWING THE SPIN-OFF Packaging will succeed to sponsorship of the Tenneco Retirement Plan and the Tenneco Thrift Plan. These plans are qualified under Section 401(a) of the Code. The Tenneco Retirement Plan is a defined benefit pension plan. The Tenneco Thrift Plan is comprised of 401(k) plans with employer matching contributions as specified in the plans. Packaging will also continue its sponsorship of a defined benefit pension plan covering hourly employees. Packaging will also succeed to sponsorship of two non-qualified deferred compensation plans as to its employees or directors: (1) the 1997 Tenneco Inc. Board of Directors Deferred Compensation Plan; and (2) the Tenneco Inc. Deferred Compensation Plan. Packaging will succeed to liabilities for benefits under the Tenneco Inc. Supplemental Executive Retirement Plan as to all participants other than those who are employees or former employees of Automotive. The 1997 Tenneco Inc. Board of Directors Deferred Compensation Plan and the Tenneco Inc. Deferred Compensation Plan will be merged as of the spin-off. All of these plans are unfunded; however, Packaging will establish one or more rabbi trusts, from which assets may be available to pay benefits in specified circumstances. Packaging will adopt an executive incentive compensation plan similar to Tenneco's plan to provide annual cash bonuses to eligible employees. Packaging may adopt an employee stock purchase plan similar to the one maintained by Tenneco, under which approximately 4,000,000 shares of Packaging common stock would be available for purchase. Tenneco will approve the adoption of such a plan as Packaging's sole stockholder prior to the spin-off. Packaging will adopt a plan calling for the grant of stock options, restricted stock, performance share equivalent units and other stock rights patterned after the 1996 Tenneco Inc. Stock Ownership Plan. Approximately 24,000,000 shares of Packaging common stock will be available for grant under this plan. This plan will be approved by Tenneco as Packaging's sole stockholder prior to the spin-off. 101 103 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following review of Packaging's financial condition and results of operations should be read in conjunction with the Combined Financial Statements of The Businesses of Tenneco Packaging, and the related notes, presented on pages F-1 through F-31. Packaging includes the assets, liabilities and operations of Tenneco's specialty packaging and paperboard packaging businesses as well as Tenneco's corporate and administrative service operations. STRATEGIC ALTERNATIVES ANALYSIS In July 1998, Tenneco's Board of Directors authorized management to develop a broad range of strategic alternatives which could result in the separation of the automotive, paperboard packaging, and specialty packaging businesses. As part of that strategic alternatives analysis, Tenneco has taken the following actions: - In January 1999, Packaging reached an agreement to contribute the containerboard assets of its paperboard packaging segment to a new joint venture with an affiliate of Madison Dearborn Partners, Inc. The contribution of the containerboard assets to the joint venture was completed in April 1999. Packaging received consideration of cash and debt assumption totaling approximately $2 billion and a 45 percent common equity interest in the joint venture valued at approximately $200 million. Packaging now owns a 43 percent common equity interest due to subsequent management equity issuances. - In April 1999, Packaging reached an agreement to sell the paperboard packaging segment's other assets, its folding carton operation, to Caraustar Industries. This transaction closed in June 1999. - Also in April 1999, Tenneco announced that its Board of Directors had approved the separation of its automotive and packaging businesses into two separate, independent companies. - In June 1999, Tenneco's Board of Directors approved a plan to sell Packaging's remaining interest in its containerboard joint venture. In September 1999, the joint venture, Packaging Corporation of America, filed a registration statement for Packaging to sell its interest in a registered public offering. Packaging expects the sale to be completed before the spin-off discussed below. The containerboard assets contributed to the new joint venture represented substantially all of the assets of Packaging's paperboard packaging segment and included four mills, 67 corrugated products plants, and an ownership or controlling interest in approximately 950,000 acres of timberland. Before the transaction, Packaging borrowed approximately $1.8 billion and used approximately $1.2 billion of those borrowings to acquire assets used by the containerboard business under operating leases and timber cutting rights and to purchase containerboard business accounts receivable that had previously been sold to a third party. The remainder of the borrowings was remitted to Tenneco and used to repay a portion of short-term debt. Packaging then contributed the containerboard business assets, subject to the new indebtedness and the containerboard business liabilities, to the joint venture in exchange for $247 million in cash and the 45 percent interest in the joint venture. As a result of the sale transaction, Packaging recognized a pre-tax loss of $293 million, $178 million after-tax, or $1.07 per diluted common share. This loss was included in discontinued operations in the first quarter of 1999. As a result of the decision to sell Packaging's remaining interest in the containerboard joint venture, Packaging's paperboard packaging segment is presented as a discontinued operation in the Combined Financial Statements of The Businesses of Tenneco Packaging contained elsewhere in this document. Refer to Note 7 for further information. The separation of Tenneco's automotive and packaging businesses will be accomplished by the spin-off of the common stock of Packaging to Tenneco shareowners. At the time of the spin-off, Packaging will include Tenneco's specialty packaging business ("Specialty"), Tenneco's administrative services operations, and the remaining interest in the containerboard joint venture if the sale has not been completed. Tenneco and Packaging are, however, currently analyzing the alternatives with respect to the administrative services operations. 102 104 Before the spin-off, Tenneco will realign substantially all of its existing debt through some combination of tender offers, exchange offers, prepayments and other refinancings. This debt realignment will be financed by internally generated cash, borrowings by Tenneco under a new credit facility, the issuance by Tenneco of senior subordinated notes and borrowings by Packaging under new credit facilities. See "The Spin-off -- Debt Realignment." Tenneco currently expects that, subject to discussions with debt rating agencies, Packaging's debt will be rated investment grade and Automotive's debt will be rated non- investment grade. Also before the spin-off, Tenneco will restructure its existing businesses, assets, and liabilities through a series of corporate restructuring transactions. As Tenneco is currently organized, ownership of its subsidiaries is based on geographic location and tax considerations rather than on the businesses in which the subsidiaries are involved. Therefore, Tenneco will need to restructure its existing businesses so that the assets, liabilities, and operations of its packaging business and administrative services operations will be owned by Packaging, and the assets, liabilities, and operations of its automotive businesses will be owned by Tenneco. The spin-off is subject to conditions, including formal declaration of the spin-off by the Tenneco Board of Directors, Tenneco's receipt, and the continued effectiveness, of a determination that the spin-off will be tax-free for U.S. federal income tax purposes, and the successful completion of the debt realignment and corporate restructuring transactions. In August 1999, Tenneco received a letter ruling from the Internal Revenue Service that the spin-off will be tax-free for U.S. federal income tax purposes to Tenneco and its shareowners and as a result the specialty packaging segment is presented as a discontinued operation in the accompanying financial statements. After discontinuing the specialty packaging segment, Tenneco's sole continuing operation is its Automotive segment. Refer to Notes to Combined Financial Statements of The Businesses of Tenneco Packaging contained elsewhere in this document for further information. RESTRUCTURING AND OTHER CHARGES In the fourth quarter of 1998, Tenneco's Board of Directors approved an extensive restructuring plan designed to reduce administrative and operational overhead costs in every part of Tenneco's business. As a result, Packaging recorded a pre-tax charge to income from continuing operations of $32 million, $20 million after-tax or $.12 per diluted common share. Of the pre-tax charge, $10 million relates to operational restructuring plans and $22 million relates to a staff and cost reduction plan. The operational restructuring plans provide for Packaging to eliminate production lines at two plants, exit four joint ventures, and eliminate 104 positions. The staff and cost reduction plan for Packaging involves the elimination of 184 administrative positions in Packaging's business operations and in Packaging's corporate operations including Tenneco's corporate operations that will become a part of Packaging in connection with the spin-off. The fixed assets for the production lines to be eliminated, as well as the joint venture investments, were written down to their fair value, less costs to sell, in the fourth quarter of 1998. Fair value for the production lines was estimated at scrap value less removal costs. Fair value for the joint ventures was determined to be zero as Packaging is relinquishing its interests in the ventures. No significant net cash proceeds are expected to be received from the ultimate disposal of these assets, which should be complete by the fourth quarter of 1999. The effect of suspending depreciation for the production lines is approximately $1 million on an annual basis. As of December 31, 1998 and June 30, 1999, approximately 158 and 233 employees, respectively, had been terminated. This restructuring is being executed according to Packaging's initial plan and Packaging expects to complete all restructuring actions by the fourth quarter of 1999. In the first quarter of 1999, in connection with Packaging's contribution of its containerboard assets to a new joint venture, Tenneco adopted a plan to realign its headquarters functions that will become a part of Packaging in connection with the spin-off. This plan involves the severance of approximately 40 103 105 employees, and the closing of the Greenwich, Connecticut headquarters facility. Tenneco reached an agreement to sell its headquarters facility in Greenwich, and recorded an impairment charge in the first quarter of 1999, based on the selling price less costs to sell. The carrying value of the facility before the impairment was $43 million. Annual depreciation will be reduced by $3 million as a result of the sale. The charge for this plan was recorded in Packaging's corporate operations in the amount of $29 million pre-tax, $17 million after-tax, or $.10 per diluted common share. Packaging collected approximately $30 million in the second quarter of 1999 related to the sale of these assets. Amounts related to the restructuring plans described above are shown in the following table:
SIX MONTHS ENDED JUNE 30, 1999 ----------------------------------- 1998 CHARGED BALANCE AT CHARGED BALANCE AT RESTRUCTURING CASH TO ASSET DECEMBER 31, RESTRUCTURING CASH TO ASSET JUNE 30, CHARGE PAYMENTS ACCOUNTS 1998 CHARGE PAYMENTS ACCOUNTS 1999 ------------- -------- -------- ------------ ------------- -------- -------- ---------- (MILLIONS) Severance............... $20 $5 $-- $15 $16 $12 $-- $19 Asset impairments....... 12 -- 12 -- 13 -- 13 -- --- -- --- --- --- -- --- --- $32 $5 $12 $15 $29 $12 $13 $19 === == === === === == === ===
Packaging expects to realize annual savings of $13 million related to the operational restructuring plans and $40 million related to the fourth quarter 1998 staff and cost reduction plan. In addition, Packaging expects to realize annual savings of $11 million related to its plan to realign its headquarters functions. These annual savings will be fully realized upon completion of the restructuring actions in the fourth quarter of 1999. SIX MONTHS ENDED JUNE 30, 1999 AND 1998 RESULTS OF CONTINUING OPERATIONS Net Sales and Operating Revenues
SIX MONTHS ENDED JUNE 30, ------------------------------ 1999 1998 % CHANGE ---- ---- -------- (MILLIONS) Specialty........................................... $1,404 $1,361 3% Intergroup sales and other.......................... -- 10 NM ------ ------ $1,404 $1,371 2% ====== ======
Packaging's revenue in its specialty segment increased by 3 percent over the first half of 1998. The second half 1998 acquisitions of Sentinel and Champion International's Belvidere, Illinois dual-ovenable paperboard tray manufacturing facility generated $21 million of the revenue increase. Lower prices due to lower raw material costs were offset by overall unit volume growth of 8 percent. The largest increases were in North American protective packaging, Hefty OneZip(R) bags, foodservice containers, disposable tableware and industrial products. Income Before Interest Expense, Income Taxes and Minority Interest ("Operating Income")
SIX MONTHS ENDED JUNE 30, ---------------------------- 1999 1998 % CHANGE ---- ---- -------- (MILLIONS) Specialty............................................ $ 190 $ 175 9% Other................................................ (46) (2) NM ----- ----- $ 144 $ 173 (17%) ===== =====
104 106 Packaging's operating income in its specialty segment increased by $15 million over the comparable period of 1998. The second half 1998 acquisitions of Sentinel and Champion International's Belvidere, Illinois dual-ovenable paperboard tray manufacturing facility produced $4 million of operating income during the first half of 1999. First half operating income also reflected $5 million of non-recurring Year 2000 and systems implementation costs, and $3 million of overhead costs related to the separation of the paperboard segment. Adjusting for these two items, Specialty Packaging's operating income improved by 13 percent. This improvement was driven by lower manufacturing costs and strong unit volumes, partially offset by lags in passing through rising raw material costs. Packaging's "Other" operating loss for both periods reflects unallocated corporate overhead and costs at Packaging's data center and administrative services operations. In addition, the first half of 1999 includes a $29 million charge recorded in the first quarter to realign Tenneco's headquarters functions as discussed above in the "Restructuring and Other Charges" section. Operating Income as a Percentage of Revenue Operating income as a percentage of revenue for the first six months of 1999 and 1998 were as follows:
SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 % CHANGE ----- ----- --------- Specialty.............................................. 13.5% 12.9% 5% Total.................................................. 10.3% 12.6% (18%)
Specialty's operating income as a percentage of revenue increased as the operating income of the segment grew at three times the rate of revenue growth. On a consolidated basis, total operating income as a percentage of revenue declined as the operating income decreased 17 percent while revenue grew 2 percent. Excluding the first quarter 1999 restructuring charge, operating income as a percentage of revenue was as follows:
SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 % CHANGE ----- ----- --------- Specialty.............................................. 13.5% 12.9% 5% Total.................................................. 12.3% 12.6% (2%)
Interest Expense, net of interest capitalized Interest expense for the first half of 1999 was even with the first half of 1998. Tenneco's historical practice has been to incur indebtedness for its consolidated group at the parent company level or at a limited number of subsidiaries. Accordingly, interest expense in each period includes an allocation of interest on Tenneco corporate debt. This allocation was based, in general, on the ratio of Packaging's net assets to Tenneco's consolidated net assets plus debt. See Note 5 to the Combined Financial Statements of The Businesses of Tenneco Packaging for a further discussion of the allocation of Tenneco consolidated debt and interest expense to Packaging. Income Taxes Packaging's effective tax rate for the first half of 1999 was 31 percent, compared to 35 percent in last year's period. DISCONTINUED OPERATIONS AND EXTRAORDINARY CHARGE Loss from discontinued operations in the first half of 1999 was $163 million, net of an income tax benefit of $102 million, or $.98 per diluted common share. This included a loss on the contribution of the containerboard assets of $178 million, net of an income tax benefit of $115 million, or $1.07 per diluted common share. 105 107 Discontinued operations generated income of $37 million, net of income tax expense of $25 million, or $.22 per diluted common share, during the first half of 1998. The current year's first six months also includes an extraordinary charge to cover the cost of early retirement of debt in connection with the contribution of the containerboard assets of $7 million, net of income tax expense of $3 million, or $.04 per diluted common share. See Note 7 to the Combined Financial Statements of The Businesses of Tenneco Packaging for a further discussion of discontinued operations. OUTLOOK See "Summary -- Recent Developments" for information concerning Packaging's expectations for third quarter 1999 results of operations. CHANGES IN ACCOUNTING PRINCIPLES In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which establishes new accounting and reporting standards for the costs of computer software developed or obtained for internal use. This statement requires prospective application, for fiscal years beginning after December 15, 1998. Packaging adopted SOP 98-1 on January 1, 1999. The impact of this new standard did not have a significant effect on Packaging's financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which requires costs of start-up activities to be expensed as incurred. This statement was effective for fiscal years beginning after December 15, 1998. This statement requires previously capitalized costs related to start-up activities to be expensed as a cumulative effect of a change in accounting principle when the statement is adopted. Packaging previously capitalized costs related to the start-up of new foreign operations and its administrative service operations. Packaging adopted SOP 98-5 on January 1, 1999, and recorded an after-tax charge for the cumulative effect of this change in accounting principle upon adoption of $32 million, net of a $9 million tax benefit, or $.19 per diluted common share. The change in accounting principle decreased the loss before cumulative effect of change in accounting principle by $4 million, net of $2 million in income tax expense, or $.02 per diluted common share, for the six months ended June 30, 1999. If the new accounting method had been applied retroactively, net income for the six months ended June 30, 1998, and the years ended December 31, 1998, 1997, and 1996, would have been lower by $7 million, net of a $5 million income tax benefit, or $.04 per diluted common share, $14 million, net of an $8 million tax benefit, or $.08 per diluted common share, $7 million, net of a $3 million tax benefit, or $.04 per diluted common share, and $7 million, net of a $4 million tax benefit, or $.04 per diluted share, respectively. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes new accounting and reporting standards requiring that all derivative instruments, including derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. This statement cannot be applied retroactively and is effective for all fiscal years beginning after June 15, 2000. Packaging is currently evaluating the new standard but has not yet determined the impact it will have on its financial position or results of operations. 106 108 EARNINGS PER SHARE Packaging's income from continuing operations was $.31 per diluted common share for the first half of 1999, compared to $.41 per diluted common share for last year's first half. All references to earnings per share in this Management's Discussion and Analysis of Financial Condition and Results of Operations are on a diluted basis unless otherwise noted. The current year's period also included a loss from discontinued operations of $.98 per diluted common share, a $.04 per share extraordinary loss on early retirement of debt in connection with the contribution of the containerboard assets, and $.19 per diluted common share of charges related to the cumulative effect of changes in accounting principles noted above. First half 1998 included $.22 per diluted common share of income from discontinued operations. Net income per diluted common share was $.63 in the first half of 1998, as compared to a loss of $.90 per diluted common share in this year's period. LIQUIDITY AND CAPITAL RESOURCES Capitalization
JUNE 30, DECEMBER 31, % 1999 1998 CHANGE -------- ------------ ------ (MILLIONS) Short-term debt and current maturities........... $ 367 $ 595 Long-term debt................................... 1,494 1,312 Debt allocated to discontinued operations........ -- 548 ------ ------ --- Total debt.................................. 1,861 2,455 (24%) Minority interest................................ 14 14 --% Combined equity.................................. 1,340 1,776 (25%) ------ ------ Total capitalization........................ $3,215 $4,245 (24%) ====== ======
Packaging's debt to total capitalization ratio was 57.8 percent at both June 30, 1999, and December 31, 1998. Debt allocated from Tenneco to Packaging declined due to the contribution by Packaging of its containerboard assets to the joint venture. Equity declined primarily as a result of the net loss for the first six months, which included the loss on the containerboard assets as well as the charge associated with the plan to realign the Greenwich, Connecticut headquarters facility. See the Statements of Changes in Combined Equity in the Combined Financial Statements of The Businesses of Tenneco Packaging contained elsewhere in this document for a description of factors affecting equity. In June 1999, Tenneco's Board of Directors approved a plan to sell Packaging's remaining interest in its containerboard joint venture. Packaging expects the sale to be completed before the spin-off, with the net proceeds used to retire Tenneco debt that would otherwise be allocated to Packaging in the debt realignment. If the sale occurs after the spin-off, the net proceeds will be used to retire Packaging debt. Cash Flows
SIX MONTHS ENDED JUNE 30, ----------------- 1999 1998 ---- ---- (MILLIONS) Cash provided (used) by: Operating activities...................................... $ (45) $ 288 Investing activities...................................... (866) (221) Financing activities...................................... 920 (66)
Cash flow provided by continuing operating activities declined by $163 million for the first six months of 1999 compared to the same period in 1998, primarily due to higher working capital levels. This was mainly attributable to higher receivables, lower payables and a seasonal build in inventories during the 1999 period. 107 109 Cash flow from Tenneco's discontinued paperboard operations declined by $170 million in the first six months of 1999 compared to the 1998 period. This is primarily attributable to the purchase of containerboard business accounts receivable in contemplation of the contribution of the containerboard business to the joint venture in April 1999. Additionally, lower linerboard and medium prices resulted in lower operating cash flow for the containerboard business. Excluding the effects of the discontinued paperboard operations, cash used by investing activities was lower during the first six months of 1999 by $127 million compared to the first six months of 1998. Reduced capital spending, lower systems related expenditures and lower acquisition activity contributed to the decline. As described above, Packaging borrowed approximately $1.8 billion in the second quarter in connection with the formation of the containerboard joint venture and used approximately $1.2 billion of that amount to purchase leased assets and timber cutting rights of that business. The remaining proceeds of these borrowings, plus additional cash proceeds of approximately $306 million from the containerboard and folding carton transactions, were used to retire Tenneco's short-term debt in the second quarter. Accordingly, absent the borrowings described above, cash used by financing activities was $840 million for the first six months of 1999. Packaging contributed the containerboard business to the new joint venture subject to the approximately $1.8 billion in new debt. The debt reduction which resulted from this contribution is shown on the statements of cash flows as a non-cash financing activity. Capital Commitments Packaging estimates that expenditures aggregating approximately $110 million will be required after December 31, 1998, to complete facilities and projects authorized at that date, and substantial commitments have been made in connection with those projects. Liquidity Historically, Packaging's excess net cash flows from operating and investing activities have been used by its parent, Tenneco, to meet consolidated debt and other obligations. Conversely, when Packaging's cash requirements have been in excess of cash flows from operations, Tenneco has utilized its consolidated credit facilities to fund Packaging's obligations. Also, depending on market and other conditions, Packaging has utilized external sources of capital to meet specific funding requirements. Packaging's management believes that, after the spin-off, Packaging's cash flows from operations combined with available borrowing capacity under the new credit facilities described below, will generally be sufficient to meet its future capital requirements for the following year. As described under "The Spin-off-Debt Realignment," Tenneco intends to realign its debt before the spin-off. As part of this debt realignment, Packaging will (1) issue the new securities in the exchange offers and (2) make new borrowings under new credit facilities entered into in connection with the spin-off. Funding under these financings will be subject to the satisfaction of numerous conditions. Cash proceeds will be remitted to Tenneco to fund the debt realignment. The terms of the new public debt securities will be substantially identical to the terms of the corresponding series of Tenneco's original securities for which they are exchanged, except that (1) Packaging will be the issuer and (2) the interest rates will be different. The terms of the new securities will not restrict Packaging's ability to make dividends or capital expenditures or incur additional unsecured debt. See "Description of the New Securities." In addition, Packaging has entered into a five-year, $750 million long-term revolving credit facility and a $250 million 364-day revolving credit facility in connection with the spin-off. Initial borrowings under these facilities will be used to fund a portion of the debt realignment. After the spin-off, additional borrowings may be used for general corporate purposes. These facilities do not include any general restrictions on Packaging's ability to pay dividends or make capital expenditures. They do, however, 108 110 include limitations on incurring liens and subsidiary debt, disposing of all or substantially all of its assets and discontinuing its primary businesses. These facilities require Packaging to comply with specified financial ratios, as well as other customary covenants and agreements. Borrowings under these facilities will bear interest at a floating rate based on LIBOR, adjusted for reserve requirements, plus a specified margin, or based on a specified prime or reference rate plus a specified margin, at Packaging's option. Borrowings under these facilities may also bear interest based on competitive bids. See "Description of Packaging -- New Financing" for further information. A lender has committed to provide Packaging up to $1.5 billion of term loan financing, which Packaging intends to use in the event it does not sell its containerboard joint venture interest before the spin-off for general corporate and other purposes. Although the terms of this financing have not been finalized, Packaging expects that borrowings under this facility would be due 18 months after funding and bear interest at a floating rate based on LIBOR, adjusted for reserve requirements, plus a specified margin or based on a specified prime or reference rate plus a specific margin, at Packaging's option. Packaging expects this financing would include covenants similar to those described above for the revolving credit facilities. See "Description of Packaging -- New Financing" for further information. Before the spin-off Packaging expects to enter into a $175 million syndicated lease facility with a third party lessor and various lenders, the proceeds of which will be used to restructure or replace certain existing operating leases and public warehouse arrangements and to facilitate additional leasing arrangements for other operating facilities. Packaging expects that the syndicated lease facility will contain customary terms and conditions, including a residual value guarantee, default provisions and financial covenants. ENVIRONMENTAL MATTERS Packaging and a number of its subsidiaries and affiliates are parties to environmental proceedings. Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and which do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments indicate that remedial efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology, and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors. All available evidence is considered including prior experience in remediation of contaminated sites, other companies' clean-up experience and data released by the United States Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new information. These liabilities are included in the combined balance sheet at their undiscounted amounts. Recoveries are evaluated separately from the liability and, when assured, are recorded and reported separately from the associated liability in the combined financial statements. As of July 1, 1999, Packaging has been designated as a potentially responsible party at three Superfund sites and it has estimated its share of the liability at these sites to be approximately $2 million in the aggregate. In addition, Packaging also may have liability to remediate several current or former facilities and it has estimated its share of the remediation costs at these facilities to be approximately $4 million in the aggregate. For both the Superfund sites and its current and former facilities, Packaging has established reserves that it believes are adequate for these costs. Although Packaging believes its estimates of remediation costs are reasonable and based on the latest information, the clean-up costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At certain sites, Packaging expects that other parties will contribute to the remediation costs. In addition, at the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that Packaging's liability could be joint and several meaning that Packaging could be required to pay in excess of its share of remediation costs. Packaging's understanding of the financial strength of other potentially responsible parties at both the Superfund sites and at its current and former facilities has been considered, where appropriate, in Packaging's determination of its estimated liability. Packaging 109 111 believes that any adjustment to the costs associated with its current status as a potentially responsible party at the Superfund sites or as a liable party at its current or former facilities will not be material to its consolidated financial position or results of operations. Packaging estimates that its capital expenditures for environmental matters for 1999 and 2000 will not be material. DERIVATIVE FINANCIAL INSTRUMENTS Foreign Currency Exchange Rate Risk Packaging currently manages its exposure to changes in foreign currency rates by making loans with a Tenneco affiliate in the functional currency of the operating company concerned. The Tenneco affiliate then integrates all of Tenneco's foreign currency denominated intercompany loans and enters into foreign currency forward purchase and sale contracts to mitigate its net exposure to changes in foreign exchange rates. This reduces Packaging's need to enter into forward contracts with third parties. Packaging expects that, following the spin-off, its use of foreign currency forward purchase and sale contracts will increase. Additionally, Packaging from time to time enters into foreign currency forward purchase and sale contracts to mitigate its exposure to changes in exchange rates on intercompany and third party trade receivables and payables. Packaging does not currently enter into derivative financial instruments for speculative purposes. The administration of these activities is concentrated at a London-based Tenneco affiliate. This affiliate enters into forward purchase and sell contracts with Tenneco's operating divisions to hedge the divisions' exposure to changes in foreign currency exchange rates. The affiliate then enters into contracts with third parties to hedge Tenneco's consolidated exposure. At December 31, 1998, Packaging had purchase contracts with this affiliate of approximately one million dollars, primarily in U.S. dollars, and sell contracts of approximately one million dollars, primarily in British pounds. At December 31, 1997, Packaging had purchase contracts of approximately two million dollars, primarily in Belgian francs and German marks, and sell contracts of approximately two million dollars, primarily in British pounds and French francs. Packaging's purchase and sell contracts as of June 30, 1999 and December 31, 1998 were not materially different. Interest Rate Risk Tenneco's historical practice has been to incur indebtedness for its consolidated group at the parent company level or at a limited number of subsidiaries. Tenneco's financial instruments that are sensitive to market risk for changes in interest rates are its debt securities. Tenneco primarily uses commercial paper to finance its short-term capital requirements. Since commercial paper generally matures in three months or less, Tenneco pays a current market rate of interest on these borrowings. Tenneco finances its long-term capital requirements with long-term debt with original maturity dates ranging up to 30 years. All of Tenneco's existing long-term debt obligations have fixed interest rates. Consequently, Tenneco is not exposed to cash flow or fair value risk from market interest rate changes on its long-term debt portfolio. Packaging's interest expense in each period includes an allocation of interest on Tenneco corporate debt. The allocated interest expense carries with it exposure to Tenneco's interest rate risk. The table 110 112 below provides information about Tenneco's financial instruments that are sensitive to interest rate risk as of December 31, 1998.
Estimated Maturity Dates Fair Value at -------------------------------------------------- December 31, 1999 2000 2001 2002 2003 THEREAFTER Total(b) 1998(a) ---- ---- ---- ---- ---- ---------- -------- ------------- (Millions Except Effective Interest Rates) Short-term (excluding current maturities)......................... $821 $-- $ -- $ -- $-- $ -- $ 821 $ 821 Average effective interest rate..... 5.9% --% --% --% --% --% Long-term debt (including current maturities)......................... $250 $10 $187 $498 $ 7 $1,583 $2,535 $2,606 Average effective interest rate..... 6.4% 12.0% 6.8% 6.8% 11.2% 7.6%
- ------------------------- (a) Fair value of short-term debt was considered to be the same as or was not determined to be materially different from the carrying amount. The fair value of fixed-rate long term debt was generally based on the market value of Tenneco debt offered in open market exchanges at December 31, 1998. (b) At December 31, 1998, short-term and long-term Tenneco debt allocated to Packaging was $583 million and $1,291 million, respectively. Corporate debt allocated to Packaging's discontinued operations was $548 million at December 31, 1998. Tenneco's financial instruments that are sensitive to interest rate risk as of June 30, 1999 are not materially different from the table presented above. In connection with the debt realignment, Packaging will enter into a new credit facility which will be subject to interest rate risks. In connection with the spin-off, the above described instruments, which are sensitive to interest rate risk, are expected to be refinanced. The statements and other information, including the tables, in this "Derivative Financial Instruments" section constitute "forward-looking statements." YEAR 2000 Many computer software systems, as well as some hardware and equipment utilizing date-sensitive data, were designed to use a two-digit date field. Consequently, these systems, hardware and equipment will not be able to properly recognize dates beyond the year 1999. This is referred to herein as the "Year 2000 issue". Packaging's significant technology transformation projects have addressed the Year 2000 issue in those areas where replacement systems are being installed for other business reasons. Where existing systems and equipment are expected to remain in place beyond 1999, Packaging has a detailed process in place to identify and assess Year 2000 issues and to remediate, replace or establish alternative procedures addressing non-Year 2000 compliant systems, hardware and equipment. Packaging has substantially completed inventorying its systems and equipment, including computer systems and business applications, as well as date-sensitive technology embedded in its equipment and facilities. Packaging continues to plan for and undertake remediation, replacement or establishment of alternative procedures for non-compliant Year 2000 systems and equipment; and test remediated, replaced or alternative procedures for systems and equipment. Packaging believes that approximately 70 percent of its major business applications systems and approximately 90 percent of its manufacturing equipment had achieved Year 2000 compliance as of June 30, 1999. Packaging has confirmed that none of its products are date-sensitive. Remediation, replacement or establishment of alternative procedures for systems and equipment have been and are being undertaken on a business priority basis. This is ongoing and was completed at some locations in 1998 with the remainder expected to be completed through the third quarter of 1999. Testing will occur in the same time frame. Based upon current estimates, Packaging believes that costs to address Year 2000 issues and implement the necessary changes to its existing systems and equipment, including costs incurred to date, 111 113 will range from $25 to $30 million. As of June 30, 1999, approximately $17 million of the costs had been incurred. These costs are being expensed as they are incurred, except that in some instances Packaging may determine that replacing existing computer systems or equipment may be more effective and efficient, particularly where additional functionality is available. These replacements would be capitalized and would reduce the estimated expense associated with Year 2000 issues. Packaging has also contacted its major suppliers, financial institutions, and others with whom it conducts business to determine whether they will be able to resolve in a timely manner Year 2000 problems possibly affecting Packaging. A majority of these entities, including critical suppliers, have responded by advising as to the status of their efforts and by stating that they expect to become Year 2000 compliant in a timely manner. Based on these responses, critical suppliers have been assigned a risk rating. This process is ongoing. Packaging intends to continue corresponding with critical high risk third parties to obtain information and updates on their Year 2000 efforts, and to assess new suppliers, financial institutions and others with whom it begins to conduct business. If Packaging is unable to complete on a timely and cost-effective basis the remediation or replacement of critical systems or equipment not yet in compliance, or develop alternative procedures, or if those with whom Packaging conducts business are unsuccessful in implementing timely solutions, Year 2000 issues could have a material adverse effect on Packaging's financial condition or results of operations. Possible worst case scenarios include interruptions in Packaging's ability to manufacture its products, process and ship orders, and bill and collect accounts receivable due to internal system failures or the system failures of its suppliers or customers. Packaging believes it will be able to timely resolve its own Year 2000 issues. As part of its planning and readiness activities, Packaging is developing Year 2000 contingency plans for critical business processes such as banking, data center operations and just-in-time manufacturing operations. Contingency plans are being developed on a business unit basis, where needed, to respond to previously undetected Year 2000 problems and business interruption from suppliers. Contingency plans will include alternative suppliers, as necessary, as well as assuring the availability of key personnel at year end to address unforeseen Year 2000 problems. Prior to the spin-off, Tenneco's administrative services operation has been assisting both Packaging and Automotive with their Year 2000 remediation, replacement and testing activities. Except for mainframe testing, substantially all of these Year 2000 assistance activities have been completed for Automotive. Shortly after the spin-off, Packaging is scheduled to assist Automotive with the completion of the mainframe testing. EURO CONVERSION The European Monetary Union resulted in the adoption of a common currency, the "Euro," among eleven European nations. The Euro is being adopted over a three-year transition period beginning January 1, 1999. In October 1997, Tenneco established a cross-functional Euro Committee, comprised of representatives of Tenneco's operational divisions, including Packaging, as well as its corporate offices. That Committee had two principal objectives: (1) to determine the impact of the Euro on Tenneco's business operations; and (2) to recommend and facilitate implementation of those steps necessary to ensure that Tenneco would be fully prepared for the Euro's introduction. As of January 1, 1999, Packaging had implemented those Euro conversion procedures that it had determined to be necessary and prudent to adopt by that date, and is on track to becoming fully "Euro ready" on or before the conclusion of the three-year Euro transition period. Packaging believes that the costs associated with transitioning to the Euro will not be material to its combined financial position or the results of its operations. 112 114 YEARS 1998 AND 1997 RESULTS OF CONTINUING OPERATIONS Packaging reported income from continuing operations of $82 million for the year ended December 31, 1998, compared to $106 million for the same period in 1997. The 1998 figure includes a $20 million after-tax charge to reduce overhead and manufacturing costs throughout every part of Packaging's business. Excluding the restructuring charge, Packaging's income from continuing operations for the 1998 period was $102 million. The decline resulted from costs related to Packaging's data center consolidation effort, offset by record results in the Specialty segment. Higher interest expense and a higher tax rate also contributed to the earnings decline. Net Sales and Operating Revenues
% 1998 1997 CHANGE ------ ------ ------ (MILLIONS) Specialty........................................... $2,785 $2,553 9% Intergroup sales and other.......................... 6 10 (40%) ------ ------ $2,791 $2,563 9% ====== ======
Packaging's revenue increase in its Specialty segment of $232 million resulted primarily from full-year inclusion of the protective and flexible packaging businesses acquired from N.V. Koninklijke KNP BT in 1997 and from the May 1998 acquisition of Richter Manufacturing. The KNP BT businesses contributed $160 million of incremental revenue in 1998 measured through the first anniversary of their acquisition in late April 1997. Richter Manufacturing revenue during 1998 was $39 million. The remaining revenue increase reflects higher unit volumes in numerous product lines which more than offset lower pricing. Operating Income The following table presents operating income by segment for the years 1998 and 1997:
% 1998 1997 CHANGE ---- ---- ------ (MILLIONS) Specialty.............................................. $328 $308 6% Other.................................................. (45) (2) NM ---- ---- $283 $306 (8%) ==== ====
As described earlier in this Management's Discussion and Analysis of Financial Condition and Results of Operations, Packaging recorded a pre-tax restructuring charge to income from continuing operations of $32 million, $20 million after-tax, in the fourth quarter of 1998. The restructuring charge affected Packaging's segments as follows: Specialty -- $18 million and Other -- $14 million. Excluding these restructuring charges, a comparison of Packaging's 1998 and 1997 operating income is as follows:
% 1998 1997 CHANGE ---- ---- ------ (MILLIONS) Specialty............................................... $346 $308 12% Other................................................... (31) (2) NM ---- ---- $315 $306 3% ==== ====
Packaging's operating income increase in its Specialty segment reflected $24 million from acquired businesses measured through the one-year anniversary of their acquisitions, as well as higher unit volumes, primarily in Hefty One-Zip(R), food service foam, and consumer tableware products. Lower raw material 113 115 costs approximately offset price reductions to customers. In addition, Specialty incurred approximately $7 million in one-time costs related to an information systems project in North America. Packaging's operating loss in its "Other" segment increased in 1998 over 1997 levels primarily as a result of higher costs related to Packaging's data center consolidation effort, which more than offset lower unabsorbed costs at Packaging's administrative services operation. Operating Income as a Percentage of Revenue Operating income as a percentage of revenue for 1998 and 1997, including the fourth quarter 1998 restructuring charge, were as follows:
1998 1997 % CHANGE ---- ---- -------- Specialty.................................................. 11.8% 12.1% (2%) Total...................................................... 10.1% 11.9% (15%)
The Specialty segment's operating income as a percentage of revenue contracted as the growth rate of operating income, including the restructuring charge, was 6 percent compared with the 9 percent growth rate of revenues. On a consolidated basis, total operating income as a percentage of revenue contracted even further, as the operating income, including both the restructuring charge and the increased costs in the other segment, decreased 8 percent while revenue grew 9 percent. Excluding the fourth quarter 1998 restructuring charge, operating income as a percentage of revenue for the same periods were as follows:
1998 1997 % CHANGE ---- ---- -------- Specialty.................................................. 12.4% 12.1% 2% Total...................................................... 11.3% 11.9% (5%)
Interest Expense, net of interest capitalized Interest expense for 1998 was $9 million, or 7 percent, higher than for 1997. As described above, interest expense in each period includes an allocation of interest on Tenneco corporate debt. This allocation was based, in general, on the ratio of Packaging's net assets to Tenneco consolidated net assets plus debt. See Note 5 to the Combined Financial Statements of The Business of Tenneco Packaging contained elsewhere in this document for a further discussion of the allocation of Tenneco consolidated debt and interest expense to Packaging. Income Taxes Packaging's effective tax rate for 1998 was 45 percent, compared to 41 percent for 1997. The effective tax rate was higher than the statutory rate in both periods primarily as a result of state and local income taxes. DISCONTINUED OPERATIONS Discontinued operations generated income of $57 million, net of income tax expense of $38 million, or $.34 per diluted common share for 1998. Discontinued operations generated income of $21 million, net of income tax expense of $14 million, or $.12 per diluted common share during 1997. Fourth quarter 1998 results from discontinued operations for the paperboard packaging business includes a pre-tax charge of $14 million related to Packaging's restructuring plan to reduce administrative and operational overhead costs. The paperboard packaging restructuring plan involves closing four box plants and the elimination of 78 positions at those plants. 114 116 Income from the discontinued paperboard packaging business in 1998 also included a $15 million pre-tax gain on the sale of its remaining 20 percent interest in a recycled paperboard joint venture with Caraustar Industries and a $17 million pre-tax gain on the sale of non-strategic timberland assets. In 1997, income from discontinued operations included a $38 million pre-tax gain on refinancing of two containerboard mill leases and a $5 million pre-tax gain from a timberland management transaction. See Note 7 to the Combined Financial Statements of The Businesses of Tenneco Packaging contained elsewhere in this document for a further discussion of discontinued operations. CHANGES IN ACCOUNTING PRINCIPLES As required by the FASB's Emerging Issues Task Force Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation," Packaging recorded an after-tax charge of $38 million, net of a tax benefit of $24 million, or $.23 per diluted common share, in the fourth quarter of 1997. EITF Issue 97-13 establishes the accounting treatment and an allocation methodology for consulting and other costs incurred in connection with information technology transformation efforts. This charge was reported as a cumulative effect of change in accounting principle. EARNINGS PER SHARE Income from continuing operations was $.49 per diluted common share for 1998, compared to $.63 per diluted common share in 1997. Discontinued operations provided income of $.34 and $.12 per diluted common share, for 1998 and 1997, respectively. In 1997, Packaging also recorded a charge for the cumulative effect of a change in accounting principle noted above of $.23 per diluted common share, resulting in net income of $.52 per diluted common share, compared to $.83 per diluted common share in 1998. LIQUIDITY AND CAPITAL RESOURCES Capitalization
% 1998 1997 CHANGE ---- ---- ------ (MILLIONS) Short-term debt and current maturities............... $ 595 $ 158 Long-term debt....................................... 1,312 1,492 Debt allocated to discontinued operations............ 548 473 ------ ------- Total debt.................................... 2,455 2,123 16% Minority interest.................................... 14 15 (7%) Combined equity...................................... 1,776 1,839 (3%) ------ ------- Total capitalization.......................... $4,245 $ 3,977 7% ====== =======
Packaging's debt to capitalization ratio was 57.8 percent at December 31, 1998, compared to 53.4 percent at December 31, 1997. The increase in the ratio is attributable to additional corporate debt allocated to Packaging from Tenneco during 1998, as well as a decline in equity. See Note 5 to the Combined Financial Statements of The Businesses of Tenneco Packaging for a further discussion of the allocation of Tenneco consolidated debt and interest expense to Packaging. See the Statements of Changes in Combined Equity of The Businesses of Tenneco Packaging for a description of factors affecting equity. 115 117 Cash Flows
1998 1997 ---- ---- (MILLIONS) Cash provided (used) by: Operating activities...................................... $ 577 $ 405 Investing activities...................................... (514) (654) Financing activities...................................... (67) 239
Cash flow from operating activities increased by $172 million from 1997 to 1998. Of this amount, $74 million was produced by continuing operations and $98 million was produced by discontinued operations. The increase from continuing operations was primarily attributable to working capital, which increased significantly during 1997 to support the growth in revenues over 1996 levels. Working capital decreased slightly during 1998 as revenue growth moderated. Cash flow from discontinued operations improved due to higher earnings in 1998 resulting from improved containerboard pricing. Investing activities used $140 million less cash during 1998 than in 1997. A significantly reduced level of acquisitions was partially offset by a higher level of capital spending for discontinued operations. This increased spending was primarily to acquire some leased timberlands in contemplation of the separation of the containerboard assets from Packaging's other businesses. Acquisitions in 1998 included: Champion International's dual-ovenable paperboard tray manufacturing facility in Belvidere, Illinois; Richter Manufacturing and Sentinel Products. In 1997, acquisitions related primarily to the protective and flexible packaging businesses of KNP. Financing activities used $67 million in 1998, compared to providing $239 million in 1997, a change of $306 million. Packaging retired $82 million less debt during 1998. During 1998, Packaging remitted $56 million to Tenneco. During 1997, Tenneco contributed $331 million to Packaging. YEARS 1997 AND 1996 RESULTS OF CONTINUING OPERATIONS Net Sales and Operating Revenues
% 1997 1996 CHANGE ---- ---- ------ (MILLIONS) Specialty............................................. $2,553 $1,987 28% Intergroup sales and other............................ 10 -- NM ------ ------ $2,563 $1,987 29% ====== ======
Packaging experienced increases in revenues from its Specialty segment of $566 million during 1997 over 1996. This growth was primarily generated by unit volume sales growth and revenues earned by companies acquired in 1996 and 1997. The protective and flexible packaging businesses acquired from KNP in late April 1997, along with revenues from the Amoco Foam products business calculated through the first anniversary of its August 1996 acquisition, contributed $491 million to this revenue growth during 1997. Unit volume sales increases, primarily in the consumer markets and clear plastic containers, accounted for significant revenue increases as well. Partially offsetting revenue growth from acquisitions and volumes was lower product pricing, reflecting lower raw material prices, which negatively impacted revenues by $53 million. 116 118 Operating Income
% 1997 1996 CHANGE ---- ---- ------ (MILLIONS) Specialty............................................... $308 $249 24% Other................................................... (2) (15) NM ---- ---- $306 $234 31% ==== ====
Packaging's higher operating income from its Specialty segment in 1997 resulted primarily from $76 million in operating income generated by the protective and flexible packaging businesses acquired from KNP in late April 1997 and the Amoco Foam products acquisition calculated through the first anniversary of its August 1996 acquisition. A portion of the 1997 earnings increase from the foam products acquisition resulted from cost savings realized by the integration of the acquired company into the Specialty segment's existing business. Packaging's operating loss in its "Other" segment increased in 1997 compared to 1996 before a charge of $17 million related to the acceleration of employee benefits in connection with Tenneco's December 1996 corporate reorganization. The increase resulted from a higher level of unallocated administrative costs related to Packaging's administrative services operation, which began operation in late 1996. Operating Income as a Percentage of Revenue Operating income as a percentage of revenue for 1997 and 1996 were as follows:
1997 1996 % CHANGE ---- ---- -------- Specialty............................................... 12.1% 12.5% (3%) Total................................................... 11.9% 11.8% 1%
Specialty segment's operating income as a percentage of revenue contracted from 1996 to 1997 as the growth rate of operating income was 24 percent compared with the 28 percent growth rate of revenues. On a consolidated basis, total operating income as a percentage of revenue expanded slightly, as the operating income grew 31 percent while revenue grew 29 percent. Interest Expense, net of interest capitalized Interest expense for 1997 was $22 million or 22 percent higher than for 1996. As described above, interest expense in each period includes an allocation of interest on Tenneco corporate debt. This allocation was based, in general, on the ratio of Packaging's net assets to Tenneco consolidated net assets plus debt. See Note 5 to the Combined Financial Statements of The Businesses of Tenneco Packaging included elsewhere in this document for a further discussion of the allocation of Tenneco consolidated debt and interest to Packaging. Income Taxes Packaging's effective tax rate for 1997 was 41 percent, compared to 51 percent for 1996. The 1997 and 1996 effective tax rate was higher than the statutory rate as a result of state and local income taxes. DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS Discontinued operations generated income of $21 million, net of income tax expense of $14 million, or $.12 per diluted common share, during 1997. Discontinued operations generated income of $71 million, net of income tax expense of $47 million, or $.42 per diluted common share, for 1996. Income from discontinued operations in 1997 included a $38 million pre-tax gain which resulted from the refinancing of two containerboard mill leases. Income from the discontinued paperboard packaging 117 119 business in 1996 included a $50 million pre-tax gain on the sale of certain recycled paperboard assets to a joint venture with Caraustar Industries and a pre-tax charge of $6 million to reorganize Packaging's folding carton operations. The extraordinary loss reported in 1996 of $2 million, net of an income tax benefit of $1 million, or $.01 per diluted common share, relates to premium paid on early retirement of debt in anticipation of the corporate reorganization effected in the fourth quarter of 1996. See Note 7 to the Combined Financial Statements of The Businesses of Tenneco Packaging included elsewhere in this document for a further discussion of discontinued operations. EARNINGS PER SHARE Income from continuing operations was $.63 per diluted common share in 1997, up from $.38 per diluted common share in 1996. Discontinued operations produced income of $.12 and $.42 per diluted common share, for 1997 and 1996, respectively. Packaging recorded the cumulative effect of a change in accounting principle discussed above of $.23 per diluted common share, resulting in net income of $.52 per diluted common share for 1997. Packaging also recorded an extraordinary loss of $.01 per diluted common share in 1996, related to early retirement of debt, resulting in net income per diluted common share of $.79. Average shares of common stock outstanding increased slightly during 1997. For further information regarding the calculation of earnings per share, see Note 3 to the Combined Financial Statements of The Businesses of Tenneco Packaging. LIQUIDITY AND CAPITAL RESOURCES Capitalization
% 1997 1996 CHANGE ---- ---- ------ (MILLIONS) Short-term debt and current maturities................ $ 158 $ 123 Long-term debt........................................ 1,492 1,073 Debt allocated to discontinued operations............. 473 394 ------ ------ Total debt.................................. 2,123 1,590 34% Minority interest..................................... 15 -- NM Combined equity....................................... 1,839 1,843 -- ------ ------ Total capitalization........................ $3,977 $3,433 16% ====== ======
Packaging's debt to capitalization ratio was 53.4 percent at December 31, 1997, compared to 46.3 percent at December 31, 1996. The increase in the ratio is attributable to additional corporate debt allocated to Packaging from Tenneco during 1997. See Note 5 to the Combined Financial Statements of The Businesses of Tenneco Packaging for a further discussion of the allocation of Tenneco consolidated debt and interest expense to Packaging. Cash Flows
1997 1996 ---- ---- (MILLIONS) Cash provided (used) by: Operating activities...................................... $ 405 $ 263 Investing activities...................................... (654) (669) Financing activities...................................... 239 399
118 120 Operating activities provided $405 million in 1997 and $263 million in 1996. Discontinued operations provided $110 million of the increase. Continuing operations benefited from higher income and cash flow benefits from tax refunds during 1997, resulting primarily from tax benefits derived from the December 1996 reorganization and debt realignment, and a 1996 tax net operating loss, which was carried back to earlier years. These positive benefits were largely offset by increased working capital associated with higher revenue levels and increased cash outflows associated with the fourth quarter 1996 restructuring initiatives. Investing activities used $15 million less cash in 1997 than in 1996. Lower capital expenditures for discontinued operations and lower acquisitions for both continuing and discontinued operations were largely offset by lower proceeds from the sale of discontinued operations. Financing activities generated $160 million less cash in 1997 than in 1996. Packaging retired $69 million more debt and Tenneco contributed $91 million less cash to Packaging in 1997 than in 1996. PRINCIPAL STOCKHOLDERS All of the capital stock of Packaging is currently owned by Tenneco. In the spin-off, Tenneco stockholders will receive one share of Packaging common stock per share of Tenneco common stock. The following table provides information about these persons that Packaging expects to own more than 5% of Packaging's common stock upon completion of the spin-off. It is based on Packaging's knowledge of those persons who owned more than 5% of Tenneco's common stock on June 30, 1999.
SHARES OF PACKAGING PERCENT OF EXPECTED NAME AND ADDRESS COMMON STOCK EXPECTED OUTSTANDING PACKAGING OF BENEFICIAL OWNER(1) TO BE OWNED(1) COMMON STOCK(1) ---------------------- --------------------- --------------------- Barrow, Hanley, Mewhinney & Strauss, Inc. .......... 20,761,040(2) 12.18%(2) One McKinney Plaza 3232 McKinney Avenue 15th Floor Dallas, Texas 75204-2429 Morgan Stanley Dean Witter & Co. ................... 10,662,171(3) 6.26%(3) 1585 Broadway New York, New York 10036
- --------------- (1) This information is based on information contained in filings made with the Securities and Exchange Commission regarding the ownership of Tenneco common stock. (2) Barrow, Hanley, Mewhinney & Strauss, Inc. has indicated that it has sole voting power over 4,533,840 shares of Tenneco Common Stock, shared voting power over 16,227,200 shares of Tenneco Common Stock, and sole dispositive power over 20,761,040 shares of Tenneco Common Stock. Barrow, Hanley also advised Tenneco that it is a registered investment advisor and these shares are held on behalf of various clients. (3) Morgan Stanley Dean Witter & Co. has indicated that it has sole voting power over 10,504,928 shares of Tenneco Common Stock. 119 121 DESCRIPTION OF TENNECO AFTER THE SPIN-OFF/AUTOMOTIVE Tenneco is a global manufacturing company whose major businesses currently consist of Automotive and Packaging. See "Incorporation of Information by Reference" and "Summary." Upon completion of the spin-off, Packaging will be an independent, publicly traded company and Tenneco's remaining operations will consist solely of Automotive. See "The Spin-off." Automotive, with 1998 revenues of over $3.2 billion, is one of the world's largest producers of emissions control and ride control systems and products. The company serves both original equipment manufacturers and replacement markets world wide through leading brands, including Monroe(R) brand ride control and Walker(R) brand emissions control products. Automotive, on an independent basis, would have ranked as number 457 based on revenues on the 1998 Fortune 500 listing of U.S. companies. As an automotive parts supplier, Automotive designs, markets and sells individual component parts for vehicles as well as groups of components that are combined as modules or systems within vehicles. These parts, modules and systems are sold globally to the vast majority of vehicle manufacturers and throughout all aftermarket distribution channels. CAPITALIZATION The following table sets forth the unaudited historical capitalization of Tenneco as of June 30, 1999, and the unaudited pro forma capitalization of Tenneco as of June 30, 1999, after giving effect to the debt realignment, spin-off and related transactions, each as if they occurred on that date. You should read this table in conjunction with the financial statements of Tenneco Inc. and Consolidated Subsidiaries and related notes, and Tenneco's Management's Discussion and Analysis of Financial Condition and Results of Operations, each included in the Tenneco Current Report on Form 8-K dated August 20, 1999. The Form 8-K is incorporated by reference in this document. You should also read this table in conjunction with the "Unaudited Pro Forma Consolidated Financial Statements of Tenneco," included elsewhere in this document.
TENNECO ---------------------- JUNE 30, 1999 ---------------------- HISTORICAL PRO FORMA ---------- --------- (IN MILLIONS) Short-term debt, including current maturities of long-term debt...................................................... $ 206 $ -- Long-term debt.............................................. 832 1,673(a) Debt allocated to discontinued operations................... 1,861(b) -- ------ ------ Total debt.................................................. 2,899 1,673 ------ ------ Minority interest of continuing operations.................. 411 17 Minority interest of discontinued operations................ 14 -- ------ ------ Total minority interest..................................... 425 17 ------ ------ Shareowners' equity......................................... 2,122 659 ------ ------ Total capitalization........................................ $5,446 $2,349 ====== ======
- --------------- (a) Represents amounts expected to be outstanding under the new Tenneco borrowings to be incurred in connection with the debt realignment. The pro forma capitalization assumes that 100% of Tenneco's existing public debt securities are either repurchased for cash or exchanged for new Packaging debt securities in the debt realignment. Also assumes that Tenneco will not record any extraordinary charge related to the retirement of the exchanged securities because they are not treated as "substantially different" from the original securities. See "Accounting Treatment of the Exchange Offers." (b) Tenneco's historical practice has been to incur debt for its consolidated group at the parent company level or at a limited number of subsidiaries, rather than at the operating company level, and to centrally manage various cash functions. Consequently, corporate debt of Tenneco has been allocated to the net assets of Tenneco's discontinued specialty packaging segment based on the portion of Tenneco's investment in the specialty packaging segment which Tenneco deemed to be debt. This allocation is generally based upon the ratio of specialty packaging's net assets to Tenneco's consolidated net assets plus debt. 120 122 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF TENNECO The following Unaudited Pro Forma Consolidated Balance Sheet of Tenneco as of June 30, 1999, and the Unaudited Pro Forma Consolidated Statements of Income for the six months ended June 30, 1999 and the year ended December 31, 1998, reflect the effects of: - the debt realignment; - the spin-off of Packaging and related transactions; and - the April 1999 contribution of Packaging's containerboard assets to a new joint venture and the June 1999 sale of Packaging's folding carton assets (the "paperboard transactions"). These two transactions are reflected only in the pro forma statement of income data since they were completed before the date of the pro forma balance sheet. The Unaudited Pro Forma Consolidated Statements of Income have been prepared as if these transactions occurred as of January 1, 1998. The Unaudited Pro Forma Consolidated Balance Sheet has been prepared as if the debt realignment, spin-off and related transactions occurred on June 30, 1999. The Unaudited Pro Forma Consolidated Financial Statements for these periods are not necessarily indicative of the results that would have actually occurred if these transactions had been consummated as of June 30, 1999 or January 1, 1998, or results which may be attained in the future. The spin-off represents the pro rata distribution of Packaging common stock to the holders of Tenneco common stock. Consequently, no gain or loss will be recognized as a result of the spin-off. The pro forma adjustments, as described in the Notes to the Unaudited Pro Forma Consolidated Financial Statements, are based upon available information and upon certain assumptions that management believes are reasonable. You should read the Unaudited Pro Forma Consolidated Financial Statements in conjunction with the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for the year ended December 31, 1998 and the six months ended June 30, 1999 contained in the Tenneco Current Report on Form 8-K dated August 20, 1999, which is incorporated by reference into this document. 121 123 TENNECO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 1999 (MILLIONS)
PRO FORMA ADJUSTMENTS -------------------------- SPIN-OFF CONSOLIDATED TENNECO DEBT AND RELATED TENNECO AS REPORTED REALIGNMENT TRANSACTIONS PRO FORMA ----------- ----------- ------------ ------------ ASSETS Current assets: Cash and temporary cash investments.............. $ 40 $ -- $ -- $ 40 Receivables...................................... 606 -- 100(c) 785 79 (b) Inventories...................................... 401 -- -- 401 Other current assets............................. 129 31(a) -- 160 ------ ----- ------- ------ Total current assets........................... 1,176 31 179 1,386 Plant, property, and equipment, net................ 1,049 -- -- 1,049 Goodwill and intangibles, net...................... 510 -- -- 510 Other assets and deferred charges.................. 260 41(a) (54)(h) 247 Net assets of discontinued operations.............. 1,421 -- (1,421)(d) -- ------ ----- ------- ------ Total assets................................... $4,416 $ 72 $(1,296) $3,192 ====== ===== ======= ====== LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt (including current maturities on long-term debt)................................ $ 206 $(206)(a) $ -- $ -- Trade payables................................... 351 -- 20(c) 371 Other current liabilities........................ 287 -- -- 287 ------ ----- ------- ------ Total current liabilities...................... 844 (206) 20 658 Long-term debt..................................... 832 841(a) -- 1,673 Deferred income taxes.............................. 39 -- (22)(h) 17(f) Other liabilities and deferred credits............. 168 -- -- 168 Minority interest.................................. 411 (394)(a) -- 17 Shareowners' equity................................ 2,122 (169)(a) (1,421)(d) 659 80(c) (32)(h) 79(b) ------ ----- ------- ------ Total liabilities and shareowners' equity...... $4,416 $ 72 $(1,296) $3,192 ====== ===== ======= ======
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements. 122 124 TENNECO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS ----------------------------------------- SPIN-OFF CONSOLIDATED TENNECO PAPERBOARD DEBT AND RELATED TENNECO AS REPORTED TRANSACTIONS REALIGNMENT TRANSACTIONS PRO FORMA ----------- ------------ ----------- ------------ ------------ REVENUES Net sales and operating revenues....................... $ 1,657 $ -- $ -- $ -- $ $1,657 Other income, net................. 8 -- -- -- 8 ------------ ---- ---- ----- ------------ 1,665 -- -- -- 1,665 ------------ ---- ---- ----- ------------ OPERATING COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)...... 1,212 -- -- -- 1,212 Engineering, research, and development.................... 27 -- -- -- 27 Selling, general, and administrative................. 203 -- -- 3(h) 206 Depreciation and amortization..... 71 -- -- -- 71 ------------ ---- ---- ----- ------------ 1,513 -- -- 3 1,516 INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST.......................... 152 -- -- (3) 149 Interest expense.................... 42 (15)(e) 53(g) -- 80(g) Income tax expense.................. 44 6(i) (21)(i) (1)(i) 28 Minority interest................... 13 -- (13)(j) -- -- ------------ ---- ---- ----- ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS........................ $ 53 $ 9 $(19) $ (2) $ 41 ============ ==== ==== ===== ============ EARNINGS PER SHARE Average shares of common stock -- Basic........................ 166,937,362 166,937,362 Diluted...................... 167,319,412 167,319,412 Income from continuing operations -- Basic........................ $.32 $.25 Diluted...................... $.32 $.25
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements. 123 125 TENNECO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1998 (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA ADJUSTMENTS ------------------------------------------ SPIN-OFF CONSOLIDATED TENNECO PAPERBOARD DEBT AND RELATED TENNECO AS REPORTED TRANSACTIONS REALIGNMENT TRANSACTIONS PRO FORMA ----------- ------------ ----------- ------------ ------------ REVENUES Net sales and operating revenues................... $ 3,237 $ -- $ -- $ -- $ 3,237 Other income, net............. (25) -- -- -- (25) ------------ ---- ---- ----- ------------ 3,212 -- -- -- 3,212 ------------ ---- ---- ----- ------------ OPERATING COSTS AND EXPENSES: Cost of sales (exclusive of depreciation shown below)..................... 2,332 -- -- -- 2,332 Engineering, research, and development................ 31 -- -- -- 31 Selling, general, and administrative............. 472 -- -- 5(h) 477 Depreciation and amortization............... 150 -- -- -- 150 ------------ ---- ---- ----- ------------ 2,985 -- 5 2,990 ------------ ---- ---- ----- ------------ INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST...................... 227 -- -- (5) 222 Interest expense................ 69 (53)(e) 145(g) -- 161(g) Income tax expense (benefit).... 13 21(i) (58)(i) (2)(i) (26) Minority interest............... 29 -- (29)(j) -- -- ------------ ---- ---- ----- ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS.................... $ 116 $ 32 $(58) $ (3) $ 87 ============ ==== ==== ===== ============ EARNINGS PER SHARE Average shares of common stock -- Basic.................... 168,505,573 168,505,573 Diluted.................. 168,834,531 168,834,531 Income from continuing operations -- Basic.................... $.69 $.52 Diluted.................. $.68 $.52
See the accompanying Notes to Unaudited Pro Forma Combined Financial Statements. 124 126 TENNECO NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (a) To reflect adjustments to Tenneco's debt for the debt realignment and the assumed payment of interest on Tenneco consolidated debt tendered or exchanged as part of the pre-spin-off debt realignment. The adjustment to equity reflects the net impact of the debt realignment, the recording of debt issue costs and deferred income taxes related to the debt realignment. Tenneco will acquire certain subsidiary preferred stock as part of the debt realignment. At this time, Tenneco cannot determine the ultimate amount of its outstanding public debt securities which will be (1) purchased in the cash tender offers that Tenneco plans to make as part of its debt realignment, or (2) exchanged for new securities in the exchange offers, and the amounts could vary significantly. These pro forma adjustments assume that 100% of the securities subject to the cash tender offers are purchased and 100% of the original securities are exchanged for new securities. These pro forma adjustments also assume that the new securities will be recorded at the net carrying amount of the original securities (in other words, the new securities are assumed not to be "substantially different;" see "Accounting Treatment of the Exchange Offers"). The results of the exchange offers could vary based on a number of factors, including the level of acceptance of the exchange offers, the ultimate interest rate of the exchanged securities and whether the exchanges will be considered extinguishments for accounting purposes. Based on current interest rate markets, it is expected that the exchange offers will not be extinguishments for accounting purposes. Tenneco expects to incur an extraordinary charge as a result of the debt realignment related to the cash tender offers. Tenneco estimates that this cost will be approximately $20 to $25 million after-tax based on current market rates of interest. Other costs, including transaction costs related to the acquisition of certain subsidiary preferred stock and costs associated with foreign tax restructuring initiatives, will be incurred by Tenneco in connection with the corporate restructuring transactions and the spin-off which Tenneco estimates will be approximately $50 million after-tax. The effect on Tenneco's debt of these costs has been reflected in this pro forma adjustment. However, these charges have not been included in the unaudited pro forma consolidated statements of income. (b) To reflect the purchase of Automotive accounts receivable at fair value which had previously been sold to a third party. (c) To reflect affiliated receivables and payables with Packaging that were eliminated in the Tenneco consolidated balance sheet. (d) To reflect the spin-off of Packaging common stock to holders of Tenneco common stock at an exchange ratio of one share of Packaging common stock for each share of Tenneco common stock. (e) To reflect the adjustment to interest expense resulting from the use of $854 million of proceeds from (1) the contribution of the containerboard assets of Tenneco's paperboard packaging segment to a new joint venture with an affiliate of Madison Dearborn Partners, Inc. and (2) the sale of Tenneco's folding carton operations. For the purpose of this pro forma adjustment, the $854 million of Tenneco short-term debt, with an average annual effective interest rate of 6 1/4%, was assumed to be repaid. (f) Deferred income taxes at June 30, 1999 include $79 million of net operating loss carryforwards which will be utilized by Packaging upon the planned sale of Packaging's remaining interest in its containerboard joint venture. 125 127 (g) To reflect the adjustment to interest expense from the allocation of Tenneco debt to Packaging in the debt realignment as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 1999 1998 ---------------- ------------ (IN MILLIONS) Interest expense on historical debt(1).......... $(42) $(69) Reduction of interest expense from paperboard transactions(2)............................... 15 53 Interest expense on the new Tenneco borrowings(3)................................. 76 153 Commitment fees and amortization of debt financing costs(4)............................ 4 8 ---- ---- Adjustment to interest expense.................. $ 53 $145 ==== ====
- --------------- (1) Weighted average outstanding historical debt and average annual effective interest rates were $985 million and 7.3%, respectively, for the six months ended June 30, 1999 and $1,155 million and 7.0%, respectively, for the year ended December 31, 1998. (2) See Note (e) above. (3) Weighted average outstanding debt and average annual effective interest rate for the new Tenneco borrowings were assumed to be $1,673 million and 9 1/8% for the six months ended June 30, 1999 and the year ended December 31, 1998. (4) Represents commitment fees on the unused borrowing capacity of the new financing arrangements to be entered into prior to the spin-off and the amortization of deferred debt financing costs. A 1/8% change in the assumed interest rates would change annual pro forma interest expense by approximately $2 million, before the effect of income taxes. (h) To reflect the increase in net periodic pension costs resulting from the transfer to Packaging of prepaid pension costs attributable to Automotive employees. Automotive employees will no longer participate in the Tenneco Retirement Plan following the spin-off and Packaging will become the sponsor of this plan. These prepaid pension costs will be transferred to Packaging in connection with the corporate restructuring transactions. (i) To reflect the income tax expense effects of pro forma adjustments at an assumed statutory tax rate of 40%. (j) To eliminate the minority interest related to the acquisition of subsidiary preferred stock in connection with the debt realignment. 126 128 SUPPLEMENTAL FINANCIAL INFORMATION OF TENNECO RESULTS OF OPERATIONS Tenneco's historical and pro forma EBIT are shown in the following table:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1998 JUNE 30, 1999 ----------------- ---------------- Historical EBIT............................................. $227 $152 Pro forma EBIT.............................................. $222 $149
Tenneco has historically incurred costs at the corporate level, including administrative services, corporate overhead, and costs related to operation as a public company, which have not been fully allocated to the operating segments. Because these functions will become part of Packaging following the spin-off, the costs have been included in Packaging's historical operating results and are not in Automotive's historical or pro forma EBIT. Automotive must be able to obtain these functions in order to operate as a public company following the spin-off. Before the spin-off, Automotive and Packaging will enter into a transition services agreement under which Packaging will continue to provide Automotive with specified administrative services for a period of time. Additionally, Automotive's EBIT includes charges for restructuring and sales of receivables which Tenneco believes require additional explanation. The following information discusses these items in detail and their financial impact on Tenneco.
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1998 JUNE 30, 1999 ----------------- ---------------- (MILLIONS) - Costs for shared services -- Packaging will own the administrative services operations after the spin-off. Tenneco must acquire the services from Packaging under a transition services agreement which Tenneco and Packaging will negotiate before the spin-off. Had the administrative services operations been allocated based on a usage charge, approximately $28 million would have been billed to Automotive for 1998. ............................................... $(28) $(14) - Public company costs -- Tenneco will not have the benefit of corporate operations such as treasury, corporate secretary, tax reporting, internal audit, board of directors and other public company functions following the spin-off. Tenneco must replace these functions so that it can operate as a public company following the spin-off. Tenneco estimates that had it operated as a stand-alone, separate entity it would have incurred additional costs for these functions. .......................................... $(19) $ (8) - Sale of receivables -- Tenneco's results of operations include costs related to a receivables sale program operated by Tenneco prior to the spin-off. The debt realignment contemplates the termination of this program. The pro forma financial statements of Tenneco calculate interest on debt balances assuming these receivables have not been sold................................................. $ 19 $ 2 - Restructuring charge -- Tenneco recorded a restructuring charge in the fourth quarter of 1998 for the costs of a plan designed to reduce administrative and operational costs. Refer to Notes to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries incorporated into this document by reference from Tenneco's Current Report on Form 8-K dated August 20, 1999. .................. $ 54 $ --
127 129
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1998 JUNE 30, 1999 ----------------- ---------------- (MILLIONS) - Cost savings -- The restructuring plan contemplates closing certain facilities and terminating employees to reduce cost of sales. Refer to Management's Discussion and Analysis of Tenneco incorporated by reference into this document from Tenneco's Current Report on Form 8-K dated August 20, 1999 for further information on the expected savings.................. $ 25 $ 6
128 130 TENNECO AND CONSOLIDATED SUBSIDIARIES SELECTED FINANCIAL DATA The following consolidated selected financial data as of and for each of the fiscal years in the five years ended December 31, 1998, were derived from the audited financial statements of Tenneco and its consolidated subsidiaries. The following consolidated selected financial data as of and for each of the six months ended June 30, 1999 and 1998 were derived from Tenneco's unaudited condensed financial statements and its consolidated subsidiaries. In the opinion of Tenneco's management, the selected financial data of Tenneco as of and for the six months ended June 30, 1999 and 1998, include all adjusting entries, consisting only of normal recurring adjustments, necessary to present fairly the information set forth. You should not regard the results of operations for the six months ended June 30, 1999 as indicative of the results that may be expected for the full year. There is other information Tenneco believes is relevant to understanding its results of operations following the spin-off. These items relate to corporate overhead costs incurred by Tenneco and its administrative services operations that Tenneco expects will differ following the spin-off. For further information you should see "Supplemental Financial Information of Tenneco" included elsewhere in this document. You should read all of this information in conjunction with the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for the year ended December 31, 1998 and for the six months ended June 30, 1999, contained in the Tenneco Current Report on Form 8-K, dated August 20, 1999. The Form 8-K is incorporated by reference into this document. 129 131
Six Months Years Ended December 31, Ended June 30, ------------------------------------------------------------------- ------------------------- 1998(a) 1997(a) 1996(a) 1995 1994 1999(a) 1998(a) ------- ------- ------- ---- ---- ------- ------- (DOLLARS IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) STATEMENTS OF INCOME DATA(b): Net sales and operating revenues from continuing operations.................. $ 3,237 $ 3,226 $ 2,980 $ 2,479 $ 1,989 $ 1,657 $ 1,664 =========== =========== =========== =========== =========== =========== =========== Income from continuing operations before interest expense, income taxes, and minority interest -- Automotive.................. $ 248 $ 407 $ 249 $ 240 $ 223 $ 156 $ 219 Other....................... (21) (12) (7) 8 7 (4) (12) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total..................... 227 395 242 248 230 152 207 Interest expense (net of interest capitalized)(c)...... 69 58 60 44 33 42 30 Income tax expense.............. 13 80 79 91 52 44 55 Minority interest............... 29 23 21 23 -- 13 16 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations.................... 116 234 82 90 145 53 106 Income (loss) from discontinued operations, net of income tax(d)........................ 139 127 564 645 307 (111) 106 Extraordinary loss, net of income tax(e)................. -- -- (236) -- (5) (7) -- Cumulative effect of changes in accounting principles, net of income tax(f)................. -- (46) -- -- (39) (134) -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss)............... 255 315 410 735 408 (199) 212 Preferred stock dividends....... -- -- 12 12 60 -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) to common stock......................... $ 255 $ 315 $ 398 $ 723 $ 348 $ (199) $ 212 =========== =========== =========== =========== =========== =========== =========== Average number of shares of common stock outstanding Basic....................... 168,505,573 170,264,731 169,609,373 172,764,198 162,307,189 166,937,362 169,341,555 Diluted..................... 168,834,531 170,801,636 170,526,112 173,511,654 162,912,425 167,319,412 169,936,676 Earnings (loss) per average share of common stock -- Basic: Continuing operations..... $ .69 $ 1.37 $ .49 $ .52 $ .90 $ .32 $ .62 Discontinued operations(d)........... .83 .75 3.25 3.67 1.52 (.67) .63 Extraordinary loss(e)..... -- -- (1.39) -- (.03) (.04) -- Cumulative effect of changes in accounting principles(f)........... -- (.27) -- -- (.24) (.80) -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- $ 1.52 $ 1.85 $ 2.35 $ 4.19 $ 2.15 $ (1.19) $ 1.25 =========== =========== =========== =========== =========== =========== =========== Diluted: Continuing operations..... $ .68 $ 1.36 $ .49 $ .52 $ .89 $ .32 $ .62 Discontinued operations(d)........... .83 .75 3.23 3.65 1.52 (.67) .63 Extraordinary loss(e)..... -- -- (1.38) -- (.03) (.04) -- Cumulative effect of changes in accounting principles(f)........... -- (.27) -- -- (.24) (.80) -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- $ 1.51 $ 1.84 $ 2.34 $ 4.17 $ 2.14 $ (1.19) $ 1.25 =========== =========== =========== =========== =========== =========== =========== Cash dividends per common share......................... $ 1.20 $ 1.20 $ 1.80 $ 1.60 $ 1.60 $ .60 $ .60
(continued on next page) 130 132
Six Months Years Ended December 31, Ended June 30, --------------------------------------------------------- --------------------- 1998(a) 1997(a) 1996(a) 1995 1994 1999(a) 1998(a) ------- ------- ------- ---- ---- ------- ------- (Millions Except Per Share Amounts) BALANCE SHEET DATA(b): Net assets of discontinued operations(d)........................... $ 1,739 $ 1,771 $ 1,883 $ 1,469 $ 700 $ 1,421 $ 1,793 Total assets.............................. 4,759 4,682 4,653 3,635 2,315 4,416 4,829 Short-term debt(c)........................ 304 75 74 109 31 206 168 Long-term debt(c)......................... 671 713 639 469 303 832 747 Debt allocated to discontinued operations(c)........................... 2,456 2,123 1,590 1,454 813 1,861 2,302 Minority interest......................... 407 408 304 301 301 411 407 Shareowners' equity....................... 2,504 2,528 2,646 3,148 2,900 2,122 2,559 STATEMENT OF CASH FLOWS DATA(b) Net cash provided (used) by operating activities.............................. $ 532 $ 519 $ 253 $ 1,443 $ 450 $ (181) $ 178 Net cash used by investing activities..... (754) (887) (685) (1,162) (113) (976) (314) Net cash provided (used) by financing activities.............................. 216 354 147 (356) (151) 1,170 125 Capital expenditures for continuing operations.............................. (195) (221) (188) (208) (114) (70) (80) OTHER DATA: EBITDA(g)................................. $ 377 $ 505 $ 336 $ 331 $ 282 $ 223 $ 279 Ratio of earnings to fixed charges(h)..... 2.16 4.80 2.33 2.62 5.36 2.28 3.82
- ------------------------- NOTE: The Financial Statements of Tenneco Inc. and Consolidated Subsidiaries discussed in the following notes are included in and incorporated by reference from the Tenneco Current Report on Form 8-K dated August 20, 1999. They cover the three years ended December 31, 1998 and the six months ended June 30, 1999 and 1998. (a) For a discussion of the significant items affecting comparability of the financial information for the years ended 1998, 1997, and 1996, and for the six months ended June 30, 1999 and 1998, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Tenneco's Current Report on Form 8-K dated August 20, 1999. (b) During the periods presented, Tenneco completed numerous acquisitions. The most significant acquisition was Automotive's acquisition of Clevite for $328 million in July 1996. See Notes to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information. See also "Description of Tenneco After the Spin-off/Automotive -- Strategic Acquisitions and Alliances" included elsewhere in this document. (c) Debt amounts for 1998, 1997, and 1996, and for June 30, 1998, are net of allocations of corporate debt to the net assets of Tenneco's discontinued specialty packaging and paperboard packaging segments. Debt amounts for June 30, 1999, are net of allocations of corporate debt to the net assets of Tenneco's discontinued specialty packaging segment. Debt amounts for 1995 and 1994 are net of allocations of corporate debt to the net assets of Tenneco's discontinued specialty packaging, paperboard packaging, energy, and shipbuilding segments. Interest expense for periods presented is net of interest expense allocated to income from discontinued operations. These allocations of debt and related interest expense are based on the ratio of Tenneco's investment in the specialty packaging, paperboard packaging, energy, and shipbuilding segments' respective net assets to Tenneco consolidated net assets plus debt. See Notes to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information. (d) Discontinued operations reflected in the above periods consist of Tenneco's (1) specialty packaging segment, which was discontinued in August 1999, (2) paperboard packaging segment, which was discontinued in June 1999, (3) energy and shipbuilding segments, which were discontinued in December 1996, (4) farm and construction equipment segment, which was discontinued in March 1996, and (5) chemicals and brakes operations, which were discontinued during 1994. See Notes to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information. (e) Represents Tenneco's costs related to prepayment of debt, including the 1996 loss recognized in the realignment of Tenneco's debt preceding its 1996 corporate reorganization and the 1999 loss recognized in connection with the contribution of the containerboard assets to a new joint venture. See the Notes to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. (f) In 1999, Tenneco implemented the American Institute of Certified Public Accountants Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." In addition, effective January 1, 1999, Tenneco changed its method of accounting for customer acquisition costs from a deferred method to an expense-as-incurred method. In 1997, Tenneco implemented the Financial Accounting Standards Board's Emerging Issues Task Force Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation." In 1994, Tenneco adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." See the Notes to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information regarding changes in accounting principles. (g) EBITDA represents income from continuing operations before interest expense, income taxes, minority interest and depreciation and amortization. EBITDA is not a calculation based upon generally accepted accounting principles. The amounts included in the EBITDA calculation, however, are derived from amounts included in the historical statements of income data. In addition, (continued on next page) 131 133 EBITDA should not be considered as an alternative to net income or operating income as an indicator of the operating performance of Tenneco, or as an alternative to operating cash flows as a measure of liquidity. Tenneco has reported EBITDA because it believes EBITDA is a measure commonly reported and widely used by investors and other interested parties as an indicator of a company's ability to incur and service debt. Tenneco believes EBITDA assists investors in comparing a company's performance on a consistent basis without regard to depreciation and amortization, which can vary significantly depending upon accounting methods, particularly when acquisitions are involved, or nonoperating factors. However, the EBITDA measure presented in this document may not always be comparable to similarly titled measures reported by other companies due to differences in the components of the calculation. (h) For purposes of computing this ratio, earnings generally consist of income from continuing operations before income taxes and fixed charges, excluding capitalized interest. Fixed charges consist of interest expense, the portion of rental expense considered representative of the interest factor and capitalized interest. For purposes of computing these ratios, preferred stock dividends have been included in the calculations on a pre-tax basis. 132 134 OVERVIEW OF AUTOMOTIVE PARTS INDUSTRY The automotive parts industry is generally separated into two categories: (1) "original equipment" or "OE" sales, in which parts are sold in large quantities directly to original equipment vehicle manufacturers; and (2) "aftermarket" sales, in which parts are sold as replacement parts in varying quantities to a wide range of wholesalers, retailers and installers. In the OE market, parts suppliers are generally divided into tiers -- "Tier 1" suppliers, who provide their products directly to original equipment manufacturers, and "Tier 2" or "Tier 3" suppliers, who sell their products principally to other suppliers for combinations into the other suppliers' own product offerings. Demand for automotive parts in the OE market is driven by the number of new vehicle sales, which in turn is largely determined by prevailing economic conditions. Although OE demand is tied to planned vehicle production, parts suppliers also have the opportunity to grow through increasing product content and customer and market penetration. Companies with global presence in advanced technology, engineering, manufacturing and support capabilities, such as Automotive, are in the best position to take advantage of these opportunities. Demand for aftermarket products is fundamentally driven by the quality of OE parts, the number of vehicles in operation, the average age of the vehicle fleet and vehicle usage. Innovative aftermarket products that upgrade the performance or safety of an automobile's original parts, as several of Automotive's products do, can also drive aftermarket demand. ANALYSIS OF AUTOMOTIVE'S REVENUES The following table provides for each of the years 1996 through 1998, and for the six months ended June 30, 1999, information relating to Automotive's net sales, by primary product lines and markets:
NET SALES (MILLIONS) ------------------------------------------- SIX MONTHS YEAR ENDED DECEMBER 31, ENDED -------------------------- JUNE 30, 1999 1998 1997 1996 ------------- ---- ---- ---- EMISSIONS CONTROL SYSTEMS & PRODUCTS Aftermarket............................. $ 268 $ 590 $ 686 $ 710 OE Market............................... 696 1,224 1,067 989 ------ ------ ------ ------ 964 1,814 1,753 1,699 ------ ------ ------ ------ RIDE CONTROL SYSTEMS & PRODUCTS Aftermarket............................. 316 685 782 768 OE Market............................... 377 738 691 513 ------ ------ ------ ------ 693 1,423 1,473 1,281 ------ ------ ------ ------ Total Automotive................... $1,657 $3,237 $3,226 $2,980 ====== ====== ====== ======
CUSTOMERS Automotive has developed long-standing business relationships with its customers around the world. It works together with its customers in all stages of production, including design, development, component sourcing, quality assurance, manufacturing and delivery. With a balanced mix of OE and aftermarket products and facilities in major markets worldwide, Automotive is well-positioned to meet customer needs. Automotive has a strong, established reputation with its customers for providing high-quality products at competitive prices, as well as for timely delivery and customer service. 133 135 Automotive serves more than 25 different original equipment manufacturers on a global basis, and its products or systems are included on six of the 10 top passenger car models and eight of the 10 top light truck models produced globally in 1998. Automotive's current OE customers include: NORTH AMERICA EUROPE INDIA CAMI BMW Maruti Suzuki DaimlerChrysler DaimlerChrysler TELCO Ford DAF Bajaj Freightliner Daihatsu General Motors Fiat AUSTRALIA Honda Ford Ford Mazda Jaguar General Motors/Holden Mitsubishi Lada Mitsubishi Navistar Leyland Toyota Nissan Mitsubishi NUMMI Nissan JAPAN Toyota Opel Mazda Volkswagen Peugeot/Citroen Nissan Porsche Suzuki SOUTH AMERICA Renault/Matra Toyota DaimlerChrysler Rover/Land Rover Fiat Saab/Scania CHINA Ford Toyota DaimlerChrysler General Motors Volkswagen/Audi/SEAT/Skoda Citroen Honda Volvo Ford Renault Toyota Toyota Volkswagen Volkswagen THAILAND General Motors Isuzu
Automotive's aftermarket customers are comprised of full-line and specialty warehouse distributors, retailers, installer chains, car dealers and jobbers -- which are traditional automotive parts stores that have historically sold primarily to installers. These customers include such wholesalers and retailers as National Auto Parts Association, Monro Muffler and Brake, and Advance Auto Parts in North America and Temot, Autodistribution International and Kwik-Fit in Europe. Automotive has a balanced mix of aftermarket customers, with its top 10 aftermarket customers accounting for less than 11% of Automotive's total net sales. The loss of a principal customer or a material decline in the requirements for Automotive's products from a principal customer, resulting, for example, from a prolonged strike against the customer, could have a material adverse effect on the operating results or financial condition of Automotive. For each of the last three years, less than five customers individually accounted for 5% or more of Automotive's revenues. For example, Ford accounted for about 11.5%, 13.2% and 12.8% of Automotive's net sales in 1996, 1997 and 1998, and DaimlerChrysler accounted for about 9.6%, 8.9% and 10.9% of Automotive's net sales in 1996, 1997 and 1998, respectively. No other customer accounted for more than 10% of Automotive's revenues for those years. COMPETITION Automotive operates in highly competitive markets. Customer loyalty is a key element of competition in these markets and is developed through long-standing relationships, customer service, value-added products and timely delivery. Product pricing and services provided are other important competitive factors. 134 136 In both the OE market and aftermarket, Automotive competes with the vehicle manufacturers, some of which are also customers of Automotive, and numerous independent suppliers. In the OE market, Automotive believes that it is among the top three suppliers in the world for both emissions control and ride control products and systems. In the aftermarket, Automotive believes that it is the market share leader in the supply of both emissions control and ride control products in the world. EMISSIONS CONTROL SYSTEMS Vehicle emissions control products and systems play a critical role in safely conveying noxious exhaust gases away from the passenger compartment, reducing the level of pollutants and engine exhaust noise to an acceptable level. Precise engineering of the exhaust system -- from the manifold that connects an engine's exhaust ports to an exhaust pipe, to the catalytic converter that eliminates pollutants from the exhaust, to the muffler -- leads to a pleasant, tuned engine sound, reduced pollutants and optimized engine performance. Automotive designs, manufactures and distributes a variety of automotive emissions control systems, which include components such as: - mufflers; - resonators -- help the muffler eliminate noise; - catalytic converters -- devices used to convert harmful gaseous emissions, such as carbon monoxide, from a vehicle's exhaust system into harmless components such as water vapor and carbon dioxide; - fabricated exhaust manifolds -- made of sheet metal or tubes and collect gases from individual cylinders of a vehicle's engine and direct them into a single exhaust pipe; - pipes -- connect various parts of an exhaust system; - hydroformed tubing -- forms into various geometric shapes, such as Y-pipes or T-pipes, and provide flexibility in design; and - electronic noise cancellation products. Automotive entered this product line in 1967 with the acquisition of Walker Manufacturing Company, which was founded in 1888. When the term "Walker" is used in this document, it refers to the affiliates of Automotive that produce emissions control products and systems. Walker supplies emissions control products used in six of the 10 top passenger car models and five of the 10 top light truck models produced globally for 1998. With the acquisition of Heinrich Gillet GmbH & Co. in 1994, Walker also became one of Europe's leading OE emissions control systems suppliers. 135 137 The following table provides for each of the years 1996 through 1998, and for the six months ended June 30, 1999, information relating to Automotive's sales of emissions control systems:
PERCENTAGE OF NET SALES ------------------------------------------ SIX MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------ JUNE 30, 1999 1998 1997 1996 ------------- ---- ---- ---- UNITED STATES MARKET Aftermarket............................ 30% 37% 43% 46% OE Market.............................. 70% 63% 57% 54% ---- ---- ---- ---- 100% 100% 100% 100% ==== ==== ==== ==== FOREIGN SALES Aftermarket............................ 27% 30% 36% 38% OE Market.............................. 73% 70% 64% 62% ---- ---- ---- ---- 100% 100% 100% 100% ==== ==== ==== ==== TOTAL SALES BY GEOGRAPHIC AREA United States.......................... 39% 41% 44% 44% European Union......................... 45% 44% 41% 43% Canada................................. 8% 7% 7% 6% Other areas............................ 8% 8% 8% 7% ---- ---- ---- ---- 100% 100% 100% 100% ==== ==== ==== ====
RIDE CONTROL SYSTEMS Superior ride control is governed by a vehicle's suspension system, including its shock absorbers and struts. Shock absorbers and struts help maintain vertical loads placed on a vehicle's tires to help keep the tires in contact with the road. A vehicle's ability to steer, brake and accelerate depends on the contact between the vehicle's tires and the road. Worn shocks and struts can allow excess weight transfer from side to side, which is called "roll," from front to rear, which is called "pitch," and up and down, which is called "bounce." Variations in tire-to-road contact can affect a vehicle's handling and braking performance and the safe operation of a vehicle. Shock absorbers are designed to control vertical loads placed on tires by providing resistance to vehicle roll, pitch and bounce. Thus, by maintaining the tire-to-road contact, ride control products are designed to function as safety components of a vehicle, in addition to providing a comfortable ride. Automotive designs, manufactures and distributes a variety of ride control products and systems. Its ride control offerings include: - shock absorbers; - struts; - electronically adjustable suspension systems that change performance based on inputs like steering and braking; - vibration control components, including rubber-like bushings and mountings that reduce vibration between metal parts of a vehicle; - springs; and - modular assemblies which are combinations of parts that are provided to customers as a unit. Automotive manufactures and markets replacement shock absorbers for virtually all North American, European and Asian makes of automobiles. In addition, Automotive manufactures and markets shock absorbers and struts for use on passenger cars and trucks, as well as for other uses such as exercise and recreational equipment. Monroe supplies ride control products used in three of the 10 top passenger car models and seven of the 10 top light truck models produced globally for 1998. Automotive entered the ride control product line in 1977 with the acquisition of Monroe Auto Equipment, which was founded in 1916 136 138 and introduced the world's first automotive shock absorber in 1926. When the term "Monroe" is used in this document it refers to the affiliates of Automotive that produce ride control products and systems. The following table provides for each of the years 1996 through 1998, and for the six months ended June 30, 1999, information relating to Automotive's sales of ride control equipment:
PERCENTAGE OF NET SALES ------------------------------------------ SIX MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------ JUNE 30, 1999 1998 1997 1996 ------------- ---- ---- ---- UNITED STATES MARKET Aftermarket............................ 40% 43% 50% 62% OE Market.............................. 60% 57% 50% 38% ---- ---- ---- ---- 100% 100% 100% 100% ==== ==== ==== ==== FOREIGN SALES Aftermarket............................ 51% 53% 56% 59% OE Market.............................. 49% 47% 44% 41% ---- ---- ---- ---- 100% 100% 100% 100% ==== ==== ==== ==== TOTAL SALES BY GEOGRAPHIC AREA United States.......................... 50% 47% 48% 48% European Union......................... 29% 32% 27% 34% Canada................................. 5% 3% 3% 3% Other areas............................ 16% 18% 22% 15% ---- ---- ---- ---- 100% 100% 100% 100% ==== ==== ==== ====
SALES AND MARKETING Automotive sells directly to original equipment manufacturers. To maintain its customer focus, Automotive's OE sales force is organized into customer-dedicated teams. These sales teams service the original equipment manufacturers at a regional facility level, with global coordination and support from Automotive's headquarters. For the aftermarket, Automotive uses a dedicated sales force and consumer brand marketing professionals to sell and market its products. This group provides extensive marketing support to aftermarket customers, including trade and consumer marketing, promotions and general advertising. Automotive maintains an aftermarket customer order fill rate of 95%, which reflects the percentage of the average customer order Automotive is able to fill from inventory. Automotive sells its aftermarket products through five primary channels of distribution: (1) the traditional three-step distribution system: full-line warehouse distributors, jobbers and installers; (2) the specialty two-step distribution system: specialty warehouse distributors that carry only specified automotive product groups and installers; (3) direct sales to retailers; (4) direct sales to installer chains; and (5) direct sales to car dealers. MANUFACTURING AND ENGINEERING Automotive uses state-of-the-art manufacturing to achieve superior product quality at the lowest operating costs possible. Automotive's manufacturing strategy centers on a lean production system that reduces overall costs -- especially indirect costs -- while maintaining quality standards and reducing manufacturing cycle time. Automotive deploys new technology where it makes sense to differentiate its processes from its competitors' or to achieve balance in one piece flow-through production lines. EMISSIONS CONTROL Walker operates 11 manufacturing facilities in the U.S. and six engineering and technical facilities worldwide. Walker also operates 32 manufacturing facilities outside of the U.S. and has a controlling 137 139 interest in six joint ventures that own manufacturing facilities in China, Germany, India, and Sweden. See "-- Properties." Walker attempts to locate original equipment manufacturing facilities close to its OE customers to provide products on demand, or "just-in-time." Eleven of Walker's plants are just-in-time facilities. During the 1990's, Walker expanded its converter and emission system design, development, test and manufacturing capabilities. Walker's engineering capabilities now include advanced predictive design tools, advanced prototyping processes and state-of-the-art testing equipment. This expanded technological capability makes Walker a "full system" integrator, supplying complete emissions control systems from the manifold to the tailpipe, to provide full emission and noise control. It also allows Walker to provide just-in-time delivery and, when feasible, sequence delivery of emissions control systems to meet customer production requirements. RIDE CONTROL Monroe operates seven manufacturing facilities in the U.S. and ten engineering and technical facilities worldwide. Monroe also operates 16 manufacturing facilities outside of the U.S. and has a controlling interest in three joint ventures that own manufacturing facilities in China and India. Monroe is attempting to locate original equipment manufacturing facilities close to customers to provide products on demand, or just-in-time. See "-- Properties." In designing its shock absorbers and struts, Monroe uses advanced engineering and test capabilities to provide product reliability, endurance and performance. Monroe's engineering capabilities feature advanced computer-aided design equipment and testing facilities. Monroe's dedication to innovative solutions has led to such technological advances as: - adaptive damping systems -- adapts to the vehicle's motion to better control undesirable vehicle motions; - electronically adjustable suspensions -- changes suspension performance based on a variety of inputs such as steering, braking, vehicle height, and velocity; and - air leveling systems -- manually or automatically adjust the height of the vehicle. Conventional shock absorbers and struts generally compromise either ride comfort or vehicle control. Monroe's innovative grooved-tube, gas-charged shock absorbers and struts provide both ride comfort and vehicle control, resulting in improved handling, less roll, reduced vibration and a wider range of vehicle control. This technology can be found in Monroe's premium quality Sensa-Trac(R) shock absorbers. In late 1997, Monroe further enhanced this technology by adding the Safe-Tech(TM) fluon banded piston, which improves shock absorber performance and durability. INDUSTRY TRENDS Currently, several significant existing and emerging trends are dramatically reshaping the automotive industry. As the dynamics of the automotive industry change, so do the roles, responsibilities and relationships of its participants. Key trends that Automotive believes are affecting automotive parts suppliers include: CUSTOMER AND SUPPLIER CONSOLIDATION The customer base for automotive parts is consolidating in both the OE market and aftermarket. Because of recent business combinations among vehicle manufacturers -- such as the DaimlerChrysler merger and Ford's acquisition of Volvo -- and in the aftermarket -- such as AutoZone's acquisition of Chief Auto Parts and CSK Auto's acquisition of Big Wheel/Rossi -- suppliers are competing for the business of fewer customers. The cost focus of these major customers is causing suppliers to reduce prices. 138 140 Consolidation is also occurring among automotive parts suppliers, particularly those who supply vehicle makers. The approximate number of Tier 1 suppliers is projected to decrease from 1,500 to 600 between 1998 and 2005. The primary reasons for this consolidation include: (1) an increasing desire by original equipment manufacturers to work with fewer, larger suppliers that can provide fully-integrated systems; and (2) the inability of smaller suppliers to compete on price with the larger companies who benefit from purchasing and distribution economies of scale. A supplier's viability in this consolidating market depends, in part, on its continuing ability to maintain and increase operating efficiencies by reducing costs and improving productivity. Also important is a supplier's ability to provide value-added services such as materials management, specialized engineering capabilities and integration of individual components into modules and systems. With its strong market positions in emissions control and ride control products and its demonstrated ability to integrate and deliver modules and systems, Automotive is well-positioned to respond to increasing customer consolidation. INCREASED OE OUTSOURCING AND DEMAND FOR FULL-SYSTEM INTEGRATION BY SUPPLIERS Original equipment manufacturers are moving towards outsourcing automotive parts and systems to simplify the vehicle assembly process, lower costs and reduce vehicle development time. Outsourcing allows original equipment manufacturers to take advantage of the lower cost structure of the automotive parts suppliers and to benefit from multiple suppliers engaging in simultaneous development efforts. Development of advanced electronics has enabled formerly independent vehicle components to become "interactive," leading to a shift in demand from individual parts to fully-integrated systems. As a result, automotive parts suppliers offer original equipment manufacturers component products individually, as well as in a variety of integrated forms such as modules and systems: - "Modules" are groups of component parts arranged in close physical proximity to each other within a vehicle. Modules are often assembled by the supplier and shipped to the original equipment manufacturer for installation in a vehicle as a unit. Seats, instrument panels, axles and door panels are examples. - "Systems" are groups of component parts located throughout a vehicle which operate together to provide a specific vehicle function. Anti-lock braking systems, safety restraint systems, emissions control and power train systems are examples. This shift in demand towards fully-integrated systems has created the role of the Tier 1 systems integrator. These systems integrators will increasingly have the responsibility to execute a number of activities, such as design, product development, engineering, testing of component systems and purchasing from Tier 2 suppliers. Automotive is an established Tier 1 supplier with ten years of product integration experience. Automotive has modules or systems for 25 vehicle platforms in production worldwide and modules or systems for three additional platforms under development. For example, Automotive supplies ride control modules for the Chrysler JA Cirrus/Stratus/Breeze and the emissions control system for the Porsche Boxster. GLOBALIZATION OF THE AUTOMOTIVE INDUSTRY Original equipment manufacturers are increasingly requiring suppliers to provide parts on a global basis. As the customer base of original equipment manufacturers changes, and emerging markets become more important to achieving growth, suppliers must be prepared to provide products any place in the world. This requires a worldwide approach to supply chain management, engineering, sales and distribution: - Growing Importance of Emerging Markets. Because the North American and Western European automotive markets are relatively mature, original equipment manufacturers are increasingly focusing on emerging markets for growth opportunities, particularly China, Eastern Europe, India and Latin America. This increased OE focus has, in turn, increased the growth opportunities in the aftermarkets in these regions. 139 141 - Governmental Tariffs and Local Parts Requirements. Many governments around the world require that vehicles sold within their country contain specified percentages of locally produced parts. Additionally, some governments place high tariffs on imported parts. - Location of Production Closer to End Markets. Original equipment manufacturers and parts suppliers have relocated production globally on an "on-site" basis that is closer to end markets. This international expansion allows suppliers to pursue sales in developing markets and take advantage of relatively lower labor costs. With facilities around the world, including the key regions of North America, South America, Europe and Asia, Automotive can supply its customers on a global basis. GLOBAL RATIONALIZATION OF OE VEHICLE PLATFORMS Original equipment manufacturers are increasingly designing "global" platforms. A "global" platform is a basic mechanical structure of a vehicle that can accommodate different features and is in production and/or development in two or more regions. Thus, original equipment manufacturers can design one platform for a number of similar vehicle models. This allows manufacturers to realize significant economies of scale through limiting variations across items such as steering columns, brake systems, transmissions, axles, exhaust systems, support structures and power window and door lock mechanisms. Automotive believes that this shift towards standardization will have a large impact on automotive parts suppliers, who should experience a reduction in production costs as original equipment manufacturers reduce variations in components. Automotive also expects parts suppliers to experience higher production volumes per unit and greater economies of scale, as well as reduced total investment costs for molds, dies and prototype development. Automotive currently works with original equipment manufacturers on 33 "global" platforms. INCREASING ELECTRONIC COMPONENTS AND TECHNOLOGICAL INNOVATION As consumers continue to demand competitively priced vehicles with increased performance and functionality, the number of electronic components utilized in vehicles is increasing. By replacing mechanical functions with electronics and by integrating mechanical and electronic functions within a vehicle, original equipment manufacturers are achieving improved emissions control, improved safety and more sophisticated features at lower costs. In addition, automotive parts customers are increasingly demanding technological innovation from suppliers to address more stringent emissions and other regulatory standards and to improve vehicle performance. To continue developing innovative products, systems and modules, Automotive maintains 16 research and development facilities and has entered into several strategic alliances focused on advanced technology designs. For example, Automotive has developed several adaptive damping systems which reduce undesirable vehicle motion. Also, Automotive has developed the self-lubricating elastomer, which has the additional ability to reduce friction between moving components in a suspension-system thereby reducing noise and vibration. INCREASING ENVIRONMENTAL STANDARDS Automotive parts suppliers and original equipment manufacturers are designing products and developing materials to comply with increasingly stringent environmental requirements. Government regulations adopted over the past decade require substantial reductions in automobile tailpipe emissions, longer warranties on parts of an automobile's pollution-control equipment and additional equipment to control fuel-vapor emissions. Some of these regulations also mandate more frequent emissions and safety inspections for the existing fleet of vehicles. Manufacturers have responded by focusing their efforts towards technological development to minimize pollution. As a leading supplier of emissions control systems with strong technical capabilities, Automotive is well-positioned to benefit from more rigorous environmental standards. 140 142 EXTENDED PRODUCT LIFE OF AUTOMOTIVE PARTS The average useful life of automotive parts -- both OE and replacement -- has been steadily increasing in recent years due to innovations in products and technologies. The longer product lives allow vehicle owners to replace parts of their vehicles less often. As a result, a portion of sales in the aftermarket has been displaced. Accordingly, a supplier's future viability in the aftermarket will depend, in part, on its ability to reduce costs and leverage its advanced technology and recognized brand names to maintain or achieve additional sales. As a Tier 1 OE supplier, Automotive is well-positioned to leverage its products and technology into the aftermarket. Furthermore, an opportunity exists for replacement of automobile parts to increase as the average age of vehicles on the road increases. For example, from 1990 to 1997 the average age of cars in the U.S. increased from 7.8 to 8.7 years. GROWING RETAIL AFTERMARKET DISTRIBUTION During the last decade, the number of retail automotive parts chains, such as AutoZone and Advance Auto Parts, has been growing while the number of traditional automotive parts stores that sell to installers ("jobbers") has been declining. Since 1990, the number of retail automotive parts stores has increased from approximately 10,000 to approximately 14,000, while the number of jobbers has decreased from approximately 25,000 to approximately 21,000. In addition, since retailers are attempting to grow their commercial sales to automotive parts installers, they are increasingly adding premium brands to their product portfolios. This enables them to offer the option of a premium brand, which is often preferred by their commercial customers, or a standard product, which is often preferred by their retail customers. Automotive is well-positioned to respond to this changing aftermarket situation because of its focus on cost reduction and high-quality, premium brands. BUSINESS STRATEGY Automotive's objective is to enhance profitability by leveraging its global position in the manufacture of emissions control and ride control products and systems. Automotive intends to apply its competitive strengths and balanced mix of products, markets, customers and distribution channels to capitalize on many of the significant existing and emerging trends in the automotive industry. The key components of Automotive's business strategy are described below. "OWN" THE PRODUCT LIFE CYCLE Using its global engineering capabilities and its advanced technology position, Automotive is pursuing opportunities to design unique, value-added products for vehicle manufacturers that yield higher margins in the OE market. Automotive expects to take advantage of its OE technology investments by moving these differentiated products into the aftermarket, where they should continue to generate future revenue streams through the entire life of the vehicle. Innovative products such as Sensa-Trac(R) shocks and Quiet-Flow(TM) mufflers are examples of where Automotive's market balance between OE and aftermarket sales allows Automotive to leverage its cost structure over the entire product life cycle. DEVELOP AND COMMERCIALIZE INNOVATIVE, VALUE-ADDED PRODUCTS Automotive intends to continue to focus on the development of highly engineered systems and complex assemblies and modules which provide value-added solutions to customers and generally carry higher profit margins than individualized components. Furthermore, Automotive intends to expand its product lines by continuing to identify and fill new fast-growing niche markets, by developing new products for existing markets, by acquiring companies with product portfolios that complement the products currently supplied by Automotive and by establishing strategic alliances with other suppliers. One example of Automotive's focus on innovation is its acquisition in early 1999 of Kinetic Ltd., an Australian advanced suspension engineering company with advanced roll-control technology. This technology also provides enhanced on-road handling while improving off road performance. In addition, in an effort to further enhance its electronic competencies Automotive entered into an agreement with 141 143 Siemens Automotive S.A. in late 1998 to cooperate in the development and commercialization of advanced electronically controlled ride control and suspension technologies. Also in late 1998, Automotive reached an agreement with Ohlins Racing A.B. to jointly develop advanced, electronically controlled suspension damping systems which decrease spring movement. LEVERAGE AFTERMARKET BRAND NAMES Automotive manufactures and markets leading brand-name products. Monroe(R) ride control products and Walker(R) emissions control products, which have been offered to consumers for over 50 years, are two of the most recognized brand-name products in the automotive parts industry. Automotive continues to emphasize product value differentiation with these brands and its other primary brands, including: - the Monroe Sensa-Trac(R) line of shock absorbers, that has been enhanced by the Safe-Tech(TM) system technology which incorporates a fluon banded piston to improve performance and durability; - Walker's Quiet-Flow(TM) muffler, which features an open-flow design that increases exhaust flow, improves sound quality and significantly reduces exhaust backpressure when compared to other replacement mufflers; - Rancho(R) ride control products for the high-performance light truck market; - DynoMax(R) high-performance emissions control systems; - Walker Perfection(TM) catalytic converters; - Clevite(TM) elastomeric vibration control components, which are primarily rubber products used to reduce vibration through "cushioning" a connection or contact point; and - in European markets, Walker(R) and Aluminox(TM) mufflers. Automotive is also capitalizing on its brand strength by incorporating newly acquired product lines within existing product families. Automotive's brand equity is a key asset in a time of customer consolidation and merging channels of distribution. DIVERSIFY END-MARKETS One of Automotive's goals is to apply its existing design, marketing and manufacturing capabilities to produce products for a variety of adjacent markets. Automotive believes that these capabilities could be used for heavy duty vehicle and industrial applications, various recreational vehicles, scooters and bicycles. Automotive expects that expanding into markets other than automotive parts will allow it to capitalize on its advancing technical and manufacturing infrastructure to achieve growth in higher margin businesses. EXPAND FULL-SYSTEM CAPABILITIES The automotive parts industry is encountering a consolidation of parts suppliers, as original equipment manufacturers require suppliers to provide design assistance and innovation and full-system capabilities rather than just specific parts. In response to this trend, Automotive has developed integrated, electronically linked global engineering and manufacturing facilities to maintain its presence on top selling vehicles. Automotive has over 10 years of experience as an integrator of systems and modules. Automotive is currently supplying modules or systems for 25 vehicle platforms worldwide and has modules or systems for three additional platforms under development. Automotive also plans to continue to dedicate more resources towards strengthening technical capability and design expertise and to pursue appropriate strategic acquisitions, joint ventures, strategic alliances and cooperative development agreements to increase its ability to deliver full-system capabilities. MAINTAIN OPERATING COST LEADERSHIP Automotive intends to continue to reduce costs by: - standardizing its products and processes throughout its operations; - further developing its global supply chain management capabilities; - improving its information technology; 142 144 - increasing efficiency through employee training; - investing in more efficient machinery; and - enhancing the global coordination of costing and quoting procedures. In the fourth quarter of 1998, Automotive began a restructuring designed to reduce administrative and operational overhead costs. The largest part of the $53 million pre-tax restructuring charge which was recorded in income from continuing operations related to the restructuring of its North American aftermarket operations. The operational restructuring, designed to better match Automotive's capacity to market demand, involves closing two plant locations and five distribution centers, with the elimination of 302 positions at those locations. Automotive expects to complete this by mid-2000. The administrative restructuring involves the reduction of approximately 450 administrative staff positions. Automotive is also considering a supplemental restructuring plan. See "Summary -- Recent Developments -- Automotive." Automotive expects to complete this by the end of 1999. Automotive has also adopted Business Operating System as a disciplined system to promote and manage continuous improvement. BOS focuses on the assembly and analysis of data for quick and effective problem resolution to create more efficient and profitable operations. Automotive has also adopted a management process of measuring the economic value of its operations to help ensure returns exceed capital costs. Automotive is planning to link the successful application of this management discipline to its incentive compensation program. EXECUTE FOCUSED ACQUISITIONS AND ALLIANCES In the past, Automotive has been successful in identifying and capitalizing on strategic acquisitions and alliances to achieve growth. Through these acquisitions and alliances, Automotive has: (1) expanded its product portfolio; (2) realized incremental business with existing customers; (3) gained access to new customers; and (4) achieved leadership positions within new geographic markets. Where appropriate, Automotive intends to continue to pursue strategic acquisitions that complement its existing technology and systems development efforts. This focused strategy will assist Automotive to identify and acquire smaller-scale companies with proven proprietary technology and recognized research capabilities necessary to help develop further leadership in systems integration. Any potential acquisition will be expected to meet strict financial criteria to ensure it increases economic value. Automotive also plans to continue to pursue its joint venture and alliance opportunities to achieve its objectives and enhance its profitability. PROPERTIES Automotive leases its principal executive offices, which are located at 500 North Field Drive, Lake Forest, Illinois, 60045. Walker operates 11 manufacturing facilities in the U.S. and six engineering and technical facilities worldwide. Walker also operates 32 manufacturing facilities outside of the U.S. and has a controlling interest in six joint ventures that own manufacturing facilities in China, Germany, India and Sweden. Monroe operates seven manufacturing facilities in the U.S. and ten engineering and technical facilities worldwide. Monroe also operates 16 manufacturing facilities outside of the U.S. and has a controlling interest in three joint ventures that own manufacturing facilities in China, South Africa and India. Automotive's manufacturing locations outside of the U.S. are located in Canada, Mexico, Belgium, Spain, the United Kingdom, the Czech Republic, Turkey, South Africa, France, Denmark, Sweden, Germany, Poland, Portugal, Argentina, Brazil, Australia, and New Zealand. Sales offices are located in Australia, Canada, Italy, Japan, Poland, Russia, and Sweden. 143 145 Of Automotive's properties described above, approximately one-half are owned and one-half are leased. Twelve of the properties are held through joint ventures. Automotive also has distribution facilities at its manufacturing sites and at a few offsite locations, substantially all of which are leased. Automotive's commitment to sound management practices and policies is also demonstrated by its successful participation in the International Standards Organization/Quality Systems certification process (ISO/QS). ISO/QS certifications are yearly audits that certify that a company's facilities meet stringent quality and business systems requirements. Without either ISO or QS certification, Automotive would not be able to supply original equipment manufacturers locally or globally. Over 90% of Automotive's manufacturing facilities have achieved ISO 9000 certification, excluding facilities held in joint ventures. Of those 60 manufacturing facilities where Automotive has determined that QS certification is required to service its customers or would provide Automotive with an advantage in securing additional business, 85% have achieved QS 9000 certification, and Automotive is pursuing certification of the remaining 15%. Automotive believes that substantially all of its plants and equipment are, in general, well maintained and in good operating condition. They are considered adequate for present needs and, as supplemented by planned construction, are expected to remain adequate for the near future. Automotive also believes that it and its subsidiaries have generally satisfactory title to the properties owned and used in their respective businesses. LEGAL AND ENVIRONMENTAL PROCEEDINGS As of June 1, 1999, Automotive has been designated as a potentially responsible party at four "Superfund" sites and it has estimated its share of the liability at these sites to be approximately $2 million in the aggregate. In addition, Automotive may have liability to remediate contaminant releases at 18 of its current or former facilities and it has estimated its share of the remediation costs at these facilities to be $19 million in the aggregate. For both the Superfund sites and its current and former facilities, Automotive has established reserves that it believes are adequate for these costs. Although Automotive believes its estimates of remediation costs are reasonable and are based on the latest available information, the clean-up costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, Automotive expects that other parties will contribute to the remediation costs. In addition, at the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that Automotive's liability could be joint and several, meaning that Automotive could be required to pay in excess of its share of remediation costs. Automotive's understanding of the financial strength of other potentially responsible parties at both the Superfund sites and at its former facilities has been considered, where appropriate, in Automotive's determination of its estimated liability. Automotive believes that any adjustment to the costs associated with its current status as a potentially responsible party at the Superfund sites or as a liable party at its current or former facilities will not be material to its consolidated financial position or results of operations. Automotive estimates that its capital expenditures for environmental matters for 1999 and 2000 will not be material. For a description of an antitrust lawsuit related to Packaging in which Tenneco has been named a defendant, see "Description of Packaging -- Legal Proceedings." Under and in accordance with the Distribution Agreement, as between Tenneco and Packaging, Packaging is responsible for defending the claims and for any liability resulting from this action. Automotive is party to various other legal proceedings arising from its operations. Tenneco believes that the outcome of these other proceedings, individually and in the aggregate, will not have a material adverse effect on Automotive's financial position or results of operations. STRATEGIC ACQUISITIONS AND ALLIANCES Strategic acquisitions, joint ventures and alliances have been an important part of Automotive's growth. Through this strategy, Automotive has expanded to meet customers' global requirements. This 144 146 strategy has also allowed Automotive to acquire or align with companies that possess proven technology and research capabilities, furthering Automotive's leadership in systems integration. EMISSIONS CONTROL - In 1996, Automotive established a joint venture in Dalian, China to supply emissions control systems to the Northern Chinese automotive market, expanded its North American heavy duty truck aftermarket business through the acquisition of Stemco Inc. and acquired Minuzzi, the second largest manufacturer of exhaust products in Argentina. - In 1997, Automotive acquired Autocan, a Mexican catalytic converter and exhaust pipe assembly manufacturer. It also acquired the manufacturing operations of MICHEL, a privately owned, Polish-based manufacturer of replacement market emissions control systems for passenger cars in Eastern Europe. - In 1998, Automotive established a joint venture in Shanghai, China to supply emissions control systems to the Central and Southern Chinese automotive markets. Automotive also established a joint venture in Pune, India to supply emissions control systems to OE customers and the aftermarket. - In 1999, Automotive began manufacturing emissions control systems at a new facility in Curitiba, Brazil to supply original equipment customers in this growing regional market. RIDE CONTROL - In 1995, Automotive acquired a 51% interest in a joint venture that has three ride control manufacturing facilities in India and acquired a 51% interest in a joint venture that has one ride control manufacturing facility in China. - In July 1996, Automotive acquired The Pullman Company and its Clevite products division. Clevite is a leading original equipment manufacturer of elastomeric vibration control components, including bushings, engine mounts and control arms, for the auto, light truck and heavy truck markets. These products connect major metal parts and help isolate noise, vibration and shock. With this acquisition, Automotive expanded its capability to deliver ride control systems to original equipment manufacturers. The Clevite acquisition also complemented Automotive's interest in global growth opportunities, since both Clevite and Monroe have manufacturing operations in Mexico and Brazil. - In September 1996, Automotive acquired full ownership of Monroe Amortisor Imalat ve Ticaret, a Turkish shock absorber manufacturer, in which it previously held a 16.7% ownership interest. - In December 1996, Automotive acquired 94% of the voting stock of Fric-Rot S.A.I.C., the leading producer and marketer of ride control products in Argentina. In 1997, Automotive increased its interest in Fric-Rot to more than 99% through the purchase of additional shares. - In 1996, Automotive also expanded its presence in Australia's ride control product market with the acquisition of National Springs. - In 1997, Automotive entered into a joint venture which resulted in its acquisition of majority ownership of Armstrong, a leading South African manufacturer of ride control products. - Earlier this year, Automotive completed its acquisition of Kinetic, an Australian advanced suspension engineering company with advanced roll-control technology. Also this year, Automotive licensed elastomer technology and equipment from Draftex, a French company. Automotive intends to apply this technology to manufacturing engine mounts and ride control products for sale in Mexico, Central America and South America. OTHER As of June 1, 1999, Automotive had approximately 23,500 employees, 34% of which were covered by collective bargaining agreements and 16% of which are governed by European works councils. Twenty-three of 145 147 Automotive's existing labor agreements, covering a total of 3,000 employees, are scheduled for renegotiation in 1999 and 2000. Automotive regards its employee relations as generally satisfactory. The principal raw material utilized by Automotive is steel. Automotive believes that an adequate supply of steel can presently be obtained from a number of different domestic and foreign suppliers. Automotive holds a number of domestic and foreign patents and trademarks relating to its products and businesses. It manufactures and distributes its products primarily under the Walker(R) and Monroe(R) brand names, which are well recognized in the marketplace and are registered trademarks of Automotive. The patents, trademarks and other intellectual property owned by or licensed to Automotive are important in the manufacturing, marketing and distribution of its products. MANAGEMENT AFTER THE SPIN-OFF BOARD OF DIRECTORS In connection with the spin-off, the current Board of Directors of Tenneco Inc. will be restructured. This restructured Board of Directors will govern the management and operations of Automotive upon completion of the spin-off. The Automotive Board of Directors is currently divided into three classes serving staggered three-year terms. At each annual meeting of stockholders, successors to the directors whose terms expire at that meeting are elected. However, Tenneco intends to submit a proposal for stockholder consideration to eliminate its staggered board structure and provide instead for the annual election of directors. Tenneco plans to submit this proposal at a special stockholders' meeting to be held on October 25, 1999. If this proposal is approved, the staggered board structure will be phased-out over the next three annual stockholders' meetings, with directors being elected annually after the expiration of the current staggered board terms set forth below. Information concerning the individuals who will serve as directors of Automotive upon completion of the spin-off and their terms is provided below. Any current directors of Tenneco Inc. who will not be continuing as Automotive directors will resign effective upon the spin-off. Terms Expiring at the 2000 Annual Meeting of Stockholders -- Class I MARK ANDREWS -- See "Description of Packaging -- Management -- Board of Directors" for information about Mr. Andrews. DAVID B. PRICE, JR. -- Mr. Price has been an Executive Vice President of the BFGoodrich Company and President and Chief Operating Officer of BFGoodrich Performance Materials, a producer of chemical additives and specialty plastics for use in consumer and industrial products, since July 1997. Prior to joining BFGoodrich, Mr. Price held various executive positions over a 20-year span at Monsanto Company, most recently serving as President of the Performance Materials Division of Monsanto Company from 1995 to July 1997. From 1993 to 1995, he was Vice President and General Manager of commercial operations for the Industrial Products Group and was also named to the management board of Monsanto's Chemical Group. Mr. Price is 53 years old and will be named a director in connection with the spin-off. Terms Expiring at the 2001 Annual Meeting of Stockholders -- Class II DANA G. MEAD, CHAIRMAN OF THE BOARD -- See "Description of Packaging -- Management -- Board of Directors" for information about Mr. Mead. M. KATHRYN EICKHOFF -- Ms. Eickhoff has been President of Eickhoff Economics, Inc., a consulting firm, since 1987. From 1985 to 1987, she was Associate Director for Economic Policy for the U.S. Office of Management and Budget, and prior to 1985, was Executive Vice President and Treasurer of Townsend-Greenspan & Co., Inc., an economic consulting firm. She is also a director of AT&T Corp., Pharmacia & Upjohn, Inc., and Fleet Bank, NA. Ms. Eickhoff is 60 years old, and has been a director of Tenneco since 146 148 1987. She previously served as a member of the Tenneco Board of Directors from 1982 until her resignation to join the Office of Management and Budget in 1985. ROGER B. PORTER -- See "Description of Packaging -- Management -- Board of Directors" for information about Mr. Porter. Terms Expiring at the 2002 Annual Meeting of Stockholders -- Class III MARK P. FRISSORA -- Mr. Frissora will be the Chief Executive Officer of Automotive upon the spin-off and has been serving as its President since April 1999. From 1996 to April 1999, he held various positions within Automotive's operations including Senior Vice President and General Manager of North American Original Equipment. Mr. Frissora joined Automotive in 1996 from Aeroquip-Vickers Corporation, where he served from 1991 as Vice President of North American marketing, sales and distribution. Mr. Frissora is 43 years old and will be named a director in connection with the spin-off. SIR DAVID PLASTOW -- Sir David Plastow was Chairman of the Medical Research Council, which promotes and supports research and post-graduate training in the biomedical and other sciences, from 1990 until his retirement in 1998. He served as Chairman of Inchcape plc, a multi-national marketing and distribution company, from June 1992 to December 1995, and Chairman and Chief Executive Officer of Vickers plc, an engineering and manufacturing company headquartered in London, from January 1987 to May 1992. He is also a director of FT Everard & Sons Limited. Sir David Plastow is 67 years old and has been a director of Tenneco since May 1996. He previously served as a member of the Board of Directors of Tenneco from 1985 until 1992. PAUL T. STECKO -- See "Description of Packaging -- Management -- Board of Directors" for information about Mr. Stecko. EXECUTIVE OFFICERS The following provides information concerning the persons who will serve as the executive officers of Automotive upon completion of the spin-off. Each of the named persons has been, or before the spin-off will be, elected to the office indicated opposite his name and will serve at the discretion of the Automotive Board of Directors.
AGE AT NAME JUNE 30, 1999 TITLE ---- ------------- ----- Mark P. Frissora............... 43 Chief Executive Officer Richard P. Schneider........... 52 Senior Vice President -- Global Administration Mark A. McCollum............... 40 Senior Vice President and Chief Financial Officer Timothy R. Donovan............. 43 Senior Vice President and General Counsel Timothy E. Jackson............. 45 Senior Vice President and General Manager -- North American Original Equipment and Worldwide Program Management David G. Gabriel............... 40 Senior Vice President and General Manager -- North American Aftermarket
MARK P. FRISSORA -- See "-- Board of Directors," above, for information about Mr. Frissora. RICHARD P. SCHNEIDER -- As Senior Vice President -- Global Administration, Mr. Schneider is responsible for the development and implementation of human resources programs and policies and corporate communications activities for Automotive's worldwide operations. He joined Automotive in 1994 from International Paper Company where, during his 20-year tenure, he held key positions in labor relations, management development, personnel administration and equal employment opportunity. MARK A. MCCOLLUM -- Mr. McCollum joined Automotive in April 1998 from Tenneco, where as Vice President, Corporate Development he was responsible for executing Tenneco's strategic transactions. From January 1995 to April 1998, he served in various capacities with Tenneco, including Vice President, 147 149 Financial Analysis and Planning and Corporate Controller. Before joining Tenneco, Mr. McCollum spent 14 years with the international public accounting firm of Arthur Andersen LLP, serving as an audit and business advisory partner of the company's worldwide partnership from 1991 to December 1994. TIMOTHY R. DONOVAN -- Mr. Donovan was named Senior Vice President and General Counsel of Automotive in August 1999. Mr. Donovan was a partner in the law firm of Jenner & Block from 1989 until his resignation in September 1999, and most recently served as the Chairman of the firm's Corporate and Securities Department and as a member of its Executive Committee. TIMOTHY E. JACKSON -- Mr. Jackson was named Senior Vice President and General Manager -- North American Original Equipment and Worldwide Program Management in June 1999. Mr. Jackson joined the company from ITT Industries where he was President of the company's Fluid Handling Systems Division. With over 20 years of management experience, 14 within the automotive industry, he was also Chief Executive Officer for HiSAN, a joint venture between ITT Industries and Sanoh Industrial Company. Mr. Jackson has also served in senior management positions at BFGoodrich Aerospace and General Motors Corporation. DAVID G. GABRIEL -- Mr. Gabriel was named Senior Vice President and General Manager -- North American Aftermarket in August 1999. From March to August 1999, Mr. Gabriel was the Vice President of Operations for Automotive's North American aftermarket business. From March 1997 to March 1999, he served as Vice President of Manufacturing for Automotive's North American aftermarket business. From February 1995 to March 1997, he served as Executive Director of Supplier Development for Tenneco Business Services. Before joining Tenneco in February 1995, Mr. Gabriel spent 15 years in various operating positions of increasing responsibility with the Pepsi Cola Company and Johnson and Johnson. From 1993 to February 1995, Mr. Gabriel was Director of Supplier Development at the Pepsi Cola Company. STOCK OWNERSHIP OF MANAGEMENT The following table shows, as of June 30, 1999, the number of shares of Tenneco common stock beneficially owned by: (1) each person who will be a director of Automotive upon the spin-off; (2) each person who is named in the Summary Compensation Table for Automotive, below; and (3) all persons who will be directors or executive officers of Automotive upon the spin-off, as a group. The table also shows: (a) Tenneco common stock equivalents held by these directors and executive officers under benefit plans; and (b) the total number of shares of Tenneco common stock and common stock equivalents held.
SHARES OF COMMON COMMON STOCK TOTAL SHARES STOCK OWNED(1)(2)(3) EQUIVALENTS(4) AND EQUIVALENTS -------------------- -------------- --------------- DIRECTORS Mark Andrews........................................... 14,155 1,600 15,755 M. Kathryn Eickhoff.................................... 9,728 1,600 11,328 Mark P. Frissora....................................... 33,968 -- 33,968 Dana G. Mead........................................... 765,821 44,737 810,558 Sir David Plastow...................................... 4,700 2,610 7,310 Roger B. Porter........................................ 2,000 3,420 5,420 David B. Price, Jr. ................................... -- -- -- Paul T. Stecko......................................... 314,362 -- 314,362 EXECUTIVE OFFICERS Richard P. Schneider................................... 24,751 -- 24,751 Mark A. McCollum....................................... 30,959 -- 30,959 Timothy R. Donovan..................................... -- -- -- Timothy E. Jackson..................................... -- -- -- David G. Gabriel....................................... 15,742 -- 15,742 All executive officers and directors as a group........ 1,216,186(5) 53,967 1,270,153(5)
- --------------- (1) Each director and executive officer has sole voting and investment power over the shares beneficially owned (or has the right to acquire shares as described in note (2) below) as set forth in this column, except for: (a) restricted shares; and (b) shares that executive officers and directors have the right to acquire pursuant to stock options. Generally, Tenneco restricted shares will be vested prior to the spin-off. In connection with the spin-off, Tenneco stock options held by the executive officers listed above will 148 150 be adjusted so that the options immediately after the spin-off will have equivalent economic terms to the options immediately before the spin-off. Tenneco stock options held by directors will be adjusted in the same manner, except that one-half of the Tenneco options held by Messrs. Mead, Andrews and Porter will be replaced with Packaging options having equivalent economic terms, and options held by Mr. Stecko will terminate unless exercised prior to the spin-off. (2) Includes restricted shares. At June 30, 1999, Ms. Eickhoff and Messrs. Andrews, Frissora, Mead, Plastow, Schneider and Gabriel held 3,963; 6,547; 12,000; 66,025; 300; 3,000; and 5,000 restricted shares, respectively. Also includes shares that are subject to options, which are exercisable within 60 days of June 30, 1999 for Ms. Eickhoff and Messrs. Andrews, Frissora, Mead, Plastow, Porter, Stecko, Schneider, McCollum and Gabriel to purchase 2,000; 2,000; 20,887; 616,176; 2,000; 2,000; 288,814; 15,844; 30,959; and 9,848 shares, respectively. (3) Less than one percent of the outstanding shares of Tenneco common stock. (4) Common stock equivalents are distributed in shares of Tenneco common stock or, in some circumstances, cash after the individual ceases to serve as a director or officer. Common stock equivalents held by directors who are not employees of Tenneco will be vested and distributed prior to the spin-off. Mr. Mead's stock equivalent units are credited to his account under the Tenneco Inc. Deferred Compensation Plan and are, therefore, already vested. (5) Includes 990,528 shares that are subject to options that are exercisable within 60 days of June 30, 1999, by all executive officers and directors as a group, and includes 96,835 restricted shares for all executive officers and directors as a group. COMMITTEES OF THE BOARD OF DIRECTORS AFTER THE SPIN-OFF The Automotive Board of Directors will have three standing committees when the spin-off is completed. These committees will have the following described responsibilities and authority: The Audit Committee, comprised solely of outside directors, will have the responsibility, among other things, to: (1) recommend the selection of Automotive's independent public accountants; (2) review and approve the scope of the independent public accountants' audit activity and extent of non-audit services; (3) review with management and such independent public accountants the adequacy of Automotive's basic accounting system and the effectiveness of Automotive's internal audit plan and activities; (4) review with management and the independent public accountants Automotive's certified financial statements and exercise general oversight of Automotive's financial reporting process; and (5) review with Automotive litigation and other legal matters that may affect Automotive's financial condition and monitor compliance with Automotive's business ethics and other policies. The Compensation/Nominating/Governance Committee, comprised solely of outside directors, will have the responsibility, among other things, to: (1) establish the salary rate of officers and employees of Automotive and its subsidiaries; (2) examine periodically the compensation structure of Automotive; and (3) supervise the welfare and pension plans and compensation plans of Automotive. It will also have significant corporate governance responsibilities, among other things, to: (a) review and determine the desirable balance of experience, qualifications and expertise among members of the Automotive Board; (b) review possible candidates for membership on the Automotive Board and recommend a slate of nominees for election as directors at Automotive's annual stockholders' meeting; (c) review the function and composition of the other committees of the Automotive Board and recommend membership on these committees; and (d) review the qualifications and recommend candidates for election as officers of Automotive. The Three-year Independent Director Evaluation Committee, comprised solely of outside directors, will have the responsibility, among other things, to review Automotive's qualified offer rights plan at least every three years and, if it deems it appropriate, recommend that the full Automotive Board modify or terminate that plan. EXECUTIVE COMPENSATION The following table shows the compensation paid for 1998 by Tenneco to: (1) the person who will become the Chief Executive Officer of Automotive upon the spin-off; and (2) each of the persons who will be included among the next three most highly compensated executive officers of Automotive upon the spin-off, based on 1998 compensation, other than the Chief Executive Officer. The table shows amounts paid to these persons for all services provided to Tenneco and its subsidiaries. Messrs. Donovan and Jackson had no compensation from Tenneco and its subsidiaries prior to 1999. 149 151 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION ----------------------- -------------------------------------- RESTRICTED OTHER ANNUAL STOCK ALL OTHER NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION(2) AWARDS(3) OPTIONS(4) COMPENSATION(5) --------------------------- --------- -------- --------------- ---------- ---------- --------------- Mark P. Frissora.................... $252,300 $130,000 $ 31,234 $450,720 35,000 $ 9,393 Chief Executive Officer Richard P. Schneider................ $216,310 $ 80,000 $ 39,169 -- 15,000 $12,683 Senior Vice President -- Global Administration Mark A. McCollum.................... $211,800 $ 75,000 $110,678 -- 15,000 $ 584 Senior Vice President and Chief Financial Officer David G. Gabriel.................... $182,353 $ 60,000 $ 15,720 $187,800 10,000 $ 7,288 Senior Vice President and General Manager -- North American Aftermarket
- --------------- (1) Includes base salary plus amounts paid in lieu of matching contributions to the Tenneco Thrift Plan. (2) Includes amounts attributable to: (a) the value of personal benefits provided by Tenneco to executive officers, such as the personal use of Tenneco-owned property, and relocation expenses; (b) reimbursement for taxes; and (c) amounts paid as dividend equivalents on performance share equivalent units ("Dividend Equivalents"). The amount of each personal benefit that exceeds 25% of the estimated value of the total personal benefits provided by Tenneco, reimbursement for taxes, and amounts paid as Dividend Equivalents to the individuals named in the table for 1998 was as follows: $1,013 for reimbursement of taxes; $8,760 in Dividend Equivalents and $20,000 perquisite allowance for Mr. Frissora; $3,950 for reimbursement of taxes, $10,200 in Dividend Equivalents and $20,000 perquisite allowance for Mr. Schneider; $58,946 in relocation expenses, $20,745 for reimbursement of taxes, $8,400 in Dividend Equivalents and $20,000 perquisite allowance for Mr. McCollum; and $3,720 in Dividend Equivalents and $12,000 perquisite allowance for Mr. Gabriel. (3) Includes the dollar value of grants of restricted shares based on the price of Tenneco common stock on the date of grant. At December 31, 1998, Messrs. Frissora, Schneider, McCollum and Gabriel held 19,300; 11,500; 7,000; and 8,100 restricted shares and/or performance share equivalent units, respectively. The value at December 31, 1998, based on a per share/equivalent unit price of $34.063 on that date, of all restricted shares/performance units held was $657,416 for Mr. Frissora, $391,725 for Mr. Schneider, $238,441 for Mr. McCollum, and $275,910 for Mr. Gabriel. Generally, restricted shares and performance share equivalent units will be vested prior to the spin-off. Dividends/Dividend Equivalents will be paid on the restricted shares/ performance share equivalent units held by each individual. (4) In connection with the spin-off, options will be adjusted so that the options immediately after the spin-off will have equivalent economic terms to the options immediately before the spin-off. (5) Includes amounts attributable during 1998 to benefit plans of Tenneco as follows: (a) The amounts contributed pursuant to Tenneco's Thrift Plan for the accounts of Messrs. Frissora, Schneider and Gabriel were $6,400, $5,013 and $5,000, respectively. (b) The dollar values paid by Tenneco for insurance premiums under the Tenneco group life insurance plan (including dependent life) for Messrs. Frissora, Schneider, McCollum, and Gabriel were $2,993, $7,670, $584, and $2,288, respectively. Automotive anticipates that, at the time of the spin-off, Mr. Frissora's annual salary will be increased to $580,000 and that his bonus target after the spin-off will be increased. Bonus targets for Messrs. Schneider, McCollum and Gabriel have been increased on a prorated basis for 1999. See also "-- Termination of Employment and Change-in-Control Arrangements." Automotive also anticipates making a grant of stock options immediately following the spin-off. This grant is intended to represent a three-year award. Messrs. Frissora, Schneider, McCollum, Donovan, Jackson and Gabriel are expected to receive options to purchase 375,000, 90,000, 120,000, 90,000, 90,000 and 75,000 shares of Automotive common stock, respectively, after giving effect to a proposed one-for-five reverse stock split. Automotive anticipates that in 2000, Messrs. Frissora, Schneider, McCollum, Donovan, Jackson and Gabriel will be granted 25,000, 5,500, 7,000, 5,500, 5,500 and 5,000 performance share equivalent units, respectively, after giving effect to a proposed one-for-five reverse stock split. 150 152 OPTIONS GRANTED IN 1998 The following table shows the number of options to purchase Tenneco common stock granted during 1998 to the persons named in the Summary Compensation Table above.
PERCENT OF SHARES OF TOTAL COMMON STOCK OPTIONS GRANTED UNDERLYING TO TENNECO EMPLOYEES EXERCISE EXPIRATION GRANT DATE NAME OPTIONS GRANTED(#)(1) IN 1998(%) PRICE($)(2) DATE PRESENT VALUE(3) ---- --------------------- -------------------- ----------- ---------- ---------------- Mr. Frissora......... 35,000 2.0% $36.63 7/21/08 $360,150 Mr. Schneider........ 15,000 .9% $36.63 7/21/08 $154,350 Mr. McCollum......... 15,000 .9% $36.63 7/21/08 $154,350 Mr. Gabriel.......... 10,000 .5% $36.63 7/21/08 $102,900
- --------------- (1) In connection with the spin-off, the Tenneco stock options held by the persons listed above will be adjusted so that the options immediately after the spin-off will have equivalent economic terms to the options immediately before the spin-off. (2) All options were granted with exercise prices equal to 100% of the fair market value of a share of Tenneco common stock on the date of grant. (3) The Black-Scholes valuation was performed using the following assumptions: 25.6% volatility, 5.7% risk free interest rate, 3.2% expected dividend rate and 10 year option life. OPTIONS AT 1998 YEAR-END The following table shows the number of options to purchase Tenneco common stock held at December 31, 1998 by the persons named in the Summary Compensation Table above. No Tenneco options were exercised in 1998, and there were no in-the-money Tenneco options as of December 31, 1998.
TOTAL NUMBER OF UNEXERCISED OPTIONS HELD AT DECEMBER 31, 1998(1) ---------------------------- NAME EXERCISABLE UNEXERCISABLE ---- ----------- ------------- Mr. Frissora................................................ 8,291 65,495 Mr. Schneider............................................... 9,180 57,862 Mr. McCollum................................................ 22,476 49,583 Mr. Gabriel................................................. 5,894 23,346
- --------------- (1) In connection with the spin-off, the Tenneco stock options held by the persons listed above will be adjusted so that the options immediately after the spin-off will have equivalent economic terms to the options immediately before the spin-off. LONG-TERM INCENTIVE PLANS PERFORMANCE SHARE EQUIVALENT UNIT AWARDS IN 1998 The following table shows information concerning performance-based awards made during 1998 to the persons named in the Summary Compensation Table above.
NUMBER OF SHARES, PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER UNITS OR OTHER PERIOD NON-STOCK PRICE-BASED PLANS(1) OTHER UNTIL MATURATION --------------------------------------- NAME RIGHTS(1)(2) OR PAYOUT(3) THRESHOLD(4) TARGET(4) MAXIMUM(4) ---- ----------------- ---------------- ------------ --------- ---------- Mr. Frissora.................. 5,000 4 years 25% 100% 150% Mr. Schneider................. 4,500 4 years 25% 100% 150% Mr. McCollum.................. 3,500 4 years 25% 100% 150% Mr. Gabriel................... 2,000 4 years 25% 100% 150%
- --------------- (1) Estimated future payouts are based on earnings per share ("EPS") from continuing operations; however, generally performance share equivalent units will be deemed to be earned at the target level and vested prior to the spin-off. 151 153 (2) Each performance share equivalent unit represents one share of Tenneco's common stock that may be earned under this award and the number of performance share equivalent units listed in this column represents the maximum number of performance share equivalent units that may be earned under this award. (3) Performance share equivalent units are earned at the rate of 25% per year based on achievement of annual EPS goals; however, generally performance share equivalent units will be deemed to be earned at the target level and vested prior to the spin-off. (4) Represents maximum performance share equivalent units earned where the goals were consistently within the indicated performance range on an individual year and accumulated four-year basis; however, generally performance share equivalent units will be deemed to be earned at the target level and vested prior to the spin-off. PENSION PLAN TABLE The following table shows the aggregate estimated annual benefits payable upon normal retirement pursuant to the Tenneco Retirement Plan and the Tenneco Inc. Supplemental Executive Retirement Plan to persons in specified remuneration and years of credited participation classifications. In connection with the spin-off, Packaging will become the sponsor of the Tenneco Retirement Plan. Automotive expects to adopt a salaried defined benefit pension plan patterned after the Tenneco Retirement Plan. The Automotive plan will count service prior to the spin-off for all purposes, including benefit accrual, but there will be an offset for benefits accrued under the Tenneco Retirement Plan. Therefore, as to Automotive employees, the benefits described in the table will be provided by a combination of payments from the Tenneco Retirement Plan and the Automotive plan. Automotive also expects to adopt plans similar to the Tenneco Inc. supplemental pension plan. Automotive also expects to adopt a key executive pension plan covering executive officers which will call for benefits commencing at age 55 of 4% of compensation (salary and bonus) per year of service up to a maximum of 50%, reduced by payments under all other Automotive qualified and non-qualified defined benefit pension plans.
YEARS OF CREDITED PARTICIPATION ANNUAL ------------------------------------------------------------------------- REMUNERATION 5 10 15 20 25 30 35 - ------------ - -- -- -- -- -- -- $250,000 $19,642 $39,285.. $ 58,928 $ 78,571 $ 98,214 $117,857 $137,500 $300,000 $23,571 $47,142.. $ 70,714 $ 94,285 $117,857 $141,428 $165,000 $350,000 $27,500 $55,000.. $ 82,500 $110,000 $137,500 $165,000 $192,500 $400,000 $31,428 $62,857.. $ 94,285 $125,714 $157,142 $188,571 $220,000 $450,000 $35,357 $70,714.. $106,071 $141,428 $176,785 $212,142 $247,500 $500,000 $39,285 $78,571.. $117,857 $157,142 $196,428 $235,714 $275,000 $550,000 $43,214 $86,428.. $129,642 $172,857 $216,071 $259,285 $302,500 $600,000 $47,142 $94,285.. $141,428 $188,571 $235,714 $282,857 $330,000 $650,000 $51,071 $102,142.. $153,214 $204,285 $255,357 $306,428 $357,500 $700,000 $55,000 $110,000.. $165,000 $220,000 $275,000 $330,000 $385,000
- --------------- 1. The benefits shown above are computed as a straight life annuity and are based on years of credited participation and the employee's average compensation, which is comprised of salary and bonus. These benefits are not subject to any deduction for Social Security or other offset amounts. The years of credited participation for Messrs. Frissora, Schneider, McCollum and Gabriel are 2, 4, 4 and 4, respectively. See the Summary Compensation Table above for salary and bonus information for these individuals. 2. If Mr. Frissora completes 10 years of service in the period commencing January 1, 1999, he will be entitled to benefits commencing at age 55 of at least 40% of his average salary plus bonus determined over a three-year period. COMPENSATION OF DIRECTORS Fee Structure. Following the spin-off, each director who is not also an employee of Automotive or its subsidiaries, an "outside director," will be paid a yearly retainer fee of $35,000 for service on the Automotive Board of Directors. In general, 100% of that fee will be paid in the form of stock-settled common stock equivalents, (the "directors' stock equivalents") as described below. A director may elect, however, to have up to 40%, or $14,000, of the fee paid in cash. These outside directors will also receive cash attendance fees and committee chair and membership fees, and reimbursement of their expenses for attending meetings of the Board of Directors. Outside directors will receive $1,000 for each meeting of the Board of Directors attended, and each one who serves as a Chairman of the Audit Committee or the 152 154 Compensation/Nominating/Governance Committee will be paid a fee of $7,000 per chairmanship. Outside directors who serve as members of these committees will be paid $4,000 per committee membership. Members of the Three-year Independent Director Evaluation Committee will receive $1,000 plus expenses for each meeting of that committee attended. Common Stock Equivalents/Options. As described above, all or a portion of an outside director's retainer fee will be paid in common stock equivalent units. These directors' stock equivalents will be payable in shares of Automotive common stock after an outside director ceases to serve as a director of Automotive. Final distribution of these shares may be made either in a lump sum or in installments over a period of years. The directors' stock equivalents will be issued at 100% of the fair market value on the date of the grant. Each outside director will also receive an annual grant of an option to purchase up to 5,000 shares of Automotive common stock and 1,000 performance share equivalent units as additional incentive compensation. Directors options: (a) will be granted with per share exercise prices equal to 100% of the fair market value of a share of Automotive common stock on the day the option is granted; (b) will have terms of ten years; and (c) will fully vest six months from the grant date. Once vested, the directors options will be exercisable at any time during the option term. Automotive expects that restricted shares of Tenneco common stock and directors' stock equivalents held by outside directors will be vested prior to the completion of the spin-off, and the directors will be paid an amount in cash to defray taxes incurred on that vesting. Deferred Compensation Plan. Automotive will have a voluntary deferred compensation plan for outside directors. Under the plan, an outside director may elect, prior to commencement of the next calendar year, to have some or all of the cash portion, that is, up to 40% or $14,000, of his or her retainer fee and some or all of his or her meeting fees credited to a deferred compensation account. The plan will provide these directors with various investment options. The investment options will include stock equivalent units of Automotive common stock, which may be paid out in either cash or shares of Automotive common stock. Restricted Stock. In satisfaction of residual obligations of Automotive under the discontinued retirement plan for directors, Ms. Eickhoff and Mr. Andrews will receive a yearly grant of $15,400 in value of restricted shares of Automotive common stock. The restricted shares may not be sold, transferred, assigned, pledged or otherwise encumbered and are subject to forfeiture if Ms. Eickhoff or Mr. Andrews ceases to serve on the Board prior to the expiration of the restricted period. This restricted period ends upon his or her normal retirement from the Board, unless he or she is disabled, dies, or the Compensation/Nominating/Governance Committee of the Board, at its discretion, determines otherwise. During the restricted period, Ms. Eickhoff and Mr. Andrews will be entitled to vote the shares and receive dividends. TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Automotive will maintain a key executive change-in-control severance benefit plan similar to the existing Tenneco plan and incorporating some provisions of the benefits protection trust. The purpose of the plan is to enable Automotive to continue to attract, retain and motivate highly qualified employees by eliminating, to the maximum practicable extent, any concern on the part of such employees that their job security or benefit entitlements will be jeopardized by a "change-in-control" of Automotive, as that term will be defined in the plan. The plan will be designed to achieve this purpose through the provision of severance benefits for key employees and officers whose positions are terminated following a change-in-control as provided in the plan. Under the plan, Automotive expects that Messrs. Frissora, Schneider, McCollum and Gabriel would have become entitled to receive payments from Automotive in the amount of $1,575,000; $1,295,001; $1,428,999 and $924,999, respectively, had their positions been terminated on August 31, 1999 following a change-in-control, based on their current 1999 salaries of $400,000, $315,000, $315,000 and $235,000, respectively. In addition, restricted shares held in the name of those individuals under restricted stock plans would have automatically reverted to Automotive, and Automotive would have been obliged to pay those individuals the fair market value of those restricted shares. Their performance share equivalent units would also have been fully vested and paid. The spin-off does not constitute a "change-in-control" of Tenneco for purposes of Tenneco's current or new change-in-control severance 153 155 benefits plans or of Automotive for purposes of the change-in-control severance benefits plans. The Tenneco benefits protection trust and the existing rabbi trust will be terminated prior to the spin-off. Other than in connection with a change-in-control, Automotive has agreed that if Mr. Frissora's employment is terminated other than for death, disability or non-performance of duties, he will be paid two times the total of his current salary and his bonus for the immediately preceding year, all outstanding stock-based awards would be vested, subject to Board approval, and his stock options will remain exercisable for at least 90 days. Automotive has agreed to provide Mr. Schneider severance benefits similar to those with respect to Mr. Frissora, except he would be paid one and one-half times the total of his current salary plus his bonus for the immediately preceding year. Mr. Donovan receives an annual salary of $290,000. His target bonus is $150,000 and he will be included in the group of executives who qualify for the benefits described above with respect to a change-in-control. Mr. Jackson receives an annual salary of $250,000. His target bonus is $150,000 and he will be included in the group of executives who qualify for the benefits described above with respect to a change-in-control. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During fiscal year 1998, Tenneco paid the firm Eickhoff Economics, Inc., of which Ms. Eickhoff is the sole owner, approximately $25,000 for financial consulting services. These services have not been and will not be provided in 1999. Upon the spin-off, Messrs. Frissora, Schneider, McCollum and Jackson will be granted Automotive restricted stock with a value on the grant date equal to the pre-spin-off value of 35,000 shares of Tenneco common stock as to Mr. Frissora and 15,000 shares of Tenneco common stock as to each of the others. One-third of such restricted stock will vest each year following the spin-off assuming that the grantee remains employed through that date. During fiscal year 1999, Mr. Frissora was indebted to Tenneco. Such indebtedness was incurred in connection with his relocation and all amounts outstanding are secured by a subordinated mortgage note without interest. Principal will only be payable in full upon termination of his employment prior to 2003 except for a termination without cause or following a change-in-control. The approximate aggregate amount outstanding is $400,000. During 1999, Mr. McCollum was indebted to an affiliate of Tenneco in connection with a relocation loan of approximately $400,000. In July, 1999, that obligation was canceled. During fiscal 1998, Tenneco and its subsidiaries paid the law firm of Jenner & Block, of which Mr. Donovan was a partner, approximately $13.5 million for legal services, a substantial portion of which related to work for Packaging. For additional information concerning certain relationships between Tenneco and members of Tenneco's existing management, see the Tenneco Inc. Proxy Statement for the Annual Meeting of Shareowners held on May 11, 1999 which is incorporated in this document by reference. See also "Description of Packaging -- Management -- Certain Relationships and Related Transactions." AUTOMOTIVE BENEFIT PLANS FOLLOWING THE SPIN-OFF Automotive will continue its sponsorship of the defined benefit pension plans covering hourly employees. Automotive expects to adopt a salaried defined benefit pension plan patterned after the Tenneco Retirement Plan, which will count service prior to the spin-off for all purposes including benefit accrual, but there will be an offset for benefits accrued under the Tenneco Retirement Plan. Automotive will adopt thrift plans covering salaried and hourly employees to which the employees' account balances in the existing Tenneco Thrift Plan will be transferred. The Automotive thrift plans will be 401(k) plans, and there will be employer contributions. 154 156 Automotive will adopt two non-qualified deferred compensation plans patterned after the existing Tenneco deferred compensation plans and supplemental defined benefit pension plan. These plans will be unfunded. Automotive will continue the executive incentive compensation plan to provide annual cash bonuses to eligible employees. Participation in the existing Tenneco employee stock purchase plan has been suspended. Automotive expects to permit resumed participation in that plan after the spin-off. Automotive will continue the 1996 Tenneco Inc. Stock Ownership Plan. Tenneco options which will continue to be held by Automotive personnel will be adjusted in connection with the spin-off to maintain economic equivalent terms. Shares underlying options previously held by non-Automotive personnel will become available for regrant at the time of the spin-off. NEW FINANCING In connection with the spin-off, Automotive (1) has entered into a new senior secured credit facility and (2) intends to issue new senior subordinated debt. Automotive plans to use the proceeds of the senior subordinated debt issue and borrowings of approximately $1,173 million under the new senior credit facility to fund a portion of the debt realignment. See "The Spin-off -- Debt Realignment." A definitive agreement for the issuance and sale of the senior subordinated notes is being negotiated and has not been completed. Accordingly, the terms of such arrangement described below are preliminary and may change as a result of the negotiation of a definitive agreement. In addition, funding under both of the financings described below will be subject to the satisfaction of numerous conditions. NEW CREDIT FACILITY Automotive has entered into a senior secured credit facility with a syndicate, or group, of banks and other financial institutions. The total available borrowing capacity under the senior secured credit facility is $1,550 million, including a $500 million revolving credit facility, with commitment terms ranging from six to eight and one-half years. Repayment. The terms of the senior secured credit facility require the revolving credit facility to be repaid on or before the date that is the sixth anniversary of the funding date. Prior to that date, funds may be borrowed, repaid and reborrowed without premium or penalty. The revolving credit facility will terminate in 2005. The term loans under the senior secured credit facility have varying maturities from six to eight and one-half years, a portion of which will be payable in quarterly installments beginning September 30, 2001 and the remainder of which will be payable at maturity. Guarantee; Security. Upon the spin-off, the senior credit facility will be guaranteed by each of Automotive's direct and indirect wholly-owned domestic subsidiaries. At that time, the senior credit facility will also be secured by a perfected security interest in (1) substantially all of the tangible and intangible assets of Automotive and its domestic subsidiaries, (2) the capital stock of Automotive's domestic subsidiaries, and (3) up to 66% of the capital stock of Automotive's first-tier foreign subsidiaries, excluding joint venture interests. Automotive expects that the collateral will be permanently released if Automotive achieves specified long-term debt ratings and a portion of the term loans have been paid in full. Covenants. The senior credit facility will require Automotive to maintain compliance with the following financial tests: - minimum interest coverage ratio, which is the ratio of consolidated earnings before interest expense, income taxes, minority interest, depreciation and amortization ("EBITDA") to consolidated cash interest expense; - minimum fixed charge coverage ratio, which is the ratio of consolidated EBITDA less consolidated capital expenditures to consolidated cash interest expense; and - maximum leverage ratio, which is the ratio of consolidated indebtedness to consolidated EBITDA. 155 157 In addition, the senior credit facility contains restrictions on Automotive's operations that are customary for similar facilities and transactions, including limitations on: (a) incurring additional liens; (b) liquidations and dissolutions; (c) incurring additional indebtedness or guarantees; (d) sales or other dispositions of assets; (e) capital expenditures; (f) dividends; (g) mergers and consolidations; (h) loans and advances; (i) prepayments and modifications of subordinated and other debt instruments; and (j) sales and leasebacks. Interest. The borrowings under the senior credit facility will bear interest at floating rates, generally based, at Tenneco's option, on a base rate defined in the senior secured credit facility or the Eurodollar rate, in each case plus an applicable margin that will depend on Automotive's leverage ratio. Mandatory Prepayments. The senior secured credit facility requires Automotive to prepay the term loan facilities and reduce commitments under the revolving credit facility with: - 100% of the net proceeds of any issuance or incurrence of indebtedness after the funding date by Automotive or its subsidiaries, subject to exceptions for permitted debt; - 50% of the net proceeds of any issuance of equity by Automotive or its subsidiaries, subject to some exceptions; - 100% of the net proceeds of any sale or other disposition by Automotive or its subsidiaries of any assets, unless such proceeds are reinvested in assets useful in Automotive's business, with some exceptions; - 75% of excess cash flow, as defined in the senior secured credit facility; and - 100% of the net proceeds of casualty insurance, condemnation awards or other recoveries, to the extent the proceeds are not reinvested in other assets useful in Automotive's business, subject to some exceptions. The mandatory prepayment percentages will be reduced if Automotive achieves certain performance measures established in the facility. NEW SUBORDINATED DEBT In connection with the spin-off, Automotive intends to offer $500 million of senior subordinated notes in a private placement for resale pursuant to Rule 144A under the Securities Act of 1933. The senior subordinated notes will be general unsecured obligations of Automotive, junior to all senior indebtedness of Automotive. While the interest rate, interest payment dates, maturity and other material terms of the senior subordinated notes have not been finalized, Automotive expects that the senior subordinated notes will have terms customary for senior subordinated note offerings of issuers similar to Automotive. Automotive also expects that the senior subordinated notes will: - mature in 10 years; - be guaranteed by all of Automotive's material domestic wholly-owned subsidiaries; - have registration rights; - be redeemable at the option of the holders upon a change of control; and - include customary limitations on Automotive for this type of financing, including limitations on indebtedness, liens, dividends, stock repurchases, investments, assets sales, mergers, subsidiary stock issuances and affiliate transactions. 156 158 U.S. FEDERAL INCOME TAX CONSEQUENCES The following discussion is a summary of U.S. federal income tax consequences of the exchange offers and consent solicitation to holders of original securities. This discussion is the opinion of Jenner & Block, tax counsel to Tenneco and Packaging in connection with the exchange offers, based on United States federal income tax laws as now in effect. This discussion does not discuss all aspects of U.S. federal income taxation that may be relevant to you in light of the your particular circumstances. For example, special rules may apply to you if you are one of the following types of holders: - an insurance company, - a tax-exempt organization, - an employee stock ownership plan, - a bank, broker, dealer or financial institution, - a holder that holds original securities as part of a position in a "straddle" or as part of a "hedging" or "conversion" transaction for U.S. federal income tax purposes, - a holder that has a "functional currency" other than the United States dollar, or - a taxpayer that is not a citizen or resident of the United States, or that is a foreign corporation, foreign partnership or foreign estate or trust as to the United States. In addition, the discussion does not consider the effect of any foreign, state, local, or other tax laws, or any United States tax consequences, such as estate or gift tax, other than income tax consequences, that may be applicable to you. Further, this summary assumes that you hold the original securities as "capital assets" within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"). "Capital assets" are generally property held for investment. This summary is based on the Code and applicable Treasury Regulations promulgated and proposed under the Code, rulings, administrative pronouncements and decisions as of the date of this document, all of which are subject to change or differing interpretations at any time with possible retroactive effect. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES TO YOU OF THE EXCHANGE OFFERS AND CONSENT SOLICITATION. TAX CONSIDERATIONS IF YOU EXCHANGE New Securities. In general, if you tender your original securities in the exchange offers, you should not recognize any gain or loss as a result of your receipt of new securities, except on the receipt of accrued and unpaid interest on the original securities and except with respect to cash received in lieu of a fractional interest in new securities. Your basis of the new securities immediately after the exchange offers will be the same as the basis of your original securities exchanged for those new securities, which will not include any basis allocated to a fractional interest in new securities for which cash is received. The holding period of the new securities received by you in the exchange offers will include the period during which you held the original securities exchanged for those new securities, assuming the original securities were held as capital assets. No ruling has been requested from the Internal Revenue Service regarding the consequences of the exchange offers and, accordingly, Tenneco and Packaging cannot assure you that the IRS will not take a view contrary to those expressed above. The above conclusions are based on the assumption, among others, that the original securities and new securities are "securities" for federal income tax purposes. Whether a debt instrument constitutes a security for U.S. federal income tax purposes depends on the terms, conditions and other facts and circumstances relating to the instrument. Prominent factors that the courts have relied upon in making this determination include: (a) the term to maturity of the debt; (b) the collateral securing the debt; (c) the degree of subordination of the debt; (d) the ratio of debt to equity of the issuer; (e) the riskiness of the business of the issuer; and (f) the negotiability of the instrument. Generally, notes with terms to maturity of ten years or more, such as some of the original securities and some of the new securities, are treated as 157 159 securities for federal income tax purposes. Securities with terms to maturity of five years or less are generally not treated as securities for federal income tax purposes. Nevertheless, the IRS has taken the position that while the term to maturity is an important factor, the determination of whether a debt instrument is a security should be based upon an evaluation of the overall nature of the debt, including the degree of participation and continuing interest in the business of the debtor obligated for the debt. Some of the series of original securities and new securities will have terms to maturity of ten years or more and the other series of original securities and new securities will have terms to maturity between five and ten years. None of the original securities or new securities will have terms to maturity of five years or less. Based on all of the factors discussed above, in the opinion of Jenner & Block, both the original securities and the new securities should be treated as securities for U.S. federal income tax purposes. However, due to the inherently factual nature of the determination of whether a debt instrument is a security for tax purposes, the IRS or a court could determine that the original securities or the new securities do not constitute securities. The above conclusions are also based on the assumption that the spin-off will qualify as a tax-free distribution under Section 355 of the Code. Tenneco has received a letter ruling from the IRS to that effect. The letter ruling is based on various factual representations and assumptions. If any of these factual representations or assumptions are incomplete or untrue in a material respect, or the facts on which the letter ruling is based are materially different from the facts at the time of the spin-off, the spin-off could become taxable to Tenneco, its stockholders and its other securityholders. If the spin-off does not qualify as a tax-free distribution under Section 355 of the Code, other than as a result of a 50% ownership shift in Automotive or Packaging, or if either the original securities or new securities are determined not to be securities for U.S. federal income tax purposes, you would recognize capital gain or loss if you participate in the exchange offers equal to the difference between the issue price of the new securities and your tax basis of the original securities exchanged. Any gain may be subject to ordinary income treatment if you acquired the original securities at a market discount. The "issue price" of the new securities will be equal to (a) the fair market value of the original securities or the new securities, if either the original securities or the new securities are traded on an established market, or (b) the stated principal amount of the new securities, if neither the original securities nor the new securities are traded on an established market. If either the original securities or the new securities are traded on an established market, the new securities may have original issue discount equal to the difference between their issue price and their stated principal amount. You would include any original issue discount in income as it accrued on the basis of a constant yield to the maturity date, and thus would be required to include amounts in income prior to the date such income is actually paid in cash. If you tender your original securities prior to the expiration of the consent solicitation, it is possible that a portion of the new securities will be treated as a consent payment. If a portion of the new securities is treated as a consent payment, it would result in ordinary income to you. Cash received by you in lieu of a fractional interest in new securities should be treated as received in exchange for a fractional interest received in exchange for your original securities, and you should generally recognize capital gain or loss for federal income tax purposes measured by the difference between the amount of cash received and the tax basis of the original securities allocable to such fractional interest. Such gain or loss should be a long-term capital gain or loss if the holding period of the original securities exchanged is greater than one year at the time of the exchange. An exception to the capital gain treatment described above applies to a holder who holds securities with "market discount." Market discount is the amount by which the holder's basis in his, her or its securities immediately after the acquisition is exceeded by the stated redemption price at maturity of the securities. Generally, a holder who purchased his, her or its securities at market discount will be required to treat as ordinary income the lesser of the gain realized on the receipt of cash in lieu of a fractional interest in new securities or the market discount that accrued while the original securities were held by the holder, unless the holder made an election to include accrued market discount in income currently. 158 160 Accrued Interest. Any portion of the payment received by you which is attributable to accrued interest on the original securities will be taxable as ordinary income in accordance with your method of accounting for U.S. federal income tax purposes. Amortizable Bond Premium. If you tender your original securities after the consent solicitation expires, the tax basis of your new securities may exceed the amount payable at maturity of the new securities. In general, such excess will be treated as "amortizable bond premium" that you may elect, under Section 171 of the Code, to amortize as an offset to interest income under the constant yield method over the period from the date of the acquisition of the new securities to the maturity date of the new securities, subject to special rules for early call provisions. If a holder of the new securities makes an election to amortize bond premium, the tax basis of the new securities must be reduced by the annual amount of the aggregate amortization deductions allowable for the bond premium. An election to amortize bond premium applies to all obligations with amortizable bond premium held by the electing holder at the beginning of the first taxable year to which the election applies or later acquired by the holder, and is irrevocable without the consent of the IRS. TAX CONSIDERATIONS IF YOU DO NOT EXCHANGE If you do not exchange your original securities in the exchange offers you should not recognize gain or loss for U.S. federal income tax purposes unless the supplemental indenture with respect to the original indenture, providing for the proposed amendments, becomes effective and is deemed to constitute a significant modification of the original securities under Section 1001 of the Code. The changes in the terms of the original securities to be effected by the supplemental indenture should not constitute a significant modification under the applicable Treasury Regulations, and should not result in a deemed exchange of securities for U.S. federal income tax purposes. Accordingly, if you hold original securities and elect to retain them, you should not recognize gain or loss as a result of the changes to the terms of the original securities effected by the supplemental indenture. Alternatively, even if the supplemental indenture were to result in a deemed exchange of securities for U.S. federal income tax purposes, if you do not tender your original securities in the exchange offers, you should not recognize gain or loss on the deemed exchange since the deemed exchange should qualify as a tax-free recapitalization, assuming the original securities constitute securities for federal income tax purposes. BACKUP WITHHOLDING Under the U.S. federal income tax backup withholding provisions of the Code and applicable Treasury Regulations, you will be subject to backup withholding at the rate of 31% with respect to interest received by you unless you: (a) are a corporation or come within another exempt category and, when required, demonstrate this fact; or (b) provide a correct taxpayer identification number to the exchange agent, certify as to no loss of exemption from backup withholding, and otherwise comply with the applicable requirements of the backup withholding rules. Any amount withheld under these rules will be credited against your U.S. federal income tax liability. To prevent backup withholding with respect to the payment of interest, you must complete and sign a substitute Form W-9, which is included as part of the consent and letter of transmittal, and return it to the exchange agent. If the exchange agent is not provided with the correct taxpayer identification number, you may also be subject to a penalty imposed by the IRS. If withholding results in an overpayment of taxes, a refund may be obtained by you from the IRS. LEGAL MATTERS Legal matters regarding the authorization and issuance of the new securities will be passed upon for Tenneco and Packaging by Jenner & Block, Chicago, Illinois. Matters regarding the federal income tax treatment of the exchange offers and consent solicitation are also being passed upon for Tenneco and Packaging by Jenner & Block. Theodore R. Tetzlaff, General Counsel of Tenneco and a partner of Jenner & Block, beneficially owns 188,406 shares of Tenneco common stock. This amount includes options to purchase 89,871 shares of Tenneco common stock, which options are either presently exercisable or 159 161 exercisable within 60 days. Timothy R. Donovan, a partner of Jenner & Block through September 1999, was named Senior Vice President and General Counsel of Automotive in August 1999. Legal matters relating to exchange offers and consent solicitation will be passed upon for the dealer managers by Cahill Gordon & Reindel, a partnership including a professional corporation, New York, New York. Cahill Gordon & Reindel has in the past represented and continues to represent Tenneco in various matters. EXPERTS The following financial statements and schedules included or incorporated by reference in this document or elsewhere in this registration statement to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen LLP, independent public accountants, and are included in this document in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports: (a) Tenneco Inc. and Consolidated Subsidiaries included in Tenneco's Current Report on Form 8-K dated August 20, 1999, incorporated by reference in this document; and (b) The Businesses of Tenneco Packaging, included in this document. 160 162 INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE OF THE BUSINESSES OF TENNECO PACKAGING
PAGE ---- Report of independent public accountants.................... F-2 Combined statements of income for each of the three years in the period ended December 31, 1998, and the six months ended June 30, 1999 (unaudited) and 1998 (unaudited)...... F-3 Combined balance sheets -- December 31, 1998 and 1997, and June 30, 1999 (unaudited)................................. F-4 Combined statements of cash flows for each of the three years in the period ended December 31, 1998, and the six months ended June 30, 1999 (unaudited) and 1998 (unaudited)............................................... F-5 Statements of changes in combined equity for each of the three years in the period ended December 31, 1998, and six months ended June 30, 1999 (unaudited).................... F-6 Statements of comprehensive income for each of the three years in the period ended December 31, 1998, and the six months ended June 30, 1999 (unaudited) and 1998 (unaudited)............................................... F-7 Notes to combined financial statements...................... F-8 Financial statement schedule -- Valuation and Qualifying Accounts.................................................. S-1
F-1 163 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Tenneco Inc.: We have audited the accompanying combined balance sheets of the Businesses of Tenneco Packaging (see Note 1) as of December 31, 1998 and 1997, and the related combined statements of income, cash flows, changes in combined equity and comprehensive income for each of the three years in the period ended December 31, 1998. These combined financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Businesses of Tenneco Packaging as of December 31, 1998 and 1997, and the results of their combined operations and cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 3 to the combined financial statements, in the fourth quarter of 1997, the Businesses of Tenneco Packaging changed their method of accounting for certain costs incurred in connection with information technology transformation projects. Our audits were made for the purpose of forming an opinion on the basic combined financial statements taken as a whole. The supplemental schedule listed in the index to the combined financial statements and schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic combined financial statements. The supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic combined financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic combined financial statements of the Businesses of Tenneco Packaging taken as a whole. ARTHUR ANDERSEN LLP Houston, Texas July 2, 1999 F-2 164 THE BUSINESSES OF TENNECO PACKAGING COMBINED STATEMENTS OF INCOME (MILLIONS EXCEPT PER SHARE AMOUNTS)
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, -------------------------- -------------------------- 1998 1997 1996 1999 1998 ---- ---- ---- ---- ---- (UNAUDITED) REVENUES Net sales and operating revenues -- Specialty................................. $2,785 $2,553 $1,987 $1,404 $1,361 Other..................................... 6 10 -- -- 10 ------ ------ ------ ------ ------ 2,791 2,563 1,987 1,404 1,371 Gain (loss) on sale of businesses and assets, net....................................... (9) -- 15 (21) (1) Other income, net............................ 6 6 34 3 9 ------ ------ ------ ------ ------ 2,788 2,569 2,036 1,386 1,379 ------ ------ ------ ------ ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below).............................. 1,870 1,796 1,417 924 931 Engineering, research, and development....... 33 34 22 18 13 Selling, general, and administrative......... 427 270 232 206 174 Depreciation and amortization................ 175 163 131 94 88 ------ ------ ------ ------ ------ 2,505 2,263 1,802 1,242 1,206 ------ ------ ------ ------ ------ INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST........................ 283 306 234 144 173 Interest expense (net of interest capitalized)............................ 133 124 102 68 67 Income tax expense........................ 67 75 67 24 37 Minority interest......................... 1 1 -- -- -- ------ ------ ------ ------ ------ INCOME FROM CONTINUING OPERATIONS.............. 82 106 65 52 69 Income (loss) from discontinued operations, net of income tax................................ 57 21 71 (163) 37 ------ ------ ------ ------ ------ Income (loss) before extraordinary loss........ 139 127 136 (111) 106 Extraordinary loss, net of income tax.......... -- -- (2) (7) -- ------ ------ ------ ------ ------ Income (loss) before cumulative effect of change in accounting principle............... 139 127 134 (118) 106 Cumulative effect of change in accounting principle, net of income tax................. -- (38) -- (32) -- ------ ------ ------ ------ ------ NET INCOME (LOSS).............................. $ 139 $ 89 $ 134 $ (150) $ 106 ====== ====== ====== ====== ====== EARNINGS (LOSS) PER SHARE Basic earnings per share of common stock -- Continuing operations........................ $ .49 $ .63 $ .38 $ .31 $ .41 Discontinued operations...................... .34 .12 .42 (.98) .22 Extraordinary loss........................... -- -- (.01) (.04) -- Cumulative effect of change in accounting principle................................. -- (.23) -- (.19) -- ------ ------ ------ ------ ------ $ .83 $ .52 $ .79 $ (.90) $ .63 ====== ====== ====== ====== ====== Diluted earnings per share of common stock -- Continuing operations........................ $ .49 $ .63 $ .38 $ .31 $ .41 Discontinued operations...................... .34 .12 .42 (.98) .22 Extraordinary loss........................... -- -- (.01) (.04) -- Cumulative effect of change in accounting principle................................. -- (.23) -- (.19) -- ------ ------ ------ ------ ------ $ .83 $ .52 $ .79 $ (.90) $ .63 ====== ====== ====== ====== ======
The accompanying notes to combined financial statements are an integral part of these combined statements of income. F-3 165 THE BUSINESSES OF TENNECO PACKAGING COMBINED BALANCE SHEETS (MILLIONS)
DECEMBER 31, ---------------- JUNE 30, 1998 1997 1999 ---- ---- -------- (UNAUDITED) ASSETS Current assets: Cash and temporary cash investments....................... $ 7 $ 11 $ 18 Receivables -- Customer notes and accounts, net....................... 336 301 320 Affiliated companies................................... 44 74 20 Income taxes........................................... 15 36 7 Other.................................................. 52 10 28 Inventories............................................... 412 404 447 Deferred income taxes..................................... 6 41 46 Prepayments and other..................................... 45 47 26 ------ ------ ------ 917 924 912 ------ ------ ------ Other assets: Long-term notes receivable, net........................... 22 21 16 Goodwill and intangibles, net............................. 1,052 1,009 1,028 Pension assets............................................ 742 654 795 Other..................................................... 143 129 107 ------ ------ ------ 1,959 1,813 1,946 ------ ------ ------ Plant, property, and equipment, at cost..................... 2,057 1,856 2,025 Less -- Reserves for depreciation and amortization........ 501 398 530 ------ ------ ------ 1,556 1,458 1,495 ------ ------ ------ Net assets of discontinued operations....................... 366 423 133 ------ ------ ------ $4,798 $4,618 $4,486 ====== ====== ====== LIABILITIES AND COMBINED EQUITY Current liabilities: Short-term debt (including current maturities on long-term debt).................................................. $ 595 $ 158 $ 367 Payables -- Trade.................................................. 255 252 257 Affiliated companies................................... 6 6 100 Taxes accrued............................................. 13 12 14 Accrued liabilities....................................... 188 192 215 Other..................................................... 85 124 107 ------ ------ ------ 1,142 744 1,060 ------ ------ ------ Long-term debt.............................................. 1,312 1,492 1,494 ------ ------ ------ Deferred income taxes....................................... 291 270 380 ------ ------ ------ Postretirement benefits..................................... 163 114 149 ------ ------ ------ Deferred credits and other liabilities...................... 100 144 49 ------ ------ ------ Commitments and contingencies Minority interest........................................... 14 15 14 ------ ------ ------ Combined equity............................................. 1,776 1,839 1,340 ------ ------ ------ $4,798 $4,618 $4,486 ====== ====== ======
The accompanying notes to combined financial statements are an integral part of these combined balance sheets. F-4 166 THE BUSINESSES OF TENNECO PACKAGING COMBINED STATEMENTS OF CASH FLOWS (MILLIONS)
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, --------------------- --------------- 1998 1997 1996 1999 1998 ---- ---- ---- ---- ---- (UNAUDITED) OPERATING ACTIVITIES Income from continuing operations........................... $ 82 $ 106 $ 65 $ 52 $ 69 Adjustments to reconcile income from continuing operations to cash provided (used) by continuing operations -- Depreciation and amortization........................... 175 163 131 94 88 Deferred income taxes................................... 77 118 4 89 27 (Gain) loss on sale of businesses and assets, net....... 9 -- (15) 21 1 Allocated interest, net of tax.......................... 85 78 63 44 44 Changes in components of working capital -- (Increase) decrease in receivables................... 28 (1) (59) (103) 37 (Increase) decrease in inventories................... 8 (12) (5) (45) (5) (Increase) decrease in prepayments and other current assets............................................. (1) (30) 8 1 (5) Increase (decrease) in payables...................... (13) (44) 13 (44) (21) Increase (decrease) in taxes accrued................. (23) (36) 40 1 (6) Increase (decrease) in interest accrued.............. -- (1) (1) (1) -- Increase (decrease) in other current liabilities..... 35 (5) (8) (2) 9 Other................................................... (90) (38) 30 (90) (58) ----- ----- ----- ------- ----- Cash provided (used) by continuing operations............... 372 298 266 17 180 Cash provided (used) by discontinued operations............. 205 107 (3) (62) 108 ----- ----- ----- ------- ----- Net cash provided (used) by operating activities............ 577 405 263 (45) 288 ----- ----- ----- ------- ----- INVESTING ACTIVITIES Net proceeds related to the sale of discontinued operations................................................ -- 10 123 306 -- Net proceeds from sale of businesses and assets............. 22 14 23 28 12 Expenditures for plant, property, and equipment............. (194) (229) (216) (75) (101) Acquisitions of businesses and assets....................... (101) (285) (323) (2) (58) Expenditures for plant, property, and equipment and business acquisitions -- discontinued operations................... (203) (108) (169) (1,129) (51) Investments and other....................................... (38) (56) (107) 6 (23) ----- ----- ----- ------- ----- Net cash provided (used) by investing activities............ (514) (654) (669) (866) (221) ----- ----- ----- ------- ----- FINANCING ACTIVITIES Issuance of long-term debt.................................. 3 4 -- 1,760 2 Retirement of long-term debt................................ (18) (18) (7) (29) (14) Net increase (decrease) in short-term debt excluding current maturities on long-term debt.............................. 4 (78) (16) (1) 5 Cash contributions from (distributions to) Tenneco.......... (56) 331 422 (810) (59) ----- ----- ----- ------- ----- Net cash provided (used) by financing activities............ (67) 239 399 920 (66) ----- ----- ----- ------- ----- Effect of foreign exchange rate changes on cash and temporary cash investments................................ -- (1) (1) 2 -- ----- ----- ----- ------- ----- Increase (decrease) in cash and temporary cash investments............................................... (4) (11) (8) 11 1 Cash and temporary cash investments, beginning of period.... 11 22 30 7 11 ----- ----- ----- ------- ----- Cash and temporary cash investments, end of period.................................................... $ 7 $ 11 $ 22 $ 18 $ 12 ===== ===== ===== ======= ===== Cash paid during the period for interest.................... $ 6 $ 9 $ 8 $ 2 $ 4 Cash paid during the period for income taxes (net of refunds).................................................. $ 21 $ (68) $ 60 $ 17 $ 10 NON-CASH INVESTING AND FINANCING ACTIVITIES Common equity interest received related to the sale of containerboard operations................................. $ -- $ -- $ -- $ 194 $ -- Principal amount of long-term debt assumed by buyers of containerboard operations................................. $ -- $ -- $ -- $(1,760) $ --
- ------------------------- Note: Cash and temporary cash investments include highly liquid investments with a maturity of three months or less at the date of purchase. The accompanying notes to combined financial statements are an integral part of these combined statements of cash flows. F-5 167 THE BUSINESSES OF TENNECO PACKAGING STATEMENTS OF CHANGES IN COMBINED EQUITY (MILLIONS)
YEARS ENDED DECEMBER 31, -------------------------- SIX MONTHS ENDED 1998 1997 1996 JUNE 30, 1999 ---- ---- ---- ---------------- (UNAUDITED) Balance, January 1................................. $1,839 $1,843 $1,531 $1,776 Net income (loss)................................ 139 89 134 (150) Accumulated other comprehensive income (loss).... 22 (24) (7) (29) Allocated interest, net of tax................... 111 102 86 49 Change in allocated corporate debt............... (333) (549) (137) 573 Cash contributions from (distributions to) Tenneco....................................... (56) 331 422 (810) Noncash contributions from (distributions to) Tenneco....................................... 54 47 (186) (69) ------ ------ ------ ------ Balance, end of period............................. $1,776 $1,839 $1,843 $1,340 ====== ====== ====== ======
The accompanying notes to combined financial statements are an integral part of these statements of changes in combined equity. F-6 168 THE BUSINESSES OF TENNECO PACKAGING COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (MILLIONS)
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------------- ----------------------------- ----------------------------- ACCUMULATED ACCUMULATED ACCUMULATED OTHER OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME INCOME INCOME INCOME INCOME INCOME ------------- ------------- ------------- ------------- ------------- ------------- NET INCOME (LOSS)................. $139 $ 89 $134 ---- ---- ---- ACCUMULATED OTHER COMPREHENSIVE INCOME: CUMULATIVE TRANSLATION ADJUSTMENT Balance, January 1.............. $(21) $ 3 $10 Translation of foreign currency statements......... 24 24 (25) (25) (6) (6) Hedges of net investment in foreign subsidiaries........ -- -- 2 2 (2) (2) Income tax benefit (expense)................... -- -- (1) (1) 1 1 ---- ---- --- Balance, end of period.......... 3 (21) 3 ---- ---- --- ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT Balance, January 1.............. -- -- -- Additional minimum pension liability adjustment........ (4) (4) -- -- -- -- Income tax benefit (expense)................... 2 2 -- -- -- -- ---- ---- --- Balance, end of period.......... (2) -- -- ---- ---- --- Balance, end of period............ $ 1 $(21) $ 3 ==== ---- ==== ---- === ---- Other comprehensive income (loss).......................... 22 (24) (7) ---- ---- ---- COMPREHENSIVE INCOME (LOSS)....... $161 $ 65 $127 ==== ==== ====
SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------- 1999 1998 ----------------------------- ----------------------------- ACCUMULATED ACCUMULATED OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME INCOME INCOME INCOME ------------- ------------- ------------- ------------- (UNAUDITED) NET INCOME (LOSS)........................................... $(150) $106 ----- ---- ACCUMULATED OTHER COMPREHENSIVE INCOME: CUMULATIVE TRANSLATION ADJUSTMENT Balance, January 1........................................ $ 3 $(21) Translation of foreign currency statements.............. (29) (29) (5) (5) Hedges of net investment in foreign subsidiaries........ -- -- -- -- Income tax benefit (expense)............................ -- -- -- -- ---- ---- Balance, end of period.................................... (26) (26) ---- ---- ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT Balance, January 1........................................ (2) -- Additional minimum pension liability adjustment......... -- -- -- -- Income tax benefit (expense)............................ -- -- -- -- ---- ---- Balance, end of period.................................... (2) -- ---- ---- Balance, end of period...................................... $(28) $(26) ==== ----- ==== ---- Other comprehensive income (loss)........................... (29) (5) ----- ---- COMPREHENSIVE INCOME (LOSS)................................. $(179) $101 ===== ====
The accompanying notes to combined financial statements are an integral part of these combined statements of comprehensive income (loss). F-7 169 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying combined financial statements represent the financial position, results of operations, and cash flows for all of the Businesses of Tenneco Packaging ("Packaging") owned directly or indirectly by Tenneco Inc. ("Tenneco") and its subsidiaries (see "Control" below). Packaging includes the assets, liabilities, and operations of Tenneco's specialty packaging and paperboard packaging businesses as well as Tenneco's corporate and administrative service operations. Unless the context otherwise requires, the term "Tenneco" refers to: (i) for periods prior to the spin-off, as defined below, Tenneco's automotive and packaging businesses, and administrative service operations and (ii) for periods after the spin-off, Tenneco's automotive business. 2. STRATEGIC ALTERNATIVES ANALYSIS In July 1998, Tenneco's Board of Directors authorized management to develop a broad range of strategic alternatives which could result in the separation of the automotive, paperboard packaging, and specialty packaging businesses. As part of that strategic alternatives analysis, Tenneco has taken the following actions: - In January 1999, Tenneco reached an agreement to contribute the containerboard assets of its paperboard packaging segment to a new joint venture with an affiliate of Madison Dearborn Partners, Inc. The contribution to the joint venture was completed in April 1999. Tenneco received consideration of cash and debt assumption totaling approximately $2 billion and a 45 percent common equity interest in the joint venture (now 43 percent due to subsequent management equity issuances) valued at approximately $200 million. - In April 1999, Tenneco reached an agreement to sell the paperboard packaging segment's other assets, its folding carton operation, to Caraustar Industries. This transaction closed in June 1999. - Also in April 1999, Tenneco announced that its Board of Directors had approved the separation of its automotive and packaging businesses into two separate, independent companies. - In June 1999, Tenneco's Board of Directors approved a plan to sell Packaging's remaining interest in its containerboard joint venture. Packaging expects the sale to be completed before the spin-off discussed below. As a result of the decision to sell Packaging's remaining interest in the containerboard joint venture, Packaging's paperboard packaging segment is presented as a discontinued operation in the accompanying combined financial statements. Reference is made to Note 7 for information related to discontinued operations. The separation of Tenneco's automotive and packaging businesses will be accomplished by the spin-off of the common stock of Packaging to Tenneco shareowners (the "Spin-off"). At the time of the Spin-off, Packaging will include Tenneco's specialty packaging business, Tenneco's administrative services operations, and the remaining interest in the containerboard joint venture if the sale has not been completed. Tenneco and Packaging are, however, currently analyzing the alternatives with regard to the administrative services operations. Before the Spin-off, Tenneco will realign substantially all of its existing debt through some combination of tender offers, exchange offers, prepayments and other refinancings. The debt realignment will be financed by internally generated cash, borrowings by Tenneco under a new credit facility, the issuance by Tenneco of subordinated debt, and borrowings by Packaging under new credit facilities. The Spin-off is subject to conditions, including formal declaration of the Spin-off by the Tenneco Board of Directors, Tenneco's receipt, and the continued effectiveness of a determination that the Spin-off F-8 170 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) will be tax-free for U.S. federal income tax purposes and the successful completion of the debt realignment and corporate restructuring transactions. In August 1999, Tenneco received a letter ruling from the Internal Revenue Service that the Spin-off will be tax-free for U.S. federal income tax purposes to Tenneco and its shareowners (unaudited). Packaging will modify or enter into certain contractual agreements with Tenneco related to becoming a separate publicly held company. These agreements include a distribution agreement, a tax sharing agreement, a human resources agreement, an insurance agreement, and a transition services agreement. These agreements will provide, among other things, that (i) Packaging will become the sponsor of the Tenneco Retirement Plan, the Tenneco Supplemental Executive Retirement Plan, and the Tenneco Thrift Plan; and (ii) Packaging will provide certain administrative services, including payroll, accounts payable, benefits administration, accounting, and travel-related services to Tenneco for a specified period of time. 3. SUMMARY OF ACCOUNTING POLICIES Control All of the outstanding common stock of Packaging is owned directly or indirectly by Tenneco. Thus, Packaging is under the control of Tenneco. Unaudited Interim Information The unaudited interim combined financial statements as of June 30, 1999, and for the six month periods ended June 30, 1999 and 1998, included herein, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Packaging's management, the unaudited interim combined financial statements contain all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. The interim financial results are not necessarily indicative of operating results for an entire year. Income Taxes Packaging utilizes the liability method of accounting for income taxes whereby it recognizes deferred tax assets and liabilities for the future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the combined financial statements. Deferred tax assets are reduced by a valuation allowance when, based upon management's estimates, it is more likely than not that a portion of the deferred tax assets will not be realized in a future period. The estimates utilized in the recognition of deferred tax assets are subject to revision in future periods based on new facts or circumstances. Packaging and Tenneco, together with certain of their respective subsidiaries which are owned 80% or more, have entered into an agreement to file a consolidated U.S. federal income tax return. This agreement provides, among other things, that (1) each company in a taxable income position will be currently charged with an amount equivalent to its U.S. federal income tax computed on a separate return basis and (2) each company in a tax loss position will be reimbursed currently. The income tax amounts reflected in the combined financial statements of Packaging under the provisions of the tax sharing arrangement are not materially different from the income taxes which would have been provided had Packaging filed a separate tax return. Under the tax sharing agreement, Tenneco pays all U.S. federal taxes directly and bills or refunds, as applicable, its subsidiaries for the applicable portion of the total tax payments. Cash taxes paid in the combined statements of cash flows include payments to Tenneco for U.S. federal income taxes. F-9 171 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Packaging does not provide for U.S. federal income taxes on unremitted earnings of foreign subsidiaries as it is the present intention of management to reinvest the unremitted earnings in its foreign operations. Unremitted earnings of foreign subsidiaries are approximately $95 million at December 31, 1998. It is not practicable to determine the amount of U.S. federal income taxes that would be payable upon remittance of the assets that represent those earnings. In connection with the Spin-off, the current tax sharing agreement will be cancelled, and Packaging will enter into a new tax sharing agreement with Tenneco. The tax sharing agreement will provide, among other things, for the allocation of taxes among the parties of tax liabilities arising prior to, as a result of, and subsequent to the Spin-off. Generally, Packaging will be liable for taxes imposed on it and its affiliates engaged in the packaging business. In the case of U.S. federal income taxes imposed on the combined activities of the consolidated group, Packaging will generally be liable to Tenneco for U.S. federal income taxes attributable to its activities. Changes in Accounting Principles In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes new accounting and reporting standards requiring that all derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting treatment. This statement cannot be applied retroactively and is effective for all fiscal years beginning after June 15, 2000. Packaging is currently evaluating the new standard but has not yet determined the impact it will have on its financial position or results of operations. In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which requires costs of start-up activities to be expensed as incurred. This statement is effective for fiscal years beginning after December 15, 1998. The statement requires previously capitalized costs related to start-up activities to be expensed as a cumulative effect of a change in accounting principle when the statement is adopted. Packaging previously capitalized certain costs in connection with the start-up of certain new foreign operations and its shared administrative service operations. Packaging adopted SOP 98-5 on January 1, 1999, and recorded an after-tax charge for the cumulative effect of this change in accounting principle upon adoption of $32 million (net of a $9 million tax benefit), or $.19 per diluted common share. The change in accounting principle decreased the loss before cumulative effect of change in accounting principle by $4 million (net of $2 million in income tax expense), or $.02 per diluted common share for the six months ended June 30, 1999. If the new accounting method had been applied retroactively, net income for the six months ended June 30, 1998, and the years ended December 31, 1998, 1997, and 1996, would have been lower by $7 million (net of a $5 million tax benefit), or $.04 per diluted common share, $14 million (net of a $8 million tax benefit), or $.08 per diluted common share, $7 million (net of a $3 million tax benefit), or $.04 per diluted common share, and $7 million (net of a $4 million tax benefit), or $.04 per diluted common share. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which establishes new accounting and reporting standards for the costs of computer software developed or obtained for internal use. This statement requires prospective application for fiscal years beginning after December 15, 1998. Packaging adopted SOP 98-1 on January 1, F-10 172 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 1999. The impact of this new standard did not have a significant effect on Packaging's financial position or results of operations. As required by the FASB's Emerging Issues Task Force ("EITF") Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation," Packaging recorded an after-tax charge of $38 million (net of a tax benefit of $24 million), or $.23 per diluted common share in the fourth quarter of 1997. EITF Issue 97-13 establishes the accounting treatment and an allocation methodology for certain consulting and other costs incurred in connection with information technology transformation efforts. This charge was reported as a cumulative effect of change in accounting principle. General and Administrative Expenses Included in the "Selling, general and administrative" caption in the Combined Statements of Income for 1998, 1997, and 1996, is $70 million, $49 million, and $51 million, respectively, which represents Packaging's share of Tenneco's corporate general and administrative costs for legal, financial, communication, and other administrative services. The allocation of Tenneco's corporate general and administrative expenses is based on estimated levels of effort devoted to Tenneco's various operations and the relative size of these operations based on revenues, gross property, and payroll. Packaging's management believes the method for allocating corporate general and administrative expenses is reasonable. Also included in the "Selling, general and administrative" caption is $55 million, $22 million, and $7 million, for 1998, 1997, and 1996, respectively, related to administrative service operations which has not been allocated among Tenneco's various operations. Packaging estimates that, had it operated as a separate, stand-alone entity and had the administrative service operations costs been allocated based on a usage charge, its annual costs for these services would have been lower by approximately $40 million (unaudited) for the year ended December 31, 1998, $27 million (unaudited) for the year ended December 31, 1997, and $18 million (unaudited) for the year ended December 31, 1996. Sales of Receivables Packaging sells trade receivables to a third party in the ordinary course of business. At December 31, 1998 and 1997, $140 million and $130 million, respectively, and $119 million at June 30, 1999, of its outstanding trade receivables had been sold. Sales of trade receivables are reflected as a reduction of customer notes and accounts receivable in the accompanying combined balance sheets and the proceeds received are included in cash flows from operating activities in the accompanying combined statements of cash flows. Inventories At December 31, 1998 and 1997, inventory by major classification was as follows:
1998 1997 ---- ---- (MILLIONS) Finished goods.............................................. $246 $265 Work in process............................................. 51 22 Raw materials............................................... 63 85 Materials and supplies...................................... 52 32 ---- ---- $412 $404 ==== ====
Inventories are stated at the lower of cost or market. A portion of total inventories (61% and 43% at December 31, 1998 and 1997, respectively) is valued using the "last-in, first-out" method. All other F-11 173 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) inventories are valued on the "first-in, first-out" ("FIFO") or "average" methods. If the FIFO or average method of inventory accounting had been used by Packaging for all inventories, inventories would have been approximately $30 million lower and $2 million higher at December 31, 1998 and 1997, respectively. Goodwill and Intangibles, Net At December 31, 1998 and 1997, goodwill and intangibles, net of amortization, by major category were as follows:
1998 1997 ---- ---- (MILLIONS) Goodwill.................................................... $ 695 $ 662 Trademarks.................................................. 177 182 Patents..................................................... 149 157 Other....................................................... 31 8 ------ ------ $1,052 $1,009 ====== ======
Goodwill is being amortized on a straight-line basis over 40 years. Such amortization amounted to $17 million, $21 million, and $12 million for 1998, 1997, and 1996, respectively, and is included in the combined statements of income caption, "Depreciation and amortization." Packaging has capitalized certain intangible assets, primarily trademarks and patents, based on their estimated fair value at date of acquisition. Amortization is provided on these intangible assets on a straight-line basis over periods ranging from 5 to 40 years. Such amortization amounted to $18 million, $17 million, and $17 million in 1998, 1997, and 1996, respectively, and is included in the combined statements of income caption, "Depreciation and amortization." Plant, Property, and Equipment, at Cost At December 31, 1998 and 1997, plant, property, and equipment, at cost, by major category was as follows:
1998 1997 ---- ---- (MILLIONS) Land, buildings, and improvements........................... $ 446 $ 389 Machinery and equipment..................................... 1,481 1,339 Other, including construction in progress................... 130 128 ------ ------ $2,057 $1,856 ====== ======
Depreciation of Packaging's properties is provided on a straight-line basis over the estimated useful lives of the assets. Useful lives range from 10 to 40 years for buildings and improvements and from 3 to 25 years for machinery and equipment. Other Long-Term Assets Packaging previously capitalized certain costs in connection with the start-up of certain new foreign operations and its shared administrative service operations. The start-up costs are amortized over the periods benefited, generally three to five years. Start-up costs capitalized, net of amortization, at December 31, 1998 and 1997, were $41 million and $20 million, respectively. Packaging adopted a new accounting standard in the first quarter of 1999, which requires these costs to be expensed. Refer to "Changes in Accounting Principles" discussed previously in this footnote. F-12 174 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Packaging capitalizes certain costs related to the purchase and development of software which is used in its business operations. The costs attributable to these software systems are amortized over their estimated useful lives, ranging from 3 to 12 years, based on various factors such as the effects of obsolescence, technology, and other economic factors. Capitalized software development costs, net of amortization, were $140 million and $104 million at December 31, 1998 and 1997, respectively. As described previously in this footnote, Packaging adopted a new accounting standard related to accounting for the costs of computer software developed for internal use. The impact of this new standard did not have a significant effect on Packaging's financial position or results of operations. Environmental Liabilities Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments indicate that remedial efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology, and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors. All available evidence is considered including prior experience in remediation of contaminated sites, other companies' clean-up experience, and data released by the United States Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new information. These liabilities are included in the balance sheet at their undiscounted amounts. Recoveries are evaluated separately from the liability and, when assured, are recorded and reported separately from the associated liability in the combined financial statements. For further information on this subject, refer to Note 15, "Commitments and Contingencies." Earnings Per Share In connection with the Spin-off, Tenneco shareowners will receive one share of Packaging common stock for each share of Tenneco common stock outstanding. Accordingly, basic and diluted earnings per share for Packaging have been calculated using Tenneco's historical weighted average shares outstanding and weighted average shares outstanding adjusted to include estimates of additional shares that would be issued if potentially dilutive common shares had been issued, respectively. Potentially dilutive securities include stock options, restricted stock and performance shares. Tenneco's basic and diluted average common shares outstanding are as follows:
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, --------------------------------------- ------------------------- 1998 1997 1996 1999 1998 ---- ---- ---- ---- ---- Basic......................... 168,505,573 170,264,731 169,609,373 166,937,362 169,341,555 Diluted....................... 168,834,531 170,801,636 170,526,112 167,319,412 169,936,676
Research and Development Research and development costs are expensed as incurred. Research and development expenses were $25 million, $29 million, and $19 million for 1998, 1997, and 1996, respectively, and are included in the combined statements of income caption "Engineering, research, and development." F-13 175 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Foreign Currency Translation Financial statements of international operations are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted average exchange rate for each applicable period for revenues, expenses, and gains and losses. Translation adjustments are reflected in the combined balance sheet caption "Combined equity." Risk Management Activities Packaging from time to time uses derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge its exposure to changes in foreign currency exchange rates. Net gains or losses on these foreign currency exchange contracts that are designated as hedges are recognized in the combined statements of income to offset the foreign currency gain or loss on the underlying transaction. Packaging has from time to time also entered into forward contracts to hedge its net investment in foreign subsidiaries. The after-tax net gains or losses on these contracts are recognized on the accrual basis in the combined balance sheet caption "Combined equity." In the statement of cash flows, cash receipts or payments related to these exchange contracts are classified consistent with the cash flows from the transaction being hedged. Packaging does not currently enter into derivative financial instruments for speculative purposes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions in determining the reported amounts of Packaging's assets, liabilities, revenues, and expenses. Reference is made to the "Income Taxes" and "Environmental Liabilities" sections of this footnote and Notes 13 and 15 for additional information on significant estimates included in Packaging's combined financial statements. 4. RESTRUCTURING AND OTHER CHARGES In the fourth quarter of 1998, Tenneco's Board of Directors approved an extensive restructuring plan designed to reduce administrative and operational overhead costs in every part of Tenneco's business. As a result, Packaging recorded a pre-tax charge to income from continuing operations of $32 million, $20 million after-tax or $.12 per diluted common share. Of the pre-tax charge, $10 million relates to operational restructuring actions and $22 million relates to a staff and cost reduction plan, which covers employees in both the operating unit and corporate operations. The operational restructuring plans for Packaging involve the elimination of production lines at two plants resulting in the elimination of 104 positions. Additionally, Packaging intends to exit four joint ventures. The staff and cost reduction plan involves the elimination of 184 administrative positions in Packaging's business unit and in Packaging's corporate operations. The fixed assets for the production lines to be eliminated, as well as the joint venture investments, were written down to their fair value, less costs to sell, in the fourth quarter of 1998. Fair value for the production lines was estimated at scrap value less removal costs. Fair value for the joint ventures were determined to be zero as Packaging is relinquishing their interest. No significant net cash proceeds are expected to be received from the ultimate disposal of these assets which should be complete by the fourth quarter of 1999. The effect of suspending depreciation for the production lines is approximately $1 million on an annual basis. F-14 176 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1998, and June 30, 1999, approximately 158 and 233 employees, respectively, have been terminated. This restructuring is being executed according to Packaging's initial plan and Packaging expects to complete all restructuring actions by the fourth quarter of 1999. In the first quarter of 1999, in connection with Packaging's contribution of its containerboard assets to a new joint venture, Tenneco adopted a plan to realign its headquarters functions. This plan involves the severance of approximately 40 employees, and the closing of the Greenwich, Connecticut headquarters facility. Tenneco reached an agreement to sell its headquarters facility in Greenwich and recorded an impairment charge based on the selling price, less costs to sell. The carrying value of the facility before the impairment was $43 million. Annual depreciation expense was reduced by approximately $3 million as a result of the sale. The charge for this plan was recorded in Packaging's corporate operations in the amount of $29 million pre-tax, $17 million after-tax, or $.10 per diluted common share. Packaging collected approximately $30 million in the second quarter of 1999 related to the sale of these assets. Amounts related to the restructuring plans described above are shown in the following table:
SIX MONTHS ENDED JUNE 30, 1999 ----------------------------------- 1998 CHARGED BALANCE AT CHARGED BALANCE AT RESTRUCTURING CASH TO ASSET DECEMBER 31, RESTRUCTURING CASH TO ASSET JUNE 30, CHARGE PAYMENTS ACCOUNTS 1998 CHARGE PAYMENTS ACCOUNTS 1999 ------------- -------- -------- ------------ ------------- -------- -------- ---------- (MILLIONS) Severance............... $20 $ 5 $-- $15 $16 $12 $-- $19 Asset impairments....... 12 -- 12 -- 13 -- 13 -- --- --- --- --- --- --- --- --- $32 $ 5 $12 $15 $29 $12 $13 $19 === === === === === === === ===
5. TRANSACTIONS WITH TENNECO Combined Equity The "Combined equity" caption in the accompanying combined financial statements represents Tenneco's cumulative net investment in the combined businesses of Packaging. Changes in the "Combined equity" caption represent the net income (loss) of Packaging, net cash and noncash contributions from (distributions to) Tenneco, accumulated other comprehensive income, changes in allocated corporate debt, and allocated corporate interest, net of tax. Reference is made to the statements of changes in combined equity for an analysis of the activity in the "Combined equity" caption for the three years ended December 31, 1998, and six months ended June 30, 1999. Corporate Debt and Interest Allocation Tenneco's historical practice has been to incur indebtedness for its consolidated group at the parent company level or at a limited number of subsidiaries, rather than at the operating company level, and to centrally manage various cash functions. Consequently, corporate debt of Tenneco and its related interest expense have been allocated to Packaging based on the portion of Tenneco's investment in Packaging which is deemed to be debt, generally based upon the ratio of Packaging's net assets to Tenneco consolidated net assets plus debt. Interest expense was allocated at a rate equivalent to the weighted- average cost of all corporate debt, which was 7.0%, 7.4%, and 8.3% for 1998, 1997, and 1996, respectively. Total pre-tax interest expense allocated to Packaging in 1998, 1997, and 1996 was $130 million, $120 million, and $99 million, respectively. Packaging has also been allocated tax benefits approximating 35% of the allocated pre-tax interest expense. Although interest expense, and the related tax effects, have been allocated to Packaging for financial reporting on a historical basis, Packaging has not been billed for these amounts. The changes in allocated corporate debt and the after-tax allocated interest have been included as a component of Packaging's combined equity. Although management believes that the F-15 177 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) historical allocation of corporate debt and interest is reasonable, it is not necessarily indicative of Packaging's debt upon completion of the realignment of Tenneco's debt nor debt and interest that will be incurred by Packaging as a separate public entity. A portion of the corporate debt of Tenneco and its related interest expense allocated to Packaging has also been allocated to discontinued operations based on the ratio of the discontinued operations' net assets to Packaging's combined net assets plus debt. Notes and Advances Receivable from Tenneco "Cash contributions from (distributions to) Tenneco" in the Statements of Changes in Combined Equity consist of net cash changes in notes and advances receivable with Tenneco which have been included in combined equity. Historically, Tenneco has utilized notes and advances to centrally manage cash funding requirements for its consolidated group. Noncash contributions from (distributions to) Tenneco result primarily from transfers of assets and liabilities to or from Tenneco, such as transfers of acquired net assets and tax assets and liabilities. At December 31, 1998 and 1997, Packaging had a note receivable from Tenneco totaling $476 million and $496 million, respectively, which is payable on demand and is included as a component of Packaging's combined equity. Accounts Receivable and Accounts Payable -- Affiliated Companies Receivables -- Affiliated companies relates to general and administrative costs incurred by Packaging and allocated to affiliates. Payables -- Affiliated companies relates to billings for costs incurred by affiliates and allocated to Packaging. Reference is made to Note 3 for a discussion of the types of such costs allocated to Packaging. Employee Benefits Certain employees of Packaging participate in the Tenneco employee stock option and employee stock purchase plans. The Tenneco employee stock option plan provides for the grant of Tenneco common stock options and other stock awards at a price not less than market value at the date of grant. The Tenneco employee stock purchase plan allows employees to purchase Tenneco common stock at a 15% discount subject to certain thresholds. Packaging expects to establish similar plans for its employees after the Spin-off. In connection with the Spin-off, outstanding options to Tenneco common stock held by Packaging employees will be replaced by options of Packaging so as to preserve the aggregate value of the options held prior to the Spin-off. Employees of Packaging also participate in certain Tenneco postretirement and pension plans. Reference is made to Notes 11 and 13 for a further discussion of these plans. 6. ACQUISITIONS During 1998, Packaging made three acquisitions for approximately $101 million. In March 1997, Packaging entered into an agreement to acquire the protective and flexible packaging division of N.V. Koninklijke KNP BT ("KNP"), a Dutch distribution, paper, and packaging firm, for approximately $380 million including debt assumed and preferred stock of a subsidiary issued to the seller. The KNP acquisition was completed in late April 1997. In June 1996, Packaging entered into an agreement to acquire Amoco Foam Products for $310 million. Amoco Foam Products manufactures expanded polystyrene tableware, hinged-lid food containers, packaging trays, and industrial products for residential and commercial construction applications. Packaging closed the acquisition of Amoco Foam Products in August 1996. F-16 178 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) All of the acquisitions discussed above have been accounted for as purchases; accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based on their fair values. The excess of the purchase price over the fair value of the net assets acquired is included in the combined balance sheet caption "Goodwill and intangibles, net." 7. DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS Discontinued Operations In January 1999, Tenneco reached an agreement to contribute the containerboard assets of its paperboard packaging segment to a new joint venture with an affiliate of Madison Dearborn Partners, Inc. The contribution to the joint venture was completed in April 1999. Tenneco received consideration of cash and debt assumption totaling approximately $2 billion plus a 45 percent common equity interest in the joint venture (now 43 percent due to subsequent management equity issuances) valued at approximately $200 million. The containerboard assets contributed to the joint venture represented substantially all of the assets of Packaging's paperboard packaging segment and included four mills, 67 corrugated products plants, and an ownership or leasehold interest in approximately 950,000 acres of timberland. Prior to the transaction, Packaging borrowed approximately $1.8 billion and used approximately $1.2 billion of those borrowings to acquire assets used by the containerboard business under operating leases and timber cutting rights and to purchase containerboard business accounts receivable that had previously been sold to a third party. The remainder of the borrowings was remitted to Tenneco and used to repay a portion of Tenneco's short-term debt. Packaging then contributed the containerboard business assets (subject to the new indebtedness and the containerboard business liabilities) to the joint venture in exchange for $247 million in cash and the 45 percent interest in the joint venture. As a result of the transaction, Packaging recognized a pre-tax loss of $293 million, $178 million after-tax or $1.07 per diluted common share, in the first quarter of 1999, based on the amount by which the carrying amount of the containerboard assets exceeded the fair value of those assets, less cost to sell. The estimate of fair value of the containerboard assets was based on the fair value of the consideration received by Tenneco from the joint venture. In June 1999, Tenneco's Board of Directors approved a plan to sell Packaging's remaining interest in its containerboard joint venture. Packaging expects the sale to be completed before the Spin-off. As a result of the decision to sell the remaining interest in the containerboard joint venture, Packaging's paperboard packaging segment is presented as a discontinued operation in the accompanying combined financial statements. In April 1999, Tenneco reached an agreement to sell the paperboard packaging segment's other assets, its folding carton operations, to Caraustar Industries. Packaging received cash proceeds of $73 million from this transaction which closed in June 1999. As a result of the sale transaction, Packaging recognized a pre-tax gain of $14 million, $9 million after-tax or $.05 per diluted share and is included in discontinued operations in the second quarter of 1999. F-17 179 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Net assets as of December 31, 1998, 1997, and 1996, and results of operations for the years then ended for the paperboard packaging segment were as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ------ ------ ------ (MILLIONS) Net assets at the end of the period (Note).................. $ 366 $ 423 $ 459 ====== ====== ====== Net sales and operating revenues............................ $1,570 $1,431 $1,605 ====== ====== ====== Income before income taxes and interest allocation.......... $ 131 $ 63 $ 152 Income tax (expense) benefit................................ (48) (19) (60) ------ ------ ------ Income before interest allocation........................... 83 44 92 Allocated interest expense, net of income tax (Note)........ (26) (23) (21) ------ ------ ------ Income from discontinued operations......................... $ 57 $ 21 $ 71 ====== ====== ======
- ------------------------- Note: Net assets of discontinued operations includes allocated corporate debt of $548 million, $473 million and $394 million as of December 31, 1998, 1997 and 1996, respectively. Reference is made to Note 5, "Transactions with Tenneco -- Corporate Debt and Interest Allocation," for a discussion of the allocation of corporate debt and interest expense to discontinued operations. Extraordinary Loss In the first quarter of 1999, Packaging recorded an extraordinary loss for extinguishment of debt of $7 million (net of a $3 million income tax benefit) or $.04 per diluted common share. The loss related to early retirement of debt in connection with the sale of the containerboard assets. 8. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS Long-Term Debt A summary of long-term debt outstanding and allocated long-term corporate debt obligations at December 31, 1998 and 1997, is set forth in the following table:
1998 1997 ---- ---- (MILLIONS) Notes due 1999 through 2016, average effective interest rate 9.5% in 1998 and 10% in 1997.............................. $ 22 $ 20 Less -- current maturities.................................. 1 1 ------ ------ 21 19 Allocated corporate debt obligations, average effective interest rate 7.0% in 1998 and 7.4% in 1997............... 1,291 1,473 ------ ------ Total long-term debt........................................ $1,312 $1,492 ====== ======
The aggregate maturities and sinking fund requirements applicable to the issues outstanding at December 31, 1998, are $1 million, $3 million, $4 million, $5 million, and $2 million for 1999, 2000, 2001, 2002, and 2003, respectively. Reference is made to Note 5 for a discussion of allocated corporate debt obligations. F-18 180 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Short-Term Debt Packaging uses lines of credit and overnight borrowings to finance certain of its short-term capital requirements. Information regarding short-term debt as of and for the years ended December 31, 1998 and 1997, are as follows:
1998 1997 ----------- ----------- CREDIT CREDIT AGREEMENTS* AGREEMENTS* ----------- ----------- (DOLLARS IN MILLIONS) Outstanding borrowings at end of year....................... $11 $ 1 Weighted average interest rate on outstanding borrowings at end of year............................................... 18.7% 7.1% Approximate maximum month-end outstanding borrowings during year...................................................... $37 $26 Approximate average month-end outstanding borrowings during year...................................................... $18 $9 Weighted average interest rate on approximate average month-end outstanding borrowings during year.............. 18.4% 17.5%
- ------------------------- * Includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements. Packaging was allocated short-term corporate debt obligations of $583 million at December 31, 1998, and $156 million at December 31,1997. Reference is made to Note 5 for a discussion of allocated corporate debt obligations. 9. FINANCIAL INSTRUMENTS Asset and Liability Instruments The fair value of cash and temporary cash investments, short and long-term receivables, and accounts payable, and short-term debt (before allocation of corporate debt to Packaging from Tenneco) was considered to be the same as or was not determined to be materially different from the carrying amount. The long-term debt reflected in the Combined Balance Sheets primarily represents corporate debt allocated to Packaging from Tenneco. As such, an estimate of fair value has not been provided. The fair value of other long-term debt is not materially different from the carrying amount. Instruments With Off-Balance-Sheet Risk Foreign Currency Contracts -- Note 3, "Summary of Accounting Policies -- Risk Management Activities" describes Tenneco's use of and accounting for foreign currency exchange contracts. Packaging currently manages its exposure to changes in foreign currency rates by making loans with a Tenneco affiliate in the functional currency of the operating company concerned. The Tenneco affiliate then integrates all of Tenneco's foreign currency denominated loans and enters into foreign currency forward purchase and sale contracts to mitigate its net exposure to changes in foreign exchange rates. For most operating companies third party trade receivables and payables are maintained in the functional currency. From time to time Packaging may enter into foreign currency forward purchase and sale contracts with terms of less than one year to mitigate its exposure to changes in exchange rates on foreign currency third party trade receivables and payables. At December 31, 1998, Packaging had purchase contracts of approximately $1 million, primarily in U.S. dollars, and sell contracts of approximately $1 million, primarily in British pounds. At December 31, 1997, Packaging had purchase contracts of approximately $2 million, primarily in Belgian francs and German marks, and sell contracts of approximately $2 million, primarily in British pounds and French francs. At June 30, 1999, Packaging's purchase and sell contracts were not significant. F-19 181 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES The domestic and foreign components of income from continuing operations before income taxes are as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- (MILLIONS) U.S. income before income taxes............................. $108 $139 $108 Foreign income before income taxes.......................... 42 43 24 ---- ---- ---- Income before income taxes.................................. $150 $182 $132 ==== ==== ====
Following is a comparative analysis of the components of income tax expense applicable to continuing operations:
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- (MILLIONS) Current -- U.S....................................................... $(11) $(57) $45 State and local........................................... (2) 9 15 Foreign................................................... 3 5 3 ---- ---- --- (10) (43) 63 ---- ---- --- Deferred -- U.S....................................................... 59 101 3 Foreign, state and other.................................. 18 17 1 ---- ---- --- 77 118 4 ---- ---- --- Income tax expense.......................................... $ 67 $ 75 $67 ==== ==== ===
Current income tax expense for the years ended December 31, 1998, 1997, and 1996, include tax benefits of $45 million, $41 million, and $34 million, respectively, related to the allocation of corporate interest expense to Packaging from Tenneco. See Note 5. Following is a reconciliation of income taxes computed at the statutory U.S. federal income tax rate (35% for all years presented) to the income tax expense reflected in the combined statements of income:
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- (MILLIONS) Tax expense computed at the statutory U.S. federal income tax rate.................................................. $ 53 $ 64 $46 Increases (reductions) in income tax expense resulting from: Foreign income taxed at different rates and foreign losses with no tax benefit.................................... 1 (8) (1) State and local taxes on income, net of U.S. federal income tax benefit..................................... 3 18 10 Amortization of nondeductible goodwill.................... 5 4 4 Other..................................................... 5 (3) 8 ---- ---- --- Income tax expense.......................................... $ 67 $ 75 $67 ==== ==== ===
F-20 182 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The components of Packaging's net deferred tax liability were as follows:
DECEMBER 31, -------------- 1998 1997 ---- ---- (MILLIONS) Deferred tax assets -- Tax loss carryforwards: U.S. .................................................. $ 95 $ 46 State and local........................................ 7 -- Foreign................................................ 13 4 Postretirement benefits other than pensions............... 13 23 Other..................................................... 26 24 Valuation allowance....................................... (8) (4) ---- ---- Net deferred tax asset............................... 146 93 ---- ---- Deferred tax liabilities -- Tax over book depreciation................................ 95 61 Pensions.................................................. 213 206 Other..................................................... 123 55 ---- ---- Total deferred tax liability......................... 431 322 ---- ---- Net deferred tax liability................................ $285 $229 ==== ====
As reflected by the valuation allowance in the table above, Packaging had potential tax benefits of $8 million and $4 million at December 31, 1998 and 1997, respectively, which were not recognized in the combined statements of income when generated. These unrecognized tax benefits resulted primarily from foreign tax loss carryforwards which are available to reduce future foreign tax liabilities. Of the $270 million of U.S. tax loss carryforwards which exist at December 31, 1998, $215 million expire in 2012 and $55 million expire in 2018. The $110 million of state tax loss carryforwards which exist at December 31, 1998, will expire in varying amounts over the period from 2000 to 2012. Of the $43 million of foreign tax loss carryforwards which exist at December 31, 1998, $18 million do not expire and the remainder expires in varying amounts over the period from 1999 to 2005. Packaging and Tenneco, together with certain of their respective subsidiaries which are owned 80% or more, have entered into an agreement to file a consolidated U.S. federal income tax return. This agreement provides, among other things, that (1) each company in a taxable income position will be currently charged with an amount equivalent to its U.S. federal income tax computed on a separate return basis and (2) each company in a tax loss position will be reimbursed currently. The income tax amounts reflected in the combined financial statements of Packaging under the provisions of the tax sharing arrangement are not materially different from the income taxes which would have been provided had Packaging filed a separate tax return. Under the tax sharing agreement, Tenneco pays all federal taxes directly and bills or refunds, as applicable, its subsidiaries for the applicable portion of the total tax payments. Cash taxes paid in the combined statements of cash flows include payments to Tenneco for income taxes. Liability for foreign income taxes is generally allocated to the legal entity on which such taxes are imposed. In the case of state income taxes, Packaging is liable for its tax in states where returns are filed for separate entities. In states where returns are filed in a combined basis, liability is allocated in a manner similar to federal income tax. F-21 183 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 11. EMPLOYEE STOCK PLANS In June 1992, Tenneco initiated an Employee Stock Purchase Plan ("ESPP"). The ESPP was terminated in 1996. Tenneco adopted a new employee stock purchase plan effective April 1, 1997 with provisions similar to the 1992 ESPP. Under the new ESPP, Tenneco sold 311,586 shares, 216,665 shares, and 185,179 shares to Packaging employees in 1998, 1997, and 1996, respectively. The plan allows U.S. and Canadian employees of Packaging to purchase Tenneco Inc. common stock through payroll deductions at a 15% discount. Each year, an employee in the plan may purchase shares with a discounted value not to exceed $21,250. The weighted average fair value of the employee purchase right, which was estimated using the Black-Scholes option pricing model and the assumptions described below except that the average life of each purchase right was assumed to be 90 days, was $6.31, $11.14, and $10.77 in 1998, 1997, and 1996, respectively. After the Spin-off, Packaging employees will no longer participate in the Tenneco ESPP. In December 1996, Tenneco adopted the 1996 Stock Ownership Plan which permits the granting of a variety of awards, including common stock, restricted stock, performance units, stock appreciation rights, and stock options, to officers and employees of Tenneco. Tenneco can issue up to 17 million shares of common stock under this plan, which will terminate December 31, 2001. Certain key Packaging employees have been granted restricted stock and restricted units under the 1996 Stock Ownership Plan. These awards generally require, among other things, that the employee remain an employee of Tenneco during the restriction period. Certain key Packaging employees have also been granted performance shares which will vest based upon the attainment of specified performance goals within four years from the date of grant. In connection with the Spin-off, outstanding restricted stock, restricted units and performance shares will generally become fully vested. After the Spin-off, Packaging employees will no longer participate in Tenneco's 1996 Stock Ownership Plan. The fair value of each stock option issued by Tenneco to Packaging employees during 1998, 1997, and 1996 is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions for grants in 1998, 1997, and 1996, respectively: (a) risk-free interest rate of 5.7%, 6.5%, and 6.0%; (b) expected lives of 10 years, 6 years, and 5 years; (c) expected volatility of 25.6%, 24.1%, and 24.9%; and (d) dividend yield of 3.2%, 2.8%, and 3.3%. The weighted average fair value of options granted during the year is $10.83, $12.03, and $11.42 for 1998, 1997, and 1996, respectively. Packaging applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," to its stock-based compensation plans. Packaging recognized after-tax stock-based compensation expense of $3 million, $4 million, and $15 million in 1998, 1997, and 1996, respectively. Had compensation costs for Packaging's stock-based compensation plans been determined in accordance with FAS No. 123, "Accounting for Stock-Based Compensation," based on the fair value at the grant dates for awards under those plans, Packaging's pro forma net income for the years ended December 31, 1998, 1997, and 1996, would have been lower by $14 million or $.08 per both basic and diluted common share, $13 million or $.08 per both basic and diluted common share, and $5 million or $.03 per both basic and diluted common share, respectively. 12. MINORITY INTEREST At December 31, 1998 and 1997, Packaging reported minority interest in the combined balance sheet of $14 million and $15 million, respectively. This primarily relates to preferred stock of a subsidiary issued in connection with the KNP acquisition. 13. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Packaging has pension plans that cover substantially all of its employees. Benefits are based on years of service and, for most salaried employees, on final average compensation. Packaging's funding policies F-22 184 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) are to contribute to the plans amounts necessary to satisfy the funding requirement of federal laws and regulations. Plan assets consist principally of listed equity and fixed income securities. After the Spin-off, Packaging will become the sponsor of the Tenneco Retirement Plan (the "TRP"). Benefits accrued under the TRP by employees of Tenneco's automotive business will be frozen as of the last day of the calendar month in which the Spin-off occurs, and all related pension obligations and assets will be retained by Packaging. In addition, all TRP pension obligations and assets associated with participating employees from former subsidiaries and affiliates of Tenneco will be retained by Packaging and have been reflected in the historical combined financial statements. These pension obligations and assets that Packaging will retain under all of these arrangements are included in the table below. Packaging has postretirement health care and life insurance plans that cover all of its salaried and certain of its hourly domestic employees. For salaried employees, the plans cover employees retiring from Packaging on or after attaining age 55 who have had a least 10 years service with Packaging after attaining age 45. For hourly employees, the postretirement benefit plans generally cover employees who retire according to one of Packaging's hourly employee retirement plans. All of these benefits may be subject to deductibles, copayment provisions, and other limitations, and Packaging has reserved the right to change these benefits. Packaging's postretirement benefit plans are not funded. F-23 185 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the change in benefit obligation, the change in plan assets, the development of net amount recognized, and the amounts recognized in the combined statement of financial position for the pension plans and postretirement benefit plans follows:
PENSION POSTRETIREMENT --------------- --------------- 1998 1997 1998 1997 ---- ---- ---- ---- (MILLIONS) Change in benefit obligations: Benefit obligation at September 30 of the previous year... $2,654 $2,361 $ 70 $ 64 Currency rate conversion.................................. 1 -- -- -- Service cost.............................................. 28 23 1 1 Interest cost............................................. 199 178 5 5 Plan amendments........................................... 44 8 -- -- Actuarial loss (gain)..................................... 293 254 1 5 Acquisitions.............................................. -- 13 -- -- Benefits paid............................................. (194) (183) (8) (6) Participants' contributions............................... -- -- 1 1 ------ ------ ---- ---- Benefit obligation at September 30........................ $3,025 $2,654 $ 70 $ 70 ====== ====== ==== ==== Change in plan assets: Fair value at September 30 of the previous year........... $3,516 $2,966 $ -- $ -- Currency rate conversion.................................. -- 4 -- -- Actual return on plan assets.............................. 102 714 -- -- Employer contributions.................................... 5 3 7 5 Participants' contributions............................... 1 -- 1 1 Acquisitions.............................................. -- 12 -- -- Benefits paid............................................. (194) (183) (8) (6) ------ ------ ---- ---- Fair value at September 30................................ $3,430 $3,516 $ -- $ -- ====== ====== ==== ==== Development of net amount recognized: Funded status at September 30............................. $ 405 $ 862 $(70) $(70) Contributions during the fourth quarter................... 1 1 2 1 Unrecognized cost: Actuarial loss (gain).................................. 200 (273) 11 11 Prior service cost..................................... 71 57 (4) (5) Transition liability (asset)........................... (43) (62) -- -- ------ ------ ---- ---- Net amount recognized at December 31...................... $ 634 $ 585 $(61) $(63) ====== ====== ==== ==== Amounts recognized in the combined balance sheet: Prepaid benefit cost...................................... $ 664 $ 594 $ -- $ -- Accrued benefit cost...................................... (56) (9) (61) (63) Intangible asset.......................................... 22 -- -- -- Accumulated other comprehensive income.................... 4 -- -- -- ------ ------ ---- ---- Net amount recognized..................................... $ 634 $ 585 $(61) $(63) ====== ====== ==== ====
- ------------------------- Note: Assets of one plan may not be utilized to pay benefits of other plans. Additionally, the prepaid (accrued) benefit cost has been recorded based upon certain actuarial estimates as described below. Those estimates are subject to revision in future periods given new facts or circumstances. F-24 186 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic pension costs (income) from continuing operations for the years 1998, 1997, and 1996, consist of the following components:
1998 1997 1996 ---- ---- ---- (MILLIONS) Service cost -- benefits earned during the year............. $ 28 $ 23 $ 20 Interest on prior year's projected benefit obligation....... 199 178 126 Expected return on plan assets.............................. (285) (265) (178) Net amortization: Actuarial loss (gain)..................................... 1 -- 3 Prior service cost........................................ 11 11 11 Transition liability (asset).............................. (19) (19) (13) ----- ----- ----- Net pension costs (income).................................. $ (65) $ (72) $ (31) ===== ===== =====
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for all pension plans with accumulated benefit obligations in excess of plan assets were $89 million, $83 million, and $27 million, respectively, as of September 30, 1998, and $12 million, $11 million, and $1 million, respectively, as of September 30, 1997. The weighted average discount rates (which are based on long-term market rates) used in determining the 1998, 1997, and 1996 actuarial present value of the benefit obligations were 7.0%, 7.75%, and 7.75%, respectively. The rate of increase in future compensation was 4.8%, 4.9%, and 4.8%, for 1998, 1997, and 1996, respectively. The weighted average expected long-term rate of return on plan assets for 1998, 1997, and 1996 was 10.0% for each year. Net periodic postretirement benefit cost from continuing operations for the years 1998, 1997, and 1996 consist of the following components:
1998 1997 1996 ---- ---- ---- (MILLIONS) Service cost -- benefits earned during the year............. $ 2 $ 1 $1 Interest on accumulated postretirement benefit obligation... 5 5 5 Net amortization: Prior service cost........................................ (2) (2) (2) Actuarial loss (gain)..................................... 1 1 -- --- --- -- Net periodic postretirement benefit cost.................... $ 6 $ 5 $4 === === ==
The initial weighted average assumed health care cost trend rate used in determining the 1998, 1997, and 1996 accumulated postretirement benefit obligation was 5%, 5%, and 6%, respectively, declining to 5% in 1997 and remaining at that level thereafter. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the 1998, 1997, and 1996 accumulated postretirement benefit obligations by approximately $2 million for each year. There would be no change in the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for any of these years. Decreasing the assumed health care cost trend rate by one percentage point in each year would decrease the 1998 accumulated postretirement benefit obligation by approximately $2 million and would not change the aggregate of service cost and interest cost components of the net periodic postretirement benefit cost. F-25 187 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The discount rates (which are based on long-term market rates) used in determining the 1998, 1997, and 1996 accumulated postretirement benefit obligations were 7.00%, 7.75%, and 7.75%, respectively. 14. SEGMENT AND GEOGRAPHIC AREA INFORMATION Packaging is a global manufacturer with a single operating segment: Specialty Packaging -- Manufacture and sale of specialty packaging and consumer products for foodservice, consumer, protective, flexible and institutional/industrial markets. The accounting policies of the segment are the same as those described in Note 3, "Summary of Accounting Policies." Packaging evaluates operating performance based primarily on income before interest expense, income taxes, and minority interest. Individual operating segments have not been aggregated within this reportable segment. Products are transferred between geographic areas on a basis intended to reflect as nearly as possible the "market value" of the products. The following table sets forth information relating to Packaging's external customer revenues for each product or each group of similar products:
NET SALES AND OPERATING REVENUES YEAR ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ---- ---- ---- (MILLIONS) SPECIALTY Disposable plastic, fiber, and aluminum packaging products............................................... $2,126 $2,105 $1,862 Plastic and fiber protective and flexible packaging products............................................... 607 399 78 Other..................................................... 52 49 47 ------ ------ ------ Total Specialty Packaging............................ 2,785 2,553 1,987 ------ ------ ------ OTHER....................................................... 6 10 -- ------ ------ ------ COMBINED.................................................... $2,791 $2,563 $1,987 ====== ====== ======
F-26 188 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The following tables summarize certain segment and geographic information of Packaging:
SEGMENT RECLASS ------------------ & SPECIALTY OTHER ELIMS COMBINED --------- ------ ------- -------- (MILLIONS) AT JUNE 30, 1999, AND FOR THE SIX MONTHS THEN ENDED Revenues from external customers........................ $1,404 $ -- $ -- $1,404 Depreciation and amortization........................... 84 10 -- 94 Income before interest, income taxes, and minority interest.............................................. 190 (46)(b) -- 144 Extraordinary loss...................................... -- (7) -- (7) Cumulative effect of change in accounting principle..... (17) (15) -- (32) Total assets............................................ 3,296 1,309(a) (119) 4,486 Net assets of discontinued operations................... -- 133 -- 133 AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED Revenues from external customers........................ $2,785 $ 6 $ -- $2,791 Depreciation and amortization........................... 152 23 -- 175 Income before interest, income taxes, and minority interest.............................................. 328 (45)(c) -- 283 Total assets............................................ 3,260 1,580(a) (42) 4,798 Net assets of discontinued operations................... -- 366 -- 366 Investment in affiliated companies...................... 17 -- -- 17 Capital expenditures.................................... 190 4 -- 194 Noncash items other than depreciation and amortization.......................................... 22 (84) -- (62) AT JUNE 30, 1998, AND FOR THE SIX MONTHS THEN ENDED Revenues from external customers........................ $1,361 $ 10 $ -- $1,371 Depreciation and amortization........................... 77 11 -- 88 Income before interest, income taxes, and minority interest.............................................. 175 (2) -- 173 Total assets............................................ 3,373 1,468(a) (53) 4,788 Net assets of discontinued operations................... -- 382 -- 382 AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED Revenues from external customers........................ $2,553 $ 10 $ -- $2,563 Depreciation and amortization........................... 143 20 -- 163 Income before interest, income taxes, and minority interest.............................................. 308 (2) -- 306 Cumulative effect of change in accounting principle..... (11) (27) -- (38) Total assets............................................ 3,244 1,412(a) (38) 4,618 Net assets of discontinued operations................... -- 423 -- 423 Investment in affiliated companies...................... 9 -- -- 9 Capital expenditures.................................... 227 2 -- 229 Noncash items other than depreciation and amortization.......................................... 10 (86) -- (76) AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED Revenues from external customers........................ $1,987 $ -- $ -- $1,987 Depreciation and amortization........................... 123 8 -- 131 Income before interest, income taxes, and minority interest.............................................. 249 (15) -- 234 Extraordinary loss...................................... -- (2) -- (2) Total assets............................................ 2,655 1,421(a) (48) 4,028 Net assets of discontinued operations................... -- 459 -- 459 Investment in affiliated companies...................... 9 1 -- 10 Capital expenditures.................................... 172 44 -- 216 Noncash items other than depreciation and amortization.......................................... (2) (44) -- (46)
F-27 189 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) - ------------------------- Notes: (a) The Other segment's total assets includes pension assets retained by Packaging related to certain employees of Tenneco's and Packaging's discontinued operations, Packaging's administrative service operations assets and net assets of the discontinued paperboard packaging segment. (b) The Other segment's income before interest expense, income taxes and minority interest for the six months ended June 30, 1999 includes a $29 million charge relating to the severance of corporate employees and the closing of the Greenwich, Connecticut headquarters facility (see Note 4). (c) The Other segment's income before interest expense, income taxes and minority interest for the year ended December 31, 1998 includes restructuring charges of $10 million relating to severance of corporate employees (see Note 4) and approximately $50 million of operating costs relating to Packaging's information technology service center that began operation in 1998.
GEOGRAPHIC AREA -------------------- UNITED RECLASS & STATES FOREIGN(A) ELIMS COMBINED ------ ---------- --------- -------- (MILLIONS) AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED Revenues from external customers(b).................... $2,212 $579 $ -- $2,791 Long-lived assets(c)................................... 2,168 295 -- 2,463 Total assets........................................... 4,131 691 (24) 4,798 AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED Revenues from external customers(b).................... $2,116 $447 $ -- $2,563 Long-lived assets(c)................................... 2,026 236 -- 2,262 Total assets........................................... 4,036 596 (14) 4,618 AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED Revenues from external customers(b).................... $1,759 $228 $ -- $1,987 Long-lived assets(c)................................... 1,957 94 -- 2,051 Total assets........................................... 3,755 281 (8) 4,028
- ------------------------- Notes: (a) Revenues from external customers and long-lived assets for individual foreign countries are not material. (b) Revenues are attributed to countries based on location of the seller. (c) Long-lived assets include all long-term assets except net assets from discontinued operations, goodwill, intangibles, and deferred tax assets. 15. COMMITMENTS AND CONTINGENCIES Capital Commitments Packaging estimates that expenditures aggregating approximately $110 million will be required after December 31, 1998, to complete facilities and projects authorized at such date, and substantial commitments have been made in connection therewith. F-28 190 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Lease Commitments Packaging holds certain of its facilities, equipment, and other assets under long-term leases. The minimum lease payments under non-cancelable operating leases with lease terms in excess of one year are $44 million, $31 million, $22 million, $15 million, and $56 million for the years 1999, 2000, 2001, 2002, and 2003, respectively, and $53 million for subsequent years. Commitments under capital leases were not significant to the accompanying combined financial statements. Total rental expense for continuing operations for the years 1998, 1997, and 1996, was $35 million, $37 million, and $24 million, respectively, including minimum rentals under non-cancelable operating leases of $45 million, $42 million, and $18 million for the corresponding periods. Litigation In May 1999, Tenneco Inc., Tenneco Packaging Inc. and a number of containerboard manufacturers were named as defendants in a civil class action antitrust lawsuit pending in the United States District Court for the Eastern District of Pennsylvania. Tenneco Packaging Inc. also was named as a defendant in a related class action antitrust lawsuit. The lawsuits allege that the defendants conspired to raise linerboard prices for corrugated containers and corrugated sheets, respectively, from October 1, 1993 through November 30, 1995, in violation of Section 1 of the Sherman Act. The lawsuits seek treble damages in an unspecified amount, plus attorney fees. Packaging believes that the allegations have no merit, is vigorously defending the claims, and believes the outcome of this litigation will not have a material adverse effect on Packaging's financial position or results of operations. Under and in accordance with the distribution agreement that will be entered into in connection the Spin-off, as between Tenneco and Packaging, Packaging will responsible for defending the claims and for any liability resulting from these actions. Packaging and its combined subsidiaries are parties to various other legal proceedings arising from their operations. Packaging believes that the outcome of these proceedings, individually and in the aggregate, will have no material effect on the financial position or results of operations of Packaging and its combined subsidiaries. Environmental Matters Packaging and its combined subsidiaries are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which they operate. Packaging has provided reserves for compliance with these laws and regulations where it is probable that a liability exists and where Packaging can make a reasonable estimate of the liability. The estimated liabilities recorded are subject to change as more information becomes available regarding the magnitude of possible clean-up costs and the timing, varying costs, and effectiveness of alternative clean-up technologies. However, Packaging believes that any additional costs which arise as more information becomes available will not have a material effect on the combined financial condition or results of operations of Packaging. F-29 191 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 16. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN MILLIONS EXCEPT PER SHARE)
INCOME (LOSS) INCOME BEFORE BEFORE INTEREST CUMULATIVE NET SALES EXPENSE, INCOME (LOSS) INCOME (LOSS) INCOME (LOSS) EFFECT OF AND INCOME TAXES, FROM FROM BEFORE CHANGE IN OPERATING AND MINORITY CONTINUING DISCONTINUED EXTRAORDINARY EXTRAORDINARY ACCOUNTING QUARTER REVENUES INTEREST OPERATIONS OPERATIONS LOSS LOSS PRINCIPLE - ------- --------- ------------- ------------- ------------- ------------- ------------- ------------- 1999 1st................. $ 666 $ 45 $ 6 $(172) $(166) $ (7) $(173) 2nd................. 738 99 46 9 55 -- 55 ------ ---- ---- ----- ----- ---- ----- $1,404 $144 $ 52 $(163) $(111) $ (7) $(118) ====== ==== ==== ===== ===== ==== ===== 1998 1st................. $ 633 $ 69 $ 18 $ 14 $ 32 $ -- $ 32 2nd................. 738 104 51 23 74 -- 74 3rd................. 696 74 15 25 40 -- 40 4th................. 724 36 (2) (5) (7) -- (7) ------ ---- ---- ----- ----- ---- ----- $2,791 $283 $ 82 $ 57 $ 139 $ -- $ 139 ====== ==== ==== ===== ===== ==== ===== 1997 1st................. $ 510 $ 48 $ 9 $ 13 $ 22 $ -- $ 22 2nd................. 675 87 31 (11) 20 -- 20 3rd................. 682 89 32 11 43 -- 43 4th................. 696 82 34 8 42 -- 42 ------ ---- ---- ----- ----- ---- ----- $2,563 $306 $106 $ 21 $ 127 $ -- $ 127 ====== ==== ==== ===== ===== ==== ===== CUMULATIVE EFFECT OF CHANGE IN NET ACCOUNTING INCOME QUARTER PRINCIPLE (LOSS) - ------- ---------- ------ 1999 1st................. $(32) $(205) 2nd................. -- 55 ---- ----- $(32) $(150) ==== ===== 1998 1st................. $ -- $ 32 2nd................. -- 74 3rd................. -- 40 4th................. -- (7) ---- ----- $ -- $ 139 ==== ===== 1997 1st................. $ -- $ 22 2nd................. -- 20 3rd................. -- 43 4th................. (38) 4 ---- ----- $(38) $ 89 ==== =====
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK --------------------------------------------------------------------------------------------------------- BEFORE CUMULATIVE CUMULATIVE EFFECT OF FROM FROM BEFORE EFFECT OF CHANGE CHANGE IN CONTINUING DISCONTINUED EXTRAORDINARY EXTRAORDINARY IN ACCOUNTING ACCOUNTING NET INCOME QUARTER OPERATIONS OPERATIONS LOSS LOSS PRINCIPLE PRINCIPLE (LOSS) - ------- ---------- ------------ ---------------- ------------- ---------------- ---------- ---------- 1999 1st................ $ .03 $(1.03) $(1.00) $(.04) $(1.04) $(.19) $(1.23) 2nd................ .28 .05 .33 -- .33 -- .33 ----- ------ ------ ----- ------ ----- ------ $ .31 $ (.98) $ (.67) $(.04) $ (.71) $(.19) $ (.90) ===== ====== ====== ===== ====== ===== ====== 1998 1st................ $ .11 $ .08 $ .19 $ -- $ .19 $ -- $ .19 2nd................ .30 .14 .44 -- .44 -- .44 3rd................ .09 .15 .24 -- .24 -- .24 4th................ (.01) (.04) (.05) -- (.05) -- (.05) ----- ------ ------ ----- ------ ----- ------ $ .49 $ .34 $ .83 $ -- $ .83 $ -- $ .83 ===== ====== ====== ===== ====== ===== ====== 1997 1st................ $ .06 $ .07 $ .13 $ -- $ .13 $ -- $ .13 2nd................ .19 (.07) .12 -- .12 -- .12 3rd................ .18 .07 .25 -- .25 -- .25 4th................ .20 .05 .25 -- .25 (.23) .02 ----- ------ ------ ----- ------ ----- ------ $ .63 $ .12 $ .75 $ -- $ .75 $(.23) $ .52 ===== ====== ====== ===== ====== ===== ======
F-30 192 THE BUSINESSES OF TENNECO PACKAGING NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK --------------------------------------------------------------------------------------------------------- BEFORE CUMULATIVE CUMULATIVE EFFECT OF FROM FROM BEFORE EFFECT OF CHANGE CHANGE IN CONTINUING DISCONTINUED EXTRAORDINARY EXTRAORDINARY IN ACCOUNTING ACCOUNTING NET INCOME QUARTER OPERATIONS OPERATIONS LOSS LOSS PRINCIPLE PRINCIPLE (LOSS) ------- ---------- ------------ ---------------- ------------- ---------------- ---------- ---------- 1999 1st................ $ .03 $(1.03) $(1.00) $(.04) $(1.04) $(.19) $(1.23) 2nd................ .28 .05 .33 -- .33 -- .33 ----- ------ ------ ----- ------ ----- ------ $ .31 $ (.98) $ (.67) $(.04) $ (.71) $(.19) $ (.90) ===== ====== ====== ===== ====== ===== ====== 1998 1st................ $ .11 $ .08 $ .19 $ -- $ .19 $ -- $ .19 2nd................ .30 .14 .44 -- .44 -- .44 3rd................ .09 .15 .24 -- .24 -- .24 4th................ (.01) (.04) (.05) -- (.05) -- (.05) ----- ------ ------ ----- ------ ----- ------ $ .49 $ .34 $ .83 $ -- $ .83 $ -- $ .83 ===== ====== ====== ===== ====== ===== ====== 1997 1st................ $ .06 $ .07 $ .13 $ -- $ .13 $ -- $ .13 2nd................ .19 (.07) .12 -- .12 -- .12 3rd................ .18 .07 .25 -- .25 -- .25 4th................ .20 .05 .25 -- .25 (.23) .02 ----- ------ ------ ----- ------ ----- ------ $ .63 $ .12 $ .75 $ -- $ .75 $(.23) $ .52 ===== ====== ====== ===== ====== ===== ======
- ------------------------- Notes: Reference is made to Notes 3, 4, 6, and 7 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for items affecting quarterly results. The sum of the quarters may not equal the total of the respective year's earnings per share on either a basic or diluted basis due to changes in the weighted average shares outstanding throughout the year. (The preceding notes are an integral part of the foregoing combined financial statements.) F-31 193 SCHEDULE II THE BUSINESSES OF TENNECO PACKAGING SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------------------------------------------- ---------- ----------------------- ---------- --------- ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END OF DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR ----------- ---------- ---------- ---------- ---------- --------- Allowance for Doubtful Accounts Deducted from Assets to Which it Applies: Year Ended December 31, 1998............ $11 $ 5 $-- $ 5 $11 === === == === === Year Ended December 31, 1997............ $18 $ 2 $2 $11 $11 === === == === === Year Ended December 31, 1996............ $ 9 $11 $-- $ 2 $18 === === == === ===
S-1 194 ANNEX A PROPOSED AMENDMENTS AND WAIVER The following is the text of the proposed amendments and waiver. The following is qualified in its entirety by reference to the supplemental indenture and the original indenture, copies of which can be obtained without charge from the information agent. Capitalized terms used below without definition have the meanings assigned to them in the original indenture. 1. IF TENNECO RECEIVES THE REQUIRED CONSENTS, THE FOLLOWING PROVISIONS REGARDING THE WAIVER WILL TAKE EFFECT UPON EXECUTION OF THE SUPPLEMENTAL INDENTURE ON OR PROMPTLY FOLLOWING THE WITHDRAWAL TIME. "SECTION 1. Definitions: As used herein, the following terms shall have the meanings set forth below: "Cash Tender Offers" means Tenneco's offers to purchase for cash certain series of Securities issued under the Original Indenture pursuant to the Offer to Purchase and Consent Solicitation of Tenneco dated , 1999, as amended from time to time. "Consent Solicitation" means Tenneco's solicitation of consents to amendments to the Original Indenture and the execution of this Eleventh Supplemental Indenture pursuant to the Exchange Offers and Cash Tender Offers. "Debt Realignment" means the realignment, prior to the Spin-off, of Tenneco's debt through some combination of tender offers, exchange offers, prepayments and other refinancings. "Exchange Offers" means Tenneco's offers to exchange notes and debentures issued by Tenneco Packaging Inc. for certain Securities issued under the Original Indenture pursuant to the Prospectus and Consent Solicitation of Packaging and Tenneco dated , 1999, as amended from time to time. "Exchange Securities" means the series of Securities subject to the Exchange Offers. "Original Indenture" means the Indenture, dated November 1, 1996, between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as trustee, as amended. "Packaging" means Tenneco Packaging Inc., a Delaware corporation. "Spin-off" means the distribution of all Packaging common stock to the holders of Tenneco common stock at a ratio of one share of Packaging common stock for each share of Tenneco common stock. "Tender Securities" means the series of Securities subject to the Cash Tender Offers. "Tenneco" means Tenneco Inc., a Delaware corporation. "Trustee" means The Chase Manhattan Bank, as trustee under the Original Indenture. SECTION 2. Waiver. Subject to Section 3.2 of this Eleventh Supplemental Indenture, the application of the covenants contained in Sections 3.6, 9.1, 9.2 and 9.3 of the Original Indenture is hereby waived to the extent required to effect the Spin-off, including, without limitation, to effect the Debt Realignment (the "Waiver"). SECTION 3. Operation of Amendments and Waiver. Section 3.1. Upon the execution and delivery of this Eleventh Supplemental Indenture by Tenneco and the Trustee, the Original Indenture shall be amended and supplemented in accordance herewith, and this Eleventh Supplemental Indenture shall form a part of the Original Indenture for all purposes, and every holder of Securities heretofore or hereafter authenticated and delivered under the Original Indenture shall be bound hereby, as hereby amended and supplemented; provided, however, that the provisions of the Eleventh Supplemental Indenture, except as described in Section 3.2 with respect to the Waiver, shall not become operative until Tenneco has notified the Trustee that it has accepted for exchange or payment the Exchange Securities and/or Tender Securities, as the case may be, tendered pursuant to the Exchange A-1 195 Offers and/or Tender Offers which represent at least a majority of all Securities outstanding under the Original Indenture (and at such time the provisions of this Eleventh Supplemental Indenture shall automatically become operative without the requirement of any further action by or notice to Tenneco, the Trustee or any holder of Exchange Securities or Tender Securities). SECTION 3.2 The Waiver shall become operative immediately upon the execution and delivery of this Eleventh Supplemental Indenture by Tenneco and the Trustee. However, if Exchange Securities and/or Tender Securities which represent at least a majority of all Securities outstanding under the Original Indenture are not accepted for exchange or purchase, as the case may be, because the related Exchange Offers, Cash Tender Offers or Consent Solicitation are terminated or withdrawn, the Waiver will cease to be operative." 2. IF THE PROPOSED AMENDMENTS ARE ADOPTED, THE FOLLOWING ITALICIZED TEXT WILL BE DELETED IN ITS ENTIRETY FROM THE ORIGINAL INDENTURE, AND THE UNDERLINED TEXT WILL BE ADDED FOLLOWING THE APPROPRIATE SECTIONS THEREOF. SECTION 3.6. NEGATIVE PLEDGE; LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. [ADD: Intentionally Deleted by Amendment] [DELETE: (a) The Issuer will not issue, assume, incur or guarantee, and will not permit any Restricted Subsidiary to issue, assume, incur or guarantee, any Debt secured by any mortgage, pledge, lien or other encumbrance (any such mortgage, pledge, lien and other encumbrance being hereinafter called a "Mortgage") upon any principal Manufacturing Property of the Issuer or any Restricted Subsidiary, or upon shares of capital stock or Debt of any Restricted Subsidiary (whether such Principal Manufacturing Property or shares of stock are now owned or hereafter acquired or such Debt is now existing or hereafter incurred or assumed), without in any such case effectively providing, concurrently with the issuance or assumption of such Debt, that the Securities (together with, if the Issuer shall so determine, any other Debt of the Issuer or such Restricted Subsidiary ranking equally with the Securities and then existing or thereafter created) shall be secured equally and ratably with such Debt; provided, however, that the foregoing restrictions shall not apply to: (i) the creation of Mortgages on any Principal Manufacturing Property (including any improvements on an existing property, as to which the Mortgage may include such underlying real property as the Issuer may deem necessary for the improvement and unnecessary for the operation of any theretofore existing Principal Manufacturing Property on the same or adjoining real property) hereafter acquired by the Issuer or a Restricted Subsidiary prior to, at the time of, or within 180 days after the latest of the acquisition, completion of construction or commencement of commercial operation of such property, to secure or provide for the payment of financing of all or any part of the purchase price thereof or construction of fixed improvements thereon, or, in addition to assumptions in transactions contemplated by subparagraph (ii) below, the assumption of any Mortgage upon any Principal Manufacturing Property hereafter acquired existing at the time of such acquisitions, or the acquisition of any Principal Manufacturing Property subject to any Mortgage without the assumption thereof; provided that the aggregate principal amount of Debt secured by any such Mortgage so issued, assumed or existing shall not exceed 100% of the cost of such Principal Manufacturing Property to the corporation acquiring the same or of the fair value thereof (as determined by resolution adopted by the Board of Directors) at the time of such acquisition, whichever is less, and, provided further, that in the case of any such acquisition, construction or improvement the Mortgage shall not apply to any property theretofore owned by the Issuer or a Restricted Subsidiary, other than, in the case of any such construction or improvement, any theretofore unimproved real property on which the property so constructed, or the improvement, is located (which unimproved real property may at the option of the Issuer be segregated by legal description from other real property of the Issuer appurtenant to such Principal Manufacturing Property and subjected to the Mortgage related to such construction or improvement); A-2 196 (ii) any Mortgages on any Principal Manufacturing Property of a corporation which is merged into or consolidated with the Issuer or a Restricted Subsidiary or substantially all of the assets of which are required by the Issuer or a Restricted Subsidiary (whether or not the obligations secured by any such Mortgage are assumed by the Issuer or a Restricted Subsidiary); provided that such Mortgages were not created in contemplation of such merger, consolidation or acquisition; (iii) Mortgages on any Principal Manufacturing Property of the Issuer or a Restricted Subsidiary in favor of the United States of America or any State thereof, or any department, agency or instrumentality or political subdivision of the United States of America or any State thereof, or in favor of any other country, or any political subdivision thereof, to secure partial, progress, advance or other payments pursuant to any contract or statute or to secure any Debt incurred or guaranteed for the purpose of financing all or any part of the cost of acquiring, construction or improving the property subject to such Mortgages (including Mortgages incurred in connection with financings of the type contemplated by Section 103 of the Internal Revenue Code, maritime financings under Title XI of the United States Code or similar financings); (iv) Mortgages on particular property (or any proceeds of the sale thereof) to secure all or any part of the cost of exploration, drilling, mining, development, operation or maintenance thereof (including, without limitation, construction of facilities for field processing) intended to obtain or increase the production and sale or other disposition of oil, gas, coal, natural gas, carbon dioxide, sulphur, helium, metals, minerals, steam, timber or other natural resources, or any Debt created, issued, assumed or guaranteed to provide funds for any or all such purposes; (v) Mortgages securing Debt of a Restricted Subsidiary owing to the Issuer and/or another Restricted Subsidiary; (vi) Mortgages on any Principal Manufacturing Property of the Issuer or a Restricted Subsidiary which Mortgages were in existence on the date of this Indenture; provided, however, that each such Mortgage shall be limited to all or a part of the property which secured such Mortgage at such date (plus improvements and construction on such Property); (vii) any extension, renewal or replacement (or successive extensions, renewals or replacements) in whole or in part, of any Mortgage referred to in the foregoing clauses (i) through (vi); provided, however, that the principal amount of Debt so secured thereby shall not exceed the principal amount of Debt so secured at the time of such extension, renewal or replacement, and that such extension, renewal or replacement shall be limited to all or a part of the property which secured the Mortgage so extended, renewed or replaced (plus improvements and construction on such property); and (viii) Permitted Mortgages.] [DELETE: (b) Notwithstanding the provisions of subsection (a) of this Section, the Issuer or anyone or more Restricted Subsidiaries may issue or assume Debt secured by a Mortgage on a Principal Manufacturing Property in addition to those permitted by subsection (a) of this Section and renew, extend or replace such Mortgages; provided that at the time of such creation, assumption, renewal, extension or replacement, and after giving effect thereto, Exempted Debt does not exceed 15% of Consolidated Net Tangible Assets.] [DELETE: (c) The Issuer will not, nor will it permit any Restricted Subsidiary to, enter into any arrangement with any Person providing for the leasing by the Issuer or any Restricted Subsidiary of any Principal Manufacturing Property, whether such principal Manufacturing Property is now owned or hereafter acquired (except for temporary leases for a term, including renewals at the option of the lessee, of not more than three years and except for leases between the Issuer and a Restricted Subsidiary or between Restricted Subsidiaries), which property has been or is to be sold or transferred by the Issuer or such Restricted Subsidiary to such Person with the intention of taking back a lease on such property (a "sale and leaseback transaction") unless the net proceeds of such sale or transfer shall be at least equal to the fair value of such property as determined by resolution adopted by the Board of Directors and either: A-3 197 (i) the Issuer or such Restricted Subsidiary would be entitled, pursuant to the provisions of subsection (a) of this Section, to issue or assume Debt secured by a Mortgage on such property at least equal in amount to the Attributable Debt in respect of such sale and leaseback transaction without equally and ratably securing the Securities; or (ii) since the date hereof and within a period commencing twelve months prior to the consummation of such sale and leaseback transaction and ending twelve months after the consummation of such sale and leaseback transaction the Issuer or such Restricted Subsidiary, as the case may be, has expended or will expend, or a combination of both, for facilities comprising all or a part of a Principal Manufacturing Property an amount equal to (A) the net proceeds of such sale and leaseback transaction and the Issuer elects to designate such amount as a credit against such sale and leaseback transaction or (B) a part of the net proceeds of such sale and leaseback transaction and the Issuer elects to designate such amount as a credit against such sale and leaseback transaction and applies an amount equal to the remainder of the net proceeds as provided in clause (iii) hereof; or (iii) such sale and leaseback transactions do not come within the exceptions provided in clause (i) hereof and the Issuer does not make the election permitted by clause (ii) hereof or makes such election only as to part of such net proceeds, in either which event the Issuer will, within 180 days after such sale and leaseback transaction, apply an amount equal to the Attributable Debt in respect of such sale and leaseback transaction (less an amount equal to the amount, if any, elected under clause (ii) hereof to the retirement (other than any mandatory retirement or by way of payment at maturity) of Debt with a maturity of greater than one year of the Issuer or any Restricted Subsidiary (other than Debt of the Issuer to any Restricted Subsidiary or of any Restricted Subsidiary to the Issuer or another Restricted Subsidiary). (d) Notwithstanding the provisions of paragraph (c) of this Section, the Issuer and any Restricted Subsidiary may enter into sale and leaseback transactions in addition to those permitted by paragraph (c) of this Section and without any obligation to make expenditures for facilities comprising a part or all of a Principal manufacturing Property or to retire any Debt, provided that at the time of entering into such sale and leaseback transaction and after giving effect thereto, Exempted Debt does not exceed 15% of Consolidated Net Tangible Assets.] SECTION 9.1. COVENANT NOT TO MERGE, CONSOLIDATE, SELL OR CONVEY PROPERTY EXCEPT UNDER CERTAIN CONDITIONS. [ADD: Intentionally Deleted by Amendment] [DELETE: The Issuer covenants that it will not merge or consolidate with any other Person or sell, lease or convey all or substantially all of its assets to any other Person, unless (i) either the Issuer shall be the continuing corporation, or the successor corporation or the Person which acquires by sale, lease or conveyance substantially all the assets of the Issuer (if other than the Issuer) shall be a corporation organized under the laws of the United States of America or any State thereof or the District of Columbia and shall expressly assume the due and punctual payment of the principal of and interest on all the Securities and Coupons, if any, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Issuer, by supplemental indenture satisfactory to the Trustee, executed and delivered to the Trustee by such corporation, and (ii) the Issuer, such Person or such successor corporation, as the case may be, shall not, immediately after such merger or consolidation, or such sale, lease or conveyance, be in default in the performance of any such covenant or condition.] SECTION 9.2. SUCCESSOR CORPORATION SUBSTITUTED. [ADD: Intentionally Deleted by Amendment] [DELETE: In case of any such consolidation, merger, sale, lease or conveyance, and following such an assumption by the successor corporation, such successor corporation shall succeed to and be substituted for the Issuer, with the same effect as if it had been named herein. Such successor corporation may cause to A-4 198 be signed, and may issue either in its own name or in the name of the Issuer prior to such succession any or all of the Securities issuable hereunder which together with any Coupons appertaining thereto theretofore shall not have been signed by the Issuer and delivered to the Trustee; and, upon the order of such successor corporation, instead of the Issuer, and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities together with any Coupons appertaining thereto which previously shall have been signed and delivered by the officers of the Issuer to the Trustee for authentication, and any Securities which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All of the Securities so issued together with any Coupons appertaining thereto shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale, lease or conveyance such changes in phrasing and form (but not in substance) may be made in the Securities and Coupons thereafter to be issued as may be appropriate. In the event of any such sale or conveyance (other than a conveyance by way of lease) the Issuer or any successor corporation which shall theretofore have become such in the manner described in this Article shall be discharged from all obligations and covenants under this Indenture and the Securities and may be liquidated and dissolved.] SECTION 9.3. OPINION OF COUNSEL DELIVERED TO TRUSTEE. [ADD: Intentionally Deleted by Amendment] [DELETE: The Trustee, subject to the provisions of Section 6.1 and 6.2, may receive an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, lease or conveyance, and any such assumption, and any such liquidation or dissolution, complies with the applicable provisions of this Indenture.] A-5 199 THE DEALER MANAGERS FOR THE EXCHANGE OFFERS ARE MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON 1585 Broadway, Second Floor Eleven Madison Avenue, Fourth Floor New York, NY 10036 New York, NY 10010 Attn: Liability Management Group Attn: Liability Management Group (800) 624-1808 (800) 820-1653
Any questions concerning the terms of the exchange offers may be directed to the dealer managers. THE INFORMATION AGENT FOR THE EXCHANGE OFFERS IS GEORGESON SHAREHOLDER COMMUNICATIONS INC. 17 State Street, 10th Floor New York, New York 10004 Banks and Brokers Call Collect: (212) 440-9800 All Others Call Toll Free: (800)223-2064 Any questions concerning tender procedures or requests for additional copies of this document may be directed to the information agent. THE EXCHANGE AGENT FOR THE EXCHANGE OFFERS IS THE CHASE MANHATTAN BANK By Hand: By Registered Mail: By Overnight Delivery: Corporate Trust Securities Window The Chase Manhattan Bank The Chase Manhattan Bank 55 Water Street Money Market Operations Money Market Operations Room 234 55 Water Street 55 Water Street North Building Room 234 Room 234 New York, NY 10041 North Building North Building Attn: Carlos Esteves New York, NY 10041 New York, NY 10041 Attn: Carlos Esteves Attn: Carlos Esteves
By Facsimile: (212) 638-7380 or (212) 638-7381 Confirm by Telephone: (212) 638-0828 UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 200 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Packaging will be restating its certificate of incorporation prior before the spin-off to provide that a director of Packaging will not be liable to Packaging or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that an exemption from liability or limitation of liability is not permitted under the Delaware General Corporation Law ("DGCL"). Based on the DGCL as presently in effect, a director of Packaging will not be personally liable to Packaging or its stockholders for monetary damages for breach of fiduciary duty as a director, except: (1) for any breach of the director's duty of loyalty to Packaging or its stockholders; (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (3) under Section 174 of the DGCL; which concerns unlawful payments of dividends, stock purchases or redemptions; or (4) for any transactions from which the director derived an improper personal benefit. While these provisions give directors protection from awards for monetary damages for breaches of their duty of care, they do not eliminate the duty. Accordingly, Packaging's certificate of incorporation will have no effect on the availability of equitable remedies such as injunction or rescission based on a director's breach of his or her duty of care. The provisions of Packaging's certificate of incorporation described above apply to an officer of Packaging only if he or she is a director of Packaging and is acting in his or her capacity as director. They do not apply to officers of Packaging who are not directors. The by-laws of Packaging currently provide that Packaging shall indemnify, to the fullest extent permitted by the DGCL, as may be amended from time to time, each person who is or was a director or officer, or who serves or may have served at Packaging's request as a director or officer of another corporation, and who is or was a party or is threatened to be made a party to any pending or completed claim, action, suit or proceeding. Packaging will provide indemnification against any expenses, including attorneys' fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by the person in his or her capacity or status as a director or officer. At the discretion of Packaging's board of directors, Packaging may indemnify each person who is or was an employee or agent of Packaging, or who served or may have served at Packaging's request as an employee or agent of another corporation, to the same extent as directors and officers. Before the spin-off, Packaging will amend and restate its by-laws. After the amendment and restatement, Packaging's by-laws will include the following provisions: "Section 14. (1) The corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (an "Indemnitee") who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, including appeals (a "proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the corporation or, while a director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise provided in paragraph (3) of this Section 14, the corporation shall be required to indemnify an Indemnitee in connection with a proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such proceeding (or part thereof) by the Indemnitee was authorized by the Board. (2) The corporation shall pay the expenses (including attorneys' fees) incurred by an Indemnitee in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the II-1 201 proceeding shall be made only upon receipt of an undertaking by the Indemnitee to repay all amounts advanced if it should be ultimately determined that the Indemnitee is not entitled to be indemnified under this Section 14 or otherwise. (3) If a claim for indemnification or payment of expenses under this Section 14 is not paid in full within thirty days after a written claim therefor by the Indemnitee has been received by the corporation, the Indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the Indemnitee is not entitled to the requested indemnification or payment of expenses under applicable law. (4) The rights conferred on any Indemnitee by this Section 14 shall not be exclusive of any other rights which such Indemnitee may have or hereafter acquire under any statute, provision of the Restated Certificate of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested directors or otherwise. (5) The corporation's obligation, if any, to indemnify or to advance expenses to any Indemnitee who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such Indemnitee may collect as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, enterprise or nonprofit enterprise. (6) Any repeal or modification of the foregoing provisions of this Section 14 shall not adversely affect any right or protection hereunder of any Indemnitee in respect of any act or omission occurring prior to the time of such repeal or modification. (7) This Section 14 shall not limit the right of the corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Indemnitees when and as authorized by appropriate corporate action." Packaging has purchased insurance which purports to insure Packaging against some of the costs of indemnification which may be incurred under the by-law section discussed above. The insurance also purports to insure the officers and directors of Packaging and its subsidiaries against some liabilities incurred by them in the discharge of their duties as officers and directors, except for liabilities resulting from their own malfeasance. In addition, in the distribution agreement Tenneco will agree to indemnify the directors and officers of Packaging against some liabilities for any violations or alleged violations of securities or other laws arising out of some of the documents related to the spin-off. See "Item 22, Undertakings" for a description of the Commission's position regarding such indemnification provisions. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed as part of this registration statement:
EXHIBIT NO. DESCRIPTION ----------- ----------- 1 None. 2 Form of Distribution Agreement by and between Tenneco Inc. and Tenneco Packaging Inc. 3.1 Certificate of Incorporation of Tenneco Packaging Inc., as amended, as currently in effect (incorporated herein by reference to Exhibit 3.1 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 3.2 Form of Restated Certificate of Incorporation of Tenneco Packaging Inc., to be adopted prior to the spin-off (incorporated herein by reference to Exhibit 3.2 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157).
II-2 202
EXHIBIT NO. DESCRIPTION ----------- ----------- 3.3 Amended By-laws of Tenneco Packaging Inc., as currently in effect (incorporated herein by reference to Exhibit 3.3 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 3.4 Form of Amended and Restated By-laws of Tenneco Packaging Inc., to be adopted prior to the spin-off (incorporated herein by reference to Exhibit 3.4 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 4.1 Indenture, dated September 29, 1999, by and between Tenneco Packaging Inc. and The Chase Manhattan Bank, as Trustee. 4.2 Form of Registration Rights Agreement between Tenneco Packaging Inc. and the trustees under the Tenneco Packaging Inc. Rabbi Trust, to be adopted in connection with the spin-off (incorporated herein by reference to Exhibit 4.4 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 4.3 Long Term Credit Agreement, dated as of September 29, 1999, among Tenneco Packaging Inc., 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. 4.4 Short Term Credit Agreement, dated as of September 29, 1999, among Tenneco Packaging Inc., 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. 4.5 Form of First Supplemental Indenture, providing for the issuance of 7.20% Notes due 2005, including the form of notes. 4.6 Form of Second Supplemental Indenture, providing for the issuance of 7.95% Debentures due 2025, including the form of debentures. 4.7 Form of Third Supplemental Indenture, providing for the issuance of 8% Notes due 2007, including the form of notes. 4.8 Form of Fourth Supplemental Indenture, providing for the issuance of 8 1/8% Debentures due June 15, 2017, including the form of debentures. 4.9 Form of Fifth Supplemental Indenture, providing for the issuance of 8 3/8% Debentures due 2027, including the form of debentures. 5 Form of opinion of Jenner & Block. 8 Form of opinion of Jenner & Block regarding tax matters. 9 None. 10.1 Form of Human Resources Agreement by and between Tenneco Inc. and Tenneco Packaging Inc. (incorporated herein by reference to Exhibit 10.1 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15147). 10.2 Form of Tax Sharing Agreement by and between Tenneco Inc. and Tenneco Packaging Inc. (incorporated herein by reference to Exhibit 10.2 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 10.3 Indenture (the "original indenture"), dated November 1, 1996, between Tenneco Inc. (formerly known as New Tenneco Inc.) and The Chase Manhattan Bank, as trustee (incorporated herein by reference to New Tenneco Inc.'s Registration Statement on Form S-4, Registration No. 333-14003). 10.4 Form of Eleventh Supplemental Indenture to the original indenture, to be entered into between Tenneco Inc. and The Chase Manhattan Bank, as Trustee, providing for the proposed amendments.**
II-3 203
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.5 Form of Trademark Transition License Agreement by and between Tenneco Inc. and Tenneco Packaging Inc. (incorporated herein by reference to Exhibit 10.3 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 10.6 Form of Tenneco Packaging Inc. Executive Incentive Compensation Plan, to be adopted in connection with the spin-off (incorporated herein by reference to Exhibit 10.4 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 10.7 Form of Tenneco Packaging Inc. Supplemental Executive Retirement Plan, to be adopted in connection with the spin-off (incorporated herein by reference to Exhibit 10.5 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 10.8 Form of Tenneco Packaging Inc. Change in Control Severance Benefit Plan for Key Executives, to be adopted in connection with the spin-off (incorporated herein by reference to Exhibit 10.6 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 10.9 Form of Tenneco Rabbi Trust Agreement, to be adopted in connection with the spin-off (incorporated herein by reference to Exhibit 10.11 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 10.10 Form of Tenneco Packaging Inc. Stock Ownership Plan, to be adopted in connection with the spin-off (incorporated herein by reference to Exhibit 10.8 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 10.11 Professional Services Agreement, dated August 22, 1996, by and between Tenneco Business Services Inc. and Newport News Shipbuilding Inc. (incorporated herein by reference to Exhibit 10.28 to Tenneco Inc.'s Form 10, File No. 1-12387). 10.12 Form of Tenneco Packaging Inc. Rabbi Trust, to be adopted in connection with the spin-off (incorporated herein by reference to Exhibit 10.10 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 10.13 Form of Tenneco Packaging Inc. Deferred Compensation Plan, to be adopted in connection with the spin-off (incorporated herein by reference to Exhibit 10.7 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 10.14(a) Contribution Agreement, dated as of January 25, 1999, by and among Tenneco Packaging Inc., PCA Holdings LLC and Packaging Corporation of America (the "Contribution Agreement") (incorporated herein by reference to Exhibit 10.30 to Tenneco Inc.'s Current Report on Form 8-K dated April 12, 1999, File No. 1-12387). 10.14(b) Letter Agreement, dated as of April 12, 1999, by and among Tenneco Packaging Inc., PCA Holdings LLC and Packaging Corporation of America, amending the Contribution Agreement (incorporated herein by reference to Exhibit 10.31 to Tenneco Inc.'s Current Report on Form 8-K dated April 12, 1999, File No. 1-12387). 10.15 Stockholders Agreement, as amended, dated as of April 12, 1999, by and among Tenneco Packaging Inc., PCA Holdings LLC and Packaging Corporation of America (incorporated herein by reference to Exhibit 10.32 to Tenneco Inc.'s Current Report on Form 8-K dated April 12, 1999, File No. 1-12387). 10.16 Registration Rights Agreement, as amended, dated as of April 12, 1999, by and among Tenneco Packaging Inc., PCA Holdings LLC and Packaging Corporation of America (incorporated herein by reference to Exhibit 10.33 to Tenneco Inc.'s Current Report on Form 8-K dated April 12, 1999, File No. 1-12387). 10.17 Form of Release Agreement by and between Dana G. Mead and Tenneco Management Company, to be executed in connection with the spin-off (incorporated herein by reference to Exhibit 10.15 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 10.18 Employment Agreement, dated as of March 11, 1997, by and between Richard L. Wambold and Tenneco Inc. (incorporated herein by reference to Exhibit 10.16 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157).
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EXHIBIT NO. DESCRIPTION ----------- ----------- 10.19 Restricted Stock Contract, dated as of June 1, 1999, by and between Paul J. Griswold and Tenneco Inc. (incorporated herein by reference to Exhibit 10.17 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 10.20 Restricted Stock Contract, dated as of June 1, 1999, by and between Richard L. Wambold and Tenneco Inc. (incorporated herein by reference to Exhibit 10.18 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 11 None. 12.1 Statement of Ratio of Earnings to Fixed Charges (Tenneco Packaging Inc.).** 12.2 Statement of Ratio of Earnings to Fixed Charges (Tenneco Inc.) (incorporated herein by reference to Exhibit 12.2 to Tenneco Inc.'s Current Report on Form 8-K dated August 20, 1999, File No. 1-12387). 13 None. 15 None. 16 None. 21 List of Subsidiaries of Tenneco Packaging Inc. (incorporated herein by reference to Exhibit 21 to Tenneco Packaging Inc.'s Registration Statement on Form 10, File No. 1-15157). 23.1 Consent of Jenner & Block (included in Exhibit 5 and Exhibit 8). 23.2 Consent of Arthur Andersen LLP. 24 Power of Attorney of Richard L. Wambold.** 25 Statement of Eligibility of Trustee.** 26 None. 27.1 Financial Data Schedule, December 31, 1998.** 27.2 Financial Data Schedule, June 30, 1999.** 99.1 Form of Letter of Consent/Transmittal. 99.2 Form of Letter to DTC Participants, including Brokers, Dealers and Other Nominees. 99.3 Form of Letter to Beneficial Holders. 99.4 Form of Letter to Holders of Physical Securities. 99.5 Consents to be named as directors of Tenneco Packaging Inc. for: Mark Andrews, Larry D. Brady, Roger B. Porter and Paul T. Stecko.**
- ------------------------- * To be filed by amendment. ** Previously filed. (b) Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts (c) Not Applicable. ITEM 22. UNDERTAKINGS. The undersigned registrant hereby undertakes: 1. To file, during any period in which offers or sales are being made of the securities registered hereby, a post-effective amendment to this registration statement: a. To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; b. To reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration statement. Notwithstanding the foregoing, any increase or decrease in volume of II-5 205 securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and c. To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement. 2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment will be deemed to be new registration statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof. 3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 4. That, for the purpose of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof. 5. To respond to requests for information that is incorporated by reference into this prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. 6. To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-6 206 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lake Forest, State of Illinois, as of the 4th day of October, 1999. TENNECO PACKAGING INC. By: /s/ DANA G. MEAD -------------------------------------- Dana G. Mead Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to the Registration Statement has been signed by the following persons in the capacities indicated on October 4, 1999.
SIGNATURE TITLE --------- ----- /s/ DANA G. MEAD Chairman of the Board and Chief Executive Officer - --------------------------------------------------- and Director Dana G. Mead (principal executive officer) /s/ ROBERT T. BLAKELY Chief Financial Officer and Director - --------------------------------------------------- (principal financial and accounting officer) Robert T. Blakely * Director - --------------------------------------------------- Richard L. Wambold *By: /s/ THEODORE R. TETZLAFF --------------------------------------------- Theodore R. Tetzlaff Attorney-in-fact
II-7 EX-2 2 DISTRIBUTION AGREEMENT 1 EXHIBIT 2 DISTRIBUTION AGREEMENT BETWEEN TENNECO INC. (TO BE RENAMED TENNECO AUTOMOTIVE INC.) AND TENNECO PACKAGING INC. , 1999 2 TABLE OF CONTENTS
PAGE ------ ARTICLE I DEFINITIONS................................................................. -1- SECTION GENERAL..................................................... 1.01. -1- SECTION REFERENCES.................................................. 1.02. -12- ARTICLE II PRE-DISTRIBUTION TRANSACTIONS; CERTAIN COVENANTS............................ -12- SECTION CORPORATE RESTRUCTURING TRANSACTIONS........................ 2.01. -12- SECTION PRE-DISTRIBUTION STOCK DIVIDEND TO TENNECO.................. 2.02. -12- SECTION CERTIFICATE OF INCORPORATION AND BYLAWS OF PACKAGING........ 2.03. -12- SECTION ELECTION OF DIRECTORS OF PACKAGING.......................... 2.04. -12- SECTION TRANSFER AND ASSIGNMENT OF CERTAIN LICENSES AND PERMITS..... 2.05. -12- SECTION TRANSFER AND ASSIGNMENT OF CERTAIN AGREEMENTS............... 2.06. -13- SECTION OTHER TRANSACTIONS.......................................... 2.07. -14- SECTION ELECTION OF OFFICERS........................................ 2.08. -14- SECTION PACKAGING REGISTRATION STATEMENT............................ 2.09. -14- SECTION STATE SECURITIES LAWS....................................... 2.10. -14- SECTION LISTING APPLICATION......................................... 2.11. -15- SECTION CERTAIN FINANCIAL AND OTHER ARRANGEMENTS.................... 2.12. -15- SECTION DIRECTOR, OFFICER AND EMPLOYEE RESIGNATIONS................. 2.13. -15- SECTION TRANSFERS NOT EFFECTED PRIOR TO THE DISTRIBUTION; TRANSFERS 2.14. DEEMED EFFECTIVE AS OF THE DISTRIBUTION DATE.............. -15- SECTION ANCILLARY AGREEMENTS........................................ 2.15. -16- SECTION DEBT REALIGNMENT............................................ 2.16. -16- ARTICLE III THE DISTRIBUTION............................................................ -16- SECTION TENNECO ACTION PRIOR TO THE DISTRIBUTION.................... 3.01. -16- SECTION THE DISTRIBUTION............................................ 3.02. -17- ARTICLE IV CONDITIONS TO THE DISTRIBUTION.............................................. -17- SECTION CONDITIONS PRECEDENT TO THE DISTRIBUTION.................... 4.01. -17- SECTION NO CONSTRAINT............................................... 4.02. -18- SECTION DEFERRAL OF DISTRIBUTION DATE............................... 4.03. -18- SECTION PUBLIC NOTICE OF DEFERRED DISTRIBUTION DATE................. 4.04. -18- ARTICLE V COVENANTS................................................................... -19- SECTION FURTHER ASSURANCES.......................................... 5.01. -19- SECTION TENNECO NAME................................................ 5.02. -19- SECTION SUPPLIES AND DOCUMENTS...................................... 5.03. -19- SECTION ASSUMPTION AND SATISFACTION OF LIABILITIES.................. 5.04. -19- SECTION NO REPRESENTATIONS OR WARRANTIES; CONSENTS.................. 5.05. -20- SECTION REMOVAL OF CERTAIN GUARANTEES............................... 5.06. -21- SECTION PUBLIC ANNOUNCEMENTS........................................ 5.07. -21- SECTION INTERCOMPANY AGREEMENTS..................................... 5.08. -21- SECTION TAX MATTERS................................................. 5.09. -21- SECTION 1996 AGREEMENTS............................................. 5.10. -22-
i 3
PAGE ------ ARTICLE VI ACCESS TO INFORMATION....................................................... -22- SECTION PROVISION, TRANSFER AND DELIVERY OF APPLICABLE CORPORATE 6.01. RECORDS................................................... -22- SECTION ACCESS TO INFORMATION....................................... 6.02. -23- SECTION REIMBURSEMENTS, OTHER MATTERS............................... 6.03. -23- SECTION CONFIDENTIALITY............................................. 6.04. -23- SECTION WITNESS SERVICES............................................ 6.05. -24- SECTION RETENTION OF RECORDS........................................ 6.06. -24- SECTION PRIVILEGED MATTERS.......................................... 6.07. -24- ARTICLE VII INDEMNIFICATION............................................................. -25- SECTION INDEMNIFICATION BY TENNECO.................................. 7.01. -25- SECTION INDEMNIFICATION BY PACKAGING................................ 7.02. -25- SECTION NO INDEMNIFICATION IN RESPECT OF INDEMNITEE'S INVESTMENT.... 7.03. -26- SECTION LIMITATIONS ON INDEMNIFICATION OBLIGATIONS.................. 7.04. -26- SECTION PROCEDURES FOR INDEMNIFICATION.............................. 7.05. -27- SECTION INDEMNIFICATION PAYMENTS.................................... 7.06. -29- SECTION OTHER ADJUSTMENTS........................................... 7.07. -29- SECTION OBLIGATIONS ABSOLUTE........................................ 7.08. -30- SECTION SURVIVAL OF INDEMNITIES..................................... 7.09. -30- SECTION REMEDIES CUMULATIVE......................................... 7.10. -30- SECTION COOPERATION OF THE PARTIES WITH RESPECT TO ACTIONS AND THIRD 7.11. PARTY CLAIMS.............................................. -30- SECTION CONTRIBUTION................................................ 7.12. -31- SECTION PROCEDURES WITH RESPECT TO TRANSACTION 7.13. LIABILITIES............................................... -31- ARTICLE VIII INDEMNIFICATION OF OFFICERS AND DIRECTORS................................... -32- SECTION INDEMNIFICATION OF OFFICERS AND DIRECTORS................... 8.01. -32- ARTICLE IX MISCELLANEOUS............................................................... -32- SECTION COMPLETE AGREEMENT, CONSTRUCTION............................ 9.01. -32- SECTION ANCILLARY AGREEMENTS........................................ 9.02. -32- SECTION COUNTERPARTS................................................ 9.03. -32- SECTION SURVIVAL OF AGREEMENTS...................................... 9.04. -33- SECTION RESPONSIBILITY FOR EXPENSES................................. 9.05. -33- SECTION NOTICES..................................................... 9.06. -33- SECTION WAIVERS..................................................... 9.07. -33- SECTION AMENDMENTS.................................................. 9.08. -33- SECTION ASSIGNMENT.................................................. 9.09. -33- SECTION SUCCESSORS AND ASSIGNS...................................... 9.10. -34- SECTION TERMINATION................................................. 9.11. -34- SECTION THIRD PARTY BENEFICIARIES................................... 9.12. -34- SECTION ATTORNEY FEES............................................... 9.13. -34- SECTION TITLE AND HEADINGS.......................................... 9.14. -34- SECTION EXHIBITS AND SCHEDULES...................................... 9.15. -34- SECTION SPECIFIC PERFORMANCE........................................ 9.16. -34- SECTION GOVERNING LAW............................................... 9.17. -34- SECTION SEVERABILITY................................................ 9.18. -34- SECTION SUBSIDIARIES................................................ 9.19. -35-
ii 4 LIST OF EXHIBITS
EXHIBIT ------- DESCRIPTION A -- AUTOMOTIVE BUSINESS PRO FORMA BALANCE SHEET B -- AUTOMOTIVE SUBSIDIARIES C -- CORPORATE RESTRUCTURING TRANSACTIONS D -- DEBT REALIGNMENT PLAN E -- FORM OF HUMAN RESOURCES AGREEMENT F -- PACKAGING BUSINESS PRO FORMA BALANCE SHEET G -- PACKAGING SUBSIDIARIES H -- FORM OF TAX SHARING AGREEMENT I -- SHARED AGREEMENTS J -- EXCEPTIONS TO RESIGNATIONS OF COMMON DIRECTORS, OFFICERS AND EMPLOYEES K -- FORM OF TRANSITION TRADEMARK LICENSE
5 DISTRIBUTION AGREEMENT THIS DISTRIBUTION AGREEMENT is made and entered into as of , 1999 by and between Tenneco Inc., a Delaware corporation to be renamed Tenneco Automotive Inc. ("TENNECO"), and Tenneco Packaging Inc., a Delaware corporation ("PACKAGING"). RECITALS WHEREAS, the Board of Directors of Tenneco has deemed it appropriate and advisable to: (a) separate and divide the existing businesses of Tenneco so that (i) Packaging and its subsidiaries shall own, directly or indirectly, the Packaging Business (as defined below), and (ii) Tenneco and its remaining subsidiaries shall own, directly or indirectly, the Automotive Business (as defined below); (b) distribute, following consummation of such separation and division as a dividend to the holders of shares of common stock, par value $.01 per share, of Tenneco (the "TENNECO COMMON STOCK") all of the outstanding shares of common stock, $.01 par value, of Packaging (the "PACKAGING COMMON STOCK"); and (c) change the name of Tenneco Inc. to Tenneco Automotive Inc. upon consummation of the transaction; and WHEREAS, each of Tenneco and Packaging has determined that it is necessary and desirable to set forth the principal corporate transactions required to effect such separation, division and distribution and to set forth other agreements that will govern certain other matters prior to and following such separation, division and distribution. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. GENERAL. Unless otherwise defined herein or unless the context otherwise requires, the following terms will have the meanings set forth or referenced below (such meanings to be equally applicable to both the singular and plural forms of the terms defined). "ACTION" means any action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority or any arbitration tribunal. "AFFILIATE" means, when used with respect to a specified Person, another Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. For the purpose of this definition, "control" means (i) the ownership or control of more than 50% of the equity interest in any Person, or (ii) the ability to direct or cause the direction of the management or affairs of a Person, whether through the direct or indirect ownership of voting interests, by contract or otherwise. "AGENT" means First Chicago Trust Company of New York, or such other trust company or bank designated by Tenneco and Packaging, who shall act as agent for the holders of Tenneco Common Stock in connection with the Distribution. "AGREEMENT" means this Distribution Agreement by and between Tenneco and Packaging, including any amendments hereto and each Schedule and Exhibit attached hereto. TENNECO DISTRIBUTION AGREEMENT 6 "ANCILLARY AGREEMENTS" means all of the written agreements, instruments, understandings, assignments or other arrangements (other than this Agreement) entered into by either of the parties hereto or any other member of its respective Group in connection with the Corporate Restructuring Transactions, the Distribution and the other transactions contemplated hereby or thereby, including, without limitation, the following: (i) the Conveyancing and Assumption Instruments; (ii) the Human Resources Agreement; (iii) the Tax Sharing Agreement; (iv) the Insurance Agreement; (v) the Transition Services Agreement; and (vi) the Transition Trademark License. "AUTOMOTIVE ASSETS" means, collectively, all of the rights and assets owned by Tenneco or any of its Subsidiaries as of the close of business on the Distribution Date, including: (i) the capital stock of the Automotive Subsidiaries; (ii) all of the assets included on the Automotive Business Pro Forma Balance Sheet which are owned by Tenneco or any of its Subsidiaries as of the close of business on the Distribution Date; (iii) all of the assets and rights expressly allocated to Tenneco or any of the Automotive Subsidiaries under this Agreement or any of the Ancillary Agreements; (iv) any other asset acquired by Tenneco or any of its Subsidiaries from the date of the Automotive Business Pro Forma Balance Sheet to the close of business on the Distribution Date that is owned by Tenneco or one of its Subsidiaries as of the close of business on the Distribution Date and that is of a type or nature that would have resulted in such asset being included as an asset on the Automotive Business Pro Forma Balance Sheet had it been acquired on or prior to the date of the Automotive Business Pro Forma Balance Sheet, determined on a basis consistent with the determination of assets included on the Automotive Business Pro Forma Balance Sheet; and (v) Tenneco Trademarks and Trade Names; provided, however, that notwithstanding the foregoing, the Automotive Assets shall not include the Packaging Assets or the capital stock of Packaging. "AUTOMOTIVE BUSINESS" means the businesses (other than the Packaging Business or Prior Packaging Business) that, after giving effect to the Corporate Restructuring Transactions, are or were conducted by: (i) Tenneco, the Automotive Subsidiaries or any of the other members of the Automotive Group; (ii) any other division, Subsidiary or investment of Tenneco, or any Automotive Subsidiary or any of the other members of the Automotive Group managed or operated or in existence as of the date of this Agreement or any prior time, unless such other division, Subsidiary or investment is expressly included in the Packaging Group immediately after giving effect to the Corporate Restructuring Transactions; or TENNECO DISTRIBUTION AGREEMENT -2- 7 (iii) any business entity acquired or established by or for Tenneco or any of the Automotive Subsidiaries between the date of the Automotive Pro Forma Balance Sheet and the close of business on the Distribution Date that is engaged in, or intends to engage in, any business that is of a type or nature that would have resulted in such business being included either as a Subsidiary or an asset of Tenneco on the Automotive Business Pro Forma Balance Sheet had it been acquired or established on or prior to the date of the Automotive Business Pro Forma Balance Sheet, determined on a basis consistent with the determination of the Subsidiaries and assets included on the Automotive Business Pro Forma Balance Sheet. "AUTOMOTIVE BUSINESS PRO FORMA BALANCE SHEET" means the column entitled "Consolidated Tenneco Pro Forma" on the Tenneco Unaudited Pro Forma Consolidated Balance Sheet (prepared in accordance with GAAP) as of June 30, 1999 attached hereto as Exhibit A, other than any amounts reflected in that column for the line items titled "Short-term debt (including current maturities on long-term debt)" and "Long-term debt." The parties agree that the liabilities of each party and its respective Subsidiaries for indebtedness for borrowed money shall be determined pursuant to the Debt Realignment. "AUTOMOTIVE GROUP" means Tenneco, the Automotive Subsidiaries and, after giving effect to the Corporate Restructuring Transactions and the Distribution, the corporations, partnerships, joint ventures, investments and other entities that represent equity investments of Tenneco or any of the Automotive Subsidiaries. "AUTOMOTIVE INDEMNITEE" means: (i) Tenneco, the Automotive Subsidiaries and each Affiliate thereof after giving effect to the Corporate Restructuring Transactions and the Distribution; and (ii) each of the respective past, present and future directors, officers, employees and agents of any of the entities described in the immediately preceding clause (i) and each of the heirs, executors, successors and assigns of such directors, officers, employees and agents. "AUTOMOTIVE LIABILITIES" means, collectively, all of the following Liabilities other than Transaction Liabilities: (i) all of the Liabilities included on the Automotive Business Pro Forma Balance Sheet which remain outstanding as of the close of business on the Distribution Date; (ii) all of the Liabilities which are incurred or which otherwise accrue or are accrued at any time on, prior to, or after the date of the Automotive Business Pro Forma Balance Sheet and which arise or arose out of, or in connection with, the Automotive Assets, Automotive Business or Prior Automotive Business, determined on a basis consistent with the determination of the Liabilities of Tenneco which are included on the Automotive Business Pro Forma Balance Sheet; (iii) all of the Liabilities of Tenneco, each Automotive Subsidiary and each member of the Automotive Group under, or to be retained or assumed by Tenneco, any Automotive Subsidiary or any other member of the Automotive Group pursuant to, the Corporate Restructuring Transactions, the Debt Realignment, this Agreement (including, without limitation, the liabilities arising from the matters allocated to it in the Litigation Letter) or any of the Ancillary Agreements; (iv) all of the Liabilities of the parties hereto or their respective Subsidiaries (whenever arising whether prior to, on or following the Distribution Date) arising out of or in connection with or otherwise relating to the management or conduct before or after the Distribution Date of the Automotive Business or any Prior Automotive Business; TENNECO DISTRIBUTION AGREEMENT -3- 8 (v) all Automotive Securities Liabilities and Tenneco Securities Liabilities; and (vi) all other Liabilities of Tenneco, of each Automotive Subsidiary and of each of member of the Automotive Group which do not constitute Packaging Liabilities. "AUTOMOTIVE RECORDS" has the meaning ascribed to such term in Section 6.01(c) hereof. "AUTOMOTIVE SECURITIES LIABILITIES" means any and all Securities Liabilities, other than Transaction Securities Liabilities, of Tenneco or any entity that was or is a Subsidiary of Tenneco on or before the Distribution Date arising out of, or in connection with, or relating to any information, data (financial or otherwise, and including pro forma financial data) or disclosures (or any omissions of information, data or disclosures) provided, made or omitted (or alleged to have been provided, made or omitted) on or prior to the Distribution Date to the extent relating to or concerning the business, operations, financial or other results, prospects, plans, potential risks, financing or management of the Prior Automotive Business, Automotive Business, Automotive Assets or Automotive Group before or after the Distribution irrespective of (A) who authored, prepared or provided such information, data or disclosures (or, as the case may be, the section or discussion in which certain information, data or disclosure is alleged to have been omitted), or (B) the form in which, or medium through which (e.g., in writing, orally, electronically, etc.), such information, data, disclosure, section or discussion was provided. "AUTOMOTIVE SUBSIDIARIES" means the Subsidiaries of Tenneco set forth on Exhibit B hereto and all other Subsidiaries of Tenneco other than Packaging and the Packaging Subsidiaries. "BOOKS AND RECORDS" means all books, records, manuals, agreements and other materials (in any form or medium), including without limitation, all mortgages, licenses, indentures, contracts, financial data, customer lists, marketing materials and studies, advertising materials, price lists, correspondence, distribution lists, supplier lists, production data, sales and promotional materials and records, purchasing materials and records, personnel records, manufacturing and quality control records and procedures, blue prints, research and development files, records, data and laboratory books, accounts records, sales order files, litigation files, computer files, computer disks and tapes, microfiche, tape recordings and photographs. "CODE" means the Internal Revenue Code of 1986, as amended, or any successor law. "COMMISSION" means the United States Securities and Exchange Commission. "CONSENTS" has the meaning ascribed to such term in Section 5.05(d) hereof. "CONVEYANCING AND ASSUMPTION INSTRUMENTS" means collectively, the various written agreements, instruments and other documents to be entered into to effect the Corporate Restructuring Transactions or to otherwise effect the transfer of assets and the assumption of Liabilities in the manner contemplated by this Agreement, the Ancillary Agreements and the Corporate Restructuring Transactions. "CORPORATE RESTRUCTURING TRANSACTIONS" means, collectively, (i) each of the distributions, transfers, conveyances, contributions, assignments and other transactions described and set forth on Exhibit C hereto, and (ii) such other distributions, transfers, conveyances, contributions, assignments and other transactions that may be required to be accomplished, effected or consummated by any of Tenneco, Packaging or any of their respective divisions, investments, Subsidiaries or Affiliates in order to separate and divide, in a series of transactions that, to the extent intended to qualify for tax-free transactions under the Code, shall qualify for tax-free treatment under TENNECO DISTRIBUTION AGREEMENT -4- 9 the Code, the existing businesses of Tenneco so that, except as otherwise expressly set forth on Exhibit C hereto: (i) the Packaging Assets shall be owned, directly and indirectly, by Packaging; and (ii) the businesses and assets of Tenneco that remain after the separations and divisions described in clause (i) above, including, without limitation, the Automotive Assets are, after giving effect to the Distribution, owned, directly and indirectly, by Tenneco. "DEBT REALIGNMENT" means the repayment, realignment, refinancing, exchange and/or modification of the consolidated indebtedness of Tenneco, as described in Exhibit D attached hereto. "DGCL" means the General Corporation Law of the State of Delaware. "DISTRIBUTION" means the distribution on the Distribution Date as a dividend to holders of record of shares of Tenneco Common Stock as of the Distribution Record Date of all of the outstanding Packaging Common Stock owned by Tenneco on the basis provided in Section 3.02 hereof. "DISTRIBUTION DATE" means such date as may hereafter be determined by Tenneco's Board of Directors as the date on which the Distribution shall be effected. "DISTRIBUTION RECORD DATE" means the close of business on the date determined by the Board of Directors of Tenneco for the purpose of determining the holders of record of Tenneco Common Stock entitled to participate in the Distribution. "ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other Governmental restrictions (including without limitation the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et seq.), whether now or hereafter in existence, relating to the environment, natural resources or human health and safety or endangered or threatened species of fish, wildlife and plants or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals, or industrial, toxic or hazardous substances or wastes or the cleanup or other remediation thereof. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "GAAP" means United States generally accepted accounting principles and practices, as in effect on the date of this Agreement, as promulgated by the Financial Accounting Standards Board and its predecessors. "GOVERNMENTAL AUTHORITY" means any government or any agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign. "GROUP" means (i) with respect to Tenneco, the Automotive Group, and (ii) with respect to Packaging, the Packaging Group. "HUMAN RESOURCES AGREEMENT" means the Human Resources Agreement by and between Tenneco and Packaging, which agreement shall be entered into on or prior to the Distribution Date in substantially the form attached hereto as Exhibit E. TENNECO DISTRIBUTION AGREEMENT -5- 10 "INDEMNIFIABLE LOSSES" means, with respect to any Person, any and all losses, liabilities, penalties, claims, damages, demands, costs and expenses (including, without limitation, reasonable attorneys' fees, investigation expenses and any and all other out-of-pocket expenses, but excluding any punitive or consequential damages) or other Liabilities whatsoever that are assessed, imposed, awarded against, incurred or accrued by such Person (a) in investigating, preparing for, defending against or otherwise arising out of or in connection with any Actions, any potential or threatened Actions or any Third Party Claims for which such Person would be entitled to indemnification under Article VII hereof, (b) as a result of the failure to remove as a guarantor or obligor any Person that is contemplated being removed as a guarantor or obligor pursuant to Section 5.06 hereof, or (c) in respect of any other event, occurrence or matter for which such Person would be entitled to indemnification under Article VII hereof, in each case whether accrued or incurred on, before or after the date of this Agreement. "INDEMNIFYING PARTY" has the meaning ascribed to such term in Section 7.04(a) hereof. "INDEMNITEE" has the meaning ascribed to such term in Section 7.04(a) hereof. "INSURANCE AGREEMENT" means the Insurance Agreement by and between Tenneco and Packaging, which agreement shall be entered into on or prior to the Distribution Date and which shall provide for the separation and administration of existing insurance programs and the purchase of "run-off" policies for fiduciaries and directors and officers. "INSURANCE PROCEEDS" means, with respect to any insured party, those monies, net of any applicable premium adjustment retrospectively-rated premium, deductible, retention or cost of reserve paid or held by or for the benefit of such insured, which are either: (i) received by an insured from an insurance carrier; or (ii) paid by an insurance carrier on behalf of an insured. "LAW" means any constitutional provision, statute, law, ordinance, rule, regulation, permit, decree, injunction, order, ruling, determination, finding or writ of any Governmental Authority. "LIABILITIES" means any and all debts, liabilities, obligations, responsibilities, response actions, losses, damages (whether compensatory, punitive or statutory), fines, penalties and sanctions, absolute or contingent, matured or unmatured, liquidated or unliquidated, foreseen or unforeseen, joint, several or individual, asserted or unasserted, accrued or unaccrued, known or unknown, whenever arising, including, without limitation, those arising under or in connection with any Law (including any Environmental Law), Action, threatened Action, order or consent decree of any Governmental Authority or any award of any arbitration tribunal, and those arising under any contract, guarantee, commitment or undertaking, whether sought to be imposed by a Governmental Authority, private party or party to this Agreement, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, or otherwise, and including any costs, expenses, interest, attorneys' fees, disbursements and expense of counsel, expert and consulting fees and costs related thereto or to the investigation or defense thereof. "LITIGATION LETTER" means the letter agreement between Tenneco and Packaging relating to the notice and defense of existing Third Party Claims. "NYSE" means the New York Stock Exchange. TENNECO DISTRIBUTION AGREEMENT -6- 11 "PACKAGING ASSETS" means, collectively, all of the following rights and assets that are owned by Tenneco or any of its Subsidiaries as of the close of business on the Distribution Date: (i) the capital stock of the Packaging Subsidiaries; (ii) all of the assets included on the Packaging Business Pro Forma Balance Sheet that are owned by Tenneco or any of its Subsidiaries as of the close of business on the Distribution Date; (iii) all of the assets and rights expressly allocated to Packaging or any Packaging Subsidiary under this Agreement, the Contribution Agreement or any of the Ancillary Agreements; and (iv) any other asset acquired by Tenneco or any of its Subsidiaries from the date of the Packaging Business Pro Forma Balance Sheet or to the close of business on the Distribution Date that is owned by Tenneco or any of its Subsidiaries as of the close of business on the Distribution Date and that is of a type or nature that would have resulted in such asset being included as an asset on the Packaging Business Pro Forma Balance Sheet had it been acquired on or prior to the date thereof, determined on a basis consistent with the determination of the assets included on the Packaging Business Pro Forma Balance Sheet. "PACKAGING BUSINESS" means the businesses that, after giving effect to the Corporate Restructuring Transactions, are or were conducted by: (i) Packaging, the Packaging Subsidiaries or any of the other members of the Packaging Group; or (ii) any business entity acquired or established by or for Tenneco, Packaging or any of the Packaging Subsidiaries between the date of this Agreement and the close of business on the Distribution Date that is engaged in, or intends to engage in, any business that is of a type or nature that would have resulted in such business being included either as a Subsidiary or an asset on the Packaging Business Pro Forma Balance Sheet, had it been acquired or established on or prior to the date thereof, determined on a basis consistent with the determination of the Subsidiaries and assets included on the Packaging Business Pro Forma Balance Sheet. "PACKAGING BUSINESS PRO FORMA BALANCE SHEET" means the column entitled "Packaging Pro Forma Combined" on the Packaging Unaudited Pro Forma Combined Balance Sheet (prepared in accordance with GAAP) as of June 30, 1999 attached hereto as Exhibit F other than any amounts reflected in that column for the line items titled "Short-term debt" and "Long-term debt". The parties agree that the liabilities of each party and its respective Subsidiaries for indebtedness for borrowed money shall be determined pursuant to the Debt Realignment. "PACKAGING COMMON STOCK" has the meaning ascribed to such term in the Recitals to this Agreement. "PACKAGING" has the meaning ascribed to such term in the Recitals to this Agreement. "PACKAGING GROUP" means Packaging, the Packaging Subsidiaries and, after giving effect to the Corporate Restructuring Transactions and the Distribution, the corporations, partnerships, joint ventures, investments and other entities that represent equity investments of any of Packaging or any of the Packaging Subsidiaries. "PACKAGING INDEMNITEES" means: (i) Packaging, the Packaging Subsidiaries and each Affiliate thereof after giving effect to the Corporate Restructuring Transactions and the Distribution; and TENNECO DISTRIBUTION AGREEMENT -7- 12 (ii) each of the respective past, present and future directors, officers, employees and agents of any of the entities described in the immediately preceding clause (i) and each of the heirs, executors, successors and assigns of any of such directors, officers, employees and agents. "PACKAGING INFORMATION STATEMENT" means the information statement or registration statement relating to Packaging and the transactions contemplated hereby to be distributed to holders of Tenneco Common Stock pursuant to the terms of this Agreement. "PACKAGING LIABILITIES" means, collectively, all of the following Liabilities other than Transaction Liabilities: (i) all of the Liabilities included on the Packaging Business Pro Forma Balance Sheet which remain outstanding as of the close of business on the Distribution Date; (ii) all of the Liabilities which are incurred or which otherwise accrue or are accrued at any time on, prior to or after the date of the Packaging Business Pro Forma Balance Sheet, and which arise or arose out of, or in connection with the Packaging Assets, Packaging Business or Prior Packaging Business, determined on a basis consistent with the determination of Liabilities of Packaging on the Packaging Business Pro Forma Balance Sheet; (iii) all of the Liabilities of Packaging, each Packaging Subsidiary or any other member of the Packaging Group under, or to be retained or assumed by Packaging, any Packaging Subsidiary or any of the other members of the Packaging Group pursuant to the Corporate Restructuring Transactions, the Debt Realignment, this Agreement (including, without limitation, the liabilities arising from the matters allocated to it in the Litigation Letter) or any of the Ancillary Agreements; (iv) all of the Liabilities of the parties hereto or their respective Subsidiaries (whenever arising whether prior to, at or following the Distribution Date) arising out of or in connection with or otherwise relating to the management or conduct before or after the Distribution Date of the Packaging Business or Prior Packaging Business; (v) the Packaging Securities Liabilities; and (vi) all other Liabilities of Packaging, of each Packaging subsidiary and of each member of the Packaging Group that are not expressly included in clauses (i) through (v) of the definition of Automotive Liabilities. "PACKAGING RECORDS" has the meaning ascribed to such term in Section 6.01(a) hereof. "PACKAGING REGISTRATION STATEMENT" means the Registration Statement on Form 10 to be filed with the Commission pursuant to the requirements of Section 12 of the Exchange Act and the rules and regulations thereunder in order to register the Packaging Common Stock under Section 12(b) of the Exchange Act. "PACKAGING SECURITIES LIABILITIES" means any and all Securities Liabilities, other than Transaction Securities Liabilities, of Tenneco or any entity that was or is a Subsidiary of Tenneco on or prior to the Distribution Date arising out of, or in connection with, or relating to any information, data (financial or otherwise, and including pro forma financial data) or disclosures (or any omissions of information, data or disclosures) provided, made or omitted (or alleged to have been provided, made or omitted) on or prior to the Distribution Date to the extent relating to or concerning the business, operations, financial or other results, prospects, plans, potential risks, financing or management of the Prior Packaging Business, Packaging Business, Packaging Assets or Packaging Group before or after the Distribution irrespective of (A) who authored, prepared or provided such information, data or disclosures (or, as the case may be, the section or discussion in which certain TENNECO DISTRIBUTION AGREEMENT -8- 13 information, data or disclosure is alleged to have been omitted), or (B) the form in which, or medium through which (e.g., in writing, orally, electronically, etc.), such information, data, disclosure, section or discussion was provided. "PACKAGING SUBSIDIARIES" means the Subsidiaries listed on Exhibit G hereto. "PERSON" means any natural person, corporation, business trust, join venture, association, company, partnership, limited liability company or other entity, or any government, or any agency or political subdivision thereof. "PRIOR AUTOMOTIVE BUSINESS" means, collectively, the businesses that were conducted by any division, Subsidiary, other business entity or investment of Tenneco (or one of its former Subsidiaries or former Affiliates) that (i) at any time prior to the Distribution Date, were included in the "automotive parts" segment for purposes of segment reporting in any Annual Report on Form 10-K of Tenneco or the entity that, from December 8, 1987 to December 12, 1996, was known as "Tenneco Inc.", and (ii) were sold, transferred or otherwise discontinued or disposed of prior to the Distribution Date. "PRIOR PACKAGING BUSINESS" means, collectively, the businesses that were conducted by any division, Subsidiary, other business entity or investment of Tenneco (or one of its former Subsidiaries or former Affiliates) that (i) at any time prior to the Distribution Date were included in the "packaging," "specialty packaging," or "paperboard packaging" segments for purposes of segment reporting in any Annual Report on Form 10-K of Tenneco or the entity that, from December 8, 1987 to December 12, 1996, was known as "Tenneco Inc.", and (ii) were sold, transferred or otherwise discontinued or disposed of prior to the Distribution Date. "PRIOR RULINGS" means, collectively, the private letter ruling issued by the Internal Revenue Service on October 30, 1996 with control number PLR-240198-96, and the three private letter rulings supplementing that ruling, issued by the Internal Revenue Service on December 4, 1996 (control number PLR-252639-96), December 5, 1996 (control number PLR-253203-96) and May 27, 1997 (control number PLR-104206-97). "PRIVILEGE" has the meaning ascribed to such term in Section 6.07(a) hereof. "PRIVILEGED INFORMATION" has the meaning ascribed to such term in Section 6.07(a) hereof. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SECURITIES LIABILITIES" means any and all losses, liabilities, penalties, claims, damages, demands, costs or expenses or other Liabilities whatsoever that are assessed, imposed, awarded against, incurred or accrued by a Person arising out of or relating in whole or in part to any Action, any potential or threatened Action or any Third Party Claim (or potential or threatened Third Party Claim) by any Governmental Authority or any other Person that is based on any violations or alleged violations of the Securities Act, Exchange Act, any of the rules or regulations of the Commission promulgated under the Securities Act or Exchange Act, or any other securities or other similar Law. "SUBSIDIARY" means, with respect to any Person: (i) any corporation of which at least a majority in interest of the outstanding voting stock (having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of a contingency) is at the time, directly or indirectly, owned or controlled by such Person or by such Person and one or more of its Subsidiaries; or TENNECO DISTRIBUTION AGREEMENT -9- 14 (ii) any non-corporate entity in which such Person or such Person and one or more Subsidiaries of such Person either (a) directly or indirectly, at the date of determination thereof, has at least majority ownership interest, or (b) at the date of determination is a general partner or an entity performing similar functions (e.g., manager of a limited liability company or a trustee of a trust). "TAX" or "TAXES" means any income, gross income, gross receipts, profits, capital stock, franchise, withholding, payroll, social security, workers compensation, unemployment, disability, property, ad valorem, stamp, excise, occupation, services, sales, use, license, lease, transfer, import, export, value added, alternative minimum, estimated or other similar tax (including any fee, assessment or other charge in the nature of or in lieu of any tax) imposed by any governmental entity or political subdivision thereof, and any interest, penalties, additions to tax or additional amounts in respect of the foregoing. "TAX SHARING AGREEMENT" means the Tax Sharing Agreement by and among Tenneco and Packaging, which agreement shall be entered into on or prior to the Distribution Date in substantially the form attached hereto as Exhibit I. "TENNECO" means Tenneco Inc., a Delaware corporation. "TENNECO COMMON STOCK" has the meaning ascribed to such term in the Recitals to this Agreement. "TENNECO CORPORATE RECORDS" has the meaning ascribed to such term in Section 6.01(a) hereof. "TENNECO HOLDERS" means the holders of record of Tenneco Common Stock as of the Distribution Record Date. "TENNECO SECURITIES LIABILITIES" means any and all Securities Liabilities of Tenneco or any of its Subsidiaries including, without limitation, Tenneco Automotive Inc., other than Packaging Securities Liabilities or Transaction Securities Liabilities. "TENNECO TRADEMARKS AND TRADE NAMES" means trademarks, service marks, and trade names containing "TENNECO", "TEN", or "TENN" or variations thereof, along with their respective applications and registrations wherever used or registered. "TERMINATION DATE" means the date on which this Agreement is terminated pursuant to and in accordance with the provisions of Section 8.11 of this Agreement. "THIRD PARTY CLAIM" has the meaning as defined in Section 7.05(a) hereof. "TRADEMARK TRANSITION LICENSE" has the meaning ascribed to such term in Section 5.02 hereof. "TRANSACTION LIABILITIES" means any and all Transaction Securities Liabilities and any and all Liabilities imposed on Tenneco, Packaging, or any member of their respective Group, jointly or severally, arising as a result of the actions taken in connection with or pursuant to this Agreement, any Ancillary Agreement, the Debt Realignment or any of the Corporate Restructuring Transactions that are based on: (i) any violation or alleged violation of the DGCL or any other corporate or other similar Law, to the extent such violation occurred or is alleged to have occurred on or prior to the Distribution Date; or TENNECO DISTRIBUTION AGREEMENT -10- 15 (ii) any violation or alleged violation by any officer or director of any member of the Packaging Group or the Automotive Group of such officer's or director's fiduciary duty as an officer or director. "TRANSACTION SECURITIES LIABILITIES" means any and all Securities Liabilities imposed on Tenneco, Packaging, or any member of their respective Group, jointly or severally, arising as a result of the actions taken in connection with or pursuant to this Agreement, any Ancillary Agreement, the Debt Realignment or any of the Corporate Restructuring Transactions that are not Automotive Securities Liabilities or Packaging Securities Liabilities. "TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement by and between Tenneco and Packaging, which agreement shall be entered into on or prior to the Distribution Date pursuant to which Packaging shall provide certain administrative services to Tenneco after the Distribution Date. "1996 AGREEMENTS" means the following agreements, and any amendments thereto: (i) Distribution Agreement, dated November 1, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), Tenneco Inc. (formerly New Tenneco Inc.) and Newport News Shipbuilding Inc., as amended (the "1996 DISTRIBUTION AGREEMENT"); (ii) Debt and Cash Allocation Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), Tenneco Inc. (formerly New Tenneco Inc.) and Newport News Shipbuilding Inc. (the "1996 DEBT AND CASH ALLOCATION AGREEMENT"); (iii) Benefits Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), Tenneco Inc. (formerly New Tenneco Inc.) and Newport News Shipbuilding Inc.; (iv) Insurance Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), Tenneco Inc. (formerly New Tenneco Inc.) and Newport News Shipbuilding Inc.; (v) Tax Sharing Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), Newport News Shipbuilding Inc., Tenneco Inc. (formerly New Tenneco Inc.) and El Paso Natural Gas Company; (vi) First Amendment to Tax Sharing Agreement, dated as of December 11, 1996, among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), Tenneco Inc. (formerly New Tenneco Inc.) and Newport News Shipbuilding Inc.; (vii) Transition Services Agreement, dated June 19, 1996, by and among Tenneco Business Services Inc., El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.) and El Paso Natural Gas Company; (viii) Trademark Transition License Agreement, dated December 11, 1996, by and between Newport News Shipbuilding Inc. and Tenneco Inc. (formerly New Tenneco Inc.) (the "Newport News License"); and (ix) Trademark Transition License Agreement, dated December 11, 1996, by and between Tenneco Inc. (formerly New Tenneco Inc.) and El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.) (the "El Paso License"). TENNECO DISTRIBUTION AGREEMENT -11- 16 SECTION 1.02. REFERENCES. References to an "Exhibit" or to a "Schedule" are, unless otherwise specified, to one of the Exhibits or Schedules attached to this Agreement, and references to a "Section" are, unless otherwise specified to one of the Sections of this Agreement. References to "including" shall be deemed to mean "including, without limitation." ARTICLE II PRE-DISTRIBUTION TRANSACTIONS; CERTAIN COVENANTS SECTION 2.01. CORPORATE RESTRUCTURING TRANSACTIONS. On or prior to the Distribution Date (but in all events prior to the Distribution) and subject to Section 2.06 below, each of Tenneco and Packaging shall, and shall cause each of their respective divisions, investments, Subsidiaries and Affiliates to, as applicable, take such action or actions as is necessary to cause, effect and consummate the Corporate Restructuring Transactions. Each of Tenneco and Packaging hereby agrees that any one or more of the Corporate Restructuring Transactions may be modified, supplemented or eliminated on or prior to the Distribution Date; provided such modification, supplement or elimination is determined to be necessary or appropriate (i) to divide the existing businesses of Tenneco so that Tenneco's packaging businesses and administrative services operations shall be owned, directly and indirectly, by Packaging, or so that Tenneco's automotive businesses shall be owned, directly and indirectly by Tenneco after giving effect to the Distribution, in each case so long as the ruling referred to in the following clause (ii) will not be adversely affected by such modification, supplement, or elimination, or (ii) to obtain a ruling from the Internal Revenue Service as described in Section 4.01(d). SECTION 2.02. PRE-DISTRIBUTION STOCK DIVIDEND TO TENNECO. On or prior to the Distribution Date (but in all events prior to the Distribution), Packaging shall issue to Tenneco, as a stock dividend, the number of shares of Packaging Common Stock as is required to effect the Distribution, as certified by the Agent. In connection therewith, Tenneco shall deliver to Packaging for cancellation the share certificate (or certificates) then held by it representing all Packaging Common Stock, and Packaging shall issue a new certificate (or certificates) to Tenneco representing the total number of shares of Packaging Common Stock to be owned by Tenneco after giving effect to such stock dividend. SECTION 2.03. CERTIFICATE OF INCORPORATION AND BYLAWS OF PACKAGING. On or prior to the Distribution Date (but in all events prior to the Distribution), Tenneco and Packaging shall each take all necessary actions so that, as of the Distribution Date, the certificate of incorporation and bylaws of Packaging are amended and/or restated in such manner as is determined appropriate by Tenneco. SECTION 2.04. ELECTION OF DIRECTORS OF PACKAGING. On or prior to the Distribution Date, Tenneco, as the sole stockholder of Packaging, shall take all necessary action so that as of the Distribution Date the directors of Packaging will be as set forth in the Packaging Information Statement. SECTION 2.05. TRANSFER AND ASSIGNMENT OF CERTAIN LICENSES AND PERMITS. (a) LICENSES AND PERMITS RELATING TO THE PACKAGING BUSINESS. On or prior to the Distribution Date, or as soon as reasonably practicable thereafter, Tenneco shall (and, if applicable, shall cause any other Person over which it has legal or effective direct or indirect control to) duly and validly transfer or cause to be duly and validly transferred to the appropriate member of the Packaging Group (as directed by Packaging) all transferrable licenses, permits and authorizations issued by any Governmental Authority that relate exclusively to the Packaging Business but which are held in the name of Tenneco, any member of the Automotive Group, or any of their respective employees, officers, directors, stockholders or agents. TENNECO DISTRIBUTION AGREEMENT -12- 17 (b) LICENSES AND PERMITS RELATING TO THE AUTOMOTIVE BUSINESS. On or prior to the Distribution Date, or as soon as reasonably practicable thereafter, Packaging shall (and if applicable, shall cause any other Person over which it has legal or effective direct or indirect control to) duly and validly transfer or cause to be duly and validly transferred to the appropriate member of the Automotive Group (as directed by Tenneco) all transferrable licenses, permits and authorizations issued by any Governmental Authority that relate exclusively to the Automotive Business but which are held in the name of any member of the Packaging Group or any of their respective employees, officers, directors, stockholders or agents. SECTION 2.06. TRANSFER AND ASSIGNMENT OF CERTAIN AGREEMENTS. (a) TRANSFER AND ASSIGNMENT OF AUTOMOTIVE BUSINESS AGREEMENTS. On or prior to the Distribution Date, or as soon as reasonably practicable thereafter, and subject to the limitations set forth in this Section 2.06, Packaging shall (and, if applicable, shall cause any of the other members of its Group over which it has legal or effective direct or indirect control to) assign, transfer and convey to Tenneco (or such other member of the Automotive Group as Tenneco shall direct) all of its (or such other member of its Group's) right, title and interest in and to any and all agreements that relate exclusively to the Automotive Business or any member of the Automotive Group. (b) TRANSFER AND ASSIGNMENT OF PACKAGING BUSINESS AGREEMENTS. On or prior to the Distribution Date, or as soon as reasonably practicable thereafter, and subject to the limitations set forth in this Section 2.06, Tenneco shall (and, if applicable, shall cause any other Person over which it has legal or effective direct or indirect control to) assign, transfer and convey to Packaging (or such other member of the Packaging Group as Packaging shall direct) all of its (or such other Person's) right, title and interest in and to any and all agreements that relate exclusively to the Packaging Business or any member of the Packaging Group. (c) SHARED AGREEMENTS. (i) Exhibit I attached hereto contains a list of certain third party agreements with Tenneco Business Services, Inc. under or through which both the Automotive Group and Packaging Group has obtained or does obtain goods or services. Of these third party agreements, those listed in Section 1 of Exhibit I have been modified to provide that Tenneco and Packaging may each order, receive and pay for the goods and services to which such agreements apply for its respective Group as if each company had a separate contract. The third-party agreements listed in Section 2 of Exhibit I will be administered by Packaging or one of its Subsidiaries after the Distribution and the allocated costs for such goods or services will be billed to and paid by Tenneco on a recurring basis. (ii) Except with respect to the 1996 Agreements and the agreements listed on Exhibit I hereto, and subject to the provisions of Section 5.08 below, any agreement to which any party hereto (or any other member of such party's Group) is a party that inures to the benefit of or relates to the Automotive Business and the Packaging Business, but that is not a Packaging Asset or otherwise the subject of this Agreement or any Ancillary Agreement, shall be assigned in part, at the expense and risk of the Assignee (as defined herein), on or prior to the Distribution Date or as soon as reasonably practicable thereafter, so that each party (or such other member of such party's Group) shall be entitled to the rights and benefits inuring to its business under such agreement. (d) OBLIGATIONS OF ASSIGNEES. The assignee of any agreement assigned, in whole or in part, hereunder (an "ASSIGNEE") shall, as a condition to such assignment, assume and agree to pay, perform and fully discharge all obligations of the assignor under such agreement (whether such obligations arose or were incurred prior to, on or subsequent to the Distribution Date and irrespective TENNECO DISTRIBUTION AGREEMENT -13- 18 of whether such obligations have been asserted as of the Distribution Date) or, in the case of a partial assignment under Section 2.06(c)(ii) above, such Assignee's related portion of such obligations as determined in accordance with the terms of the relevant agreement, where determinable on the face thereof, or otherwise as determined in accordance with the practice of the parties prior to the Distribution. Furthermore, the Assignee shall use its reasonable efforts to cause the assignor of such agreement to be released from the Assignee's obligations under the assigned agreements. (e) NO ASSIGNMENT OF CERTAIN AGREEMENTS. Notwithstanding anything in this Agreement to the contrary, this Agreement shall not constitute an agreement to assign any agreement, in whole or in part, or any rights thereunder if the agreement to assign or attempt to assign, without the consent of a third party, would constitute a breach thereof or in any way adversely affect the rights of the Assignee thereto until such consent is obtained. If an attempted assignment thereof would be ineffective or would adversely affect the rights of any party hereto (or a member of its Group) so that the Assignee would not, in fact, receive all such rights, the parties hereof will make efforts consistent with Section 5.05(d) hereof to effect any arrangement designed reasonably to provide for the Assignee the benefits of, and to permit the Assignee to assume liabilities under, any such agreement subject to the remaining sentences of this Section 2.06(e). There are certain software license agreements held in the name of a member of the Packaging Group that presently inure to the benefit of the Automotive Business and the Packaging Business. Notwithstanding any other provision of this Agreement and subject to the terms of the Transition Service Agreement, each such license agreement shall continue to be held by that member of the Packaging Group without any obligation of any party to cause the assignment or inurement to the benefit of such license agreement, or to effect any arrangement to provide such benefit, to the Automotive Business, except where the license agreement expressly permits the benefits and obligations to be divided among the Businesses or as may be negotiated with the licensor by that member of the Packaging Group and such other parties. SECTION 2.07. OTHER TRANSACTIONS. On or prior to the Distribution Date (but in all events prior to the Distribution), each of Tenneco and Packaging shall have consummated those other transactions in connection with the Corporate Restructuring Transactions and the Distribution that are contemplated by the Packaging Information Statement and the ruling request submitted by Tenneco to the Internal Revenue Service dated April 29, 1999 (as subsequently supplemented), and not specifically referred to in Sections 2.01 through 2.06 above, as long as such other transactions will not adversely affect the ruling from the Internal Revenue Service. SECTION 2.08. ELECTION OF OFFICERS. On or prior to the Distribution Date, each of Tenneco and Packaging shall, as applicable, take all actions necessary and desirable so that as of the Distribution Date the officers of Packaging will be as set forth in the Packaging Information Statement. SECTION 2.09. PACKAGING REGISTRATION STATEMENT. Tenneco and Packaging shall prepare or cause to be prepared, and Packaging shall file or cause to be filed with the Commission, the Packaging Registration Statement. The Packaging Registration Statement shall include or incorporate by reference the Packaging Information Statement setting forth appropriate disclosure concerning Tenneco, Packaging, the Distribution and such other matters as may be required to be disclosed therein by the provisions of the Exchange Act and the rules and regulations promulgated thereunder. Tenneco and Packaging shall take all such actions as may be reasonably necessary or appropriate in order to cause the Packaging Registration Statement to become effective by order of the Commission pursuant to the Exchange Act. SECTION 2.10. STATE SECURITIES LAWS. Prior to the Distribution Date, Tenneco and Packaging shall take all such action as may be necessary or appropriate under the securities or blue sky laws of states or other political subdivisions of the United States in order to effect the Distribution. TENNECO DISTRIBUTION AGREEMENT -14- 19 SECTION 2.11. LISTING APPLICATION. Prior to the Distribution Date, Tenneco and Packaging shall prepare and file with the NYSE a listing application and related documents and shall take all such other actions with respect thereto as shall be necessary or desirable in order to cause the NYSE to list on or prior to the Distribution Date, subject to official notice of issuance, the Packaging Common Stock. SECTION 2.12. CERTAIN FINANCIAL AND OTHER ARRANGEMENTS. (a) SETTLEMENT OF INTERCOMPANY ACCOUNTS BETWEEN PACKAGING GROUP AND AUTOMOTIVE GROUP. All intercompany receivables, payables and loans (other than receivables, payables and loans otherwise specifically provided for in any of the Ancillary Agreements or hereunder), including, without limitation, in respect of any cash balances, any cash balances representing deposited checks or drafts for which only a provisional credit has been allowed or any cash held in any centralized cash management system, between any member of the Packaging Group, on the one hand, and any member of the Automotive Group, on the other hand, shall, as of the close of business on the Distribution Date, be settled, capitalized or converted into ordinary trade accounts, in each case as may be agreed in writing prior to the Distribution Date by duly authorized representatives of Tenneco and Packaging. (b) OPERATIONS IN ORDINARY COURSE. Except as otherwise provided in this Agreement or any Ancillary Agreement during the period from the date of this Agreement through the Distribution Date, each of Tenneco and Packaging shall, and shall cause any entity that is a Subsidiary of such party at any time during such period to, conduct its business in a manner substantially consistent with current and past operating practices and in the ordinary course. SECTION 2.13. DIRECTOR, OFFICER AND EMPLOYEE RESIGNATIONS. Subject to the provisions of Section 2.04 and Section 2.08 above: (a) RESIGNATIONS BY DIRECTORS AND EMPLOYEES OF THE AUTOMOTIVE GROUP. Tenneco shall cause all of its directors and all employees of the Automotive Group to resign, effective as of (or immediately prior to) the close of business on the Distribution Date, from all boards of directors or similar governing bodies (including committees and trusts responsible for benefit plans and compensation structures) of each member of the Packaging Group on which they serve, and from all positions as officers or employees of any member of the Packaging Group, except as otherwise set forth on Exhibit J hereto or in the Packaging Information Statement or as otherwise mutually agreed to in writing on or prior to the Distribution Date by Tenneco and Packaging. (b) RESIGNATIONS BY DIRECTORS AND EMPLOYEES OF THE PACKAGING GROUP. Packaging shall cause all of its directors and all employees of the Packaging Group to resign, effective as of the close of business on the Distribution Date, from all boards of directors or similar governing bodies (including committees and trusts responsible for benefit plans and compensation structures) of each member of the Automotive Group on which they serve, and from all positions as officers or employees of any member of the Automotive Group, except as otherwise set forth on Exhibit J hereto or in the Packaging Information Statement or as otherwise mutually agreed to in writing on or prior to the Distribution Date by Packaging and Tenneco. SECTION 2.14. TRANSFERS NOT EFFECTED PRIOR TO THE DISTRIBUTION; TRANSFERS DEEMED EFFECTIVE AS OF THE DISTRIBUTION DATE. To the extent that any transfers or transactions contemplated by this Article II shall not have been consummated on or prior to the Distribution Date, the parties hereto shall cooperate and make efforts consistent with Section 5.05(d) hereof (and shall cause each of their respective Affiliates and each member of their respective Groups over which they have legal or effective direct or indirect control to cooperate and make such efforts) to effect such transfers or transactions as promptly following the Distribution Date as shall be practicable. Nothing herein shall be deemed to require the transfer of any assets or the assumption of any Liabilities which by TENNECO DISTRIBUTION AGREEMENT -15- 20 their terms or operation of Law cannot be transferred or assumed, provided, however, that the parties hereto shall cooperate (and shall cause each of their respective Affiliates and each member of their respective Groups over which they have legal or effective direct or indirect control to cooperate) to seek to obtain any necessary consents or approvals for the transfer of all assets and Liabilities contemplated to be transferred or assumed pursuant to this Article II and Section 5.04, in a manner consistent with Section 5.05(d) hereof. In the event that any such transfer of assets or assumption of Liabilities has not been consummated, from and after the Distribution Date the party retaining such asset or Liability (or, as applicable, such other member or members of such party's Group) shall hold such asset in trust for the use and benefit of the party entitled thereto (at the expense of the party entitled thereto) or retain such Liability for the account of the party by whom such Liability is to be assumed pursuant hereto, as the case may be, and take such other action pursuant to Section 5.05(d) hereof as may be reasonably requested by the party to whom such asset is to be transferred, or by whom such Liability is to be assumed, as the case may be, in order to place such party, insofar as is reasonably possible, in the same position as would have existed had such asset or Liability been transferred or assumed as contemplated hereby. As and when any such asset or Liability becomes transferable or assumable, such transfer shall be effected forthwith. As of the Distribution Date, each party hereto (or, if applicable, such other members of such party's Group) shall be deemed to have acquired (or, as applicable, retained) complete and sole beneficial ownership over all of the assets, together with all rights, powers and privileges incident thereto, and shall be deemed to have assumed in accordance with the terms of this Agreement all of the Liabilities, and all duties, obligations and responsibilities incident thereto, which such party (or any other member of such party's Group) is entitled to acquire or required to assume pursuant to the terms of this Agreement. SECTION 2.15. ANCILLARY AGREEMENTS. Prior to the Distribution Date, each of Tenneco and Packaging shall enter into, or where applicable shall cause such other members of their respective Group to enter into, (a) the Ancillary Agreements and (b) any other agreements in respect of the Corporate Restructuring Transactions and the Distribution as are reasonably necessary or appropriate in connection with the transactions contemplated hereby and thereby. SECTION 2.16. DEBT REALIGNMENT. Tenneco and Packaging shall each use commercially reasonable efforts so that, immediately prior to the Distribution, the Debt Realignment plan set forth on Exhibit D attached hereto has been effected in accordance with the goal set forth in clause 1 of Exhibit D. Notwithstanding the foregoing, neither Tenneco nor Packaging, nor any member of its respective Group, shall have any recourse, claim, or cause of action to or against any other member of either Group if the ultimate result of the Debt Realignment, the manner of the Debt Realignment or any element or component thereof varies from that set forth in Exhibit D. ARTICLE III THE DISTRIBUTION SECTION 3.01. TENNECO ACTION PRIOR TO THE DISTRIBUTION. Subject to the terms and conditions set forth herein, Tenneco shall take, or cause to be taken, the following acts or actions in connection with, and to otherwise effect in accordance with the terms of this Agreement, the Distribution. (a) DECLARATION OF DISTRIBUTION AND ESTABLISHMENT OF DISTRIBUTION DATE. The Board of Directors of Tenneco shall, in its sole discretion and subject to and in accordance with this Agreement, the applicable rules of the NYSE and provisions of the DGCL, declare the Distribution and establish the Distribution Record Date, the Distribution Date, the date on which Packaging Common Stock shall be mailed to the Tenneco Holders and all appropriate procedures in connection with the Distribution to the extent not provided for herein; provided, however, that no such action shall create any obligation on the part of Tenneco to effect the Distribution or in any way limit Tenneco's power of termination as set forth in Section 8.11 hereof or alter the consequences of any such termination from those specified in such Section. TENNECO DISTRIBUTION AGREEMENT -16- 21 (b) NOTICE TO NYSE. Tenneco shall, to the extent possible, give the NYSE not less than ten days advance notice of the Distribution Record Date in compliance with Rule 10b-17 under the Exchange Act. (c) MAILING OF PACKAGING INFORMATION STATEMENT. Tenneco shall, as soon as practicable after the Packaging Registration Statement shall have been declared effective under the Exchange Act, cause the Packaging Information Statement to be mailed to the holders of Tenneco Common Stock. SECTION 3.02. THE DISTRIBUTION. (a) DUTIES AND OBLIGATIONS OF TENNECO. Subject to the conditions contained herein, on the Distribution Date but effective immediately following the close of business on the Distribution Date Tenneco shall: (i) deliver to the Agent the share certificates representing the Packaging Common Stock issued to Tenneco by Packaging, pursuant to Section 2.02 hereof, endorsed by Tenneco in blank, for the benefit of the Tenneco Holders; and (ii) instruct the Agent to distribute, as soon as practicable following consummation of the Distribution, to the Tenneco Holders one share of Packaging Common Stock for every one share of Tenneco Common Stock held by such Tenneco Holders as of the Distribution Record Date. (b) DUTIES AND RESPONSIBILITIES OF PACKAGING. Packaging shall provide, or cause to be provided, to the Agent sufficient certificates representing Packaging Common Stock, in such denominations as the Agent may request in order to effect the Distribution. All shares of Packaging Common Stock issued in connection with the Distribution will be validly issued, fully paid and nonassessable and free of any preemptive (or similar) rights. ARTICLE IV CONDITIONS TO THE DISTRIBUTION SECTION 4.01. CONDITIONS PRECEDENT TO THE DISTRIBUTION. The obligation of Tenneco to cause the Distribution to be consummated shall be subject, at the option of Tenneco, to the fulfillment or waiver, on or prior to the Termination Date, of each of the following conditions. (a) ANCILLARY AGREEMENTS. Each of the parties to each Ancillary Agreement shall have executed and delivered such Ancillary Agreement and all Ancillary Agreements shall be in full force and effect. (b) REGISTRATION STATEMENT. The Packaging Registration Statement shall have been declared effective by order of the Commission and no stop order shall have been entered, and no proceeding for that purpose shall have been initiated or threatened by the Commission with respect thereto. (c) NYSE LISTING. The Packaging Common Stock shall have been approved for listing on the NYSE, subject to official notice of issuance. (d) TAX RULING. Tenneco shall have received rulings from the Internal Revenue Service reasonably acceptable to Tenneco and Packaging, which rulings shall be in full force and effect as of the Distribution Date, to the effect that: (i) the Distribution as contemplated hereunder will be tax-free for federal income tax purposes to Tenneco under Section 355(c)(1) of the Code and to the stockholders of Tenneco under Section 355(a) of the Code; TENNECO DISTRIBUTION AGREEMENT -17- 22 (ii) the merger, pursuant to a plan of complete liquidation, of Tenneco Packaging Specialty and Consumer Products Inc. with and into Packaging will be tax-free for federal income tax purposes to Packaging and Tenneco Packaging Specialty and Consumer Products Inc. under Sections 332 and 337 of the Code, respectively; (iii) the transfers of property by Tenneco to Packaging and the entity now known as Tenneco Automotive Inc. will be tax-free for federal income tax purposes under Sections 361(a) and 351(a), respectively; and (iv) the foregoing transactions will have no adverse effect on the Prior Rulings. (e) PRE-DISTRIBUTION TRANSACTIONS. Each of the transactions and other matters contemplated by Article II and Section 3.01 hereof (including, without limitation, each of the distributions, transfers, conveyances, contributions, assignments or other transactions included in, or otherwise necessary to consummate, the Corporate Restructuring Transactions) and the Debt Realignment shall have been fully effected, consummated and accomplished. (f) COVENANTS. The covenants contained in Article V of this Agreement that are required to be performed on or before the Distribution Date shall have been fully performed. (g) NO PROHIBITIONS. Consummation of the transactions contemplated hereby shall not be prohibited by Law and no Governmental Authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and which materially restricts, prevents or prohibits consummation of the Distribution, or any transaction contemplated by this Agreement, it being understood that the parties hereto hereby agree to use their reasonable best efforts to cause any such decree, judgment, injunction or other order to be vacated or lifted as promptly as possible. (h) CONSENTS. Tenneco and Packaging and the other members of their respective Groups shall have obtained all Consents the failure of which to obtain would, in the determination of the Board of Directors of Tenneco, have a material adverse effect on the Automotive Group or the Packaging Group, each taken as a whole, and such Consents shall be in full force and effect. SECTION 4.02. NO CONSTRAINT. Notwithstanding the provisions of Section 4.01 above, the fulfillment or waiver of any or all of the conditions precedent to the Distribution set forth therein shall not: (i) create any obligation on the part of Tenneco or any other party hereto to effect the Distribution; (ii) in any way limit Tenneco's right and power under Section 8.11 to terminate this Agreement and the process leading to the Distribution and to abandon the Distribution; or (iii) alter the consequences of any such termination under Section 8.11 from those specified in such Section. SECTION 4.03. DEFERRAL OF DISTRIBUTION DATE. If the Distribution Date shall have been established by the Board of Directors of Tenneco but all the conditions precedent to the Distribution set forth in this Agreement have not theretofore been fulfilled or waived, or Tenneco does not reasonably anticipate that they will be fulfilled or waived, on or prior to the date established as the Distribution Date, Tenneco may, by resolution of its Board of Directors (or a committee thereof, so authorized), defer the Distribution Date to a later date or terminate this Agreement under Section 8.11. SECTION 4.04. PUBLIC NOTICE OF DEFERRED DISTRIBUTION DATE. If the Board of Directors (or a committee thereof, so authorized) of Tenneco shall defer the Distribution Date in accordance with Section 4.03 above and public announcement of the prior Distribution Date has TENNECO DISTRIBUTION AGREEMENT -18- 23 theretofore been made, Tenneco shall promptly thereafter issue, in accordance with the advice of legal counsel, a public announcement with respect to such deferment and shall, with the advice of legal counsel, take such other actions as may be deemed necessary or desirable with respect to the dissemination of such information. ARTICLE V COVENANTS SECTION 5.01. FURTHER ASSURANCES. Each of Tenneco and Packaging shall use all reasonable efforts to: (a) take or cause to be taken all actions, and to do or cause to be done all things reasonably necessary, proper or advisable under applicable Law and agreements or otherwise to consummate and make effective the transactions contemplated hereby, including without limitation using commercially reasonable efforts to obtain any, consents and approvals from, enter into any amendatory agreements with and make any applications, registrations or filings with, any third Person or any Governmental Authority necessary or desirable in order to consummate the transactions contemplated hereby or to carry out the purposes of this Agreement; and (b) execute and deliver such further instruments and documents and take such other actions as the other party may reasonably request in order to consummate the transactions contemplated hereby and effectuate the purposes of this Agreement. SECTION 5.02. TENNECO NAME. As part of the Corporate Restructuring Transactions the Tenneco Trademarks and Trade Names will be assigned to a member of the Automotive Group designated by Tenneco. Tenneco shall grant to Packaging and to each of the members of the Packaging Group a transition license, substantially in the form of Exhibit K hereto (the "TRADEMARK TRANSITION LICENSE"), to use certain Tenneco Trademarks and Trade Names. SECTION 5.03. SUPPLIES AND DOCUMENTS. Tenneco shall, pursuant to the terms of the Trademark Transition License, grant a license (on a nonexclusive basis) to Packaging and to each of the members of the Packaging Group to use existing supplies and documents which have imprinted thereon any of the Tenneco Trademarks and Trade Names to the extent that such supplies and documents were existing in the inventory of such member of the Packaging Group as of the Distribution Date. SECTION 5.04. ASSUMPTION AND SATISFACTION OF LIABILITIES. Except as otherwise specifically set forth in any Ancillary Agreement, from and after the Distribution Date: (a) Tenneco shall, and shall cause each of the other members of the Automotive Group over which it has legal or effective direct or indirect control to, assume, pay, perform and discharge all Automotive Liabilities in accordance with their terms, when determinable, and otherwise as determined in accordance with the practice of the parties prior to the Distribution; (b) Packaging shall, and shall cause each of the other members of the Packaging Group over which it has legal or effective direct or indirect control to, assume, pay, perform and discharge all Packaging Liabilities in accordance with their terms, when determinable, and otherwise as determined in accordance with the practice of the parties prior to the Distribution; and (c) Tenneco and Packaging each severally and not jointly covenant and agree to assume, pay, and discharge one half of the amount of any and all Transaction Liabilities. TENNECO DISTRIBUTION AGREEMENT -19- 24 SECTION 5.05. NO REPRESENTATIONS OR WARRANTIES; CONSENTS. (a) GENERAL. Each of the parties hereto understands and agrees that no party hereto is, in this Agreement or in any other agreement or document contemplated by this Agreement (including the Ancillary Agreements) or otherwise, making to any other party hereto any representation or warranty whatsoever, including without limitation, any representation or warranty: (i) as to the value or freedom from encumbrance of, or any other matter concerning, any assets of such party; or (ii) as to the legal sufficiency to convey title to any asset as of the execution, delivery and filing of this Agreement or any Ancillary Agreement, including, without limitation, any Conveyancing and Assumption Instrument. (b) DISCLAIMER OF MERCHANTABILITY OR FITNESS OF ASSETS. Each party hereto further understands and agrees that there are no warranties, express or implied, as to the merchantability or fitness of any of the assets either transferred to or retained by the Automotive Group or the Packaging Group, as the case may be, pursuant to the Corporate Restructuring Transactions and the other terms and provisions of this Agreement, any Conveyancing and Assumption Agreement or any Ancillary Agreement, and all such assets which are so transferred will be transferred on an "AS IS, WHERE IS" basis, and the party to which any such assets are transferred hereunder, or which retains assets hereunder, shall bear the economic and legal risk that any conveyances of such assets shall prove to be insufficient or that the title of such party or any other member of its respective Group to any such assets shall be other than good and marketable and free from encumbrances. (c) NO REPRESENTATIONS OR WARRANTIES REGARDING CONSENTS. Each of the parties hereto understands and agrees that no party hereto is, in this Agreement or any Ancillary Agreement or in any other agreement or document contemplated by this Agreement or any Ancillary Agreement or otherwise, representing or warranting in any way to any other party hereto that the obtaining of any consents or approvals, the execution and delivery of any amendatory agreements and the making of any filings or applications contemplated by this Agreement will satisfy the provisions of any or all applicable agreements or the requirements of any or all applicable Law. Each of the parties hereto further agrees and understands that the party to which any assets to be or are transferred as contemplated by the Corporate Restructuring Transactions or the other provisions of this Agreement shall bear the economic and legal risk that any necessary consents or approvals are not obtained, that any necessary amendatory agreements are not executed and delivered or that any requirements of Laws are not complied with. (d) COVENANT TO USE REASONABLE EFFORTS TO OBTAIN CONSENTS. Notwithstanding the provisions of Section 5.05(c) above, each of the parties hereto shall (and shall cause each of their respective Affiliates and each member of its respective Group over which it has direct or indirect legal or effective control to) use commercially reasonable efforts to obtain all consents and approvals (the "CONSENTS"), to enter into all amendatory agreements and to make all filings and applications which may be reasonably required for the consummation of the Corporate Restructuring Transactions, the Distribution and all other transactions contemplated by this Agreement and shall take all such further reasonable actions as shall be reasonably necessary to preserve for each of the Automotive Group and the Packaging Group, to the greatest extent feasible, the economic and operational benefits of the allocation of assets and Liabilities contemplated by this Agreement. In case at any time after the Distribution Date any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement, or their successors in interest, shall take all such necessary or desirable action. TENNECO DISTRIBUTION AGREEMENT -20- 25 SECTION 5.06. REMOVAL OF CERTAIN GUARANTEES. (a) REMOVAL OF TENNECO AS GUARANTOR OF PACKAGING LIABILITIES. Except as otherwise contemplated in the Corporate Restructuring Transactions or otherwise specified in any Ancillary Agreement, each of Tenneco and Packaging shall use its commercially reasonable efforts to have, on or prior to the Distribution Date, or as soon as practicable thereafter, Tenneco and any other member of the Automotive Group removed as a guarantor of, or obligor under or for, any Packaging Liability. (b) REMOVAL OF PACKAGING AS GUARANTOR OF AUTOMOTIVE LIABILITIES. Except as otherwise contemplated in the Corporate Restructuring Transactions or otherwise specified in any Ancillary Agreement, each of Tenneco and Packaging shall use its commercially reasonable efforts to have, on or prior to the Distribution Date, or as soon as practicable thereafter, Packaging and any other member of the Packaging Group removed as a guarantor of, or obligor under or for, any Automotive Liability. SECTION 5.07. PUBLIC ANNOUNCEMENTS. Each party hereto shall consult with each other before issuing any press release or otherwise issuing any other similar written public statement with respect to this Agreement or the Distribution and shall not issue any such press release or make any such public statement without the prior consent of each other party, which shall not be unreasonably withheld or delayed; provided, however, that a party may, without the prior consent of any other party, issue such press release or other similar written public statement as may be required by law or any listing agreement with a national securities exchange to which any party hereto (or any member of such party's Group) is a party if it has used all reasonable efforts to consult with such other party and to obtain such party's consent but has been unable to do so in a timely manner. SECTION 5.08. INTERCOMPANY AGREEMENTS. Effective as of the consummation of the Distribution, each of Packaging and Tenneco shall (and shall cause each other member of its respective Group over which it has legal or effective direct or indirect control to) terminate each and every agreement between it and any member of the other Group other than this Agreement, any of the Ancillary Agreements, and any agreements between third Persons who are not members of either Group, on the one hand, and members of both Groups, on the other hand; provided, however, that such termination shall not have any effect whatsoever on any of its rights or obligations that accrued or were incurred prior to the Distribution Date (subject to the terms of Section 2.12 above). SECTION 5.09. TAX MATTERS. Each of Tenneco and Packaging intend the Distribution to be treated as a tax-free distribution under Code Sections 355(a) and 361(c)(1) and each such party shall use its reasonable best efforts to cause the Distribution to so qualify. Neither Tenneco, on the one hand, nor Packaging, on the other hand, shall take, or permit any member of its Group over which it has legal or effective direct or indirect control to take, any action which might cause: (i) the Distribution to fail to qualify as a tax-free distribution under Code Section 355(a) or Code Section 361(c)(1); (ii) the merger, pursuant to a plan of complete liquidation, of Tenneco Packaging Specialty and Consumer Products Inc. with and into Packaging to not be tax-free for federal income tax purposes to Packaging and Tenneco Packaging Specialty and Consumer Products Inc. under Sections 332 and 337 of the Code, respectively; (iii) the transfers of property by Tenneco to Packaging and the entity now known as Tenneco Automotive Inc. to not be tax-free for federal income tax purposes under Sections 361(a) and 351(a), respectively; (iv) the foregoing transactions to have an adverse effect on the Prior Rulings; or TENNECO DISTRIBUTION AGREEMENT -21- 26 (v) any other transfer described in the Corporate Restructuring Transactions that is intended (as described in Tenneco's request for rulings from the Internal Revenue Service) to qualify as a tax-free transfer under Code Sections 332, 351, 355 or 368 to fail to so qualify. SECTION 5.10. 1996 AGREEMENTS. (a) ALLOCATION OF BENEFITS AND LIABILITIES. Except as expressly provided otherwise in an Ancillary Agreement, Tenneco and Packaging each shall use its commercially reasonable efforts to allocate and provide to the other party to the greatest extent feasible the economic and operational benefits and liabilities of the 1996 Distribution Agreement and the 1996 Debt and Cash Allocation Agreement, which allocation shall be based on the nature of the underlying asset or liability giving rise to the allocated benefit or liability. To the extent such benefit or liability is derived from or relates to an Automotive Asset, an Automotive Liability, the Automotive Business, or the Prior Automotive Business, it shall be allocated to Tenneco. To the extent such benefit or liability is derived or related to a Packaging Asset, a Packaging Liability, the Packaging Business, or the Prior Packaging Business, it shall be allocated to Packaging. (b) ASSIGNMENT OF CERTAIN AGREEMENTS. Tenneco and Packaging each shall use its commercially reasonable efforts to cause the Newport News License and the El Paso License to be assigned to Tenneco. ARTICLE VI ACCESS TO INFORMATION SECTION 6.01. PROVISION, TRANSFER AND DELIVERY OF APPLICABLE CORPORATE RECORDS. (a) PROVISION, TRANSFER AND DELIVERY OF PACKAGING RECORDS. Tenneco shall (and shall cause each other member of its Group over which it has legal or effective direct or indirect control to) arrange as soon as practicable following the Distribution Date for the transportation (at Packaging's cost) to Packaging of the Books and Records in its possession, if any, that relate primarily to the Packaging Business or are necessary to operate the Packaging Business (collectively, the "Packaging Records"), except to the extent such items are already in the possession of any member of the Packaging Group. The Packaging Records shall be available to Tenneco for review and duplication, at its cost, pursuant to the terms of this Agreement. (b) PROVISION, TRANSFER AND DELIVERY OF AUTOMOTIVE RECORDS. Packaging shall (and shall cause each other member of its Group over which it has legal or effective direct or indirect control to) arrange as soon as practicable following the Distribution Date for the transportation (at Tenneco's cost) to Tenneco of the Books and Records in its possession, if any, (i) that relate primarily to the Automotive Business or are necessary to operate the Automotive Business (collectively, the "AUTOMOTIVE RECORDS"), (ii) that relate to any Tenneco business other than the Packaging Business, or (iii) that consist of the corporate minutes of the Board of Directors (or committees thereof) of Tenneco or otherwise relate to the business, administrative and management operations of Tenneco as the parent holding company of the Automotive Business, Packaging Business and all other Tenneco businesses or operations (collectively, the "TENNECO CORPORATE RECORDS") except to the extent such items are already in the possession of any member of the Automotive Group. The Automotive Records and the Tenneco Corporate Records shall be the property of Tenneco, but shall be available to Packaging for review and duplication, at its cost, pursuant to the terms of this Agreement. TENNECO DISTRIBUTION AGREEMENT -22- 27 SECTION 6.02. ACCESS TO INFORMATION. Unless otherwise contemplated by Section 6.06, from and after the Distribution Date, each of Tenneco and Packaging shall (and shall cause each of the other members of its respective Group over which it has legal or effective direct or indirect control to) afford to each other party and its authorized accountants, counsel and other designated representatives reasonable access and duplicating rights (all such duplicating costs to be borne by the requesting party) during normal business hours, subject to appropriate restrictions for classified, privileged or confidential information, to the personnel, properties, Books and Records and other data and information of such party and each other member of such party's Group relating to operations prior to the Distribution insofar as such access is reasonably required by the other requesting party for the conduct of the requesting party's business (but not for competitive purposes). SECTION 6.03. REIMBURSEMENTS, OTHER MATTERS. Except to the extent otherwise contemplated hereby or by any Ancillary Agreement, a party providing Books and Records or access to information to any other party (or such party's representatives) under this Article VI shall be entitled to receive from such other party, upon the presentation of invoices therefor, payments for such amounts, relating to supplies, disbursements and other out-of-pocket expenses, as may be reasonably incurred in providing such Books and Records or access to information. SECTION 6.04. CONFIDENTIALITY. (a) GENERAL RESTRICTION ON DISCLOSURE. Each of Tenneco and Packaging shall not (and shall not permit any other member of its respective Group over which it has legal or effective direct or indirect control to) use or permit the use of (without the prior written consent of the other) and shall hold, and shall cause its consultants, advisors and other representatives and any other member of its respective Group (over which it has legal or effective direct or indirect control) to hold, in strict confidence, all information concerning each other party hereto and the other members of such other party's Group in its possession, custody or control to the extent such information either (i) relates to the period up to the Distribution Date, (ii) relates to any Ancillary Agreement, or (iii) is obtained in the course of performing services for the other party pursuant to any Ancillary Agreement, and each party hereto shall not (and shall cause each other member of its respective Group over which it has legal or effective direct or indirect control not to) otherwise release or disclose such information to any other Person, except its auditors, attorneys, financial advisors, bankers and other consultants and advisors, without the prior written consent of the other affected party or parties, unless compelled to disclose such information by judicial or administrative process or unless such disclosure is required by Law and such party has used commercially reasonable efforts to consult with the other affected party or parties prior to such disclosure. (b) COMPELLED DISCLOSURE. To the extent that a party hereto or a member of its Group over which it has legal or effective direct or indirect control is compelled by judicial or administrative process to disclose such information under circumstances in which any evidentiary privilege would be available, such party agrees to assert or cause to be asserted such privilege in good faith prior to making such disclosure. Each of the parties shall consult with each relevant other party in connection with any such judicial or administrative process, including without limitation, in determining whether any privilege is available, and shall not object to each such relevant party and its counsel participating in any hearing or other proceeding (including, without limitation, any appeal of an initial order to disclose) in respect of such disclosure and assertion of privilege. TENNECO DISTRIBUTION AGREEMENT -23- 28 (c) EXCEPTIONS TO CONFIDENTIAL TREATMENT. Anything herein to the contrary notwithstanding, no party hereto shall be prohibited from using or permitting the use of, or required to hold in confidence, any information to the extent that (i) such information has been or is in the public domain through no fault of such party, (ii) such information is, after the Distribution Date, lawfully acquired from other sources by such party, or (iii) this Agreement, any Ancillary Agreement or any other agreement entered into pursuant hereto permits the use or disclosure of such information by such party. SECTION 6.05. WITNESS SERVICES. At all times from and after the Distribution Date, each of Tenneco and Packaging shall use its reasonable efforts to make available to each other party hereto, upon reasonable written request, the officers, directors, employees and agents of each member of its respective Group for fact finding, consultation or interviews and as witnesses to the extent that: (a) such persons may reasonably be required in connection with the prosecution or defense of any Action in which the requesting party or any member of its respective Group may from time to time be involved; and (b) there is no conflict in the Action between the requesting party or any member of its respective Group and the party to which a request is made pursuant to this Section 6.05 or any member of such party's Group. Except as otherwise agreed by the parties, a party providing witness services to any other party under this Section shall be entitled to receive from the recipient of such services, upon the presentation of invoices therefor, payments for such amounts relating to supplies, disbursements and other out-of-pocket expenses (but not salary expenses) of employees who participate in fact finding, consultation or interviews or are witnesses, as are actually and reasonably incurred in providing such fact finding, consulting, interviews or witness services by the party providing such services. SECTION 6.06. RETENTION OF RECORDS. Except when a longer period is required by Law or is specifically provided for herein or in any Ancillary Agreement, each party hereto shall cause the members of its Group over which it has legal or effective direct or indirect control, to retain, for a period of at least seven years following the Distribution Date, all material information (including without limitation all material Books and Records) relating to such Group and its operations prior to the Distribution Date. Notwithstanding the foregoing, any party hereto may offer in writing to deliver to the other parties all or a portion of such information as it relates to members of the offering party's Group and, if such offer is accepted in writing within 90 days after receipt thereof, the offering party shall promptly arrange for the delivery of such information (or copies thereof) to each accepting party (at the expense of such accepting party). If such offer is not so accepted, except as required by Law the offered information may be destroyed or otherwise disposed of by the offering party at any time thereafter. SECTION 6.07. PRIVILEGED MATTERS. (a) PRIVILEGED INFORMATION. Each of the parties hereto shall, and shall cause the members of its Group over which it has legal or effective direct or indirect control to, use its reasonable efforts to maintain, preserve, protect and assert all privileges including, without limitation, all privileges arising under or relating to the attorney-client relationship (including without limitation the attorney-client and attorney work product privileges) that relate directly or indirectly to any member of any other Group for any period prior to the Distribution Date ("PRIVILEGE" or "PRIVILEGES"). Each of the parties hereto shall use its reasonable efforts not to waive, or permit any member of its Group over which it has legal or effective direct or indirect control to waive, any such Privilege that could be asserted under applicable Law without the prior written consent of the other parties. With respect to each party, the rights and obligations created by this Section 6.07 shall apply to all information as to which a member of any Group did assert or, but for the Distribution, TENNECO DISTRIBUTION AGREEMENT -24- 29 would have been entitled to assert the protection of a Privilege ("PRIVILEGED INFORMATION") including, but not limited to, any and all information that either: (i) was generated or received prior to the Distribution Date but which, after the Distribution, is in the possession of a member of another Group; or (ii) is generated or received after the Distribution Date but refers to or relates to Privileged Information that was generated or received prior to the Distribution Date. (b) PRODUCTION OF PRIVILEGED INFORMATION. Upon receipt by a party or any member of its Group of any subpoena, discovery or other request that arguably calls for the production or disclosure of Privileged Information, or if a party or any member of its Group obtains knowledge that any current or former employee of such party or any member of its Group has received any subpoena, discovery or other request which arguably calls for the production or disclosure of Privileged Information, such party shall promptly notify the other parties of the existence of the request and shall provide the other parties a reasonable opportunity to review the information and to assert any rights it may have under this Section 6.07 or otherwise to prevent the production or disclosure of Privileged Information. No party will, or will permit any member of its Group over which it has direct or indirect legal or effective control to, produce or disclose any information arguably covered by a Privilege under this Section 6.07 unless: (i) each other party has provided its express written consent to such production or disclosure; or (ii) a court of competent jurisdiction has entered an order which is not then appealable or a final, nonappealable order finding that the information is not entitled to protection under any applicable privilege. (c) NO WAIVER. The parties hereto understand and agree that the transfer of any Books and Records or other information between any members of the Automotive Group or the Packaging Group shall be made in reliance on the agreements of Tenneco and Packaging, as set forth in Section 6.04 and Section 6.07 hereof, to maintain the confidentiality of Privileged Information and to assert and maintain all applicable Privileges. The Books and Records being transferred pursuant to Section 6.01 hereof, the access to information being granted pursuant to Section 6.02 hereof, the agreement to provide witnesses and individuals pursuant to Section 6.05 hereof and the transfer of Privileged Information to either party pursuant to this Agreement shall not be deemed a waiver of any Privilege that has been or may be asserted under this Section or otherwise. ARTICLE VII INDEMNIFICATION SECTION 7.01. INDEMNIFICATION BY TENNECO. Except as otherwise specifically set forth in any provision of this Agreement or of any Ancillary Agreement, Tenneco shall, to the fullest extent permitted by law, indemnify, defend and hold harmless the Packaging Indemnitees from and against any and all Indemnifiable Losses of the Packaging Indemnitees arising out of, by reason of or otherwise in connection with (i) the Automotive Liabilities, (ii) to the extent Tenneco has not discharged its obligations under Section 5.04(c) above, Tenneco's share of any Transaction Liability, or (iii) the breach by Tenneco or any Automotive Subsidiary of any provision of this Agreement or any Ancillary Agreement. SECTION 7.02. INDEMNIFICATION BY PACKAGING. Except as otherwise specifically set forth in any provision of this Agreement or of any Ancillary Agreement, Packaging shall, to the fullest extent permitted by law, indemnify, defend and hold harmless the Automotive Indemnitees from and against any and all Indemnifiable Losses of the Automotive Indemnitees arising out of, by reason of or otherwise in TENNECO DISTRIBUTION AGREEMENT -25- 30 connection with either (i) the Packaging Liabilities, (ii) to the extent Packaging has not discharged its obligations under Section 5.04(c) above, Packaging's share of any Transaction Liability, or (iii) the breach by Packaging or any Packaging Subsidiary of any provision of this Agreement or any Ancillary Agreement. SECTION 7.03. NO INDEMNIFICATION IN RESPECT OF INDEMNITEE'S INVESTMENT. Notwithstanding anything to the contrary contained herein, Tenneco shall not be obligated to indemnify, defend and hold harmless the Packaging Indemnitees from and against, and Packaging shall not be obligated to indemnify, defend and hold harmless the Automotive Indemnitees from and against, any Indemnifiable Losses to the extent such Indemnifiable Losses arise out of, by reason of or otherwise in connection with (i) the direct or indirect ownership, from and after the Distribution Date, of any equity or other investment interest by such Indemnitee in a member of the Indemnifying Party's Group or (ii) any direct or indirect contractual or similar arrangement arising in the ordinary course of business between a member of the Automotive Group and a member of the Packaging Group, except as otherwise contemplated by the terms of such arrangement. SECTION 7.04. LIMITATIONS ON INDEMNIFICATION OBLIGATIONS. (a) REDUCTIONS FOR INSURANCE PROCEEDS AND OTHER RECOVERIES. The amount that any party (an "INDEMNIFYING PARTY") is or may be required to pay to any other Person (an "INDEMNITEE") pursuant to Section 7.01 or Section 7.02 above, as applicable, shall be reduced (retroactively or prospectively) by any Insurance Proceeds or other amounts actually recovered from third parties by or on behalf of such Indemnitee in respect of the related Indemnifiable Losses. The existence of a claim by an Indemnitee for insurance or against a third party in respect of any Indemnifiable Loss shall not, however, delay any payment pursuant to the indemnification provisions contained herein and otherwise determined to be due and owing by an Indemnifying Party. Rather, the Indemnifying Party shall make payment in full of such amount so determined to be due and owing by it against an assignment by the Indemnitee to the Indemnifying Party of the entire claim of the Indemnitee for such insurance or against such third party. Notwithstanding any other provisions of this Agreement, it is the intention of the parties hereto that no insurer or any other third party shall be (i) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, (ii) relieved of the responsibility to pay any claims for which it is obligated or (iii) entitled to any subrogation rights with respect to any obligation hereunder. If an Indemnitee shall have received the payment required by this Agreement from an Indemnifying Party in respect of any Indemnifiable Losses and shall subsequently actually receive Insurance Proceeds or other amounts in respect of such Indemnifiable Losses, then such Indemnitee shall hold such Insurance Proceeds in trust for the benefit of such Indemnifying Party and shall pay to such Indemnifying Party a sum equal to the amount of such Insurance Proceeds or other amounts actually received, up to the aggregate amount of any payments received from such Indemnifying Party pursuant to this Agreement in respect of such Indemnifiable Losses. (b) FOREIGN CURRENCY ADJUSTMENTS. In the event that any indemnification payment required to be made hereunder or under any Ancillary Agreement shall be denominated in a currency other than U.S. Dollars, the amount of such payment shall be translated into U.S. Dollars using the foreign exchange rate for such currency determined in accordance with the following rules: (i) with respect to any Indemnifiable Losses arising from the payment by a financial institution under a guarantee, comfort letter, letter of credit, foreign exchange contract or similar instrument, the foreign exchange rate for such currency shall be determined as of the date on which such financial institution shall have been reimbursed; (ii) with respect to any Indemnifiable Losses covered by insurance, the foreign exchange rate for such currency shall be the foreign exchange rate employed by the insurance company providing such insurance in settling such Indemnifiable Losses with the Indemnifying Party; and TENNECO DISTRIBUTION AGREEMENT -26- 31 (iii) with respect to any Indemnifiable Losses not covered by either clause (i) or (ii) above, the foreign exchange rate for such currency shall be determined as of the date that notice of the claim with respect to such Indemnifiable Losses shall be given to the Indemnitee. SECTION 7.05. PROCEDURES FOR INDEMNIFICATION. Except as otherwise specifically provided in any Ancillary Agreement, including, without limitation, the Tax Sharing Agreement and the Human Resources Agreement: (a) NOTICE OF THIRD PARTY CLAIMS. If a claim or demand is made against an Indemnitee by any Person who is not a member of the Automotive Group or the Packaging Group (a "THIRD PARTY CLAIM") as to which such Indemnitee is entitled to indemnification pursuant to this Agreement, such Indemnitee shall notify the Indemnifying Party in writing, and in reasonable detail, of the Third Party Claim promptly (and in any event within 30 business days) after receipt by such Indemnitee of written notice of the Third Party Claim, provided, however, that failure to give such notification shall not affect the Indemnitee's right to indemnification hereunder except to the extent the Indemnifying Party shall have been actually prejudiced as a result of such failure (except that the Indemnifying Party shall not be liable for any expenses incurred during the period in which the Indemnitee failed to give such notice). The Indemnifying Party shall have 30 days from personal delivery or mailing of such written notice to notify the Indemnitee (i) whether or not the Indemnifying Party disputes the liability of the Indemnifying Party to the Indemnitee with respect to such claim or demand and (ii) whether or not it assumes the defense of such claim or demand. Thereafter, the Indemnitee shall deliver to the Indemnifying Party, promptly (and in any event within 15 business days) after the Indemnitee's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third Party Claim. (b) LEGAL DEFENSE OF THIRD PARTY CLAIMS. If a Third Party Claim is made against an Indemnitee, the Indemnifying Party shall be entitled to participate in the defense thereof and, if it so chooses, to assume the defense thereof with counsel selected by the Indemnifying Party, which counsel shall be reasonably satisfactory to the Indemnitee. Should the Indemnifying Party so elect to assume the defense of a Third Party Claim, the Indemnifying Party shall not be liable to the Indemnitee for legal or other expenses subsequently incurred by the Indemnitee in connection with the defense thereof. If the Indemnifying Party assumes such defense the Indemnitee shall have the right to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the Indemnifying Party, it being understood that the Indemnifying Party shall control such defense. The Indemnifying Party shall be liable for the reasonable fees and expenses of counsel employed by the Indemnitee for any period during which the Indemnifying Party has failed to assume the defense of the Third Party Claim (other than during the period prior to the time the Indemnitee shall have given notice of the Third Party Claim as provided above). If the Indemnifying Party so elects to assume the defense of any Third Party Claim, all of the Indemnitees shall cooperate with the Indemnifying Party in the defense or prosecution thereof. Notwithstanding the foregoing: (i) the Indemnifying Party shall not be entitled to assume the defense of any Third Party Claim (and shall be liable to the Indemnitee for the reasonable fees and expenses of counsel incurred by the Indemnitee in defending such Third Party Claim) if the Third Party Claim either seeks an order, injunction or other equitable relief or relief for other than money damages against the Indemnitee which the Indemnitee reasonably determines, after conferring with its counsel, cannot be separated from any related claim for money damages; provided, however, that if such equitable relief or other relief portion of the Third Party Claim can be so separated from that for money damages, the Indemnifying Party shall be entitled to assume the defense of the portion relating to money damages; TENNECO DISTRIBUTION AGREEMENT -27- 32 (ii) an Indemnifying Party shall not be entitled to assume the defense of any Third Party Claim (and shall be liable for the reasonable fees and expenses of counsel incurred by the Indemnitee in defending such Third Party Claim) if, in the Indemnitee's reasonable judgment, a conflict of interest between such Indemnitee and such Indemnifying Party exists in respect of such Third Party Claim or if the claim for indemnification relates to a matter that, if determined adversely, could reasonably be expected to expose the Indemnitee to criminal prosecution or penalties; and (iii) if at any time after assuming the defense of a Third Party Claim an Indemnifying Party shall fail to prosecute or withdraw from the defense of such Third Party Claim, the Indemnitee shall be entitled to resume the defense thereof and the Indemnifying Party shall be liable for the reasonable fees and expenses of counsel incurred by the Indemnitee in such defense. (c) SETTLEMENT OF THIRD PARTY CLAIMS. Except as otherwise provided below in this Section 7.05(c), or as otherwise specifically provided in any Ancillary Agreement, if the Indemnifying Party has assumed the defense of any Third Party Claim, then: (i) in no event will the Indemnitee admit any liability with respect to, or settle, compromise or discharge, any Third Party Claim without the Indemnifying Party's prior written consent (which consent shall not be unreasonably withheld or delayed); provided, however, that the Indemnitee shall have the right to settle, compromise or discharge such Third Party Claim without the consent of the Indemnifying Party if the Indemnitee releases the Indemnifying Party from its indemnification obligation hereunder with respect to such Third Party Claim and such settlement, compromise or discharge would not otherwise adversely affect the Indemnifying Party, and (ii) the Indemnitee will agree to any settlement, compromise or discharge of a Third Party Claim that the Indemnifying Party may recommend and that by its terms obligates the Indemnifying Party to pay the full amount of the liability in connection with such Third Party Claim and releases the Indemnitee completely in connection with such Third Party Claim and that would not otherwise adversely affect the Indemnitee; provided, however, that the Indemnitee may refuse to agree to any such settlement, compromise or discharge if the Indemnitee agrees that the Indemnifying Party's indemnification obligation with respect to such Third Party Claim shall not exceed the amount that would be required to be paid by or on behalf of the Indemnifying Party in connection with such settlement, compromise or discharge. If the Indemnifying Party has not assumed the defense of a Third Party Claim then in no event shall the Indemnitee settle, compromise or discharge such Third Party Claim without providing prior written notice to the Indemnifying Party, which shall have the option within 15 business days following receipt of such notice to (i) approve and agree to pay the settlement, (ii) approve the amount of the settlement, reserving the right to contest the Indemnitee's right to indemnity pursuant to this Agreement, (iii) disapprove the settlement and assume in writing all past and future responsibility for such Third Party Claim (including all of Indemnitee's prior expenditures in connection therewith), or (iv) disapprove the settlement and continue to refrain from participation in the defense of such Third Party Claim, in which event the Indemnifying Party shall have no further right to TENNECO DISTRIBUTION AGREEMENT -28- 33 contest the amount or reasonableness of the settlement if the Indemnitee elects to proceed therewith. In the event the Indemnifying Party does not respond to such written notice from the Indemnitee within such 15 business-day period, the Indemnifying Party shall be deemed to have elected option (i) above. (d) OTHER CLAIMS. Any claim on account of an Indemnifiable Loss which does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the applicable Indemnifying Party. Such Indemnifying Party shall have a period of 30 business days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 30 business-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 30 business-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such party under applicable Law or under this Agreement. (e) EXISTING THIRD PARTY CLAIMS. Effective as of the Distribution Date, Tenneco and Packaging shall each be deemed to have (i) received notification of a claim for indemnification from the other party with respect to the Third Party Claims allocated to it under the Litigation Letter, and (ii) elected to assume the defense of the Third Party Claims allocated to it under the Litigation Letter pursuant to Section 7.05(b). Thereafter, the relationships of the parties with respect to such Third Party Claims shall be governed by the provisions of Section 7.05. SECTION 7.06. INDEMNIFICATION PAYMENTS. Indemnification required by this Article VII shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when invoices or bills are received or loss, liability, claim, damage or expense is incurred. SECTION 7.07. OTHER ADJUSTMENTS. (a) ADJUSTMENTS FOR TAXES. The amount of any Indemnifiable Loss shall be: (i) increased to take into account any net Tax cost actually incurred by the Indemnitee arising from any payments received from the Indemnifying Party (grossed up for such increase); and (ii) reduced to take account of any net Tax benefit actually realized by the Indemnitee arising from the incurrence or payment of any such Indemnifiable Loss. In computing the amount of such Tax cost or Tax benefit, the Indemnitee shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt of any payment with respect to an Indemnifiable Loss or the incurrence or payment of any Indemnifiable Loss, and such Tax cost or Tax benefit shall be determined on a stand-alone basis (based upon the operations of such Indemnitee) after eliminating any effect resulting from the consolidation or inclusion for Tax purposes of the operations of any affiliates, companies, partnerships, or any other Person with the Indemnitee. (b) REDUCTIONS FOR SUBSEQUENT RECOVERIES OR OTHER EVENTS. In addition to any adjustments required pursuant to Section 7.04 hereof or Section 7.07(a) above, if the amount of any Indemnifiable Losses shall, at any time subsequent to any indemnification payment made by the Indemnifying Party pursuant to this Article VII, be reduced by recovery, settlement or otherwise, the amount of such reduction, less any expenses incurred in connection therewith, shall promptly be repaid by the Indemnitee to the Indemnifying Party, up to the aggregate amount of any payments received from such Indemnifying Party pursuant to this Agreement in respect of such Indemnifiable Losses. TENNECO DISTRIBUTION AGREEMENT -29- 34 SECTION 7.08. OBLIGATIONS ABSOLUTE. The foregoing contractual obligations of indemnification set forth in this Article VII shall: (i) also apply to any and all Third Party Claims that allege that any Indemnitee is independently, directly, vicariously or jointly and severally liable to such third party; (ii) to the extent permitted by applicable law, apply even if the Indemnitee is partially negligent or otherwise partially culpable or at fault, whether or not such liability arises under any doctrine of strict liability; and (iii) be in addition to any liability or obligation that an Indemnifying Party may have other than pursuant to this Agreement. SECTION 7.09. SURVIVAL OF INDEMNITIES. The obligations of Tenneco and Packaging under this Article VII shall survive the sale or other transfer by any of them of any assets or businesses or the assignment by any of them of any Liabilities, with respect to any Indemnifiable Loss of any Indemnitee related to such assets, businesses or Liabilities. SECTION 7.10. REMEDIES CUMULATIVE. The remedies provided in this Article VII shall be cumulative and shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party. SECTION 7.11. COOPERATION OF THE PARTIES WITH RESPECT TO ACTIONS AND THIRD PARTY CLAIMS. (a) IDENTIFICATION OF PARTY IN INTEREST. Any party to this Agreement that has responsibility for an Action or Third Party Claim shall identify itself as the true party in interest with respect to such Action or Third Party Claim and shall use its commercially reasonable efforts to obtain the dismissal of any other party to this Agreement from such Action or Third Party Claim. (b) DISPUTES REGARDING RESPONSIBILITY FOR ACTIONS AND THIRD PARTY CLAIMS. If there is uncertainty or disagreement concerning which party to this Agreement has responsibility for any Action or Third Party Claim (including any Action or Third Party Claim with respect to any 1996 Agreement not otherwise provided for), the following procedure shall be followed in an effort to reach agreement concerning responsibility for such Action or Third Party Claim: (i) In general, each party shall control the portion of such dispute or controversy that directly and exclusively relates to a liability or benefit borne by such party. To the extent any issue involved in, or aspect of, such dispute or controversy does not directly and exclusively relate to the liability or benefit of one party, Tenneco and Packaging shall jointly control and otherwise handle such issue or matter upon such terms as they may agree. The parties in disagreement over the responsibility for an Action or Third Party Claim shall exchange brief written statements setting forth their position concerning which party has responsibility for the Action or Third Party Claim in accordance with the provisions of this Article VII. These statements shall be exchanged within 10 days of a party putting another party on written notice that the other party is or may be responsible for the Action or Third Party Claim. (ii) If within 10 days of the exchange of the written statement of each party's position agreement is not reached on responsibility for the Action or Third Party Claim, the General Counsel for each of the parties in disagreement over responsibility for the Action or Third Party Claim shall speak either by telephone or in person to attempt to reach agreement on responsibility for the Action or Third Party Claim. TENNECO DISTRIBUTION AGREEMENT -30- 35 (c) EFFECT OF FAILURE TO FOLLOW PROCEDURE. Failure to follow the procedure set forth in clause (b) above shall not affect the rights and responsibilities of the parties as established by the other provisions of this Article VII. (d) EXCHANGE OF INFORMATION. In connection with the handling of current or future Actions or Third Party Claims, the parties may determine that it is in their mutual interest to exchange privileged or confidential information. If so, the parties agree to discuss whether it is in their mutual interest to enter into a joint defense agreement or information exchange agreement to maintain the confidentiality of their communications and to permit them to maintain the confidentiality of proprietary information or information that is otherwise confidential or subject to an applicable privilege, including but not limited to the attorney-client, work product, executive, deliberative process or self-evaluation privileges. SECTION 7.12. CONTRIBUTION. To the extent that any indemnification provided for under Section 7.01 or Section 7.02 is unavailable to an Indemnitee or is insufficient in respect of any of the Indemnifiable Losses of such Indemnitee then the Indemnifying Party under such Section, in lieu of indemnifying such Indemnitee thereunder, shall contribute to the amount paid or payable by such Indemnitee as a result of such Indemnifiable Losses (i) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Party on the one hand and the Indemnitee on the other hand from the transaction or other matter which resulted in the Indemnifiable Losses or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Indemnifying Party on the one hand and of the Indemnitee on the other hand in connection with the action, inaction, statements or omissions that resulted in such Indemnifiable Losses as well as any other relevant equitable considerations. SECTION 7.13. PROCEDURES WITH RESPECT TO TRANSACTION LIABILITIES. (a) NOTICE. If a Third Party Claim is made against either party or such party's Group which may give rise to a Transaction Liability, such party shall notify the other party in writing, and in reasonable detail, of the Third Party Claim promptly (and in any event within 15 business days) after receipt by such party of written notice of the Third Party Claim, provided, however, that failure to give such notification shall not affect either party's right to indemnification hereunder except to the extent a party shall have been actually prejudiced as a result of such failure. The parties shall deliver to each other, promptly (and in any event within 15 business days) after the receipt thereof, copies of all notices and documents (including court papers) received by a party relating to such Third Party Claim. (b) LEGAL DEFENSE. If the parties jointly determine that a Third Party Claim may give rise to a Transaction Liability, the parties shall jointly agree on the manner of the defense of such Third Party Claim, including the selection of counsel and responsibility for strategic decisions, and share equally all costs and expenses incurred in connection with defending such Claim. If the parties disagree as to whether any Third Party Claim may or may not give rise to a Transaction Liability, the parties shall proceed in accordance with Section 7.11(b) above with respect to such Third Party Claim. (c) SETTLEMENT. In no event will either party admit any liability with respect to, or settle, compromise or discharge, any Third Party Claim that the parties have jointly determined may give rise to a Transaction Liability without the other party's prior written consent (which consent shall not be unreasonably withheld or delayed); provided, however, that either party shall have the right to settle, compromise or discharge such Third Party Claim without the consent of the other party if such party releases the other party from its indemnification obligation hereunder with respect to such Third Party Claim and such settlement, compromise or discharge contains a full and unconditional release TENNECO DISTRIBUTION AGREEMENT -31- 36 of the other party with no obligation to pay any amounts on account of such Claim and would not otherwise adversely affect the other party. ARTICLE VIII INDEMNIFICATION OF OFFICERS AND DIRECTORS SECTION 8.01. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Packaging and Tenneco shall, to the fullest extent permitted by law, indemnify, defend and save harmless the persons who were officers and directors of Tenneco Inc., immediately prior to the Distribution Date, from and against any and all liability (including any judgments, losses, damages, civil penalties, excise taxes, interest and any other form of liability or expense of any kind) or claim of liability (as defined above and including any investigatory action) to which they may be subjected by reason of any act alleged to have been done or omitted to be done in connection with their service as officers and directors of Tenneco Inc. and any related or affiliated entity, including all expenses reasonably incurred in their defense if Packaging and Tenneco fail to provide such defense after having been requested to do so in writing. Regardless of whether Packaging or Tenneco assumes such defense, counsel for such defense shall be selected by the indemnified officer or director. Defense costs shall be indemnified as incurred in the course of the defense or investigation. The remedies provided by this Section 8.01 shall be cumulative and without prejudice to the assertion of any other rights. To the extent that an officer or director receives payment under any liability insurance or other indemnification arrangement with respect to a matter covered by this Section 8.01, that officer or director shall reimburse the party which has made payments to him or her hereunder, but no reimbursement shall be required except to the extent that the total which he or she has received from all sources is greater than the aggregate amount of his or her liability and expense with respect to that matter. The liability of Tenneco and Packaging with respect to the indemnification provided in this Section 8.01 shall be joint and several as to the officer or director in question, but as between Tenneco and Packaging, such liability shall be allocated as provided under this Agreement. Tenneco and Packaging each jointly and severally agrees to purchase and keep in force, or cause one of their respective subsidiaries to purchase and keep in force, director and officer "run-off" insurance policies that remain in effect for a period of seven years and provide coverage for acts prior to the Distribution by directors and officers. Notwithstanding the provisions of Section 9.12 hereof, the officers and directors covered by this Section 8.01 shall be and shall be deemed to be beneficiaries of this Article VIII and shall be entitled to enforce their rights hereunder through legal action or otherwise. ARTICLE IX MISCELLANEOUS SECTION 9.01. COMPLETE AGREEMENT, CONSTRUCTION. This Agreement, including the Exhibits and Schedules hereto, and the Ancillary Agreements shall constitute the entire agreement between the parties with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter. In the event of any inconsistency between this Agreement and any Schedule or Exhibit hereto, the Schedule or Exhibit, as the case may be, shall prevail. Notwithstanding any other provisions in this Agreement to the contrary, in the event and to the extent that there shall be a conflict between the provisions of this Agreement and the provisions of any Ancillary Agreement, such Ancillary Agreement shall control. SECTION 9.02. ANCILLARY AGREEMENTS. This Agreement is not intended to address, and should not be interpreted to address, the matters specifically and expressly covered by the Ancillary Agreements except as specifically and expressly provided by the Ancillary Agreements. TENNECO DISTRIBUTION AGREEMENT -32- 37 SECTION 9.03. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the parties and delivered to the other parties. SECTION 9.04. SURVIVAL OF AGREEMENTS. Except as otherwise expressly provided herein, all covenants and agreements of the parties contained in this Agreement shall survive the Distribution Date. SECTION 9.05. RESPONSIBILITY FOR EXPENSES. Subject to the provisions of the Debt Realignment, Tenneco and Packaging will each pay for all fees, costs and expenses incurred by it or a member of its respective Group on or prior to the Distribution Date. Except as otherwise set forth in this Agreement or any Ancillary Agreement each party shall bear its own costs and expenses incurred after the Distribution Date; provided, however, that all fees, costs and expenses described on Schedule 1 of Exhibit D ("Transaction Costs") (i) that are not paid out of assets of Fund B of the Tenneco Rabbi Trust, and (ii) that are incurred by Tenneco or Packaging or any member of its respective Group after the Distribution Date, shall be shared equally by Tenneco and Packaging. Transaction Costs shall be paid to the vendor by the party receiving the invoice for such Transaction Costs in accordance with the terms of the invoice. The party paying such Transaction Costs may submit to the other party a request for reimbursement of an amount equal to not more than one-half of the payment no later than 30 days after payment of such invoice. Such reimbursement request shall include a copy of the vendor's invoice and a statement by the chief accounting or other responsible officer attesting to the payment of such invoice. Not later than 30 days after receipt of a reimbursement request under this Section 9.05, the party receiving the reimbursement request shall pay the amount requested or advise the other party that it disputes the reimbursement request and the basis for such dispute. The failure to submit a dispute notice within ten days of receipt of the reimbursement request shall constitute a waiver of any right to dispute the reimbursement request. SECTION 9.06. NOTICES. All notices and other communications to a party hereunder shall be in writing and hand delivered or mailed by registered or certified mail (return receipt requested) or sent by any means of electronic message transmission with delivery confirmed (by voice or otherwise) to such party (and will be deemed given on the date on which the notice is received by such party) at the address. for such party set forth below (or at such other address for the party as the party shall, from time to time, specify by like notice to the other parties): If to Tenneco, at: 500 North Field Drive Lake Forest, Illinois 60045 Telecopier: Attention: General Counsel If to Packaging, at: 1900 West Field Court Lake Forest, Illinois 60045 Telecopier: Attention: General Counsel SECTION 9.07. WAIVERS. The failure of any party hereto to require strict performance by any other party of any provision in this Agreement will not waive or diminish that party's right to demand strict performance thereafter of that or any other provision hereof. SECTION 9.08. AMENDMENTS. Subject to the terms of Section 8.11 hereof, this Agreement may not be modified or amended except by an agreement in writing signed by the parties hereto. SECTION 9.09. ASSIGNMENT. This Agreement shall be assignable in whole in connection with a merger or consolidation or the sale of all or substantially all the assets of a party hereto so long as the resulting, surviving or transferee entity assumes all the obligations of the relevant party hereto by operation of law or pursuant to an agreement in form and substance reasonably satisfactory to the parties to this TENNECO DISTRIBUTION AGREEMENT -33- 38 Agreement. Otherwise this Agreement shall not be assignable, in whole or in part, directly or indirectly, by any party hereto without the prior written consent of the other, and any attempt to assign any rights or obligations arising under this Agreement without such consent shall be void. SECTION 9.10. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective permitted successors and permitted assigns. SECTION 9.11. TERMINATION. This Agreement may be terminated and the Distribution may be amended, modified or abandoned at any time prior to the Distribution by and in the sole discretion of Tenneco without the approval of Packaging or the stockholders of Tenneco. In the event of such termination, no party shall have any liability of any kind to any other party or any other person. After the Distribution, this Agreement may not be terminated except by an agreement in writing signed by all of the parties hereto; provided, however, that Article VII shall not be terminated or amended after the Distribution in respect of the third party beneficiaries thereto without the consent of such persons. SECTION 9.12. THIRD PARTY BENEFICIARIES. Except as provided in Article VII hereof (relating to Indemnitees), this Agreement is solely for the benefit of the parties hereto and the members of their respective Groups and Affiliates, and should not be deemed to confer upon third parties any remedy, claim, liability, right of reimbursement, claim of action or other right in excess of those existing without reference to this Agreement. SECTION 9.13. ATTORNEY FEES. A party in breach of this Agreement shall, on demand, indemnify and hold harmless the other parties hereto for and against all out-of-pocket expenses, including, without limitation, reasonable legal fees, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement. The payment of such expenses is in addition to any other relief to which such other party may be entitled hereunder or otherwise. SECTION 9.14. TITLE AND HEADINGS. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. SECTION 9.15. EXHIBITS AND SCHEDULES. The Exhibits and Schedules attached hereto shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. SECTION 9.16. SPECIFIC PERFORMANCE. Each of the parties hereto acknowledges that there is no adequate remedy at law for the failure by such parties to comply with the provisions of this Agreement and that such failure would cause immediate harm that would not be adequately compensable in damages. Accordingly, each of the parties hereto agrees that their agreements contained herein may be specifically enforced without the requirement of posting a bond or other security, in addition to all other remedies available to the parties hereto under this Agreement. SECTION 9.17. GOVERNING LAW. ALL QUESTIONS OR DISPUTES CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE SCHEDULES AND EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY (i) AGREES TO BE SUBJECT TO, AND HEREBY CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE STATE OF DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE, (ii) TO THE EXTENT SUCH PARTY IS NOT OTHERWISE SUBJECT TO SERVICE OF PROCESS IN THE STATE OF DELAWARE, HEREBY APPOINTS THE CORPORATION TRUST COMPANY, AS SUCH PARTY'S AGENT IN THE STATE OF DELAWARE FOR ACCEPTANCE OF LEGAL PROCESS AND (iii) AGREES THAT SERVICE MADE ON ANY SUCH AGENT SET FORTH IN (ii) ABOVE SHALL HAVE THE SAME LEGAL FORCE AND EFFECT AS IF SERVED UPON SUCH PARTY PERSONALLY WITHIN THE STATE OF DELAWARE. TENNECO DISTRIBUTION AGREEMENT -34- 39 SECTION 9.18. SEVERABILITY. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 9.19. SUBSIDIARIES. Each of the parties hereto shall cause to be performed, and hereby guarantee the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party which is contemplated to be a Subsidiary of such party on and after the Distribution Date. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. TENNECO INC. By ----------------------------------- Name: Title: TENNECO PACKAGING INC. By ----------------------------------- Name: Title: TENNECO DISTRIBUTION AGREEMENT -35- 40 EXHIBIT A TENNECO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 1999 (MILLIONS)
PRO FORMA ADJUSTMENTS -------------------------- SPIN-OFF CONSOLIDATED TENNECO DEBT AND RELATED TENNECO AS REPORTED REALIGNMENT TRANSACTIONS PRO FORMA ----------- ----------- ------------ ------------ ASSETS Current assets: Cash and temporary cash investments.............. $ 40 $ -- $ -- $ 40 Receivables...................................... 606 -- 100(c) 785 79 (b) Inventories...................................... 401 -- -- 401 Other current assets............................. 129 31(a) -- 160 ------ ----- ------- ------ Total current assets........................... 1,176 31 179 1,386 Plant, property, and equipment, net................ 1,049 -- -- 1,049 Goodwill and intangibles, net...................... 510 -- -- 510 Other assets and deferred charges.................. 260 41(a) (54)(f) 247 Net assets of discontinued operations.............. 1,421 -- (1,421)(d) -- ------ ----- ------- ------ Total assets................................... $4,416 $ 72 $(1,296) $3,192 ====== ===== ======= ====== LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt (including current maturities on long-term debt)................................ $ 206 $(206)(a) $ -- $ -- Trade payables................................... 351 -- 20(c) 371 Other current liabilities........................ 287 -- -- 287 ------ ----- ------- ------ Total current liabilities...................... 844 (206) 20 658 Long-term debt..................................... 832 841(a) -- 1,673 Deferred income taxes.............................. 39 -- (22)(f) 17(e) Other liabilities and deferred credits............. 168 -- -- 168 Minority interest.................................. 411 (394)(a) -- 17 Shareowners' equity................................ 2,122 (169)(a) (1,421)(d) 659 80(c) (32)(f) 79(b) ------ ----- ------- ------ Total liabilities and shareowners' equity...... $4,416 $ 72 $(1,296) $3,192 ====== ===== ======= ======
See the accompanying Notes to Unaudited Pro Forma Combined Balance Sheet. TENNECO DISTRIBUTION AGREEMENT A-1 41 TENNECO NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (a) To reflect adjustments to Tenneco's debt for the debt realignment and the assumed payment of interest on Tenneco consolidated debt tendered or exchanged as part of the pre-spin-off debt realignment. The adjustment to equity reflects the net impact of the debt realignment, the recording of debt issue costs and deferred income taxes related to the debt realignment. Tenneco will acquire certain subsidiary preferred stock as part of the debt realignment. At this time, Tenneco cannot determine the ultimate amount of its outstanding public debt securities which will be (1) purchased in the cash tender offers that Tenneco plans to make as part of its debt realignment, or (2) exchanged for new securities in the exchange offers, and the amounts could vary significantly. These pro forma adjustments assume that 100% of the securities subject to the cash tender offers are purchased and 100% of the original securities are exchanged for new securities. These pro forma adjustments also assume that the new securities will be recorded at the net carrying amount of the original securities (in other words, the new securities are assumed not to be "substantially different." See the section titled "Accounting Treatment of the Exchange Offers" contained in Tenneco Packaging Inc.'s Registration Statement on Form S-4, File No. 333-82923). The results of the exchange offers could vary based on a number of factors, including the level of acceptance of the exchange offers, the ultimate interest rate of the exchanged securities and whether the exchanges will be considered extinguishments for accounting purposes. Based on current interest rate markets, it is expected that the exchange offers will not be extinguishments for accounting purposes. Tenneco expects to incur an extraordinary charge as a result of the debt realignment related to the cash tender offers. Tenneco estimates that this cost will be approximately $20 to $25 million after-tax based on current market rates of interest. Other costs, including transaction costs related to the acquisition of certain subsidiary preferred stock and costs associated with foreign tax restructuring initiatives, will be incurred by Tenneco in connection with the corporate restructuring transactions and the spin-off which Tenneco estimates will be approximately $50 million after-tax. The effect on Tenneco's debt of these costs has been reflected in this pro forma adjustment. However, these charges have not been included in the unaudited pro forma consolidated statements of income. See the section titled "Unaudited Pro Forma Consolidated Financial Statements of Tenneco" contained in Tenneco Packaging Inc.'s Registration Statement on Form S-4, File No. 333-82923. (b) To reflect the purchase of Automotive accounts receivable at fair value which had previously been sold to a third party. (c) To reflect affiliated receivables and payables with Packaging that were eliminated in the Tenneco consolidated balance sheet. (d) To reflect the spin-off of Packaging common stock to holders of Tenneco common stock at an exchange ratio of one share of Packaging common stock for each share of Tenneco common stock. (e) Deferred income taxes at June 30, 1999 include $79 million of net operating loss carryforwards which will be utilized by Packaging upon the planned sale of Packaging's remaining interest in its containerboard joint venture. (f) To reflect the increase in net periodic pension costs resulting from the transfer to Packaging of prepaid pension costs attributable to Automotive employees. Automotive employees will no longer participate in the Tenneco Retirement Plan following the spin-off and Packaging will become the sponsor of this plan. These prepaid pension costs will be transferred to Packaging in connection with the corporate restructuring transactions. TENNECO DISTRIBUTION AGREEMENT A-2 42 EXHIBIT B AUTOMOTIVE SUBSIDIARIES TENNECO INC. (DELAWARE) (to be renamed Tenneco Automotive Inc.) Tenneco Automotive Inc. (to be renamed)................... 100% Beijing Monroe Automobile Shock Absorber Company Ltd. (Peoples Republic of China)........................... 51 (Tenneco Automotive Inc. owns 51%; and Beijing Automotive Industry Corporation, an unaffiliated company, owns 49%) Dalian Walker-Gillet Muffler Co. Ltd. (Peoples Republic of China)............................................. 55 (Tenneco Automotive Inc. owns 55%; and non-affiliates own 45%) McPherson Strut Company Inc. (Delaware)................ 100 Precision Modular Assembly Corp. (Delaware)............ 100 Shanghai Walker Exhaust Company, Ltd. (Peoples Republic of China)............................................. 55 (Tenneco Automotive Inc. owns 55%; and Shanghai Tractor and Internal Combustion Engine Company, Ltd., an unaffiliated company, owns 45%) Tenneco Asheville Inc. (Delaware)...................... 100 Tenneco Asia Inc. (Delaware)........................... 100 Tenneco Automotive Foreign Sales Corporation Limited (Jamaica)............................................. 100 Tenneco Automotive Japan Ltd. (Japan).................. 100 Tenneco Automotive Nederlands B.V. (Netherlands)....... 100 Tenneco Automotive RSA Company (Delaware).............. 100 Tenneco Automotive Trading Company (Delaware).......... 100 Tenneco Brake, Inc. (Delaware)......................... 100 Tenneco Europe Limited (Delaware)...................... 100 Wimetal S. A. (France)............................... ,1 (Tenneco Europe Limited owns 1 share; Walker Limited owns 1 share; Walker France S.A. owns 99%; and each of David Zerhusen, Howard van Schoyck, Daniel Barth, Daniel Bellanger, Herman Weltens and Theo Bonneu, affiliated persons, owns 1 share) Tenneco Inc. (Nevada).................................. 100 Tenneco International Finance Limited (United Kingdom)(1)........................................... 100 Tenneco International Holding Corp. (Delaware)......... 100 Monroe Australia Pty. Limited (Australia)............ 100 Monroe Springs (Australia) Pty. Ltd. (Australia)....................................... 100 Monroe Superannuation Pty. Ltd. (Australia)....... 100 Walker Australia Pty. Limited (Australia)......... 100 Tenneco Automotive Europe N.V. (Belgium)............. 100 Monroe Amortisor Imalat Ve Ticaret A.S. (Turkey).......................................... 99.85 (Tenneco Automotive Europe N.V. owns 99.85%; and various unaffiliated individual stockholders own 0.15%) Tenneco Automotive Italia S.r.l. (Italy)............. 85 (Tenneco International Holding Corp. owns 85%; and Tenneco Automotive France, S.A. owns 15%) Tenneco Automotive Polska Sp. z.O.O.................. 1 (Tenneco International Holding Corp. owns 1%; and Tenneco Global Holdings Inc. owns 99%)
TENNECO DISTRIBUTION AGREEMENT B-1 43 SUBSIDIARIES OF TENNECO INC. SUBSIDIARIES OF TENNECO AUTOMOTIVE INC. SUBSIDIARIES OF TENNECO INTERNATIONAL HOLDING CORP. Tenneco Romania Sr(1)(Romania)....................... 0.14% (Tenneco International Holding Corp. owns 0.14%; and Tenneco Global Holdings Inc. owns 99.86%) Tenneco Automotive Sverige A.B.(Sweden).............. 100 Tenneco Canada Inc.(Ontario)......................... 100 Tenneco Global Holdings Inc.(Delaware)............... 100 Fric-Rot S.A.I.C. (Argentina)..................... 55 (Tenneco Global Holdings Inc. owns 55%; Maco Inversiones S.A. owns 44.85%; and unaffiliated parties own .15%) Maco Inversiones S.A.(Argentina).................. 100 Fric-Rot S.A.I.C. (Argentina)................... 44.85 (Maco Inversiones S.A. owns 44.85%; Tenneco Global Holdings Inc. owns 55%; and unaffiliated parties own .15%) Monroe Springs (New Zealand) Pty. Ltd. (New Zealand).......................................... 100 Monroe Czechia s.r.o. (Czech Republic)............ 100 Tenneco Automotive Iberica, S.A. (Spain).......... 100 Tenneco Automotive Polska Sp. z.O.O. (Poland)..... 99 (Tenneco Global Holdings Inc. owns 99%; and Tenneco International Holding Corp. owns 1%) Tenneco Romania Srl (Romania)..................... 99.86 (Tenneco Global Holdings Inc. owns 99.86%; and Tenneco International Holding Corp. owns 0.14%) Tenneco Mauritius Limited (Mauritius)............. 100 Hydraulics Limited (India)...................... 51 (Tenneco Mauritius Limited owns 51% and Bangalore Union Services Limited, an unaffiliated company, owns 49%) Renowned Automotive Products Manufacturers Ltd. (India)....................................... 83 (Hydraulics Limited owns 83%; and non-affiliates own 17%) Tenneco Automotive India Private Limited (India)......................................... 100 Walker Exhaust India Private Limited (India)....................................... 100 (Tenneco Automotive India Private Limited owns less than 100%; and an unaffiliated party owns the balance) Tenneco Holdings Danmark A/S (Denmark)............... 100 Gillet Exhaust Technologie (Proprietary) Limited (South Africa).................................... 100 Gillet Lazne Belohrad, s.r.o. (Czech Republic).... 100 Kinetic Ltd. (Australia).......................... 99 (Tenneco Holdings Danmark A/S owns 99%+; and unaffiliated entities own less than 1%) Tenneco Automotive Holdings South Africa Pty. Ltd. (South Africa).................................... 51 (Tenneco Holdings Danmark A/S owns 51%; and an unaffiliated party owns 49%) Armstrong Hydraulics South Africa (Pty.) Ltd. (South Africa).................................. 100 Armstrong Properties (Pty.) Ltd. (South Africa)......................................... 100
- --------------- (1) In dissolution.
TENNECO DISTRIBUTION AGREEMENT B-2 44 SUBSIDIARIES OF TENNECO INC. SUBSIDIARIES OF TENNECO AUTOMOTIVE INC. SUBSIDIARIES OF TENNECO GLOBAL HOLDINGS INC. SUBSIDIARIES OF TENNECO AUTOMOTIVE HOLDINGS SOUTH AFRICA PTY. LTD. Monroe Manufacturing (Pty.) Ltd. (South Africa)......................................... 100% Smiths Industrial (SWA) (Pty.) Ltd. (South Africa)......................................... 100 Tenneco Automotive Port Elizabeth (Proprietary) Limited (South Africa)............................ 100 Tenneco Automotive Portugal -- Componentes para Automovel, S.A. (Portugal)........................ 100 Walker Danmark A/S (Denmark)...................... 100 Tenneco Automotive France S.A. (France).............. 100 (Tenneco International Holding Corp. owns 470,371 shares; Daniel Bellanger owns 16 shares; Robert Bellanger owns 8 shares; and each of Walker Europe, Inc., Alain Bellanger, Theodore Bonneu, Roy Kolotylo and David Zerhusen owns 1 share) Gillet Tubes Technologies G.T.T. (France)......... 100 Monroe Packaging N.V. (Belgium)................... 99.9 (Tenneco Automotive Europe N.V. owns 99.9%; and Tenneco Automotive France S.A. owns 0.1%) Tenneco Automotive Europe Coordination Center N.V. (Belgium)......................................... 99.9 (Tenneco Automotive Europe N.V. owns 99.9%; and Tenneco Automotive France S.A. owns 0.1%) Tenneco Automotive Italia S.r.l. (Italy).......... 15 (Tenneco International Holding Corp. owns 85%; and Tenneco Automotive France S.A. owns 15%) Walker France Constructeurs S.A.R.L. (France)..... 100 Wimetal S.A. (France)............................. 99 (Tenneco Automotive France S.A. owns 99%; Tenneco Europe Limited owns 1 share, Walker Limited owns 1 share; and each of David Zerhusen, Howard van Schoyck, Daniel Barth, Daniel Bellanger, Herman Weltens and Theo Bonneu, affiliated persons, owns 1 share) The Pullman Company (Delaware)......................... 100 Autopartes Walker S.A. de C.V. (Mexico).............. 100 Consorcio Terranova S.A. de C.V. (Mexico)......... 99.99 (Autopartes Walker S.A. de C.V. owns 99.99%; and Josan Latinamericana S.A. de C.V., an unaffiliated company, owns 0.01%) Monroe-Mexico S.A. de C.V. (Mexico)............... 100 Tenneco Automotive Servicios de Mexico, S.A. de C.V. (Mexico)................................... 0.01 (Monroe-Mexico, S.A. de C.V. owns 1 share; and Proveedora Walker S. de R.L. de C.V. owns 49,999 shares) Proveedora Walker S. de R.L. de C.V. (Mexico)..... 99.99 (Autopartes Walker S.A. de C.V.owns 99.99%; and Pullmex S. de R.L. de C.V. owns .01%)
TENNECO DISTRIBUTION AGREEMENT B-3 45 SUBSIDIARIES OF TENNECO INC. SUBSIDIARIES OF TENNECO AUTOMOTIVE INC. SUBSIDIARIES OF THE PULLMAN COMPANY SUBSIDIARIES OF PROVEEDORA WALKER S. DE R.L. DE CV Pullmex S. de R.L. de C.V. (Mexico)............. 0.01% (Proveedora Walker S. de R.L. de C.V. owns 0.01% and Autopartes Walker S.A. de C.V. owns 99.99%) Tenneco Automotive Servicios de Mexico, S.A. de C.V. (Mexico)................................... 99.99 (Proveedora Walker S. de R.L. de C.V. owns 49,999 shares, and Monroe-Mexico, S.A. de C.V. owns 1 share) Pullmex S. de R.L. de C.V......................... 99.99 (Autopartes Walker S.A. de C.V. owns 99.9%; and Proveedora Walker S. de R.L. de C.V. owns 0.1%) Proveedora Walker S. de R.L. de C.V. (Mexico)... 0.01 (Pullmex S. de R.L. de C.V. owns 0.01%; and Autopartes Walker S.A. de C.V. owns 99.99%) Clevite Industries Inc. (Delaware)................... 100 Peabody International Corporation (Delaware)......... 100 Barasset Corporation (Ohio)....................... 100 Peabody Galion Corporation (Delaware)............. 100 Peabody Gordon-Piatt, Inc. (Delaware)............. 100 Peabody N.E., Inc. (Delaware)..................... 100 Peabody World Trade Corporation (Delaware)........ 100 Peabody-Myers Corporation (Illinois).............. 100 Pullman Canada Ltd. (Canada)...................... 61 (Peabody International Corporation owns 61%; and The Pullman Company owns 39%) Pullman Canada Ltd. (Canada)......................... 39 (The Pullman Company owns 39%; and Peabody International Corporation owns 61%) Pullman Standard Inc. (Delaware)..................... 100 Tenneco Brazil Ltda. (Brazil)........................ 100 Tenneco Automotive Brasil Ltda. (Brazil).......... 100 Thompson and Stammers Dunmow (Number 6) Limited (United Kingdom).............................................. 100 Thompson and Stammers Dunmow (Number 7) Limited (United Kingdom).............................................. 100 TMC Texas Inc. (Delaware).............................. 100 Walker Electronic Silencing Inc. (Delaware)............ 100 Walker Europe, Inc. (Delaware)......................... 100 Tenneco Automotive France S.A. (France).............. 1 (Tenneco International Holding Corp. owns 470,371 shares; Daniel Ballenger owns 16 shares; Robert Bellanger owns 8 shares; and each of Walker Europe, Inc., Alain Bellanger, Theodore Bonneu, Roy Kolotylo and David Zerhusen owns 1 share) Walker Limited (United Kingdom)........................ 100
TENNECO DISTRIBUTION AGREEMENT B-4 46 SUBSIDIARIES OF TENNECO INC. SUBSIDIARIES OF TENNECO AUTOMOTIVE INC. SUBSIDIARIES OF WALKER LIMITED (UNITED KINGDOM) Gillet Torsmaskiner UK Limited (United Kingdom)...... 50 (Walker Limited owns 100 A Ordinary Shares, 50% of total equity; and AB Torsmaskiner, an unaffiliated company, owns 100 B Ordinary Shares, 50% of total equity) Exhaust Systems Technology Limited (United Kingdom).......................................... 99.99% (Gillet Torsmaskiner UK Limited owns 99.99%; and Heinrich Gillet GmbH & Co. owns .01%) Tenneco Automotive UK Limited (United Kingdom)....... 100 Gillet Exhaust Manufacturing Limited (United Kingdom).......................................... 100 Gillet Pressings Cardiff Limited (United Kingdom).......................................... 100 Walker (UK) Limited (United Kingdom).............. 100 J.W. Hartley (Motor Trade) Limited (United Kingdom)........................................ 100 Tenneco -- Walker (U.K.) Ltd. (United Kingdom)........................................ 100 Tenneco Management (Europe) Limited (United Kingdom)............................................ 100 Wimetal S. A. (France)............................... 1 (Walker Limited owns 1 share; Tenneco Europe Limited owns 1 share; Tenneco Automotive France S.A. owns 99%; and each of David Zerhusen, Howard van Schoyck, Daniel Barth, Daniel Bellanger, Herman Weltens and Theo Bonneu, affiliated persons, owns 1 share) Walker Manufacturing Company (Delaware)................ 100 Ced's Inc. (Illinois)................................ 100 Walker Norge A/S (Norway).............................. 100 Tenneco Deutschland Holdinggesellschaft mbH (Germany)..... 99.97 (Tenneco Inc. owns 99.97%; and Atlas Vermoegensverwaltung, an unaffiliated company, owns 0.03%) GILLET Unternehmesverwaltungs GmbH (Germany)........... 100 Heinrich Gillet GmbH & Co. KG (Germany).............. 0.1 (GILLET Unternehmesverwaltungs GmbH owns 0.1%; and Tenneco Deutschland Holdinggesellschaft mbH owns 99.9%. The subsidiaries of Heinrich Gillet GmbH & Co. KG are listed below.) Heinrich Gillet GmbH & Co. KG (Germany)................ 99.9 (Tenneco Deutschland Holdinggesellschaft mbH owns 99.9%; and GILLET Unternehmesverwaltungs GmbH owns 0.1%) ELGIRA Montagebetrieb fur Abgasanlagen Rastatt GmbH (Germany)........................................... 50 (Heinrich Gillet GmbH & Co. KG owns 50%; and an unaffiliated party owns 50%) Exhaust Systems Technology Limited (United Kingdom)............................................ 0.01 (Heinrich Gillet GmbH & Co. KG owns 0.01%; and Gillet Torsmaskiner UK Limited owns 99.99%) Gillet-Abgassysteme Zickau Gmbh (Germany)............ 100 Elagest AB (Sweden)............................... 50 (Gillet-Abgassysteme Zickau GmbH owns 50%; and an unaffiliated party owns 50%)
TENNECO DISTRIBUTION AGREEMENT B-5 47 SUBSIDIARIES OF TENNECO INC. SUBSIDIARIES OF TENNECO AUTOMOTIVE INC. SUBSIDIARIES OF TENNECO DEUTSCHLAND HOLDINGGESELLSCHAFT MBH SUBSIDIARIES OF HEINRICH GILLET GMBH & CO. KG Mastra-Gillet Industria e Comercio Ltda. (Brazil).... 50 (Heinrich Gillet GmbH & Co. KG owns 50%; and Mastra Industriae Comercio Ltda., an unaffiliated company, owns 50%) Montagewerk Abgastechnik Emden GmbH (Germany......... 50% (Heinrich Gillet GmbH & Co. KG owns 50%; and an unaffiliated party owns 50%) Tenneco Automotive Deutschland GmbH (Germany).......... 100 WALKER GILLET (Europe) GmbH (Germany).................. 100
- --------------- (1) In dissolution. TENNECO DISTRIBUTION AGREEMENT B-6 48 EXHIBIT C CORPORATE RESTRUCTURING TRANSACTIONS Set forth below are the transactions that, as applicable, the members of each of the Packaging and Automotive Groups will consummate in connection with the Distributions and Spin. A list of defined terms is included as Schedule 1 to this Exhibit. Capitalized terms used but not otherwise defined in Schedule 1 have the meaning ascribed to them under the Distribution Agreement. A. REALIGNMENT OF INTERCOMPANY OBLIGATIONS. The following transactions will be effected to realign the intercompany accounts of the Automotive and Packaging Groups. After the completion of these transactions, TI will have a single net intercompany obligation from TPI and all other intercompany obligations (other than trade accounts) will be exclusively between entities which are members of the same Group. Following the completion of these transactions, there will be no further transfers of funds between members of different Groups other than pursuant to transactions occurring in the ordinary course of business (trade accounts) and transfers required or otherwise permitted pursuant to these Corporate Restructuring Transactions. 1. Realignment of AG Intercompany Obligations. Realignment of AG Foreign Intercompany Accounts. Each foreign member of AG having a net intercompany obligation owing from a member of PG (excluding trade accounts receivable) will transfer such net intercompany obligation to TMEL in exchange for an intercompany advance receivable from TMEL in an amount equal to the aggregate amount of the net intercompany receivables and notes transferred. TMEL will assume the net intercompany obligation owed by each foreign member of AG having a net intercompany obligation to a member of PG (excluding trade accounts payable) in exchange for the issuance by each such AG member of an intercompany advance payable to TMEL in an amount equal to the aggregate amount of the net intercompany obligations assumed. Realignment of AG Domestic Intercompany Obligations. Each domestic member of AG having a net intercompany obligation owing from a member of PG (excluding trade accounts receivable) will transfer such net intercompany obligation to TI in exchange for an intercompany advance receivable from TI in an amount equal to the aggregate amount of the net intercompany receivables and notes transferred. TI will assume the net intercompany obligations owed by each domestic member of AG having a net intercompany obligation to a member of PG (excluding trade accounts payable) in exchange for the issuance by each such AG member of an intercompany advance payable to TI in an amount equal to the aggregate amount of the net intercompany obligations assumed. 2. Realignment of PG Intercompany Obligations Realignment of PG Foreign Intercompany Accounts. Each foreign member of PG having a net intercompany obligation from a member of AG (excluding trade accounts receivable) will transfer such net intercompany obligation to TPUKL in exchange for an intercompany advance receivable from TPUKL in an amount equal to the aggregate amount of the net intercompany receivables and notes transferred. TPUKL will assume the net intercompany obligations owed by each foreign member of PG having a net intercompany obligation to a member of the AG (excluding trade accounts payable) in exchange for the issuance by each such PG member of an intercompany advance payable to TPUKL in an amount equal to the aggregate amount of the net intercompany obligations assumed. Realignment of PG Domestic Intercompany Obligations. Each domestic member of PG having a net intercompany obligation owing from a member of AG (excluding trade accounts receivable) will transfer such net intercompany obligation to TPI in exchange for an intercompany advance receivable from TPI in TENNECO DISTRIBUTION AGREEMENT C-1 49 an amount equal to the aggregate amount of the net intercompany receivables and notes transferred. TPI will assume the net intercompany obligations owed by each domestic member of PG having a net intercompany obligation to a member of AG (excluding trade accounts payable) in exchange for the issuance by each such PG member of an intercompany advance payable to TPI in an amount equal to the aggregate amount of the net intercompany obligations assumed. B. DEBT REALIGNMENT 1. Each of TI and TPI shall participate in the Debt Realignment. C. IMPLEMENTATION OF CORPORATE RESTRUCTURING TRANSACTIONS. The following transactions will be effected pursuant to the requirement in Section 2.01 of the Distribution Agreement that the parties and their affiliates "take such action or actions as is necessary to cause, effect and consummate the Corporate Restructuring Transactions." Transactions occurring on the same day shall be deemed to have occurred in the order listed herein regardless of the order in which the documentation is executed, filed, or accepted, and regardless of the order in which the funds or other assets are transferred. 1. Separation of the German and U.K. Packaging and Automotive Parts Businesses German Restructuring: a. TDH will form six new German corporate subsidiaries (each, a"GP GmbH") and PDH: (1) Omni-Pac GP GmbH; (2) OPE GP GmbH; (3) Sengewald V GP GmbH; (4) Kobusch GP GmbH; (5) Sengewald K GP GmbH; (6) Nord-West GP GmbH; and (7) PDH b. The TDH corporate subsidiaries will be converted to German partnerships or GmbH & Co KGs ("operating target KGs"). c. TDH will transfer (in trust) a nominal interest (.1%) in each of OPE GmbH, Kobusch GmbH, Nord-West GmbH, Sengewald V GmbH, and Sengewald K GmbH to the corresponding GP GmbHs. d. TI will sell its 1% interest in Omni-Pac to Omni-Pac GP GmbH. An entity classification election will be made for US tax purposes so that each of the operating target KGs, as well as all other direct and indirect subsidiaries of the operating target KGs will be treated as divisions/branches of TDH effective as of the conversion date. e. Packaging Deutschland will form six new German limited partnerships ("financing KGs" or "F KGs") corresponding to the six operating target KGs created in b. above: Omni-Pac F KG; OPE F KG; Omni-Pac F KG; Nord-West F KG; Sengewald V F KG; and Sengewald K F KG. An entity classification election will be made for US tax purposes so that each of the financing KGs will be treated as divisions of Packaging Deutschland GmbH effective as of the date of formation. f. Each of the six general partner GmbHs formed in a. above will become a general partner of one of the respective financing KGs formed in e. above. Packaging Deutschland GmbH will receive 100% limited partnership interest in each of the newly created financing KGs in exchange for nominal equity contribution. g. TDH will sell Halle real estate to Sengewald V F KG. TENNECO DISTRIBUTION AGREEMENT C-2 50 h. Each of the financing KGs will acquire respective operating target KG limited partnership interests from TDH. i. TDH will sell the following entities to PDH: (1) Omni-Pac GP GmbH; (2) OPE GP GmbH; (3) Kobusch GP GmbH; (4) Nord-West GP GmbH; (5) Sengewald V GP GmbH; and (6) Sengewald K GP GmbH. j. TDH will sell its entire limited partnership interests in the following entities: (1) Omni-Pac KG to Omni-Pac F KG; (2) OPE KG to OPE F KG; (3) Kobusch KG to Kobusch F KG; (4) Nord-West KG to Nord-West F KG; and (5) Sengewald V KG to Sengewald V F KG. k. Sengewald V KG will sell its entire limited partnership interests in Sengewald K KG to Sengewald K F KG. l. TI will transfer 99.97% share in Sentinel GmbH Verpackungen to TPI as equity contribution. m. The following mergers will occur: (1) Omni-Pac F KG (survivor) and Omni-Pac KG; (2) OPE F KG (survivor) and OPE KG; (3) Kobusch F KG (survivor) and Kobusch KG; (4) Nord-West F KG (survivor) and Nord-West KG; (5) Sengewald V F KG (survivor) and Sengewald V KG; and (6) Sengewald K F KG (survivor) and Sengewald K KG. UK Restructuring. a. TI will make an entity classification election for US tax purposes so that each of the following entities will be treated as a division of its parent: (1) OPUKL; (2) Packaging Scotland; (3) Alpha; (4) Caerphilly; (5) Films; (6) Livingston; (7) Stanley; (8) Brucefield; and (9) Polbeth. b. Baldwin will purchase all of the stock of the following subsidiaries from Walker: TPUKL; OPUKL; and Packaging Scotland. c. TPUKL will become PG internal finance company. d. Walker Ltd will transfer its shares in Omni-Pac UK and TPL to Baldwin. 2. Albright and Wilson Note. TI will transfer the Albright and Wilson note to TMC. TENNECO DISTRIBUTION AGREEMENT C-3 51 3. TPI Name Change. TPI will change its name to and will register to do business in the following states (where Specialty is registered and TPI is not): Arkansas, Louisiana, New Hampshire, and South Dakota 4. TI Contribution of Capital to TPI. TI will transfer all of its ownership interests (100% unless otherwise indicated) in the following entities to TPI as a contribution to capital: a. Baldwin b. Wood Products Leasing Company (DE) c. Tenneco Packaging Hungary Holdings Inc. (DE) d. Tenneco Packaging International Holdings Inc. (DE) e. Scriptoria N.V. (Belgium)(1) f. Airpack Polska SP z.O.O. (Poland) g. Airpack Japan K.K. (Japan) h. Tenneco Packaging Europe B.V. (Netherlands) i. Wellenfoam N.V. (Belgium)(2) j. Kobusch Packaging Egypt Ltd. (Egypt)(3) k. Tenneco Packaging -- Chile Holdings Inc. (Delaware) l. Airpack SPA (Italy)(4) m. Aircal S.A. (France)(5) n. Tenneco PPI Company (DE) o. Omni-Pac S.A.R.L. (France)(6) p. Tenneco Packaging Hexacomb S.A. (Spain) q. Tenneco Romania Holdings Inc. (DE) r. Tenneco Packaging Leasing Company (DE) s. TBSHI t. Tenneco NV Inc. u. Tenneco International Finance B.V. (Netherlands) v. Tenneco International Business Development Limited (DE) w. Tenneco Management Company (DE) x. Tenneco Retail Receivables Co. (DE) y. Sentinel GmbH Verpackungen (Germany)(7) z. Alupak aa. Tenneco Packaging RSA Company (DE) 5. Tenneco Trademarks and Trade Names. The Tenneco Trademarks and tradenames will be assigned to a member of the AG. - --------------- (1) TI owns 99.56%; Tenneco Packaging International Holdings Inc. holds 18 shares; the balance of shares outstanding are held by unaffiliated persons. (2) TI owns all of the shares except for one, which is owned by Tenneco Packaging International Holdings Inc. (Delaware). (3) TI owns 99% and Kobusch Folien GmbH (Germany) owns 1%. (4) TI owns 98%; Tenneco Packaging International Holdings Inc. (Delaware) owns 2%. (5) TI owns all of the shares except seven which are held by the company's four directors and TPI, Tenneco Protective Packaging Inc. (Delaware), and Tenneco Packaging International Holdings Inc. (Delaware). (6) TI owns 97% and Omni-Pac GmbH (Germany) owns 3%. (7) A small percentage of shares is owned by Scriptoria N.V. (Belgium). TENNECO DISTRIBUTION AGREEMENT C-4 52 6. TPI Recapitalization. Immediately before the Distribution, TPI will be recapitalized as provided in Section 2.02 of the Distribution Agreement. 7. Specialty Merger. Pursuant to a plan of complete liquidation, Specialty will be merged with and into TPI, with TPI as the surviving corporation. 8. TI Contribution of Capital to TAI. Following step C4, TI will transfer all of its remaining assets (other than its ownership interests in TAI, TPI, Tenneco Automotive Merger Sub Inc. and Tenneco Deutschland) to TAI as a contribution to capital. 9. TAI Name Change. Prior to the Distribution Date, TAI will change its name to . D. DISTRIBUTIONS 1. Dividend of TPI Stock. On the Distribution Date following the consummation of steps C1 through C7, TI will distribute all of the stock of TPI to Tenneco shareholders as a distribution with respect to stock (i.e., return of contributed surplus) pro rata on the basis of one share of TPI stock for one share of Tenneco common stock outstanding. Cash will be paid in lieu of issuing fractional shares of TPI stock. Each share of stock of TPI will have attached to it stock purchase rights (the "Rights") which will entitle the holder to purchase certain stock of TPI, as the case may be, upon the occurrence of certain triggering events. 2. TI Stock Split. One day after the Distribution Date, TI will effect a reverse stock split. Cash will be paid in lieu of issuing fractional shares of TI stock. 3. TI Name Change. Prior to the Distribution Date, but after C9, a merger subsidiary will be incorporated in Delaware as Tenneco Automotive Merger Sub Inc. Effective as of 8:00 a.m. EST on the day following the Distribution Date, TI will merge with the Merger Subsidiary with TI as survivor under the name Tenneco Automotive Inc. TENNECO DISTRIBUTION AGREEMENT C-5 53 SCHEDULE 1 CORPORATE RESTRUCTURING TRANSACTIONS LIST OF DEFINED TERMS "AG" = Automotive Group "Alpha" = Alpha Products (Bristol) Limited (UK) "Alupak" = Alupak A.G. (Switzerland) "ASCC" = Asset Securitization Cooperative Corporation "Baldwin" = The Baldwin Group, Ltd. (UK) "Brucefield" = Brucefield Plastics Limited (Scotland) "Caerphilly" = Tenneco Packaging (Caerphilly) Limited (UK) "CIBC" = Canadian Imperial Bank of Commerce "Films" = Tenneco Packaging (Films) Limited (UK) "Hexacomb" = Tenneco Packaging Hexacomb S.S. (Spain) "Iberica" = Tenneco Automotive Iberica S.A. (Spain) "KG" = German limited partnership "Klinik" = Klinik GmbH (Germany) "Kobusch" = Kobusch Folien GmbH (Germany "Livingston" = Tenneco Packaging (Livingston) Limited (Scotland) "Nord-West" = Nord-West Verpackung GmbH (Germany) "Omni-Pac = Omni-Pac GmbH (Germany) "OPE" = Omni-Pac Ekco GmbH (Germany) "OPUKL" = Omni-Pac U.K. Limited (UK) "Packaging Deutschland" = Packaging Deutschland GmbH (Germany) "Packaging Scotland" = Tenneco Packaging Limited (Scotland) "PCA" = Packaging Corporation of America "PDH" = Tenneco Packaging Deutschland Holdinggesellschaft mbH (Germany) "PG" = Packaging Group "Polbeth" = Polbeth Packaging (Corby) Limited (Scotland) "Sengewald V" = Sengewald Verpackungen GmbH (Germany) "Sengewald K" = Sengewald Klinicprodukte GmbH (Germany) "Specialty" = Tenneco Packaging Specialty and Consumer Products Inc. (DE) "Stanley" = Tenneco Packaging (Stanley) Limited (UK) "TA France" = Tenneco Automotive France S.A. (France) "TAI" = Tenneco Automotive Inc. (DE) "TARSAC" = Tenneco Automotive RSA Company Inc. (DE) "TAVIAI" = Tenneco AVI Acquisition Inc, (DE) "TBSHI" = Tenneco Business Services Holdings Inc. (DE) "TBSI" = Tenneco Business Services Inc. (DE) "TCI" = Tenneco Canada Inc. "TDH" = Tenneco Deutschland Holinggessellschaft mbH (Germany) "TI" = Tenneco Inc. (DE) "TIHC" = Tenneco International Holdings Corp. (DE) "TMC" = Tenneco Management Company (DE) "TMC Texas" = TMC Texas Inc. (DE) "TMEL" = Tenneco Management (Europe) Limited (UK) "TPI" = Tenneco Packaging Inc. (DE) "TPRSAC" = Tenneco Packaging RSA Company Inc. (DE) "TPUKL" = Tenneco Packaging (UK) Limited (UK) "Walker" = Walker Limited (UK) "WE" = W.E. Verwaltungsgesellschaft mbH
TENNECO DISTRIBUTION AGREEMENT C-6 54 EXHIBIT D DEBT REALIGNMENT (Capitalized terms used but not otherwise defined herein have the meanings ascribed to them in the Distribution Agreement to which this is attached.) 1. The specific goal of the Debt Realignment is to reach the allocation between Packaging and Tenneco of Tenneco's Consolidated Debt at the time of the Distribution (after giving effect to the repurchase of subsidiary preferred stock and payment of transaction fees and expenses) that is reflected in the June 30, 1999 pro forma balance sheets of Tenneco and Packaging, and the related notes thereto, that are included as Exhibits A and F, respectively, to the Distribution Agreement. Such allocation may be adjusted by Tenneco in its sole discretion at any time prior to the Distribution to ensure Tenneco and Packaging are in compliance with their respective financing arrangements. 2. Tenneco shall in its discretion tender for, prepay or otherwise refinance, or shall offer Packaging debt in exchange for or otherwise refinance, one or more of the issues of Consolidated Debt (as defined below). Concurrently with the Debt Realignment, Tenneco will, if in its discretion it deems such to be advisable, solicit the consent of the holders of such Consolidated Debt to certain aspects of the Debt Realignment. Tenneco reserves the right to determine whether or not it tenders for, prepays, otherwise refinances or leaves outstanding, or offers to exchange Packaging debt for or otherwise refinance, any particular issue of Consolidated Debt. The term "CONSOLIDATED DEBT" means the following obligations that are outstanding or have been accrued as of the Distribution Date: a. indebtedness for money borrowed, including accrued interest, of Tenneco and its consolidated subsidiaries before the Distribution, including public debt, short-term borrowings and bank debt, and borrowings to fund a rabbi trust for actual and estimated transaction costs, including, without limitation, the expenses listed on Schedule 1 to this Exhibit; b. to the extent not included in the computation of the cash funding of a rabbi trust prior to the Distribution, the current and deferred obligations under severance packages, SERP (other than the Tenneco Inc. Pilots' Supplemental Retirement Plan) and deferred compensation for persons who meet all of the following criteria: (i) they are treated as active employees of TMC under the Human Resources Agreement as of the Distribution Date; (ii) liabilities with respect to them (other than the liabilities under the Tenneco Retirement Plan) are allocated to the Packaging Group under the Human Resources Agreement; and (iii) they do not continue in the active employment of Packaging Group (excluding TMC) or Automotive Group after the Distribution Date. c. obligations in respect of the preferred stock issued by Tenneco International Holding Corporation; and d. the cost to purchase accounts receivable previously sold by Tenneco or its consolidated subsidiaries. 3. Tenneco shall have the sole right and authority to have in place a credit facility(ies) and/or other financing for itself (with such guarantees of its obligations thereunder by the Automotive Subsidiaries as it deems necessary) and for Packaging (with such guarantees of Packaging's obligations thereunder by the TENNECO DISTRIBUTION AGREEMENT D-1 55 Packaging Subsidiaries as it deems necessary in an aggregate principal amount sufficient (together with other funds available to Tenneco) to fund such tenders, prepayments and other refinancings and for other general corporate purposes (including, without limitation, working capital). These facility(ies) and/or other financings shall be in effect on or prior to the Distribution Date. 4. Accordingly, after giving effect to the Debt Realignment and the Distribution, (i) Tenneco will be responsible for all of Tenneco Inc.'s public debt that remains outstanding, any borrowings under its new credit facility(ies) and/or other financing described above and any Consolidated Debt for which a member of the Automotive Group is the primary obligor as of the Distribution which remains outstanding and (ii) Packaging will be responsible for any public debt of Packaging issued in exchange for Tenneco Inc.'s public debt, any borrowings under its new credit facility(ies) and/or other financings described above and any Consolidated Debt for which a member of the Packaging Group is the primary obligor as of the Distribution which remains outstanding. 5. All aspects of (x) the Debt Realignment and any financing thereof and (y) the terms of any consents solicited in respect of Consolidated Debt, shall be controlled solely and exclusively by Tenneco. Tenneco shall select, in its sole discretion, the dealer manager(s) for any and all consent solicitations, debt tenders and debt exchanges in respect of Consolidated Debt. 6. Tenneco and Packaging shall comply with all applicable securities, blue sky and other laws in connection with the Debt Realignment and the other transactions contemplated hereunder. TENNECO DISTRIBUTION AGREEMENT D-2 56 SCHEDULE 1 TRANSACTION COSTS Transaction costs shall include the following fees, costs and expenses related or attendant to the Corporate Restructuring Transactions, the Distribution and the Debt Realignment incurred by Tenneco or Packaging or any member of its respective Group, provided that such expenses either were or are incurred by or with the approval of Tenneco Inc. headquarters personnel in Greenwich, Connecticut or are for goods or services to be provided by entities that provided goods or services in connection with or attendant to the Corporate Restructuring Transactions, the Distribution or the Debt Realignment with the approval of such personnel: Accounting fees and expenses Actuarial fees and expenses Appraisal fees and expenses Audit fees and expenses Broker/dealer fees and expenses Consulting fees and expenses Costs to purchase "wrap-around" and run-off D&O and fiduciary insurance policies Costs to transfer Tenneco Trade Names and Trademarks (but not expenses associated with the Tenneco Packaging name change). Exchange/paying agent fees and expenses Exit consent fees Fees and expenses incurred in connection with arranging revolving debt, including commitment fees, drawdown fees, agent's fees, facility fees and similar fees and expenses, and lender's costs and expenses payable by the borrower Filing fees, including SEC, NYSE, NASD, HSR and other similar fees Information agent fees and expenses Investment banking fees and expenses, dealer manager fees and expenses, and similar fees and expenses Fees and expenses with respect to legal matters and solvency opinions pertaining to the transactions Mailing expenses Newspaper advertising costs Printing fees and expenses Proxy solicitation fees and expenses Soliciting dealer fees and expenses Rating Agency fees TENNECO DISTRIBUTION AGREEMENT D-3 57 EXHIBIT E FORM OF HUMAN RESOURCES AGREEMENT THIS HUMAN RESOURCES AGREEMENT is made and entered into as of this day of , 19 , by, between and among TENNECO INC., a Delaware corporation to be renamed Tenneco Automotive Inc. ("Tenneco" or "Automotive Company"), and Tenneco Packaging Inc. (to be renamed), a Delaware corporation ("Packaging Company"). WHEREAS, pursuant to the terms of that certain Distribution Agreement by and between Tenneco and Packaging Company and dated as of (the "Distribution Agreement"), the parties have entered into this Agreement regarding certain labor, employment, compensation and benefit matters occasioned by the Distribution. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement and the Distribution Agreement, each of the parties hereto, on behalf of itself and each other entity over which it has direct or indirect legal or effective control, hereby agrees as follows: SECTION 1. DEFINITIONS. The following terms, when capitalized herein, shall have the meanings set forth below in this Section 1. All other capitalized terms which are used but are not otherwise defined herein shall have the meanings ascribed to them in the Distribution Agreement. "Active Employees" means, with respect to each Group, all employees regularly engaged in the performance of services to, for or on behalf of any member of such Group as of the close of business on the Distribution Date; provided, that all such employees of Tenneco Management Company ("TMC") who are employed by a member of the Automotive Group immediately after the Distribution shall, for all purposes hereunder, be treated as Active Employees of the Automotive Group and; provided further that for purposes of allocation of liabilities, non-employee officers of Tenneco Inc. shall be treated as Active Employees of TMC. "Common Stock" means Tenneco Common Stock or Packaging Common Stock, as applicable. "Former Employees" means, with respect to each Group, all former employees of Tenneco and/or its Subsidiaries (including, but not limited to, such employees who, as of the close of business on the Distribution Date, are on leave of absence, long-term disability or layoff with recall rights) who, if they were regularly engaged in the performance of services to, for or on behalf of Tenneco or any of its Subsidiaries at the close of business on the Distribution Date, would be an Active Employee of such Group, determined on a basis consistent with the determination of the Active Employees of such Group. "Tenneco Salaried Welfare Plans" means, collectively, the Tenneco Inc. Health Care Plan, the Tenneco Inc. Group Life Insurance Plan, the Tenneco Inc. Long Term Disability Plan, the Tenneco Inc. Travel Accident Insurance Plan, the Tenneco Inc. Health Care Flexible Spending Account Program and the Tenneco Inc. Dependent Day Care Flexible Spending Account Plan. SECTION 2. GENERAL EMPLOYMENT MATTERS. 2.01 General Obligations. From and after the Distribution Date, each of Automotive Company and Packaging Company shall (and shall, as applicable, cause each of the other members of its respective Group over which it has direct or indirect legal or effective control to) (a) continue the employment of all of the Active Employees of its respective Group, subject, however to the terms of Section 2.03 below and (b) except as otherwise specifically provided herein, pay, perform and discharge any and all labor, employment, compensation and benefit liabilities, whether arising prior to, on or after the Distribution Date, with respect to all such Active Employees and all Former Employees of its respective Group. TENNECO DISTRIBUTION AGREEMENT E-1 58 Notwithstanding the foregoing, all payments to be made to Active Employees and Former Employees of TMC who are not employed by the Automotive Group or the Packaging Group (excluding TMC) immediately after the Distribution out of general corporate assets shall be made, processed and administered by Tenneco Business Services Inc. ("TBS") (rather than by Packaging Company or another member of the Packaging Group). Packaging Group shall maintain one or more rabbi trusts to facilitate such payments. 2.02 Initial Compensation of Active Employees. The initial compensation (base salary or wage level) of each Active Employee of each such Group as of the Distribution Date shall be the same as the compensation (base salary or wage level) of such Active Employee immediately prior to the Distribution Date. 2.03 No Additional Employment Rights Created. Nothing in this Agreement shall give any Active Employee of any Group any right to continued employment by any member of that Group or the other Group beyond the Distribution Date, which is in addition to or supplemental to any such right he or she may have arising under contract or otherwise. SECTION 3. COLLECTIVE BARGAINING. 3.01 Continuation of Existing Collective Bargaining Agreements. Each of Automotive Company and Packaging Company shall (and shall cause, as applicable, each other member of its Group over which it has direct or indirect legal or effective control to) continue to honor all collective bargaining agreements covering the Active Employees of its respective Group which are in effect as of the close of business on the Distribution Date, in accordance with and subject to the terms of each such collective bargaining agreement. 3.02 Recognition of Incumbent Labor Organizations. Each of Automotive Company and Packaging Company shall (and shall cause, as applicable, each other member of its Group over which it has direct or indirect legal or effective control to) continue to recognize all incumbent labor organizations which, as of the close of business on the Distribution Date, have established collective bargaining relationships in respect of the Active Employees of its respective Group. 3.03 Continued Sponsorship of Hourly Employee Benefit Plans. Except as otherwise specifically provided herein, each of Automotive Company and Packaging Company shall continue (and shall, as applicable, cause each other member of its respective Group over which it has direct or indirect legal or effective control to continue) to sponsor all employee benefit plans for hourly employees which, as of the close of business on the Distribution Date, are in existence and relate to the Active Employees and/or Former Employees of its respective Group, subject to its rights under such plans to amend or terminate such plans. 3.04 Provisions of Wages, Rights and Other Employment Benefits Required Under Existing Collective Bargaining Agreements. Without limiting the generality of the foregoing, each of Automotive Company and Packaging Company shall (and shall cause each other member of its respective Group over which it has direct or indirect legal or effective control to) provide those of its Active Employees whose employment is subject to collective bargaining agreements and/or established collective bargaining relationships as of the close of business on the Distribution Date with the wages, benefits, and terms and conditions of employment required by such agreements or relationships, except that (i) participation in the Tenneco Inc. Employee Stock Purchase Plan will be suspended as provided in Section 4.06 hereof, and (ii) the provisions of any defined contribution plan calling for contributions or investment in the common stock of Tenneco Inc. shall be amended in accordance with Section 4.05 hereof. 3.05 Limitation on Obligations. Each of the parties hereto hereby agrees and acknowledges that nothing contained in this Agreement, including its obligation to continue its applicable collective bargaining agreements or relationships, shall be construed to restrict any right it, or any other member of TENNECO DISTRIBUTION AGREEMENT E-2 59 its respective Group, may have to terminate, renegotiate, reopen or otherwise seek changes in any of its collective bargaining agreements or relationships. SECTION 4. UNITED STATES SALARIED PENSION AND THRIFT BENEFITS AND STOCK PURCHASE PLAN. 4.01 Tenneco Retirement Plan. Effective as of the Impact Date (as defined below), Automotive Company and all other members of that Group shall cease to be sponsors of the Tenneco Retirement Plan (the "TRP"), and Packaging Company shall become the sponsor of the TRP; provided that Packaging's sponsorship shall be subject to the terms and conditions of the TRP. The TRP shall retain liability for all pension benefits accrued by the Active Employees and Former Employees of the Automotive Group who are or were formerly participants in the TRP through the last day of the calendar month in which the Distribution Date occurs (the "Impact Date"). Following the Distribution Date, Automotive Group will have no liability, contingent or otherwise, with respect to the TRP, including without limitation any liability for benefits accrued through the Impact Date (including early retirement benefits and related subsidies, as to which all age, service and participation requirements were satisfied on or before the Impact Date) for Active Employees or Former Employees of the Automotive Group, and Packaging Company shall assume or retain, as the case may be, all such liabilities. Packaging Company shall succeed Tenneco Inc. under and with respect to the Tenneco General Employee Benefit Trust (the "GEBT"). As soon as practicable after the Distribution Date, Packaging Company shall cause the GEBT to transfer to a trustee designated by Automotive Company the assets of the GEBT attributable to the Automotive Group's hourly defined benefit pension plans. Such transfer shall be in cash, except that Tenneco Common Stock may be transferred, subject to the limitations of applicable law, and the assets managed by one of more managers may be transferred. Packaging Company shall create an investment committee (the "New Committee") to manage the assets of the GEBT, equivalent to the committee which performed those functions as of the Distribution Date (the "Old Committee"), and the New Committee shall have as members, the members of the Old Committee as of the Distribution Date until the earlier of March 31, 2000 or the date such persons die, resign or are removed in accordance with rules equivalent to the rules applicable to the Old Committee. 4.02 Amendment of TRP. The sponsor of the TRP shall amend the TRP to (a) "freeze" the benefit accruals of the Active Employees of the Automotive Group as of the Impact Date, and (b) provide that all benefits accrued as of the Impact Date by the Active Employees of the Automotive Group shall be fully vested and non-forfeitable (as will the benefits to Former Employees of the Automotive Group to the extent required by applicable laws) and the sponsor shall inform, in writing, as soon as practicable following the Impact Date, each such Employee of his or her accrued benefits under the TRP as of the Impact Date. 4.03 No Credit for Post-Impact Date Service. Except as may be required by law, the TRP shall not be required to count service with any entity other than a member of the Packaging Group after the Impact Date for any purpose, nor shall there be any requirement that Active Employees of the Automotive Group be permitted to "grow into" normal or early retirement benefits under the TRP based upon events occurring after the Impact Date. 4.04 Tenneco Thrift Plan. The active participation in the Tenneco Thrift Plan and the Tenneco Thrift Plan for Hourly Employees (collectively the "Tenneco DC Plan") by persons other than the Active Employees of the Packaging Group shall cease effective as of January 31, 2000 (the "Transition Date"). In addition, Automotive Company and all other members of that Group shall cease to be sponsors of the Tenneco DC Plan as of the Transition Date, and Packaging Company shall become the sponsor of the Tenneco DC Plan from and after the Transition Date. Automotive Group shall bear the costs of employer matching contributions attributable to the participation of its employees in the Tenneco DC Plan for the period commencing with the Distribution Date. TENNECO DISTRIBUTION AGREEMENT E-3 60 4.05 Establishment of DC Plans. (a) Automotive Thrift Plan. Automotive Company shall (and/or cause its respective Group members to) establish or make available on or with effect from the Transition Date, one or more defined contribution plans for the benefit of its Active Employees (collectively, the "Automotive Thrift Plan") which may, subject to Section 4.05(d) hereof, be subject to amendment or termination by Automotive Company or the applicable member of the Automotive Group. (b) Transfer of Account Balances to Automotive Thrift Plan. As soon as practicable following the Transition Date, Packaging Company shall cause the Tenneco DC Plan to transfer to the Automotive Thrift Plan, the account balances of each Active Employee of the Automotive Group and each Former Employee of the Automotive Group with respect to whom the Tenneco DC Plan maintains an account as of the close of business on the Transition Date. Such transfers shall be in cash, except that the Automotive Thrift Plan will accept the following: (i) Tenneco Common Stock, Packaging Common Stock received in the Distribution, stock of Newport News Shipbuilding Inc. (if any remains in such account balances) and stock of El Paso Energy Corporation (if any remains in such account balances) for the Tenneco Common Stock fund portion of such account balances; (ii) amounts credited to the Tenneco DC Plan which are held in mutual funds which are also investment media in the Automotive Thrift Plan; and (iii) participant loans. (c) Investment Options. Tenneco Common Stock shall not be offered as an investment option with respect to contributions made after the Distribution Date by the Packaging Group employees to the thrift plans of the Packaging Group. The sponsor of each of the Tenneco DC Plan and the Automotive Thrift Plan shall cause the plan to afford each participant therein, for a period of at least 90 days following the Distribution Date, an election to sell the Common Stock of the entities held in the plan's stock fund which does not directly or indirectly employ him or her immediately following the Distribution Date. From and after the Distribution Date employer stock contributions with respect to Packaging Group employees shall be in Packaging Common Stock and employer stock contributions with respect to the Automotive Group employees shall be in Tenneco Common Stock. (d) Certain Automotive Obligations. The Automotive Company shall (and shall cause each member of its Group over which it has legal or effective direct or indirect control to) sponsor, establish, administer, maintain, amend and otherwise deal with one or more defined contribution pension plans (including the Automotive Thrift Plan) in a manner consistent with any and all representations which Tenneco or its affiliates at the time makes or has made to the Internal Revenue Service, including without limitation, any actions that may be required to increase and/or maintain the amount of Tenneco Common Stock held by such plans. 4.06 Tenneco Stock Purchase Plan. Participation in the Tenneco Inc. Employee Stock Purchase Plan will be suspended effective June 30, 1999 and will not resume prior to the Distribution Date. SECTION 5. PENSION MATTERS OUTSIDE THE UNITED STATES. With respect to the business and operations of each Group in jurisdictions outside the United States, each of the parties hereto shall (and, as applicable, shall cause each other member of its Group over which it has direct or indirect legal or effective control to) assume and retain any and all pension liabilities and attendant plans and their assets related to its Active Employees and Former Employees. SECTION 6. EXECUTIVE AND DIRECTORS' COMPENSATION. 6.01 Tenneco Supplemental Executive Retirement Plan. Effective upon the Distribution Date, Tenneco and Packaging Company shall cause the Tenneco Inc. Supplemental Executive Retirement Plan and the Tenneco Inc. Pilots' Supplemental Retirement Plan (collectively, the "SERP") to be amended to cause the separation of participation in, and liabilities under, the SERP as follows: (1) Packaging Company shall (a) become the sponsor of the SERP with respect to all Active Employees and Former Employees of its respective Group and, subject to the terms of the 1996 Benefits Agreement (as defined TENNECO DISTRIBUTION AGREEMENT E-4 61 below), all active and former employees of the Shipbuilding Group and Energy Group (each as defined below), and all other participants in the SERP not specifically allocated to Automotive Company below and (b) assume and agree to pay, perform and discharge all liabilities under the SERP with respect to such employees, whether accrued before, on or after the Distribution Date; and (2) Automotive Company shall continue sponsorship of the SERP with respect to all Active Employees and Former Employees of its respective Group and shall assume and agree to pay, perform and discharge all liabilities under the SERP with respect to such employees, whether accrued before, on or after the Distribution Date. All accrued benefits under the SERP as of the close of business on the Distribution Date shall be fully vested and nonforfeitable; provided, that this rule shall not be applied to grant an employee an amount equal to the benefit he or she has accrued under the Tenneco Retirement Plan but only the amount provided by the SERP, nor shall it be applied to alter or diminish any service requirement contained in any special appendix or other document providing benefits in addition to those called for by the SERP generally. 6.01A Pullman Supplemental Pension Benefits. Notwithstanding any other provision hereof, the Automotive Company shall retain and succeed to any and all liabilities for non-qualified defined benefit pension benefits for Active Employees and Former Employees of its respective Group who were formerly employed by The Pullman Company, Peabody International Corporation or any predecessor of either, including without limitation, benefits under the Peabody Special Benefits Plan, the Peabody Supplemental Plan and the Pullman Supplemental Plan (the "Pullman Plans"). Automotive Company shall retain sponsorship of the rabbi trust created in connection with the Pullman Plans. 6.02 Tenneco Inc. Deferred Compensation Plan. The participation of the Active Employees and Former Employees of the Automotive Group in the Tenneco Inc. Deferred Compensation Plan (the "DC Plan") shall cease as of the Distribution Date. As of the Distribution Date, (i) Automotive Company shall assume the liability for the accounts of its Active Employees and Former Employees in the DC Plan, (ii) Packaging Company shall assume the liability for the accounts of the Active Employees and Former Employees of the Packaging Group in the DC Plan, and (iii) Packaging Company shall succeed to sponsorship of the DC Plan. The Automotive Group Active Employee's or Former Employee's account in the DC Plan as of the Distribution Date shall become the opening balance of such Active Employee's or Former Employee's account in a nonqualified deferred compensation plan created, as of the Distribution Date by the Automotive Group. Such opening balances shall become fully vested as of the close of business on the Distribution Date. 6.03 Tenneco Benefits Protection Program and Rabbi Trust. The Tenneco Inc. Benefits Protection Trust (the "BPT") and the Tenneco Inc. Rabbi Trust (collectively the "Trusts") shall be terminated prior to the Distribution, and neither Packaging Company nor Automotive Company shall have any liability with respect to either of the Trusts or any of the terms of either. 6.04 [RESERVED] 6.05 Stock Options. Effective as of the Distribution Date, Tenneco shall cause all outstanding options to purchase Tenneco Common Stock held by employees and officers other than (i) Active Employees and Former Employees of Automotive Group, (ii) employees of Packaging Corporation of America and (iii) employees of the folding carton division (or persons who have succeeded to the rights of any persons described in (i), (ii) or (iii) with respect to options to purchase Tenneco Common Stock) to be replaced by options to purchase Packaging Common Stock. Subject to the requirements of applicable law and generally accepted accounting principles, the number, exercise price and other terms of such replacement options shall be determined in a manner consistent with that described in Exhibit A attached hereto. Options held by persons described in clause (ii) or (iii) above, not exercised prior to the Distribution Date shall be canceled effective as of the Distribution Date. Options held by Active Employees and Former Employees of Automotive Group (or persons who have succeeded to the rights of such persons) shall, unless exercised prior to the Distribution Date, remain outstanding as adjusted as provided herein after the Distribution Date, subject to the requirements of TENNECO DISTRIBUTION AGREEMENT E-5 62 applicable law and generally accepted accounting principles. The parties recognize that in some jurisdictions, Automotive employees were granted rights other than stock options in lieu of the Special Stock Option Award of 100 options per grantee, and in those jurisdictions, the outstanding rights will be adjusted comparably. The Automotive Company options and rights shall have the same terms and conditions as prior to the Distribution Date except that the number of options and the option exercise price shall be adjusted as described in Exhibit A attached hereto. To the extent that the exercisability of options to purchase Tenneco Common Stock currently is subject to the attainment of share price hurdles, those hurdles will also be adjusted with respect to both options to purchase Packaging Common Stock and Tenneco Common Stock. Tenneco may grant special pre-Distribution Date exercisability with respect to some or all options which are not otherwise exercisable. 6.06 Directors. Except for stock options which will expire at the Distribution in accordance with their terms, stock options held by directors of Tenneco and/or Packaging Company shall be treated as provided in Section 6.05 hereof as if the director in question were an employee. Notwithstanding the foregoing, stock options held by directors who do not continue on the board of Packaging Company or Automotive Company will be replaced by Packaging Company options in accordance with Section 6.05 hereof. The 1997 Tenneco Inc. Board of Directors Deferred Compensation Plan shall be treated as provided in Section 6.02 hereof, and the directors' accounts shall be treated as if the directors were employees; however, the accounts of directors who do not continue on the board of Packaging Company or Automotive Company shall be the obligation of Packaging Company. If an individual becomes a director of both Packaging Company and Automotive Company immediately after the Distribution Date, his or her options, unless they expire at the Distribution, shall be split and maintained one-half by Packaging Company and one-half by Automotive Company; and with respect to individuals who were outside directors prior to the Distribution Date, their deferred compensation accounts shall be split similarly. Any continuing liabilities under the terminated Outside Directors' Retirement Plan including the obligation to grant restricted stock in lieu of such plan shall be retained and performed by Automotive Company. SECTION 7. WELFARE PLANS. 7.01 Tenneco Salaried Welfare Plans. Effective on December 31, 1999, each member of the Automotive Group shall cease to be a sponsor of the Tenneco Salaried Welfare Plans, Active Employees and Former Employees of Automotive Group shall cease to participate in the Tenneco Salaried Welfare Plans as of that date, and Packaging Company shall serve as the sponsor of the Tenneco Salaried Welfare Plans from and after that date. Automotive Company shall reimburse Packaging Company for all claims paid with respect to the participation of its employees in such plans. SECTION 8. GENERAL. 8.01 Post-Distribution Administration of Plans. The parties hereto agree to administer all plans consistently herewith, and to the extent necessary to amend plans accordingly. 8.02 Cost and Expenses. Except as otherwise expressly provided herein, each party shall bear all costs and expenses, including but not limited to legal, administrative and actuarial fees, incurred in the design, drafting, administration and implementation of any and all plans and compensation structures which it enables or creates and the amendment of its existing plans or compensation structures. 8.03 Reserved 8.04 Human Resources Support Services. Subject to the rules set forth below, Packaging Company shall provide (or have provided by TBS or otherwise to) Automotive Company or its Affiliates the TENNECO DISTRIBUTION AGREEMENT E-6 63 following corporate-wide human resource support services that are currently being provided to the Automotive Company and/or members of the Automotive Group: a. Benefits administration by Hewitt & Associates LLC and other outside administrators. Packaging Company will provide management of the services that are outsourced and continue benefits administration services currently being provided by TBS. b. Assistance in executive compensation plans, including stock options, restricted stock, performance shares, deferred compensation, director's stock options, and director's restricted stock. c. Generation of EEO reports. d. Packaging Company will prepare, process and disburse invoices and check requests for Prudential relocations or cause such services to be provided. Packaging Company shall provide the services described in this Section 8.04 for the period from the Distribution Date through the earlier of (i) December 31, 2000 and (ii) the date as of which Automotive Company no longer desires such services, provided that Automotive Company shall have given Packaging Company at least 60 days' advance written notice of such date. In consideration for such services, other than third party fees as described in the next sentence, Automotive Company shall pay Packaging Company per . Any third party fees for such services for outsourced providers utilized with respect to the Automotive Group as of the date hereof, or for new outsourced providers selected with prior consent of Automotive Company (which consent shall not be unreasonably withheld or delayed), will be billed directly by the third party to Automotive Company; provided, that if the third party refuses to bill Automotive Company directly, Automotive Company shall reimburse Packaging Group for all amounts which it pays such third party on behalf of Automotive Company. Reference is made to the Transition Services Agreement between Tenneco and Packaging Company of even date herewith (the "Transition Services Agreement"). The services described in this Section 8.04 shall be considered Packaging Services (as such term is defined in the Transition Services Agreement) for purposes of Sections 2.3, 3, 4, 5 and 7 of the Transition Services Agreement and shall be provided in accordance with and subject to the terms and conditions thereof. The provisions of Sections 4.2, 4.3, 4.4 and 7 of the Transition Services Agreement shall survive termination of the provision of services hereunder. SECTION 9. MISCELLANEOUS. 9.01 1996 Benefits Agreement. Effective on the Distribution Date, Tenneco shall assign to Packaging Company all of its rights under, and Packaging Company shall assume and agree to pay, perform and discharge when due (and will thereafter indemnify each member of the Automotive Group against) all obligations, liabilities and responsibilities of Industrial Company under, the certain Benefits Agreement (the "1996 Benefits Agreement"), dated as of December 11, 1996, by and among New Tenneco Inc., Newport News Shipbuilding Inc. and the company then known as Tenneco Inc. The rights Tenneco shall assign to Packaging Company under the 1996 Benefits Agreement shall include, without limitation, the right to receive and retain all reimbursements for the payment of SERP benefits to employees and former employees of the Shipbuilding Group and Energy Group (capitalized terms used in this Section 9.01 and in Section 6.01 and not otherwise defined in this Agreement shall have the meanings ascribed to such terms in the 1996 Benefits Agreement). 9.02 Complete Agreement; Construction. This Agreement and the Distribution Agreement shall constitute the entire agreement between the parties with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter. Notwithstanding any other provisions in this Agreement or the Distribution Agreement to the contrary, in the event and to the extent that there shall be a conflict between the provisions of this Agreement and the provisions of the Distribution Agreement or any other Ancillary Agreement, this Agreement shall control. TENNECO DISTRIBUTION AGREEMENT E-7 64 9.03 Other Ancillary Agreements. This Agreement is not intended to address, and should not be interpreted to address, the matters specifically and expressly covered by any of the other Ancillary Agreements. 9.04 Counterparts. This Agreement may be executed in one or more counter parts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the parties and delivered to the other parties. 9.05 Survival of Agreements. Except as otherwise expressly provided herein, all covenants and agreements of the parties contained in this Agreement shall survive the Distribution Date. 9.06 Notices. All notices and other communications to a party hereunder shall be in writing and hand delivered or mailed by registered or certified mail (return receipt requested) or sent by any means of electronic message transmission with delivery confirmed (by voice or otherwise) to such party (and will be deemed given on the date on which the notice is received by such party) at the address for such party set forth in the Distribution Agreement (or at such other address for the party as the party shall, from time to time, specify by like notice to the other parties). 9.07 Waivers. The failure of any party hereto to require strict performance by any other party of any provision in this Agreement will not waive or diminish the party's right to demand strict performance thereafter of that or any other provision hereof. 9.08 Amendments. This Agreement may not be modified or amended except by an agreement in writing signed by the parties hereto. 9.09 Assignment. This Agreement shall be assignable in whole in connection with a merger or consolidation or the sale of all or substantially all the assets of a party hereto so long as the resulting, surviving or transferee entity assumes all the obligations of the relevant party hereto by operation of law or pursuant to an agreement in form and substance reasonably satisfactory to the other parties to this Agreement. Otherwise this Agreement shall not be assignable, in whole or in part, directly or indirectly, by any party hereto without the prior written consent of the other (which consent shall not be unreasonably withheld or delayed), and any attempt to assign any rights or obligations arising under this Agreement without such consent shall be void. 9.10 Successors and Assigns. The provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective permitted successors and permitted assigns. 9.11 No Third Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and the members of their respective Groups, after giving effect to the Distribution, and should not be deemed to confer upon other third parties any remedy, claim, liability, right of reimbursement, claim of action or other right in excess of those existing without reference to this Agreement. 9.12 Attorney Fees. A party determined to be in breach of this Agreement shall, on demand, indemnify and hold harmless the other party hereto for and against all out-of-pocket expenses, including, without limitation, reasonable legal fees, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement; provided, that such determination shall be effective only when made by the court having final jurisdiction of the matter and the period for appeal from that court, if any, shall have expired. The payment of such expenses is in addition to any other relief to which such other party may be entitled hereunder or otherwise. 9.13 Title and Headings. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. TENNECO DISTRIBUTION AGREEMENT E-8 65 9.14 Governing Law. All questions and/or disputes concerning the construction, validity and interpretation of this agreement and the exhibits hereto shall be governed by the internal laws, and not the law of conflicts, of the State of Delaware. Each of the parties to this agreement hereby irrevocably and unconditionally (i) AGREES TO BE SUBJECT TO, AND HEREBY CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE STATE OF DELAWARE AND THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE, (ii) TO THE EXTENT SUCH PARTY IS NOT OTHERWISE SUBJECT TO SERVICE OF PROCESS IN THE STATE OF DELAWARE, HEREBY APPOINTS THE CORPORATION TRUST COMPANY, AS SUCH PARTY'S AGENT IN THE STATE OF DELAWARE FOR ACCEPTANCE OF LEGAL PROCESS AND (iii) AGREES THAT SERVICE MADE ON ANY SUCH AGENT SET FORTH IN (ii) ABOVE SHALL HAVE THE SAME LEGAL FORCE AND EFFECT AS IF SERVED UPON SUCH PARTY PERSONALLY WITHIN THE STATE OF DELAWARE. 9.15 Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 9.16 Subsidiaries. Each of the parties hereto shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party which is contemplated to be a Subsidiary of such party on and after the Distribution Date. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. TENNECO INC. By: ---------------------------------- Name: Title: TENNECO PACKAGING INC. (to be renamed) By: ---------------------------------- Name: Title: TENNECO DISTRIBUTION AGREEMENT E-9 66 EXHIBIT A OPTION CONVERSION FORMULA*/ FORMULA Original option exercise price New market price of Tenneco - -------------------------------- X Common Stock or Packaging = New option exercise price Original market price of Tenneco Common Stock, as applicable***/ ("New Option Price") Common Stock**/
No. of shares underlying original option X original option exercise price Number of shares - ------------------------------------------------------------ = underlying new option New Option Price
ASSUME No. of shares Tenneco Common Stock underlying original 1,000 option $45.31 Original option exercise price $25.00 Original market price of Tenneco Common Stock $ 7.00 New market price for Tenneco Common Stock $18.00 New market price for Packaging Common Stock
ADJUSTED TENNECO OPTIONS (for Automotive Group employees) $45.31 - ------ X $7.00 = $12.69 New Option Price $25.00
1,000 X $45.31 - -------------- = 3,571 shares Tenneco Common Stock $12.69 underlying new option
NEW PACKAGING COMPANY OPTIONS (for Packaging Group employees) $45.31 - ------ X $18.00 = $32.62 New Option Price $25.00
1,000 X $45.31 - -------------- = 1,389 shares Packaging Common Stock $32.62 underlying new option
- --------------- */ May be adjusted, as necessary, to reflect a reverse stock split by Tenneco which becomes effective after the Distribution. **/ Based on the closing sale price of the "full value" Tenneco Common Stock (i.e. not giving effect to the declaration of any dividend) on the New York Stock Exchange ("NYSE") on the day immediately prior to the Distribution Date. ***/ For the new market price of Tenneco Common Stock: Based on the closing sale price of Tenneco Common Stock "without due bills" on the day immediately prior to the Distribution Date, unless "when issued" trading for Tenneco Automotive Inc. Common Stock exists on such date, in which case the new market price of the Tenneco Common Stock would be based on the closing "when issued" market sale price of Tenneco Automotive Inc. Common Stock on such date. For the new market price of Packaging Common Stock: Based on the closing "when issued" market sale price of Packaging Common Stock on the day immediately prior to the Distribution Date, as applicable. TENNECO DISTRIBUTION AGREEMENT E-10 67 NEW PACKAGING COMPANY OPTIONS (for Packaging Group employees) $45.31 - ------ X $18.00 = $32.62 New Option Price $25.00
1,000 X $45.31 - -------------- = 1,389 shares Packaging Common Stock $32.62 underlying new option
TENNECO DISTRIBUTION AGREEMENT E-11 68 EXHIBIT F PACKAGING UNAUDITED PRO FORMA COMBINED BALANCE SHEET JUNE 30, 1999 (IN MILLIONS) ASSETS
PRO FORMA ADJUSTMENTS ---------------------------- PACKAGING SPIN-OFF PRO PACKAGING DEBT AND RELATED FORMA HISTORICAL REALIGNMENT TRANSACTIONS COMBINED ---------- ----------- ------------ --------- Current assets: Cash and temporary cash investments...... $ 18 $ -- $ -- $ 18 Receivables.............................. 375 -- 119(b) 494 Inventories.............................. 447 -- -- 447 Prepayments and other.................... 72 -- -- 72 ------ ----- ------- ------ Total current assets............. 912 -- 119 1,031 Plant, property, and equipment, net........ 1,495 -- -- 1,495 Goodwill and intangibles, net.............. 1,028 -- -- 1,028 Other assets and deferred charges.......... 918 59(a) 85(c) 1,062 Net assets of discontinued operations...... 133 -- -- 133 ------ ----- ------- ------ Total assets..................... $4,486 $ 59 $ 204 $4,749 ====== ===== ======= ======
LIABILITIES AND EQUITY Current liabilities: Short-term debt.......................... $ 367 $ 829(a) $ -- $1,010(e) Trade payables........................... 357 -- -- 357 Other current liabilities................ 336 -- -- 336 ------ ----- ------- ------ Total current liabilities........ 1,060 643 -- 1,203 Long-term debt............................. 1,494 (308)(a) -- 1,186(e) Deferred income taxes...................... 380 (52)(a) 34(c) 362 Other liabilities and deferred credits..... 198 -- -- 198 Minority interest.......................... 14 -- -- 14 Equity: Combined equity.......................... 1,340 (224)(a) 119(b) -- 51(c) (1,286)(d) Common stock............................. -- -- 2(d) 2 Paid-in capital.......................... -- -- 1,284(d) 1,284 Retained earnings........................ -- -- --(d) -- ------ ----- ------- ------ Total liabilities and equity..... $4,486 $ 59 $ 204 $4,749 ====== ===== ======= ======
See the accompanying Notes to Unaudited Pro Forma Combined Balance Sheet. TENNECO DISTRIBUTION AGREEMENT F-1 69 PACKAGING NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (a) To reflect debt allocated to Packaging in the debt realignment. The adjustment to equity reflects the net impact of the debt realignment, the recording of debt issue costs and deferred income taxes related to the exchange offers and other transaction costs. Pro forma long-term debt includes $1,166 million of new securities ($1,176 million aggregate principal amount) assumed to be exchanged in the exchange offers, and $20 million of long-term debt of Packaging subsidiaries. Pro forma short-term debt includes $1,001 million borrowed under Packaging's new credit facilities to be entered into as part of this debt realignment and $9 million of short-term debt of Packaging subsidiaries. At this time, Packaging and Tenneco cannot determine the ultimate amount of the original securities which will be exchanged into new securities, and this amount could vary significantly. These pro forma adjustments assume that 100% of the original securities subject to the exchange offers will be tendered before the early exchange time and exchanged for the new securities and the new securities will be recorded at the net carrying amount of the original securities (in other words, the new securities are assumed not to be "substantially different." See the section titled "Accounting Treatment of the Exchange Offers" contained in Tenneco Packaging Inc.'s Registration Statement on Form S-4, File No. 333-82923). The results of the exchange offers could vary based on a number of factors, including the timing and level of acceptance of the exchange offers, the interest rate of the exchanged securities and whether the exchanges will be considered extinguishments for accounting purposes. Based on current interest rate markets, Packaging expects that the exchange offers will not be extinguishments for accounting purposes. Therefore, Packaging does not expect to recognize an extraordinary loss attributable to the debt exchange. Other costs, including transaction costs related to the spin-off and contractual employment obligations, are expected to be incurred by Packaging in connection with the corporate restructuring transactions and the spin-off which Packaging estimates will be approximately $70 million after-tax. The effects on Packaging's debt of these costs has been reflected in this pro forma adjustment. However, these charges have not been included in the unaudited pro forma combined statement of income. See the section titled "Unaudited Pro Forma Combined Financial Statements of Packaging" contained in Tenneco Packaging Inc.'s Registration Statement on Form S-4, File No. 333-82923. (b) To reflect the purchase of Packaging accounts receivable at fair value which had previously been sold to a third party. (c) To reflect the transfer to Packaging of prepaid pension costs attributable to Automotive employees and the corresponding reduction in net periodic pension costs and the increase in prepaid pension cost attributable to the curtailment of the pension benefits related to Automotive employees. Automotive employees will no longer participate in the Tenneco Retirement Plan following the spin-off and Packaging will become the sponsor of this plan. These prepaid pension costs will be transferred to Packaging in connection with the corporate restructuring transactions. Packaging estimates that a curtailment gain of approximately $30 million will be recognized relating to the freezing of Automotive employees' pension benefits in connection with the spin-off. This gain has not been included in the unaudited pro forma combined statements of income. (d) To reflect the spin-off of Packaging common stock to holders of Tenneco common stock at an exchange ratio of one share of Packaging common stock for each share of Tenneco common stock. (e) The Packaging pro forma debt balances do not give effect to the application of any proceeds from the planned sale of Packaging's remaining interest in Packaging's containerboard joint venture. Packaging expects the sale to be completed before the spin-off, with the proceeds used to repay the Tenneco debt that would otherwise be allocated to Packaging in the debt realignment. If the sale occurs after the spin-off, the net proceeds will be used to retire Packaging debt. In September 1999, the joint venture, Packaging Corporation of America, filed a registration statement for Packaging to sell its interest in a TENNECO DISTRIBUTION AGREEMENT F-2 70 PACKAGING NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET -- (CONTINUED) registered public offering. Based on indications of value in that registration statement, estimated net proceeds ranging from $525 million to $600 million are anticipated to be received from the sale of Packaging's remaining interest in its containerboard joint venture. For each $50 million of after-tax proceeds received from the sale, pro forma interest expense would be reduced by approximately $3 million on an annual basis and pro forma income from continuing operations would be increased by approximately $2 million on an annual basis, or $0.01 per diluted common share. TENNECO DISTRIBUTION AGREEMENT F-3 71 EXHIBIT G PACKAGING SUBSIDIARIES TENNECO PACKAGING INC. (DELAWARE) A&E Plastics, Inc. (Delaware)............................. 100% Aircal S.A. (France)...................................... 100 (Tenneco Packaging Inc. owns all shares except seven which are held by its four directors and Tenneco Protective Packaging Inc. and Tenneco Packaging International Holdings Inc.) Airpack Japan K.K. (Japan)................................ 100 Airpack Polska Sp.Z.O.O. (Poland)......................... 100 Airpack SPA (Italy)....................................... 98 (Tenneco Packaging Inc. owns 98%; Tenneco Packaging International Holdings Inc. owns 2%) Altapack SPA (Italy)................................... 100 Alupak, A.G. (Switzerland)................................ 100 Counce Finance Corporation (Delaware)..................... 100 Dongguan PCA Packaging Co., Ltd. (Peoples Republic of 50 China)................................................. (Tenneco Packaging Inc. owns 50%; and Dongguan Dong Ya Color Printing & Packaging Factory, an unaffiliated company, owns 50%) EKCO Products, Inc. (Illinois)............................ 100 E-Z Por Corporation (Delaware)............................ 100 Glacier-Cor US Corporation (Delaware)..................... 100 Glacier-Cor US Holding Corporation (Delaware).......... 100 E. H. Carton Products -- Management Company Ltd. 50 (Israel)............................................ (Glacier-Cor US Holding Corporation owns 50%; and 2 non-affiliates owns 50%) Glacier-Cor 1995 L.P. (Israel)............................................ (E.H. Carton Products -- Management Company Ltd. owns 2%; Ha'Lakoach Ha'Neeman Ha'Sheesheen Ou'Shena'yim Ltd. owns 49%; and non-affiliates own 49%) Ha'Lakoach Ha'Neeman Ha'Sheesheem Ou'Shena'yim Ltd. 99 (Israel)............................................ (Glacier-Cor US Holding Corporation owns 99%; and Hexacomb Corporation owns 1%) Glacier-Cor 1995 L.P. (Israel).................. 49 (Ha'Lakoach Ha'Neeman Ha'Sheesheen Ou'Shena'yim Ltd. owns 49%; non-affiliates own 49%; and E. H. Carton Products -- Management Company Ltd. owns 2%) Kinarot Pallet Ltd. (Israel)...................... 50 (Ha'Lakoach Ha'Neeman owns 50%; and I.M.A. Engineering, an Israeli company and a non-affiliate, owns 50% Yamaton Ltd. (Israel.............................. 33.3 (Ha'Lakoach Ha'Neeman owns 33.3%; and non-affiliates, Kibbutz Ein Hamifietz and Kibbutz Ga'aton own 66.7%) Hexacomb Corporation (Illinois)........................... 100 Ha'Lakoach Ha' Neeman Ha' Sheesheem Ou' Shena'yim Ltd. 1 (Israel).............................................. (Hexacomb Corporation owns 1%; and Glacier-Cor US Holding Corporation owns 99%. Subsidiaries are listed above.)
TENNECO DISTRIBUTION AGREEMENT G-1 72 SUBSIDIARIES OF TENNECO PACKAGING INC. SUBSIDIARIES OF HEXACOMB CORPORATION Hexajapan Company, Ltd. (Japan)........................ 60% (Hexacomb Corporation owns 60%; and non-affiliates own 40%) Kobusch Packaging Egypt Ltd. (Egypt)...................... 99.75 (Tenneco Packaging Inc. owns 99.75%; and Tenneco Kobusch-Folien GmbH owns .25%) Omni-Pac S.A.R.L. (France)................................ 97 (Tenneco Packaging Inc. owns 97%; and Tenneco Omni-Pac GmbH & Co. KG Verpackungsmittel owns 3%) Packaging Corporation of America (Delaware)............... 43.5 (Tenneco Packaging Inc. owns 43.5%; PCA Holdings LLC, an unaffiliated limited liability company, owns 53.2%; and PCA's management owns 3.3%) American Cellulose Corporation (Delaware).............. 50 (Packaging Corporation of America owns 50%; and Larry E. Homan, an unaffiliated individual, owns 50%) Dahlonega Packaging Corporation (Delaware)............. 100 Dixie Container Corporation (Virginia)................. 100 PCA Hydro, Inc. (Delaware)............................. 100 PCA Tomahawk Corporation (Delaware).................... 100 PCA Valdosta Corporation (Delaware).................... 100 PCA Box Company (Delaware)(1)............................. 100 PCA Romania Srl (Romania)................................. 50 (Tenneco Packaging Inc. owns 50%; and Kraftcorr Inc., an unaffiliated company, owns 50%) PCA West Inc. (Delaware).................................. 100 Coast-Packaging Company (California General 50 Partnership).......................................... (PCA West Inc. owns 50%, as General Partner; and J. G. Haddy Sales Company, an unaffiliated company, owns 50%, as General Partner) Pressware International, Inc. (Delaware).................. 100 Revere Foil Containers, Inc. (Delaware)................... 100 Scriptoria N.V. (Belgium)................................. 99.6 (Tenneco Packaging Inc. owns approximately 99.6%; Tenneco Packaging International Holdings Inc. owns 18 shares; and the remainder of the shares are held by unknown third parties) Sentinel GmbH Verpackungen (Germany)................... ,1 (Scriptoria N.V. owns ,1%; and Tenneco Packaging Inc. owns .99%) Sentinel GmbH Verpackungen (Germany)...................... 99 (Tenneco Packaging Inc. owns .99%; and Scriptoria N.V. owns ,1%)
- --------------- (1) In dissolution.
TENNECO DISTRIBUTION AGREEMENT G-2 73 SUBSIDIARIES OF TENNECO PACKAGING INC Sentinel Polyolefins, L.L.C............................... 50% (Tenneco Packaging Inc. owns 50%; and Sentinel Products Corp., an unaffiliated company and its principals, own 50%) Suncor, Inc. (South Carolina)............................. 100 Tenneco AVI Acquisition Inc. (Delaware)................... 100 Tenneco Business Services Holdings Inc. (Delaware)........ 100 Tenneco Business Services Inc. (Delaware).............. 100 Tenneco CAP Acquisition Inc. (Delaware)(1)................ 100 Tenneco CPI Holding Company (Delaware).................... 100 Tenneco Forest Products GmbH (Germany).................... 100 PCA Embalajes Espana S.L. (Spain)...................... 99 (Tenneco Forest Products GmbH owns 99%; and Tenneco Omni-Pac Ekco Verpackungsmittel GmbH & Co. KG owns 1%) Tenneco International Business Development Limited 100 (Delaware)............................................. Ambassador Packaging (Ireland) Limited (Ireland)....... 100 Tenneco International Finance B.V. (Netherlands).......... 100 Tenneco Management Company (Delaware)..................... 100 Tenneco Management (Europe) Limited (United Kingdom)...... 100 Tenneco NHC Inc. (Nevada)................................. 100 Tenneco Packaging -- Chile Holdings Inc. (Delaware)....... 100 Tenneco Packaging -- Chile S.A. (Chile)................ 100 Tenneco Packaging de Mexico, S.A. de C.V. (Mexico)........ 0.01 (Tenneco Packaging Inc. owns 1 share; and Tenneco Packaging International Holdings Inc. owns 499,999 shares) Tenneco Packaging Deutschland Holdinggesellschaft mbH 100 (Germany).............................................. Kobusch Folien Verwaltungsgesellschaft mbH (Germany)... 100 Tenneco Kobusch-Folien GmbH & Co. KG (Germany).... 100 (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Kobusch-Folien Verwaltungsgesellschaft mbH is the General Partner) Kobusch Packaging Egypt Ltd. (Egypt)............ 0.25 (Tenneco Kobusch-Folien GmbH & Co. KG owns 0.25%; and Tenneco Packaging Inc. owns 99.75%) Nord-West Verpackung Verwaltungsgesellschaft mbH 100 (Germany)............................................. Tenneco Nord-West Verpackung GmbH & Co. KG 100 (Germany)......................................... (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Nord-West Verpackung Verwaltungs-gesellschaft mbH is the General Partner) Nord-West Wohnungsbau GmbH (Germany)............ 100 Omni-Pac Ekco Verpackungsmittel Verwaltungsgesellschaft 100 mbH (Germany).........................................
- --------------- (1) In dissolution.
TENNECO DISTRIBUTION AGREEMENT G-3 74 SUBSIDIARIES OF TENNECO PACKAGING INC. SUBSIDIARIES OF TENNECO PACKAGING DEUTSCHLAND HOLDINGGESELLSCHAFT MBH SUBSIDIARIES OF OMNI-PAC EKCO VERPACKUNGSMITTEL VERWALTUNGSGESELLSCHAFT MBH Tenneco Omni-Pac Ekco Verpackungsmittel GmbH & Co. KG 100% (Germany)........................................... (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Omni-Pac Ekco Verpackungsmittel Verwaltungsgesellschaft mbH is the General Partner) Omni-Pac Poland Sp. z.o.o. (Poland)............... 100 PCA Embalajes Espana S.L. (Spain)................. 1 (Tenneco Omni-Pac Ekco Verpackungsmittel GmbH & Co. KG owns 1%; and Tenneco Forest Products GmbH owns 99%) Omni-Pac Verpackungsmittel Verwaltungsgesellschaft 100 mbH................................................. Tenneco Omni-Pac GmbH & Co. KG Verpackungsmittel 100 (Germany)........................................... (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Omni-Pac Verpackungsmittel Verwaltungsgesellschaft mbH is the General Partner) Omni-Pac ApS (Denmark)............................ 100 Omni-Pac A.B. (Sweden)............................ 100 Omni-Pac S.A.R.L. (France)........................ 3 (Tenneco Omni-Pac GmbH & Co. KG Verpackungsmittel owns 3%; and Tenneco Packaging Inc. owns 97%) Sengewald Verpackungen Verwaltungsgesellschaft mbH 100 (Germany)........................................... Tenneco Sengewald Verpackungen GmbH & Co. KG 100 (Germany)........................................... (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Sengewald Verpackung Verwaltungs-gesellschaft mbH is the General Partner) Sengewald Klinikprodukte Verpackungsmittel GmbH...... 100 Tenneco Sengewald Klinikprodukte GmbH & Co. KG 100 (Germany)........................................... (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Sengewald Klinikprodukte Verwaltungs-gesellschaft mbH is the General Partner) Sengewald France S.A.R.L. (France)(1)............. 100 Tenneco Omni-Pac GmbH & Co. KG Verpackungsmittel 100 (Germany)........................................... (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Omni-Pac Verpackungsmittel Verwaltungs-gesellschaft mbH is the General Partner) Tenneco Omni-Pac Ekco Verpackungsmittel GmbH & Co. KG 100 (Germany)........................................... (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Omni-Pac Ekco Verpackungsmittel Verwaltungs-gesellschaft mbH is the General Partner)
- --------------- (1) In dissolution.
TENNECO DISTRIBUTION AGREEMENT G-4 75 SUBSIDIARIES OF TENNECO PACKAGING INC. SUBSIDIARIES OF TENNECO PACKAGING DEUTSCHLAND HOLDINGGESELLSCHAFT MBH Tenneco Sengewald Verpackungen GmbH & Co. KG 100% (Germany)............................................. (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Sengewald Verpackung Verwaltungs-gesellschaft mbH is the General Partner) Tenneco Kobusch-Folien GmbH & Co. KG (Germany)......... 100 (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Kobusch-Folien Verwaltungsgesellschaft mbH is the General Partner) Tenneco Nord-West Verpackung GmbH & Co. KG (Germany)... 100 (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Nord-West Verpackung Verwaltungs-gesellschaft mbH is the General Partner) Tenneco Sengewald Klinikprodukte GmbH & Co. KG 100 (Germany)............................................. (Tenneco Packaging Deutschland Holdinggesellschaft mbH is the Limited Partner; and Sengewald Klinikprodukte Verwaltungs-gesellschaft mbH is the General Partner) Tenneco Packaging Europe B.V. (Netherlands)............... 100 Nederlandse Pillo-Pak Maatschappij B.V. 100 (Netherlands)......................................... Tenneco Packaging Hexacomb S.A. (Spain)................... 100 Tenneco Packaging Hungary Holdings Inc. (Delaware)........ 100 Tenneco Packaging Hungary Packaging Material Limited 100 (Hungary)(1)........................................... Budafok Recycling Waste Paper Recovery Ltd. 63.8 (Hungary)............................................. (Tenneco Packaging Hungary Packaging Material Limited owns 63.8%; and Asco Hungaria Kft., an unaffiliated company, owns 36.2%) Tenneco Packaging International Holdings Inc. 100 (Delaware)............................................. Airpack SPA (Italy).................................... 2 (Tenneco Packaging International Holdings Inc. owns 2%; and Tenneco Packaging Inc. owns 98%) Scriptoria N.V. (Belgium).............................. ,1 (Tenneco Packaging International Holdings Inc. owns ,1% or 18 shares; Tenneco Packaging Inc. owns approximately 99.6%; and the remainder of the shares are held by unknown third parties) Tenneco Packaging de Mexico, S.A. de C.V............... 99.99 (Tenneco Packaging International Holdings Inc. owns 499,999 shares; and Tenneco Packaging Inc. owns 1 share)
- --------------- (1) This company is commonly referred to as "Tenneco Packaging Hungary Kft."
TENNECO DISTRIBUTION AGREEMENT G-5 76 SUBSIDIARIES OF TENNECO PACKAGING INC. SUBSIDIARIES OF TENNECO PACKAGING INTERNATIONAL HOLDINGS INC SUBSIDIARIES OF TENNECO PACKAGING DE MEXICO, S.A. DE C.V. Empaques Protectores Tenneco S.A. de C.V. (Mexico)... 40% (Tenneco Packaging de Mexico, S.A. de C.V. owns 40%; non-affiliates own 60%) Wellenfoam N.V. (Belgium).............................. ,1 (Tenneco Packaging International Holdings Inc. owns ,1% or 1 share; and Tenneco Packaging Inc. owns 99+%) Tenneco Packaging Leasing Company (Delaware).............. 100 Tenneco Packaging RSA Company (Delaware).................. 100 Tenneco PPI Company (Delaware)............................ 100 Tenneco Protective Packaging Inc. (Delaware).............. 100 AVI Technologies, Inc. (Delaware)...................... 100 Tenneco Retail Receivables Company (Delaware)............. 100 Tenneco Rochester Acquisition Inc. (Delaware)(1).......... 100 Tenneco Romania Holdings Inc. (Delaware).................. 100 Tenneco Forest Products S.A. (Romania)................. 100 (Shawn Kelly, Richard Bierlich, Robert Haught and Brent Nyberg, all of whom are affiliated, each hold share(s) of this company) Tenneco Windsor Box & Display, Inc. (Delaware)(2)......... 100 The Baldwin Group, Ltd. (U.K.)............................ 100 Ambassador Packaging Ltd. (U.K.)....................... 100 Coastal Packaging Ltd. (U.K.)........................ 100 Prempack Limited (U.K.).............................. 100 R & H Robinson (Sheffield) Ltd. (U.K.)............... 100 Baldwin Packaging Limited (U.K.)....................... ,1 (The Baldwin Group owns ,1% or 1 share; J&W Baldwin (Holdings) Ltd. owns 99.9%) J&W Baldwin (Holdings) Ltd. (U.K.)..................... 100 Baldwin Packaging Limited (U.K.)..................... 99.9 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group owns ,1% or 1 share) Jiffy Rugated Products Limited (U.K.)............. 99.9 (Baldwin Packaging Limited owns 99.9%; and The Baldwin Group owns ,1% or 1 share) J&W Baldwin (Manchester) Limited (U.K.)........... 99.9 (Baldwin Packaging Limited owns 99.9%; and The Baldwin Group owns ,1% or 1 share)
- --------------- (1) In dissolution.
(2) In dissolution.
TENNECO DISTRIBUTION AGREEMENT G-6 77 SUBSIDIARIES OF TENNECO PACKAGING INC. SUBSIDIARIES OF THE BALDWIN GROUP, LTD. SUBSIDIARIES OF J&W BALDWIN (HOLDINGS) LTD. Jifcour (UK) Limited (U.K.).......................... 99.9% (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group, Ltd. owns ,1% or 1 share) Jiffy Packaging Company Ltd. (U.K.).................. 99.9 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group, Ltd. owns ,1% or 1 share) Pentland Packaging Limited (Scotland)................ 99.9 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group, Ltd. owns ,1% or 1 share) J&W Baldwin (Manchester) Limited (U.K.)................ ,1 (The Baldwin Group, Ltd. owns ,1% or 1 share and Baldwin Packaging Limited owns 99.9%) Jifcour (UK) Limited (U.K.)............................ ,1 (The Baldwin Group, Ltd. owns ,1% or 1 share and J&W Baldwin (Holdings) Ltd. owns 99.9%) Jiffy Packaging Company Ltd. (U.K.).................... ,1 (The Baldwin Group, Ltd. owns ,1% or 1 share; and J&W Baldwin (Holdings) Ltd. owns 99.9%) Jiffy Rugated Products Limited (U.K.).................. ,1 (The Baldwin Group, Ltd. owns ,1% or 1 share; and Baldwin Packaging Limited owns 99.9%) Omni-Pac U.K. Limited (United Kingdom)................. 100 Pentland Packaging Limited (Scotland).................. ,1 (The Baldwin Group, Ltd. owns ,1% or 1 share; and J&W Baldwin (Holdings) Ltd. owns 99.9%) Tenneco Packaging Limited (Scotland)................... 100 Alpha Products (Bristol) Limited (United Kingdom).... 100 Brucefield Plastics Limited (Scotland)............... 100 Polbeth Packaging (Corby) Limited (Scotland)......... 100 Tenneco Packaging (Caerphilly) Limited (United 100 Kingdom)............................................ Tenneco Packaging (Films) Limited (United Kingdom)... 100 Tenneco Packaging (Livingston) Limited (Scotland).... 100 Tenneco Packaging (Stanley) Limited (United 100 Kingdom)............................................ Tenneco Packaging (UK) Limited (United Kingdom)........ 100 The Corinth and Counce Railroad Company (Mississippi)..... 100 Valdosta Southern Railroad Company (Florida)........... 100 798795 Ontario Limited (Ontario).......................... 100 Astro-Valcour, Ltd. (Ontario).......................... 100 Tenneco Packaging Canada Inc. (Ontario)................ 100 Tenneco Packaging -- Hexacomb Limited (Ontario)........ 100 Shearmat Structures Ltd. (Manitoba).................. 100
TENNECO DISTRIBUTION AGREEMENT G-7 78 SUBSIDIARIES OF TENNECO PACKAGING INC. Wellenfoam N.V. (Belgium)................................. 99.9% (Tenneco Packaging Inc. owns 99.9%; and Tenneco Packaging International Holdings Inc. owns ,1% or 1 share) Wood Products Leasing Company (Delaware).................. 100 Zhejing Zhongbao Packaging (Peoples Republic of China).... 62.5 (Tenneco Packaging Inc. owns 62.5%; and non-affiliates own 37.5%)
TENNECO DISTRIBUTION AGREEMENT G-8 79 EXHIBIT H FORM OF TAX SHARING AGREEMENT This Tax Sharing Agreement is entered into as of , 1999 by and between Tenneco Inc., a Delaware corporation, to be renamed Tenneco Automotive Inc. ("Tenneco"), and , a Delaware corporation, formerly known as Tenneco Packaging Inc. ("Packaging Company"). Tenneco and Packaging Company are sometimes collectively referred to herein as the "Companies." Capitalized terms used in this Agreement are defined in Section 1 below. Unless otherwise indicated, all "Section" references in this Agreement are to sections of this Agreement. RECITALS WHEREAS, as of the date hereof, Tenneco is the common parent of an affiliated group of corporations, including Packaging Company, which has elected to file consolidated Federal income tax returns; and WHEREAS, the Companies have entered into a Distribution Agreement setting forth the corporate transactions pursuant to which Tenneco will distribute all of the outstanding shares of common stock of Packaging Company to Tenneco shareholders in a transaction intended to qualify as a tax-free distribution under Section 355 of the Code; and WHEREAS, as a result of the Distribution, Packaging Company and its subsidiaries will cease to be members of the affiliated group of which Tenneco is the common parent, effective as of the Distribution Date; and WHEREAS, the Companies desire to provide for and agree upon the allocation between the parties of liabilities for Taxes arising prior to, as a result of, and subsequent to the transactions contemplated by the Distribution Agreement, and to provide for and agree upon other matters relating to Taxes; NOW THEREFORE, in consideration of the mutual agreements contained herein, the Companies hereby agree as follows: SECTION 1. DEFINITION OF TERMS. For purposes of this Agreement (including the recitals hereof), the following terms have the following meanings: "Accounting Cutoff Date" means, with respect to Packaging Company, any date as of the end of which there is a closing of the financial accounting records for such entity. "Accounting Firm" shall have the meaning provided in Section 15. "Adjustment Request" means any formal or informal claim or request filed with any Tax Authority, or with any administrative agency or court, for the adjustment, refund, or credit of Taxes, including (a) any amended Tax Return claiming adjustment to the Taxes as reported on the Tax Return or, if applicable, as previously adjusted, or (b) any claim for refund or credit of Taxes previously paid. "Affiliate" means any entity that directly or indirectly is "controlled" by the person or entity in question. For purposes of this Agreement, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through ownership of voting securities, by contract or otherwise. Except as otherwise provided herein, the term Affiliate shall refer to Affiliates of a person as determined immediately after the Distribution. "Agreement" shall mean this Tax Sharing Agreement. TENNECO DISTRIBUTION AGREEMENT H-1 80 "Available Other Group Carryback" shall have the meaning provided in Section 4.07(c)(ii). "Benchmark Income (Or Loss) Allocation" shall have the meaning provided in Section 2.02(a)(ii). "Benchmark 1997 Loss Carryforward Allocation" shall have the meaning provided in Section 2.02(a)(iii). "Benchmark 1998 Loss Carryforward Allocation" shall have the meaning provided in Section 2.02(a)(iii). "Benchmark Period" shall have the meaning provided in Section 2.02(a)(ii). "Carryback" means any net operating loss, net capital loss, excess tax credit, or other similar Tax item which may or must be carried from one Tax Period to another Tax Period under the Code or other applicable Tax Law. "Carryback Group" shall have the meaning provided in Section 4.07(c)(ii). "Code" means the U.S. Internal Revenue Code of 1986, as amended, or any successor law. "Companies" means Tenneco and Packaging Company collectively, and "Company" means any one of Tenneco or Packaging Company. "Consolidated Or Combined Income Tax" means any Income Tax computed by reference to the assets and activities of members of more than one Group. "Consolidated Or Combined State Income Tax" means any State Income Tax computed by reference to the assets and activities of members of more than one Group. "Consolidated Tax Liability" means, with respect to any Tenneco Federal Consolidated Return, the "tax liability of the group" as that term is used in Treasury Regulation Section 1.1552-1(a)(1) (including applicable interest, additions to tax, additional amounts and penalties as provided in the Code), provided, that such tax liability shall be treated as including any alternative minimum tax liability under Code Section 55. "Corporate Restructuring Transactions" shall have the meaning provided in the Distribution Agreement. "Debt Realignment" shall have the meaning provided in the Distribution Agreement. "Distribution Agreement" means the Distribution Agreement, dated as of , 1999, between Tenneco and Packaging Company, as amended from time to time, setting forth the corporate transactions required to effect the distribution to Tenneco shareholders of all of the outstanding stock of Packaging Company owned by Tenneco, and to which this Tax Sharing Agreement is attached as an exhibit. "Distribution Date" means the Distribution Date as that term is defined in the Distribution Agreement. "Distribution" shall have the meaning provided in the Distribution Agreement. "Estimated Tax Payments" shall have the meaning provided in Section 2.03(a)(ii)(B). "Federal Income Tax" means any Tax imposed by Subtitle A (Income Taxes) or F (Procedure and Administration) of the Code. "Final Income Or Loss Allocation" shall have the meaning provided in Section 2.02(a)(iv). "Final 1997 Loss Carryforward Allocation" shall have the meaning provided in Section 2.02(a)(v). TENNECO DISTRIBUTION AGREEMENT H-2 81 "Final 1998 Loss Carryforward Allocation" shall have the meaning provided in Section 2.02(a)(v). "Foreign Income Tax" means any Tax imposed by any foreign country or any possession of the United States, or by any political subdivision of any foreign country or United States possession, which is an income tax as defined in Treasury Regulation Section 1.901-2. "German Restructuring Transactions" shall have the meaning provided in Section 2.04(b). "Group" means the Tenneco Group and the Packaging Group, as the context requires. "Hypothetical State Tax Liability" shall have the meaning provided in Section 2.03(a)(ii)(A). "Income Tax" means any Federal Income Tax, State Income Tax, or Foreign Income Tax. "IRS Ruling Letter" shall have the meaning provided in the Distribution Agreement. "Joint Adjustment" means any proposed adjustment by a Tax Authority or claim for refund asserted in a Tax Contest which is neither a Tenneco Adjustment nor a Packaging Adjustment. "Old Tenneco" shall have the meaning provided in Section 2.06(a) "Other Group" shall have the meaning provided in Section 4.07(c)(ii). "Packaging Adjustment" means any proposed adjustment by a Tax Authority or claim for refund asserted in a Tax Contest to the extent Packaging Company would be exclusively liable for any resulting Tax under this Agreement and exclusively entitled to receive any resulting Tax Benefit under this Agreement. "Packaging Company" means , a Delaware corporation, formerly known as Tenneco Packaging Inc., and any successor. "Packaging Group" means Packaging Company and its Affiliates as determined immediately after the Distribution, modified as provided in Section 18. "Packaging Group Prior State Tax Liability" shall have the meaning provided in Section 2.03(b)(i)(B). "Packaging Group Recomputed State Tax Liability" shall have the meaning provided in Section 2.03(b)(i)(A). "Payment Date" means (i) with respect to any Tenneco Federal Consolidated Return, the due date for any required installment of estimated taxes determined under Code Section 6655, the due date (determined without regard to extensions) for filing the return determined under Code Section 6072, and the date the return is filed, and (ii) with respect to any Tax Return for any Consolidated or Combined State Income Tax, the corresponding dates determined under the applicable Tax Law. "Post-Distribution Period" means any Tax Period beginning after the Distribution Date, and, in the case of any Straddle Period, the portion of such Straddle Period beginning the day after the Distribution Date. "Post-Distribution State Income Tax Return" means any State Income Tax Return for the Tax Period ended December 31, 1999. "Pre-Distribution Period" means any Tax Period ending on or before the Distribution Date, and, in the case of any Straddle Period, the portion of such Straddle Period ending on the Distribution Date. TENNECO DISTRIBUTION AGREEMENT H-3 82 "Prime Rate" means the base rate on corporate loans charged by Citibank, N.A., New York, New York from time to time, compounded daily on the basis of a year of 365 or 366 (as applicable) days and actual days elapsed. "Prior Intercompany Tax Allocation Agreements" means any written or oral agreement or any other arrangements relating to allocation of Taxes existing between or among the Tenneco Group and the Packaging Group as of the Distribution Date (other than this Agreement and other than any such agreement or arrangement between or among persons who are members of a single Group). "Prohibited Action" shall have the meaning provided in Section 11. "Responsible Company" means, with respect to any Tax Return, the Company having responsibility for preparing and filing such Tax Return under this Agreement. "Restructuring Tax" means the Taxes described in Sections 2.05(a)(i) or 2.05(a)(ii) (relating to Tax resulting from any income or gain recognized as a result of the Transactions but excluding any Transfer Taxes described in Section 2.05). "Ruling Request" means the letter filed by Tenneco with the Internal Revenue Service dated April 30, 1999 requesting a ruling from the Internal Revenue Service regarding certain Federal Income Tax consequences of the Transactions (including all attachments, exhibits, and other materials submitted with such ruling request letter) and any amendment or supplement to such ruling request letter. "Separate Company Tax" means any Tax computed by reference to the assets and activities of a member or members of a single Group. "Separate Company State Income Tax" means any State Income Tax that is a Separate Company Tax. "Straddle Period" means any Tax Period that begins on or before and ends after the Distribution Date. "State Income Tax" means any Tax imposed by any State of the United States or by any political subdivision of any such State which is imposed on or measured by net income, including state and local franchise or similar Taxes measured by net income (including, without limitation, any Tax which is measured by the higher of capital or net income (e.g., Ohio Rev. Code Ann. Title 57, Section 5733, Corporate Franchise Tax)). "Tax" or "Taxes" means any income, gross income, gross receipts, profits, capital stock, franchise, withholding, payroll, social security, workers compensation, unemployment, disability, property, ad valorem, stamp, excise, severance, occupation, service, sales, use, license, lease, transfer, import, export, value added, alternative minimum, estimated or other similar tax (including any fee, assessment, or other charge in the nature of or in lieu of any tax) imposed by any governmental entity or political subdivision thereof, and any interest, penalties, additions to tax, or additional amounts in respect of the foregoing. "Tax Authority" means, with respect to any Tax, the governmental entity or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Tax for such entity or subdivision. "Tax Benefit" means any refund, credit, or other reduction in otherwise required Tax payments (including any reduction in estimated Tax payments). "Tax Contest" means an audit, review, examination, or any other administrative or judicial proceeding with the purpose or effect of redetermining Taxes of any of the Companies or their TENNECO DISTRIBUTION AGREEMENT H-4 83 Affiliates (including any administrative or judicial review of any claim for refund) for any Tax Period ending on or before the Distribution Date or for any Straddle Period. "Tax Contest Committee" shall have the meaning provided in Section 9.02(b). "Tax Item" means, with respect to any Income Tax, any item of income, gain, loss, deduction, and credit. "Tax Law" means the law of any governmental entity or political subdivision thereof relating to any Tax. "Tax Period" means, with respect to any Tax, the period for which the Tax is reported as provided under the Code or other applicable Tax Law. "Tax Records" means Tax Returns, Tax Return work papers, documentation relating to any Tax Contests, and any other books of account or records required to be maintained under the Code or other applicable Tax Laws or under any record retention agreement with any Tax Authority. "Tax Return" means any report of Taxes due, any claims for refund of Taxes paid, any information return with respect to Taxes, or any other similar report, statement, declaration, or document required to be filed under the Code or other Tax Law, including any attachments, exhibits, or other materials submitted with any of the foregoing, and including any amendments or supplements to any of the foregoing. "Tenneco" means Tenneco Inc., a Delaware corporation, and any successor. "Tenneco Adjustment" means any proposed adjustment by a Tax Authority or claim for refund asserted in a Tax Contest to the extent Tenneco would be exclusively liable for any resulting Tax under this Agreement and exclusively entitled to receive any resulting Tax Benefit under this Agreement. "Tenneco Affiliated Group" means the affiliated group (as that term is defined in Code Section 1504) that includes Tenneco as the common parent and includes any member of the Packaging Group. "Tenneco Federal Consolidated Return" means any United States federal Tax Return for the Tenneco Affiliated Group. "Tenneco Group" means Tenneco and its Affiliates excluding any entity that is a member of the Packaging Group. "Transactions" means the transactions contemplated by the Distribution Agreement (including the Corporate Restructuring Transactions, Debt Realignment and Distribution, as defined in such agreement). "Transfer Taxes" means all Taxes (other than Taxes imposed on income or gains) incurred or imposed by reason of the sale, assignment or transfer of title of the applicable property, regardless of upon whom such Taxes are levied or imposed by the applicable Tax Law, including sales, use, value- added, excise, stock transfer, real estate transfer, lease assignment, transfer gains tax, stamp, documentary, filing, recording, permit, license, authorization, intangible and similar Taxes. "True-Up Amount" shall have the meaning provided in Section 2.02(a)(vi). "Treasury Regulations" means the regulations promulgated from time to time under the Code as in effect for the relevant Tax Period. "UK Restructuring Transactions" shall have the meaning provided in Section 2.04(c). "1996 Spin-Off Tax Sharing Agreement" shall have the meaning provided in Section 2.06(a). TENNECO DISTRIBUTION AGREEMENT H-5 84 "1997 Loss Carryforward" shall have the meaning provided in Section 2.02(a)(i). "1998 Loss Carryforward" shall have the meaning provided in Section 2.02(a)(i). "1999 Tax Period" shall have the meaning provided in Section 2.02(a). For purposes of this Agreement, any reference to "including" shall be deemed to mean "including, without limitation." SECTION 2. ALLOCATION OF TAX LIABILITIES. The provisions of this Section 2 are intended to determine each Company's liability for Taxes with respect to Pre-Distribution Periods. Once the liability has been determined under this Section 2, Section 5 determines the time when payment of the liability is to be made, and whether the payment is to be made to the Tax Authority directly or to another Company. 2.01 General Rule. (a) Tenneco Liability. Tenneco shall be liable for all Taxes not specifically allocated to Packaging Company under this Section 2. Tenneco shall indemnify and hold harmless the Packaging Group from and against any liability for Taxes for which Tenneco is liable under this Section 2.01(a). (b) Packaging Company Liability. Packaging Company shall be liable for, and shall indemnify and hold harmless the Tenneco Group from and against any liability for, Taxes which are allocated to Packaging Company under this Section 2. 2.02 Allocation of United States Federal Income Tax. Except as provided in Sections 2.05 and 2.06: (a) Allocation of Tax and Tax Attributes Relating to the 1999 Tax Period. With respect to the Tenneco Federal Consolidated Return for the tax period ending December 31, 1999 (the "1999 Tax Period"), the allocation and use of net operating loss carryforwards and current year losses, and the allocation of Consolidated Tax Liability, if any, shall be made as follows: (i) Step One. The net operating losses attributable to the tax period ended December 31, 1997 (the "1997 Loss Carryforward") and the net operating losses attributable to the tax period ended December 31, 1998 (the "1998 Loss Carryforward") shall be allocated between the Tenneco Group and Packaging Group based upon the legal entities that incurred such losses (treating the income of any member of the Tenneco Affiliated Group for the relevant tax period as reducing the losses of each legal entity included in the Tenneco Affiliated Group on a pro rata basis in accordance with Treasury Regulation Section 1.1502-21(b)(2). (ii) Step Two. The taxable income (or loss) of each of the Tenneco Group and Packaging Group for the portion of the 1999 Tax Period ending on September 30, 1999 (the "Benchmark Period") shall be computed (the "Benchmark Income (or Loss) Allocation ") subject to adjustment for material divestments, the costs of the Debt Realignment, and similar items. (iii) Step Three. The taxable losses, if any, incurred by any member of the Tenneco Affiliated Group for the Benchmark Period shall be deemed to be utilized first to offset the taxable income, if any, of each other member of the Tenneco Affiliated Group for such tax period (which losses shall be deemed to be utilized by such members on a pro rata basis). Next, the 1997 Loss Carryforward shall be deemed to be utilized, on a pro rata basis, to offset the taxable income of each member of the Tenneco Affiliated Group. Finally, to the extent the taxable income for such period exceeds the losses for such period and the 1997 Loss Carryforward, the 1998 Loss Carryforward shall be deemed to be utilized, on a pro rata basis, to offset the remaining taxable income of each member of the Tenneco Affiliated Group. Neither Tenneco nor Packaging Company shall have any obligation to pay or reimburse the other party for utilization of such party's net operating losses under this Step Three. Each Group's allocable share of the 1997 Loss Carryforward and 1998 Loss Carryforward following the utilization of TENNECO DISTRIBUTION AGREEMENT H-6 85 losses described in this Step Three shall be referred to as such Group's "Benchmark 1997 Loss Carryforward Allocation" and "Benchmark 1998 Loss Carryforward Allocation," respectively. In the event the 1997 Loss Carryforward and 1998 Loss Carryforward are fully utilized, the Benchmark 1997 Loss Carryforward Allocation and the Benchmark 1998 Loss Carryforward Allocation shall be deemed to equal zero. In the event the Tax Return for the tax period ended December 31, 1998 has not been filed at the time the Benchmark 1997 and Benchmark 1998 Loss Carryforward Allocations are made pursuant to Step Three, the parties shall use an agreed upon estimate of the net operating losses for the tax period ended December 31, 1998, and within 30 days of the filing the Tax Return for such tax period, the Benchmark 1997 Loss Carryforward Allocation and Benchmark 1998 Loss Carryforward Allocation shall be redetermined. In the case of such redetermination if Packaging Company's Benchmark 1997 Loss Carryforward Allocation or Benchmark 1998 Loss Carryforward Allocation, as redetermined, exceeds the amount of such allocation as initially determined under Step Three, Packaging Company shall pay to Tenneco an amount equal to such excess multiplied by 35%, and if Packaging Company's Benchmark 1997 Loss Carryforward Allocation or Benchmark 1998 Loss Carryforward Allocation, as redetermined, is less than Packaging Company's Benchmark 1997 Loss Carryforward Allocation or Benchmark 1998 Loss Carryforward Allocation, Tenneco shall pay to Packaging Company an amount equal to such difference multiplied by 35%. (iv) Step Four. The taxable income (or loss) of each of the Tenneco Group and the Packaging Group for the 1999 Tax Period shall be computed (in the same manner as described in Step Two) based on the Tax Return as filed for such tax period (the "Final Income or Loss Allocation"). (v) Step Five. Based on the Tax Return as filed for the 1999 Tax Period, the taxable losses, if any incurred by any member of the Tenneco Group or Packaging Group for such period shall be deemed to be utilized first to offset the taxable income, if any, of each other member of the Tenneco Affiliated Group for such period (which losses shall be deemed to be utilized by such members on a pro rata basis). Next, the 1997 Loss Carryforward shall be deemed to be utilized, on a pro rata basis, to offset the taxable income of each member of the Tenneco Affiliated Group. Finally, to the extent the taxable income for such period exceeds the losses for the current period and the 1997 Loss Carryforward, the 1998 Loss Carryforward shall be deemed to be utilized, on a pro rata basis, to offset the remaining taxable income of each member of the Tenneco Affiliated Group. Each Group's allocable share of the 1997 Loss Carryforward and 1998 Loss Carryforward following the utilization of losses described in this Step Five shall be referred to as the "Final 1997 Loss Carryforward Allocation" and "Final 1998 Loss Carryforward Allocation," respectively. (vi) Step Six. Within sixty (60) days of filing the Tenneco Federal Consolidated Tax Return for the 1999 Tax Period, the Packaging Group shall compute the "True-Up Amount," which amount shall equal (I) the sum of (A) the Packaging Group's' Final Income (or Loss) Allocation less the Packaging Group's Benchmark Income or (Loss) Allocation (any loss allocation shall be treated as a negative number for purposes of this computation) plus (B) the Packaging Group's Final 1997 Loss Carryforward less the Packaging Group's Benchmark 1997 Loss Carryforward (as redetermined under Step Three, if applicable), plus (C) the Packaging Group's Final 1998 Loss Carryforward less the Packaging Group's Benchmark 1998 Carryforward (as redetermined under Step Three, if applicable), multiplied by (II) 35%. (vii) Step Seven. In the event the Packaging Group's True-Up Amount is positive, Packaging Company shall pay such amount to Tenneco, and in the event the Packaging Group's True-Up Amount is negative, Tenneco shall pay such amount to Packaging Company. TENNECO DISTRIBUTION AGREEMENT H-7 86 Schedule A attached hereto sets forth the parties' agreement as to the determinations required under Steps One, Two and Three of this Section 2.02(a). Schedule B attached hereto provides an example of the manner in which Steps Four, Five and Six are to be computed. The actual determination required to be made under Steps Four, Five and Six will be based on the information contained on the Tax Return as filed for the 1999 Tax Period. (b) Allocation of Tenneco Federal Consolidated Return Tax Adjustments. If there is any adjustment to the reported Tax liability with respect to any Tenneco Federal Consolidated Return, or to such Tax liability as previously adjusted, Packaging Company shall be liable to Tenneco for the excess (if any) of: (i) the Consolidated Tax Liability of the Packaging Group computed as if all members of the Packaging Group included in the Tax Return had filed a consolidated Tax Return for such members based on the Tax Items of such members as so adjusted (the "Packaging Group Recomputed Federal Tax Liability"); over (ii) the Consolidated Tax Liability of the Packaging Group computed as if such members of the Packaging Group had filed a consolidated Tax Return for such members based on the Tax Items of such members as reported (or, if applicable, as previously adjusted) (the "Packaging Group Prior Federal Tax Liability"). Solely with respect to the Tenneco Federal Consolidated Return for the 1999 Tax Period, the Packaging Group Prior Federal Tax Liability with respect to such Tax Return shall equal the Consolidated Tax Liability allocable to the Packaging Group with respect to such Tax Return under Section 2.02(a) hereof. If the Packaging Group Prior Federal Tax Liability exceeds the Packaging Group Recomputed Federal Tax Liability, Tenneco shall be liable to Packaging Company for such excess. For purposes of this Section 2.02(b), if the Packaging Group has a net operating loss after taking into account the adjustments allocable to such Group, the Recomputed Federal Tax Liability of the Group shall be less than zero to the extent such net operating loss produces a Tax Benefit in consolidation for the applicable taxable year (which shall be determined applying the principles of Section 4.07(c)(ii)). For example, if the Packaging Group's Prior Federal Tax Liability for Year X was $50 and taking into account all adjustments for Year X, Packaging Group has a net operating loss of $40 resulting in a Tax Benefit of $14 (determined by computing the Consolidated Tax Liability for such Tax Period with and without the net operating loss), then the Packaging Group's Recomputed Federal Tax Liability for Year X would be negative $14, and Tenneco would be liable to Packaging Company in the amount of $64, i.e. ($50 - (-$14)). 2.03 Allocation of State Income Taxes. Except as provided in Sections 2.04, 2.05 and 6.03, State Income Taxes shall be allocated as follows: (a) Allocation of State Income Tax Liabilities for Post-Distribution State Income Tax Returns. (i) Separate Company Taxes. In the case of any Separate Company State Income Tax with respect to a Post-Distribution State Income Tax Return, Packaging Company shall be liable for such Tax imposed on any members of the Packaging Group. (ii) Consolidated or Combined State Income Taxes. In the case of any Consolidated or Combined State Income Tax with respect to a Post-Distribution State Income Tax Return, the Consolidated or Combined State Income Tax liability shall be allocated between the Tenneco Group and the Packaging Group as follows: (A) Each Group shall compute its "Hypothetical State Tax Liability," which shall equal the State Income Tax liability of such Group (which number shall be deemed to be zero if such Group has net operating losses for such Tax Period), computed as if all members of such Group included in the computation of such Tax had filed a consolidated or TENNECO DISTRIBUTION AGREEMENT H-8 87 combined Tax Return for such Group's members based on the income, apportionment factors, and other items of such members. (B) In the event the Estimated Tax Payments (as defined below) exceed, or are less than, the actual State Income Tax liability shown on the Consolidated and Combined State Income Tax Return such excess or deficit, as the case may be, shall be shared by the Tenneco Group and the Packaging Group. Each Group's share shall be determined by multiplying such excess or deficit by a fraction, (a) the numerator of which is the Hypothetical State Tax Liability of such Group, and (b) the denominator of which is the sum of the Hypothetical State Tax Liability of the Tenneco Group and the Packaging Group, with appropriate payments being made by Packaging Company to Tenneco, or by Tenneco to Packaging Company, to achieve the appropriate sharing of such excess or deficit. The term "Estimated Tax Payments" shall mean any and all estimated payments made in connection with the Combined or Consolidated State Income Tax Return filed for such Tax Period; provided, however, such amount shall (i) exclude any estimated Tax payments made after the Distribution Date and (ii) include any overpayments of Combined or Consolidated State Income Tax for any prior Tax Periods which are carried forward and applied as payments on the Combined or Consolidated State Income Tax Returns for the applicable Tax Period. (iii) Post-Distribution Estimated Payments. Notwithstanding anything to the contrary in the foregoing, in the case of both Separate Company Taxes and Consolidated or Combined Income Taxes, Packaging Company shall pay to the appropriate State Tax Authority any estimated Taxes with respect to the Tax Period ended December 31, 1999 due after the Distribution Date. Tenneco shall reimburse Packaging Company for (i) any estimated Tax payments made by Packaging Company after the Distribution Date with respect to Separate Company Taxes imposed on members of the Tenneco Group and (ii) any and all estimated Tax payments made by Packaging Company after the Distribution Date with respect to any Consolidated or Combined State Income Tax. (b) Allocation of State Income Tax Adjustments. (i) Combined or Consolidated State Income Tax Adjustments. If there is any adjustment to the amount of Consolidated or Combined State Income Tax reported on any Tax Return (or as previously adjusted), the liability of the Packaging Group shall be recomputed as provided in this subparagraph. Packaging Company shall be liable to Tenneco for the excess (if any) of: (A) the State Income Tax liability computed as if all members of the Packaging Group included in the Tax Return had filed a consolidated or combined Tax Return for such members based on the income, apportionment factors, and other items of such members as so adjusted (the "Packaging Group Recomputed State Tax Liability"); over (B) the State Income Tax liability computed as if such members of the Packaging Group had filed a consolidated or combined Tax Return for such members based on the income, apportionment factors, and other items of such members as reported (or, if applicable, as previously adjusted) (the "Packaging Group Prior State Tax Liability"). If the Packaging Group Prior State Tax Liability exceeds the Packaging Group Recomputed State Tax Liability, Tenneco shall be liable to Packaging Company for such excess. For purposes of this paragraph, (i) if the Packaging Group has a net operating loss after taking into account the adjustments allowable to such Group, the Packaging Group Recomputed State Tax Liability shall be less than zero to the extent such net operating loss produces a Tax Benefit for purposes of the applicable Consolidated or Combined State Income Tax and (ii) the determination and payment of estimated Taxes (including the determination and payment of any Tax required to be paid with a TENNECO DISTRIBUTION AGREEMENT H-9 88 request for an extension of time to file a Tax Return) shall not be treated as an adjustment to the related Consolidated or Combined State Income Tax. (ii) Separate Company Taxes. In the case of any adjustment to the amount of a Separate Company Tax Liability, Packaging Company shall be liable for such Tax imposed on members of the Packaging Group, and Tenneco shall be liable for such Tax imposed on members of the Tenneco Group. 2.04 Allocation of Other Taxes. (a) General. Except as provided in Section 2.04 (b) and (c) and Section 2.05, all Taxes other than those specifically allocated pursuant to Sections 2.02 and 2.03 shall be allocated based on the legal entity on which the legal incidence of the Tax is imposed (provided, however, that in the event the legal entity on which the legal incidence of the tax is imposed is a member of a group including members of both the Packaging Group and Tenneco Group, the tax shall be allocated between the Tenneco Group and Packaging Group based on each Group's respective share of the taxable income giving rise to such Tax. As between the parties to this Agreement, Packaging Company shall be liable for all Taxes imposed on any member of the Packaging Group. The Companies believe that there is no Tax not specifically allocated pursuant to Sections 2.02 and 2.03 which is legally imposed on more than one legal entity (e.g., joint and several liability); however, if there is any such Tax, it shall be allocated in accordance with past practices as reasonably determined by the affected Companies, or in the absence of such practices, in accordance with any allocation method agreed upon by the affected Companies. (b) German Restructuring. Notwithstanding anything to the contrary in this Agreement, with respect to the Corporate Restructuring Transactions involving the restructuring of the German entities (i.e., the members of the Tenneco Affiliated Group organized under the laws of Germany) (the "German Restructuring Transactions"), the parties agree as follows: (i) Packaging Company shall be liable for any and all Transfer Taxes incurred as a result of the German Restructuring Transactions. (ii) Tenneco Deutschland Holdinggesellschaft mBH's ("Tenneco Deutschland") German Tax losses shall be utilized to the fullest extent permitted under German Tax Law to offset income realized in connection with the German Restructuring Transactions and Packaging Company shall have no obligation to reimburse or otherwise compensate Tenneco for the use of such Tax losses; provided, however, that (X) in the event the German Tax Authority makes a final determination that the income realized in connection with the German Restructuring Transactions is greater than the amount reported on the Tax Return as originally filed, Packaging Company shall pay to Tenneco Deutschland an amount equal to the additional German Tax loss used to offset Tenneco Deutschland's in creased income multiplied by the applicable German Tax rate, and (Y) in the event the German Tax Authority makes a final determination that the income realized in connection with the German Restructuring Transactions is less than the amount reported on the Tax Return as originally filed, Tenneco Deutschland shall pay to Packaging Company an amount equal to the German Tax loss restored as a result of such determination multiplied by the applicable German Tax rate. (iii) In the event any member of the Packaging Group is required to make profit and absorption payments to Tenneco Deutschland after the Distribution Date, such payments shall be promptly repaid to Tenneco Packaging Deutschland Holding Gesellschaft mBH as an adjustment to purchase price with respect to Tenneco Deutschland's sale of such member to Tenneco Packaging Deutschland Holding Gesellschaft mBH pursuant to the German Restructuring Transactions. (iv) In the event the German Tax Authority disallows Tenneco Deutschland's Organschaft status for any reason whatsoever, Tenneco Deutschland shall pay to Packaging Company the Tax Benefit TENNECO DISTRIBUTION AGREEMENT H-10 89 realized by Tenneco Deutschland by reason of claiming input credits arising out of deemed dividend payments made by members of the Packaging Group. (c) United Kingdom Restructuring. Notwithstanding anything to the contrary in this Agreement, with respect to the Corporate Restructuring Transactions involving the restructuring of the United Kingdom entities (i.e., the members of the Tenneco Affiliated Group organized under the laws of United Kingdom) (the "UK Restructuring Transactions"), the Companies agree as follows: (i) Packaging Company shall be liable for any and all Transfer Taxes (including, without limitation, any stamp duty) incurred as a result of the UK Restructuring Transactions. (ii) Each Group shall be entitled to cause any of its members to surrender such member's Tax losses for group relief or consortium relief (or other amounts eligible for group or consortium relief) to another member of such Group; provided, however, that if the Tax losses of a Group cannot be utilized by the members of such Group, the Tax losses shall be surrendered for group relief or consortium relief to the members of the other Group, as designated in writing by the parent company of such other Group (and such other Group shall have no obligation to reimburse or otherwise compensate the surrendering Group for its losses). 2.05 Transaction and Other Taxes. (a) General. Except as otherwise provided in this Section 2.05, any and all liability for Taxes resulting from the Transactions shall be allocated as follows: (i) Any sales and use, gross receipts or other Transfer Taxes imposed on the transfers occurring pursuant to the Transactions (together with any Tax resulting from any income or gain recognized under Treasury Regulation Sections 1.1502-13 or 1.1502-19 (or any other corresponding provisions of other applicable Tax Laws) as a result of the Transactions) shall be allocated to the legal entity on which the legal incidence of the Tax is imposed. As between the parties to this Agreement, Packaging Company shall be liable for all Taxes imposed on any member of the Packaging Group and Tenneco shall be liable for all Taxes imposed on any member of the Tenneco Group. (ii) Any Tax liability resulting from any income or gain recognized as a result of any of the transactions contemplated by the Distribution Agreement failing to qualify for tax-free treatment under Code Sections 332, 351, 355, 361 or other provisions of the Code (as contemplated by the Ruling Request) or corresponding provisions of other applicable Tax Laws, shall be allocated fifty percent (50%) to Tenneco and fifty percent (50%) to Packaging Company. (b) Indemnity for Inconsistent Acts. Tenneco or Packaging Company, as the case may be, shall be liable for, and shall indemnify and hold harmless the members of the other Group from and against any liability for, any Restructuring Tax to the extent arising from any breach by such party of its representations or covenants under Section 11. (c) Indemnity for Liability Under Code Section 355(e). Notwithstanding anything to the contrary in this Section 2.05, any Tax liability incurred by Tenneco under Code Section 355(e) (or any corresponding provision of other applicable Tax Laws) by reason of the acquisition by one or more persons of a "50-percent or greater interest" (as such term is defined in Code Section 355(d)(4)) in Tenneco or Packaging Company (a "50% Ownership Shift") shall be allocated to that entity (i.e., Tenneco or Packaging Company) with respect to which such Ownership Shift has occurred. 2.06 Liability Under 1996 Spin-Off Tax Sharing Agreement. (a) With respect to any Tax liability imposed on or incurred by Tenneco (or any Tax Benefit owing to Tenneco) under the Tax Sharing Agreement dated as of December 11, 1996, as amended, by and among Tenneco, Newport News Shipbuilding Inc., El Paso Natural Gas Company, and El Paso Tennessee TENNECO DISTRIBUTION AGREEMENT H-11 90 Pipeline Co. ("Old Tenneco") (the "1996 Spin-Off Tax Sharing Agreement), Packaging Company shall be liable for, and shall indemnify and hold the Tenneco Group harmless from, any and all such Tax liabilities (and Packaging Company shall be entitled to any and all such Tax Benefits) except to the extent such Tax liability (or such Tax Benefit) would be treated as allocable to the Tenneco Group under the terms of Sections 2.01 through 2.04 hereof, in which case the Tenneco Group shall be liable for such Tax liability and shall be entitled to such Tax Benefit. Any amount owed by Packaging Company under this Section 2.06 shall be paid by Packaging Company to Tenneco within 30 days from the date of written notice and demand from Tenneco evidencing the payment of such amount by Tenneco in accordance with the terms of the 1996 Spin-Off Tax Sharing Agreement. Any amount due to Packaging Company under this Section 2.06 shall be paid to Packaging Company by Tenneco within 30 days from the date of receipt of such amount by Tenneco in accordance with the terms of the 1996 Spin-Off Tax Sharing Agreement. (b) The Companies agree that in the case of any dispute or controversy under the 1996 Spin-Off Tax Sharing Agreement, (i) each Company shall control the portion of such dispute or controversy that directly and exclusively relates to a Tax liability or Tax Benefit borne by such Company under the terms hereof, and (ii) to the extent any issue involved in, or aspect of, such dispute or controversy does not directly and exclusively relate to the Tax liability or Tax Benefits of one Company under the terms hereof, the Companies shall jointly control and otherwise handle such issue or matter in accordance with the rules for defense or prosecution of Joint Adjustments in Section 9.02(b) hereof. In furtherance of the foregoing, Tenneco shall, upon Packaging Company's request, execute such powers of attorney or other documentation as reasonably determined by Packaging Company to be necessary or appropriate to permit Packaging Company to fully exercise its rights under this Section 2.06(b). Each of Tenneco and Packaging Company agree that, with respect to any issue which involves or could involve the other Company's liability (or entitlement to payment) under the 1996 Spin-Off Tax Sharing Agreement pursuant to this Section 2.06, it shall not have the right to settle such issue without the prior written consent of such other Company. SECTION 3. PRORATION OF TAXES FOR STRADDLE PERIODS. 3.01 General Method of Proration. In the case of any Straddle Period, Tax Items shall be apportioned between Pre-Distribution Periods and Post-Distribution Periods in accordance with the principles of Treasury Regulation Section 1.1502-76(b) as reasonably interpreted and applied by the Companies. No election shall be made under Treasury Regulation Section 1.1502-76(b)(2)(ii) (relating to ratable allocation of a year's items). If the Distribution Date is not an Accounting Cutoff Date, the principles of Treasury Regulation Section 1.1502-76(b)(2)(iii) will be applied to ratably allocate the items (other than extraordinary items described in Treasury Regulation Section 1.1502-76(b)(2)(ii)(C)) for the month which includes the Distribution Date. 3.02 Transaction Treated as Extraordinary Item. In determining the apportionment of Tax Items between Pre-Distribution Periods and Post-Distribution Periods, any Tax Items relating to the Transactions shall be treated as an extraordinary item described in Treasury Regulation Section 1.1502-76(b)(2)(ii)(C) and shall be allocated to Pre-Distribution Periods, and any Taxes related to such items shall be treated under Treasury Regulation Section 1.1502-76(b)(2)(iv) as relating to such extraordinary item and shall be allocated to Pre-Distribution Periods. SECTION 4. PREPARATION AND FILING OF TAX RETURNS. 4.01 General. Except as otherwise provided in this Section 4, Tax Returns shall be prepared and filed when due (including extensions) by the person obligated to file such Tax Returns under the Code or applicable Tax Law. The Companies shall provide, and shall cause their Affiliates to provide, assistance and cooperate with one another in accordance with Section 7 with respect to the preparation and filing of Tax Returns, including providing information required to be provided in Section 7. TENNECO DISTRIBUTION AGREEMENT H-12 91 4.02 Packaging Company's Responsibility. Packaging Company has the exclusive obligation and right to prepare and file, or to cause to be prepared and filed: (a) Tenneco Federal Consolidated Returns for Tax Periods ending on or before December 31, 1999. (b) The U.S. federal Income Tax return for the affiliated group (as that term is defined in Code Section 1504) of which Tenneco International Holding Corp. is the common parent for Tax Periods ending on or before December 31, 1999. (c) Tax Returns for Separate Company State Income Taxes or Consolidated or Combined State Income Taxes which the Companies reasonably determine, in accordance with Tenneco's past practices, are required to be filed by the Companies or any of their Affiliates for Tax Periods ending on or before December 31, 1999 (including without limitation, the filing of amended Tax Returns to take into account Federal Income Tax adjustments or Carryback Items). (d) Tax Returns that are required to be filed by the members of the Packaging Group. Nothing in this Section 4.02 shall impose on Packaging Company any liability for any failure to file any Tax Return, or for failure to file any Tax Return when due, with respect to any Pre-Distribution Period if the due date for such return (including extensions) was prior to the Distribution Date. 4.03 Tenneco Responsibility. Tenneco shall prepare and file, or shall cause to be prepared and filed, Tax Returns required to be filed by or with respect to members of the Tenneco Group other than those Tax Returns which Packaging Company is required to prepare and file under Section 4.02. The Tax Returns required to be prepared and filed by Tenneco under this Section 4.03 shall include (a) the Tenneco Federal Consolidated Return for Tax Periods ending after December 31, 1999, (b) the U.S. Federal Income Tax return for the affiliated group (as that term is defined in Code Section 1504) of which Tenneco International Holding Corp. is the common parent for Tax Periods ending after December 31, 1999, and (c) Tax Returns for Consolidated or Combined State Income Taxes which the Companies reasonably determine, in accordance with Tenneco's past practices, are required to be filed by the Companies or any of their Affiliates for Tax Periods ending after December 31, 1999. 4.04 Tax Accounting Practices. (a) General Rule. Except as otherwise provided in this Section 4.04, any Tax Return for any Pre-Distribution Period or any Straddle Period, and any Tax Return for any Post-Distribution Period to the extent items reported on such Tax Return might reasonably affect items reported on any Tax Return for any Pre-Distribution Period or any Straddle Period, shall be prepared in accordance with past Tax accounting practices used with respect to the Tax Returns in question (unless such past practices are no longer permissible under the Code or other applicable Tax Law), and to the extent any items are not covered by past practices (or in the event such past practices are no longer permissible under the Code or other applicable Tax Law), in accordance with reasonable Tax accounting practices selected by the Responsible Company. (b) Reporting of Transaction Tax Items. The tax treatment reported on any Tax Return of Tax Items relating to the Transactions shall be consistent with the treatment of such item in the IRS Ruling Letter. To the extent there is a Tax Item relating to the Transactions which is not covered by the IRS Ruling Letter, the Companies shall agree on the tax treatment of any such Tax Item reported on any Tax Return. For this purpose, the tax treatment of such Tax Items on a Tax Return by the Responsible Company with respect to such Tax Return shall be agreed to by the other Company unless either (i) there is no reasonable basis for such tax treatment, or (ii) such tax treatment is inconsistent with the tax treatment contemplated in the Ruling Request. Such Tax Return shall be submitted for review pursuant to Section 4.06(a), and any dispute regarding such TENNECO DISTRIBUTION AGREEMENT H-13 92 proper tax treatment shall be referred for resolution pursuant to Section 15, sufficiently in advance of the filing date of such Tax Return (including extensions) to permit timely filing of the return. 4.05 Consolidated or Combined Returns. The Companies will elect and join, and will cause their respective Affiliates to elect and join, in filing consolidated, unitary, combined, or other similar joint Tax Returns, to the extent each entity is eligible to join in such Tax Returns, if the Companies reasonably determine that the filing of such Tax Returns is consistent with past reporting practices, or in the absence of applicable past practices, will result in the minimization of the net present value of the aggregate Tax to the entities eligible to join in such Tax Returns. 4.06 Right to Review Tax Returns. (a) General. The Responsible Company with respect to any Tax Return shall make such Tax Return and related workpapers available for review by the other Company, if requested, to the extent (i) such Tax Return relates to Taxes for which the requesting party may be liable, (ii) such Tax Return relates to Taxes for which the requesting party may be liable in whole or in part for any additional Taxes owing as a result of adjustments to the amount of Taxes reported on such Tax Return, (iii) such Tax Return relates to Taxes for which the requesting party may have a claim for Tax Benefits under this Agreement, or (iv) the requesting party reasonably determines that it must inspect such Tax Return to confirm compliance with the terms of this Agreement. The Responsible Company shall use its reasonable best efforts to make such Tax Return available for review as required under this paragraph sufficiently in advance of the due date for filing such Tax Returns to provide the requesting party with a meaningful opportunity to analyze and comment on such Tax Returns and have such Tax Returns modified before filing, taking into account the party responsible for payment of the tax (if any) reported on such Tax Return and the materiality of the amount of Tax liability with respect to such Tax Return. The Companies shall attempt in good faith to resolve any issues arising out of the review of such Tax Returns. (b) Execution of Returns Prepared by Other Party. In the case of any Tax Return which is required to be prepared and filed by one Company under this Agreement and which is required by law to be signed by the other Company (or by its authorized representative), the Company which is legally required to sign such Tax Return shall not be required to sign such Tax Return under this Agreement if there is no reasonable basis for the tax treatment of any material items reported on the Tax Return. 4.07 Claims for Refund, Carrybacks, and Self-Audit Adjustments ("Adjustment Requests"). (a) Consent Required for Adjustment Requests Related to Consolidated or Combined Income Taxes. Neither Company shall be entitled to file an Adjustment Request with respect to any Consolidated or Combined Income Tax for a Pre-Distribution Period without the consent in writing of the other Company (which consent shall not be unreasonably withheld or delayed). Any Adjustment Request which the Companies consent to make under this Section 4.07 shall be prepared and filed by the Responsible Company under Section 4.02 for the Tax Return to be adjusted. The Company requesting the Adjustment Request (if not the Responsible Company) shall provide to the Responsible Company all information required for the preparation and filing of such Adjustment Request in such form and detail as reasonably requested by the Responsible Filing Company. (b) Other Adjustment Requests Permitted. Nothing in this Section 4.07 shall prevent any Company or its Affiliates from filing any Adjustment Request with respect to Income Taxes which are not Consolidated or Combined Income Taxes or with respect to any Taxes other than Income Taxes. Any refund or credit obtained as a result of any such Adjustment Request (or otherwise) shall be for the account of the person liable for the Tax under this Agreement. (c) Ordering of and Payment for Carrybacks. (i) In the event that a member of the Packaging Group, on the one hand, and a member of the Tenneco Group, on the other hand, are each entitled to carryback a Tax Item to a Pre-Distribution TENNECO DISTRIBUTION AGREEMENT H-14 93 Period, the respective Tax Items shall be utilized under the rules of applicable Tax Law (which shall be, in the case of Carrybacks to such Tax Periods of the affiliated group of which Tenneco is the common parent, the rules contained in Treasury Regulation Section 1.1502-21T). (ii) Any Tax refund or other Tax Benefit resulting from the Carryback of any member of one Group (the "Carryback Group") of any Tax Item arising after the Distribution Date to a Pre-Distribution Period shall be for the account of the Carryback Group (and in the event the Packaging Group is the Carryback Group, Tenneco shall promptly pay to Packaging Company the amount of such Tax refund or other Tax Benefit); provided, however, that if at the time of the utilization of the Carryback Items of a member of the Carryback Group, a member of the other Group (the "Other Group") possesses Carryback Tax Items which, but for the ordering rule set forth in Section 4.07(c)(i), would have been available to be utilized (the "Available Other Group Carryback") in lieu of the Carryback Group's Tax Items, then (but only to the extent of the Available Other Group Carryback) the Carryback Group shall not be entitled to payment of the amount of such Tax refund or Tax Benefit until the earlier of (X) the date on which a member of the Other Group claims the Available Other Group Carryback on a Tax Return or (Y) the date on which a member of the Carryback Group would have been able to utilize the Carryback had it not been claimed with respect to the Pre-Distribution Period Tax Return. (iii) In the event the Carryback of Tax Items of a member of the Packaging Group, or the Tenneco Group, as the case may be, does not result in a Tax refund, due to an offsetting Tax adjustment to a member of the Other Group, then the Other Group shall promptly pay the amount of any decrease in Tax liability resulting from the Carryback claim, provided, however, that in the event the Other Group possesses Carryback Items which, but for the ordering rules of Section 4.07(c)(i) would have been available to be utilized in lieu of the Carryback Group's Tax Items, then (but only to the extent of the Available Other Group Carryback), the Other Group shall not be required to pay the amount of such decrease in Tax liability to the Carryback Group until the earlier of (X) the date on which a member of the Other Group claims the Available Other Group Carryback on a Tax Return or (Y) the date on which a member of the Carryback Group would have been able to utilize the Carryback had it not been claimed with respect to the Pre-Distribution Period Tax Return. (d) Payment of Refunds. Except as otherwise provided in Section 4.07(c), any refunds or other Tax Benefits received by any Company (or any of its Affiliates) as a result of any Adjustment Request which are for the account of another Company (or member of such other Company's Group) shall be paid by the Company receiving (or whose Affiliate received) such refund or Tax Benefit to such other Company in accordance with Section 6. SECTION 5. TAX PAYMENTS AND INTERCOMPANY BILLINGS. 5.01 Payment of Taxes With Respect to Post-Distribution Tenneco Federal Consolidated Returns. In the case of the Tenneco Federal Consolidated Tax Return for the 1999 Tax Period: (a) Computation and Payment of Tax Due. At least three business days prior to the Payment Date with respect to the Tenneco Federal Consolidated Tax Return for the 1999 Tax Period, Packaging Company shall compute the amount of Tax required to be paid to the Internal Revenue Service (taking into account the requirements of Section 4.04 relating to consistent accounting practices) with respect to such Tax Return, and Packaging Company shall notify Tenneco in writing of the amount of Tax required to be paid on such Payment Date. Tenneco will pay such amount to the Internal Revenue Service on or before such Payment Date. (b) Computation and Payment of Packaging Company Liability With Respect to Tax Due. (i) Within 30 days of the determination date under Section 2.01(a)(vi) with respect to the Tenneco Federal Consolidated Tax Return for the 1999 Tax Period, Packaging Company shall pay to Tenneco an amount equal to the True-Up Amount, if positive, as determined under TENNECO DISTRIBUTION AGREEMENT H-15 94 Section 2.02(a)(vii). In the event the Packaging Group's True-Up Amount, as determined under Section 2.02(a)(vii) is negative, Tenneco shall pay such amount to Packaging Company within 30 days of the Payment Date with respect to the Tenneco Federal Consolidated Return for the 1999 Tax Period. (ii) In the event of a redetermination of the Benchmark 1997 Loss Allocation Carryforward or Benchmark 1998 Loss Allocation Carryforward pursuant to Section 2.02(a)(iii), Packaging Company shall pay to Tenneco, or Tenneco shall pay to Packaging Company, the amount, if any, required to be paid pursuant to the last sentence of Section 2.02(a)(iii), which payment shall be due within 30 days of such redetermination. (b) Interest on Intergroup Tax Allocation Payments. In the case of any payments to Tenneco required under paragraph (b) of this subsection 5.01, Packaging Company shall also pay to Tenneco an amount of interest computed at the Prime Rate on the amount of the payment required based on the number of days from the applicable Payment Date to the date of payment. In the case of any payments by Tenneco required under paragraph (b) of this subsection 5.01, Tenneco shall also pay to Packaging Company an amount of interest computed at the Prime Rate on the amount of the payment required based on the number of days from the date of receipt of the Tax Benefit to the date of payment of such amount to Packaging Company. 5.02 Payment of Federal Income Tax Related to Adjustments. (a) Adjustments Resulting in Underpayments. Tenneco shall pay to the Internal Revenue Service when due any additional Federal Income Tax required to be paid as a result of any adjustment to the Tax liability with respect to any Tenneco Federal Consolidated Return for any Pre-Distribution Period. The Responsible Company shall compute the amount attributable to the Packaging Group in accordance with Section 2.02(b) and Packaging Company shall pay to Tenneco any amount due Tenneco under Section 2.02(b) within 30 days from the later of (i) the date the additional Tax was paid by Tenneco or (ii) the date of receipt by Packaging Company of a written notice and demand from Tenneco for payment of the amount due, accompanied by evidence of payment and a statement detailing the Taxes paid and describing in reasonable detail the particulars relating thereto. Any amount due to Packaging Company under Section 2.02(b) shall be paid by Tenneco to Packaging Company within 30 days from the date the additional Tax was paid by Tenneco to the Internal Revenue Service. Any payments required under this Section 5.02(a) shall include interest computed at the Prime Rate based on the number of days from the date the additional Tax was paid by Tenneco to the date of the payment under this Section 5.02(a). (b) Adjustments Resulting in Overpayments. Within 30 days of receipt by Tenneco of any Tax Benefit resulting from any adjustment to the Consolidated Tax Liability with respect to any Tenneco Federal Consolidated Return for any Pre-Distribution Period, Tenneco shall pay to Packaging Company or Packaging Company shall pay to Tenneco (as the case may be), respective amounts due from or to Tenneco as determined by the Responsible Company in accordance with Section 2.02(b). Any payments required under this Section 5.02(b) shall include interest computed at the Prime Rate based on the number of days from the date the Tax Benefit was received by Tenneco to the date of payment to under this Section 5.02(b). 5.03 Payment of State Income Tax With Respect to Post-Distribution State Income Tax Returns. (a) Computation and Payment of Tax Due. At least three business days prior to any Payment Date for any Tax Return with respect to any State Income Tax (except for post-Distribution estimated Tax payments which shall be governed by Section 2.03(a)(iii)), the Responsible Company shall compute the amount of Tax required to be paid to the applicable Tax Authority (taking into account the requirements TENNECO DISTRIBUTION AGREEMENT H-16 95 of Section 4.04 relating to consistent accounting practices) with respect to such Tax Return on such Payment Date and: (i) If such Tax Return is with respect to a Consolidated or Combined State Income Tax, the Responsible Company shall, if Tenneco is not the Responsible Company with respect to such Tax Return, notify Tenneco in writing of the amount of Tax required to be paid on such Payment Date. Tenneco will pay such amount to such Tax Authority on or before such Payment Date. (ii) If such Tax Return is with respect to a Separate Company Tax, the Responsible Company shall, if it is not the Company liable for the Tax reported on such Tax Return, notify the Company liable for such Tax in writing of the amount of Tax required to be paid on such Payment Date. The Company liable for such Tax will pay such amount to such Tax Authority on or before such Payment Date. (b) Computation and Payment of Packaging Company Liability. With respect to the Consolidated or Combined State Income Tax Returns (excluding any Tax Return with respect to payment of estimated Taxes or Taxes due with a request for extension of time to file), within 120 days of the due date (including extensions) for filing of the Consolidated or Combined Tax Return with the latest due date for filing of all such Consolidated or Combined Tax Returns, Packaging Company shall pay to Tenneco the Tax liability allocable to the Packaging Group, or Tenneco shall pay to Packaging Company amounts owing to Packaging Company, as the case may be, as determined by the Responsible Company under the provisions of Section 2.03(a), plus interest computed at the Prime Rate on the amount of the payment based on the number of days from such latest due date (including extensions) to the date of payment. 5.04 Payment of State Income Taxes Related to Consolidated or Combined State Income Tax Adjustments. (a) Adjustments Resulting in Underpayments. Tenneco shall pay to the applicable Tax Authority when due any additional State Income Tax required to be paid as a result of any adjustment to the Tax liability with respect to any Tax Return for any Consolidated or Combined State Income Tax for any Pre- Distribution Period. Packaging Company shall pay to Tenneco its share of any such additional Tax payment determined by the Responsible Company in accordance with Section 2.03(b) within 120 days from the later of (i) the date the additional Tax was paid by Tenneco or (ii) the date of receipt by Packaging Company of a written notice and demand from Tenneco for payment of the amount due, accompanied by evidence of payment and a statement detailing the Taxes paid and describing in reasonable detail the particulars relating thereto. Packaging Company shall also pay to Tenneco interest on its share of such additional Tax computed at the Prime Rate based on the number of days from the date the additional Tax was paid by Tenneco to the date of payment to Tenneco under this Section 5.04(a). Any amount due to Packaging Company under Section 2.03(b) shall be paid within 30 days from the date the additional Tax was paid by Tenneco to the applicable Tax Authority (including interest computed at the Prime Rate based on the number of days from the date the additional Tax was paid by Tenneco to the date of payment to Packaging Company). (b) Adjustments Resulting in Overpayments. In the case of any Tax Benefits resulting from any adjustment to any Tax Return for any Consolidated or Combined State Income Tax for any Pre-Distribution Period, Tenneco shall pay to Packaging Company or Packaging Company shall pay to Tenneco (as the case may be) respective amounts due from or to Tenneco as determined in accordance with Section 2.03(b). Any payments owing to Packaging Company under this Section 5.04(b) shall be made within 60 days of the earlier of (i) the date of receipt of the Tax Benefit by Tenneco or (ii) receipt by Tenneco of a written notice and demand from Packaging Company evidencing the filing of the applicable Consolidated or Combined Income Tax Return containing the relevant adjustments and detailing the extent to which the resulting Tax Benefit is attributable to Packaging Company. Any payments owing to Tenneco under this Section 5.04(b) shall be made within 30 days of Tenneco's receipt TENNECO DISTRIBUTION AGREEMENT H-17 96 of any Tax Benefit resulting from the adjustment to the applicable Consolidated or Combined State Income Tax Return. Any payments required under this Section 5.04(b) shall include interest computed at the Prime Rate based on the number of days from the date the Tax Benefit was received by Tenneco to the date of payment to Packaging Company under this Section 5.04(b). 5.05 Payment of Separate Company Taxes. Each Company shall pay, or shall cause to be paid, to the applicable Tax Authority when due all Separate Company Taxes owed by such Company or a member of such Company's Group. 5.06 Indemnification Payments. If any Company (the "payor") is required to pay to a Tax Authority a Tax that another Company (the "responsible party") is liable for under this Agreement, the responsible party shall reimburse the payor within 30 days of delivery by the payor to the responsible party of an invoice for the amount due, accompanied by evidence of payment and a statement detailing the Taxes paid and describing in reasonable detail the particulars relating thereto. The reimbursement shall include interest on the Tax payment computed at the Prime Rate based on the number of days from the date of the payment to the Tax Authority to the date of reimbursement under this Section 5.06. SECTION 6. TAX BENEFITS. 6.01 General Rule. (a) If a member of one Group receives a Tax refund with respect to Taxes for which a member of the other Group is liable hereunder, the Company receiving such Tax refund shall make a payment to the Company who is liable for such Taxes hereunder within 30 days following receipt of the Tax refund in an amount equal to such Tax refund, plus interest on such amount computed at the Prime Rate based on the number of days from the date of receipt of the Tax refund to the date of payment under this Section 6.01. (b) In the event one Group is reimbursed for its payment of a Tax liability of the other Group, the amount of such reimbursement shall be computed net of any Tax Benefit realized by the reimbursed Group as the result of payment of the other Group's Tax liability. 6.02 Adjustment of Tax Attributes. In the event that the Carryback of Tax Items of one Group, or a Tax adjustment attributable to such Group under the terms of this Agreement, results in the disallowance or limitation of Tax attributes (including Tax credits, deductions and similar items) claimed on the Tax Return as filed, the Carryback Group shall be responsible for any increase in Tax liability resulting from the disallowance or limitation of such Tax attributes; provided, however, that in the event the disallowance or limitation of Tax attributes results in a Tax Benefit resulting from the use of such Tax attributes in another Tax Period, such Tax Benefit shall be deemed to be for the account of the Carryback Group for purposes of this Agreement. 6.03 Correlative Adjustments. If, upon examination by any Tax Authority of any Tax Return including a member of the Tenneco Group or Packaging Group for any Tax Period, an item of deduction, credit or expense is disallowed for which Tenneco is or may be liable for Taxes hereunder (or an item of income is required to be recognized on a Tax Return which was not reported on such Tax Return), in either such case resulting in a tax detriment suffered by the Tenneco Group, and such disallowance (or recognition) results in a Tax Benefit to the Packaging Group (with respect to that Tax Period or another Tax Period), then Packaging shall pay to Tenneco the amount of such Tax Benefit (but in no case to exceed the corresponding tax detriment). Any payment required to be made hereunder shall be made when such Tax Benefit is realized in the form of an actual reduction in Tax (which shall be computed by comparing the Tax which would have been owed by Packaging but for the item giving rise to the Tax Benefit with the Tax owed by Packaging taking such item into account). The provisions of this Section 6.03 shall apply mutatis mutandis where an item of deduction, credit or expense is disallowed for which Packaging is or may be liable for Taxes hereunder (or an item of income is required to be recognized on a Tax Return which was not reported on such Tax Return), as they apply where the Tenneco Group suffers such a tax detriment. For avoidance of doubt, any payment required to be made by TENNECO DISTRIBUTION AGREEMENT H-18 97 Tenneco to the Packaging Group under this Section 6.03 shall, to the extent applicable, be deemed as an offset to amounts owing by Packaging to Tenneco under Section 2.02 hereof. SECTION 7. ASSISTANCE AND COOPERATION. 7.01 General. After the Distribution Date, each of the Companies shall cooperate (and cause their respective Affiliates to cooperate) with each other and with each other's agents, including accounting firms and legal counsel, in connection with Tax matters relating to the Companies and their Affiliates including (i) preparation and filing of Tax Returns, (ii) determining the liability for and amount of any Taxes due (including estimated Taxes) or the right to and amount of any refund of Taxes, (iii) examinations of Tax Returns, and (iv) any administrative or judicial proceeding in respect of Taxes assessed or proposed to be assessed. Such cooperation shall include making all information and documents in their possession relating to the other Companies and their Affiliates available to such other Companies as provided in Section 8. Each of the Companies shall also make available to each other, as reasonably requested and available, personnel (including officers, directors, employees and agents of the Companies or their respective Affiliates) responsible for preparing, maintaining, and interpreting information and documents relevant to Taxes, and personnel reasonably required as witnesses or for purposes of providing information or documents in connection with any administrative or judicial proceedings relating to Taxes. Any information or documents provided under this Section 7 shall be kept confidential by the Company receiving the information or documents, except as may otherwise be necessary in connection with the filing of Tax Returns or in connection with any administrative or judicial proceedings relating to Taxes. 7.02 Income Tax Return Information. Each Company will provide to the other Company information and documents relating to their respective Groups required by the other Company to prepare Tax Returns. The Responsible Company shall determine a reasonable compliance schedule for such purpose in accordance with Tenneco's past practices. Any additional information or documents the Responsible Company requires to prepare such Tax Returns will be provided in accordance with past practices, if any, or as the Responsible Company reasonably requests and in sufficient time for the Responsible Company to file such Tax Returns timely. SECTION 8. TAX RECORDS. 8.01 Retention of Tax Records. Except as provided in Section 8.02, each Company shall preserve and keep all Tax Records exclusively relating to the assets and activities of its Group for Pre-Distribution Tax Periods, and Tenneco shall preserve and keep all other Tax Records relating to Taxes of the Groups for Pre-Distribution Tax Periods, for so long as the contents thereof may become material in the administration of any matter under the Code or other applicable Tax Law, but in any event until the later of (i) the expiration of any applicable statutes of limitation, and (ii) seven years after the Distribution Date. If, prior to the expiration of the applicable statute of limitation and such seven-year period, a Company reasonably determines that any Tax Records which it is required to preserve and keep under this Section 8 are no longer material in the administration of any matter under the Code or other applicable Tax Law, such Company may dispose of such records upon 90 days prior notice to the other Company. Such notice shall include a list of the records to be disposed of describing in reasonable detail each file, book, or other record accumulation being disposed. The notified Company shall have the opportunity, at its cost and expense, to copy or remove, within such 90-day period, all or any part of such Tax Records. 8.02 State Income Tax Returns. Tax Returns with respect to State Income Taxes and workpapers prepared in connection with preparing such Tax Returns shall be preserved and kept, in accordance with the guidelines of Section 8.01, by the Company responsible for preparing and filing the applicable Tax Return. 8.03 Access to Tax Records. The Companies and their respective Affiliates shall make available to each other for inspection and copying during normal business hours upon reasonable notice all Tax TENNECO DISTRIBUTION AGREEMENT H-19 98 Records in their possession to the extent reasonably required by the other Company in connection with the preparation of Tax Returns, audits, litigation, or the resolution of items under this Agreement. SECTION 9. TAX CONTESTS. 9.01 Notice. Each of the parties shall provide prompt notice to the other party of any pending or threatened Tax audit, assessment or proceeding or other Tax Contest of which it becomes aware related to Taxes for Tax Periods for which it is indemnified by the other party hereunder. Such notice shall contain factual information (to the extent known) describing any asserted Tax liability in reasonable detail and shall be accompanied by copies of any notice and other documents received from any Tax Authority in respect of any such matters. If an indemnified party has knowledge of an asserted Tax liability with respect to a matter for which it is to be indemnified hereunder and such party fails to give the indemnifying party prompt notice of such asserted Tax liability, then (i) if the indemnifying party is precluded from contesting the asserted Tax liability in any forum as a result of the failure to give prompt notice, the indemnifying party shall have no obligation to indemnify the indemnified party for any Taxes arising out of such asserted Tax liability, and (ii) if the indemnifying party is not precluded from contesting the asserted Tax liability in any forum, but such failure to give prompt notice results in a monetary detriment to the indemnifying party, then any amount which the indemnifying party is otherwise required to pay the indemnified party pursuant to this Agreement shall be reduced by the amount of such detriment. 9.02 Control of Tax Contests. (a) Separate Company Taxes. In the case of any Tax Contest with respect to any Separate Company Tax, the Company having liability for the Tax shall have exclusive control over the Tax Contest, including exclusive authority with respect to any settlement of such Tax liability. (b) Consolidated or Combined Income Taxes. In the case of any Tax Contest with respect to any Consolidated or Combined Income Tax, (i) Tenneco shall control the defense or prosecution of the portion of the Tax Contest directly and exclusively related to any Tenneco Adjustment, including settlement of any such Tenneco Adjustment, and (ii) Packaging Company shall control the defense or prosecution of the portion of the Tax Contest directly and exclusively related to any Packaging Adjustment, including any settlement of any Packaging Adjustment, and (iii) the two-person committee (the "Tax Contest Committee"), comprised of one person selected by Packaging Company (as designated in writing to Tenneco) and one person selected by Tenneco (as designated in writing to Packaging Company) shall control the defense or prosecution of Joint Adjustments and any and all administrative matters not directly and exclusively related to any Tenneco Adjustment. Each person serving on the Tax Contest Committee shall continue to serve unless and until he or she is replaced by the party designating such person. Any and all matters to be decided by the Tax Contest Committee shall require the unanimous approval of both persons serving on the committee. In the event the Tax Contest Committee shall be deadlocked on any matter, the provisions of Section 15 of this Agreement shall apply. A Company shall not agree to any Tax liability for which another Company may be liable under this Agreement, or compromise any claim for any Tax Benefit which another Company may be entitled under this Agreement, without such other Company's written consent (which consent may be given or withheld at the sole discretion of the Company from which the consent would be required). SECTION 10. EFFECTIVE DATE; TERMINATION OF PRIOR INTERCOMPANY TAX ALLOCATION AGREEMENTS. This Agreement shall be effective on the Distribution Date. Immediately prior to the close of business on the Distribution Date Tenneco shall cause all Prior Intercompany Tax Allocation Agreements to be terminated with respect to Packaging Company and its Affiliates. Upon such termination, no further payments by or to Tenneco or by or to Packaging Company, with respect to such agreements shall be made, and all other rights and obligations resulting from such agreements between the Companies and their Affiliates shall cease at such time. TENNECO DISTRIBUTION AGREEMENT H-20 99 SECTION 11. NO INCONSISTENT ACTIONS. Each of the Companies covenants and agrees that it will not take any action, and it will cause its Affiliates to refrain from taking any action, which is inconsistent with the Tax treatment of the Transactions as contemplated in the Ruling Request (any such action is referred to in this Section 11 as a "Prohibited Action"), unless such Prohibited Action is required by law, or the person acting has obtained the prior written consent of each of the other parties (which consent shall not be unreasonably withheld). With respect to any Prohibited Action proposed by a Company (the "Requesting Party"), the other party (the "Requested Party") shall grant its consent to such Prohibited Action if the Requesting Party obtains a ruling with respect to the Prohibited Action from the Internal Revenue Service or other applicable Tax Authority that is reasonably satisfactory to each of the Requested Party (except that the Requesting Party shall not submit any such ruling request if a Requested Party deter mines in good faith that filing such request might have a materially adverse effect upon such Requested Party). Without limiting the foregoing: (a) No Inconsistent Plan or Intent. Packaging Company and Tenneco each represent and warrant that neither it nor any of its Affiliates has any plan or intent to take any action which is inconsistent with any factual statements or representations in the Ruling Request. Regardless of any change in circumstances, Packaging Company and Tenneco each covenant and agree that it will not take, and it will cause its Affiliates to refrain from taking, any such inconsistent action on or before the last day of the calendar year ending after the second anniversary of the Distribution Date, other than as permitted in this Section 11. (b) 355(e) Covenant. Without in any manner limiting paragraph (a) above, each of Packaging Company and Tenneco covenants and agrees that it will not enter into any negotiations, agreement or arrangements with respect to transactions or events (including stock issuances, option grants, capital contributions or acquisitions, but not including the Transactions), which may cause the Distribution to be treated as part of a plan pursuant to which one or more persons acquire directly or indirectly Packaging Company or Tenneco stock, as the case may be, representing a "50-percent or greater interest" within the meaning of Section 355(d)(4) of the Code. (c) Amended or Supplemental Rulings. Each of the Companies covenants and agrees that it will not file, and it will cause its Affiliates to refrain from filing, any amendment or supplement to the Ruling Request subsequent to the Distribution Date without the consent of the other Company, which consent shall not be unreasonably withheld or delayed. SECTION 12. SURVIVAL OF OBLIGATIONS. The representations, warranties, covenants and agreements set forth in this Agreement shall be unconditional and absolute and shall remain in effect without limitation as to time. SECTION 13. EMPLOYEE MATTERS. Each of the Companies agrees to utilize, or cause its Affiliates to utilize, the alternative procedure set forth in respect to wage reporting set forth in Revenue Procedure 96-60, 1996-2 C.B. 399, with respect to wage reporting. SECTION 14. TREATMENT OF PAYMENTS; TAX GROSS UP. 14.01 Treatment of Tax Indemnity and Tax Benefit Payments. In the absence of any change in tax treatment under the Code or other applicable Tax Law, (a) any Tax indemnity payments made by a Company under Section 5 shall be reported for Tax purposes by the payor and the recipient as distributions or capital contributions, as appropriate, occurring immediately before the distribution of all of the outstanding stock of Packaging Company to Tenneco shareholders on the Distribution Date, and (b) any Tax Benefit payments made by a Company under Section 6, shall be reported for Tax purposes by the payor and the recipient as distributions or capital contributions, as appropriate, occurring TENNECO DISTRIBUTION AGREEMENT H-21 100 immediately before the distribution of all of the outstanding stock of Packaging Company to Tenneco shareholders on the Distribution Date. 14.02 Tax Gross Up. If notwithstanding the manner in which Tax indemnity payments and Tax Benefit payments were reported, there is an adjustment to the Tax liability of a Company as a result of its receipt of a payment pursuant to this Agreement, such payment shall be appropriately adjusted so that the amount of such payment, reduced by the amount of all Income Taxes payable with respect to the receipt thereof (but taking into account all correlative Tax Benefits resulting from the payment of such Income Taxes), shall equal the amount of the payment which the Company receiving such payment would otherwise be entitled to receive pursuant to this Agreement. 14.03 Interest Under This Agreement. Anything herein to the contrary notwithstanding, to the extent one Company ("indemnitor") makes a payment of interest to another Company ("indemnitee") under this Agreement with respect to the period from the date that the indemnitee made a payment of Tax to a Tax Authority to the date that the indemnitor reimbursed the indemnitee for such Tax payment, or with respect to the period from the date that the indemnitor received a Tax Benefit to the date indemnitor paid the Tax Benefit to the indemnitee, the interest payment shall be treated as interest expense to the indemnitor (deductible to the extent provided by law) and as interest income by the indemnitee (includible in income to the extent provided by law). The amount of the payment shall not be adjusted under Section 14.02 to take into account any associated Tax Benefit to the indemnitor or increase in Tax to the indemnitee. SECTION 15. DISAGREEMENTS. If after good faith negotiations the parties cannot agree on the application of this Agreement to any matter, then the matter will be referred to a nationally recognized accounting firm acceptable to each of the parties (the "Accounting Firm"). The Accounting Firm shall furnish written notice to the parties of its resolution of any such disagreement as soon as practical, but in any event no later than 45 days after its acceptance of the matter for resolution. Any such resolution by the Accounting Firm will be conclusive and binding on all parties to this Agreement. In accordance with Section 17, each party shall pay its own fees and expenses (including the fees and expenses of its representatives) incurred in connection with the referral of the matter to the Accounting Firm. All fees and expenses of the Accounting Firm in connection with such referral shall be shared equally by the parties affected by the matter. SECTION 16. LATE PAYMENTS. Any amount owed by one party to another party under this Agreement which is not paid when due shall bear interest at the Prime Rate plus two percent, compounded semiannually, from the due date of the payment to the date paid. To the extent interest required to be paid under this Section 16 duplicates interest required to be paid under any other provision of this Agreement, interest shall be computed at the higher of the interest rate provided under this Section 16 or the interest rate provided under such other provision. SECTION 17. EXPENSES. Except as provided in Section 15, each party and its Affiliates shall bear their own expenses incurred in connection with preparation of Tax Returns, Tax Contests, and other matters related to Taxes under the provisions of this Agreement. SECTION 18. SPECIAL RULES FOR DETERMINING MEMBERS OF GROUPS. For purposes of this Agreement, the following special rules shall apply for determining the members of the Packaging Group: (a) Former Affiliates of Packaging Group. The Packaging Group shall be deemed to include any corporation which (1) was a member of the affiliated group (as defined in Code Section 1504(a), but treating all corporations as "includable corporations" for purposes of such Code Section) of which Tenneco is (or Old Tenneco was) the common parent, (2) was included in the "packaging," "specialty packaging" or "paperboard packaging" segments for purposes of segment reporting in Tenneco's (or Old Tenneco's) Annual Reports on Form 10-K and (3) was sold, transferred, otherwise TENNECO DISTRIBUTION AGREEMENT H-22 101 disposed of, or discontinued prior to the date hereof. Any entity substantially all of the assets and liabilities of which have been transferred to a member of the Packaging Group (e.g., by a statutory merger) shall be treated as a member of the Packaging Group. For example, Tenneco Packaging Specialty and Consumer Products Inc., a Delaware corporation, shall, by virtue of its liquidation into Tenneco Packaging Inc., be treated as a member of the Packaging Group. Similarly, Tenneco United Kingdom Holdings Limited shall be treated as a member of the Packaging Group. SECTION 19. GENERAL PROVISIONS. 19.01 Addresses and Notices. Any notice, demand, request or report required or permitted to be given or made to any party under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class mail or by other commercially reasonable means of written communication (including delivery by an internationally recognized courier service or by facsimile transmission) to the party at the party's address as follows: If to Tenneco: With a copy to: If to Packaging Company: With a copy to: A party may change the address for receiving notices under this Agreement by providing written notice of the change of address to the other parties. 19.02 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. 19.03 Waiver. No failure by any party to insist upon the strict performance of any obligation under this Agreement or to exercise any right or remedy under this Agreement shall constitute waiver of any such obligation, right, or remedy or any other obligation, rights, or remedies under this Agreement. 19.04 Invalidity of Provisions. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality, and enforceability of the remaining provisions contained herein shall not be affected thereby. 19.05 Further Action. The parties shall execute and deliver all documents, provide all information, and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement, including the execution and delivery to the other parties and their Affiliates and representatives of such powers of attorney or other authorizing documentation as is reasonably necessary or appropriate in connection with Tax Contests (or portions thereof) under the control of such other parties in accordance with Section 9. 19.06 Integration. This Agreement constitutes the entire agreement among the parties pertaining to the subject matter of this Agreement and supersedes all prior agreements and understandings pertaining thereto. In the event of any inconsistency between this Agreement and the Distribution Agreement or any other agreements relating to the transactions contemplated by the Distribution Agreement, the provisions of this Agreement shall control. 19.07 Construction. The language in all parts of this Agreement shall in all cases be construed according to its fair meaning and shall not be strictly construed for or against any party. TENNECO DISTRIBUTION AGREEMENT H-23 102 19.08 No Double Recovery; Subrogation. No provision of this Agreement shall be construed to provide an indemnity or other recovery for any Taxes costs, damages, or other amounts (including Tax Benefits) for which the damaged party has been fully compensated under any other provision of this Agreement or under any other agreement or action at law or equity. Unless expressly required in this Agreement, a party shall not be required to exhaust all remedies available under other agreements or at law or equity before recovering under the remedies provided in this Agreement. Subject to any limitations provided in this Agreement (for example, the limitation on filing claims for refund in Section 4.07), the indemnifying party shall be subrogated to all rights of the indemnified party for recovery from any third party. 19.09 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. 19.10 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts executed in and to be performed in that State. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the respective officers as of the date set forth above. TENNECO INC. By: ---------------------------------- Its: ------------------------------------ By: ---------------------------------- Its: TENNECO DISTRIBUTION AGREEMENT H-24 103 EXHIBIT I SHARED AGREEMENTS SECTION 1. 1. Corporate Travel Agreement dated as of November 30, 1998 by and between American Airlines, Inc. and Tenneco Business Services Inc. (travel incentive). 2. Corporate Supply Agreement dated as of July 1, 1996 by and between Boise Cascade Office Products Corporation and Tenneco Business Services Inc. (office supplies). 3. Corporate Supply Agreement dated as of February 1, 1999 by and between Bowman Distribution Division of Barnes Group, Inc. and Tenneco Business Services Inc. (fasteners). 4. Corporate Agreement dated as of October 30, 1998 by and between Delta Air Lines, Inc. (on its own behalf and on behalf of Austrian Airlines, N.V. Sabena S.A. and Swiss Air Transport Company) and Tenneco Business Services Inc. (air travel incentive). 5. Global Pricing Agreement dated as of February 4, 1998 by and between Federal Express Corporation and Tenneco Business Services Inc. (package delivery). 6. Corporate Account Agreement dated as of October 17, 1998 by and between The Hertz Corporation and Tenneco Business Services Inc. (vehicle rental). 7. Agreement for Services dated as of May 16, 1996 by and between Kelly Services, Inc. and Tenneco Business Services Inc. (services/temporary workers). 8. Supply Agreement dated as of August 31, 1995 by and among Motion Industries, Inc., Berry Bearing Company, a division of Motion Industries, Inc. and Tenneco Business Services Inc. (bearings, etc.). 9. Preferred Carrier Agreement dated as 1998 by and between Northwest Airlines, Inc. and Tenneco Business Services Inc. (travel incentive). 10. Security Services Contract dated as of September 15, 1995 by and between Per Mar Security and Research Corp. and Tenneco Business Services Inc. (security services). 11. Travel Services Agreement dated as of September 3, 1996 by and between Rosenbluth International, Inc. and Tenneco Business Services Inc. (travel services). 12. Agreement by and between Equilon Enterprises LLC (formerly Texaco Lubricants Company) and Tenneco Business Services Inc. (industrial lubricants). 13. UPS Ground, Air and International Incentive Program dated as of April 28, 1997 by and between United Parcel Service, Inc. and Tenneco Business Services Inc. (carrier/package delivery). 14. Corporate Supply Agreement dated as of April 1996 by and between Wallace Computer Services, Inc. and Tenneco Business Services Inc. (business forms). 15. Corporate Supply Agreement dated as of June 1, 1997 by and between WESCO Distribution Inc. and Tenneco Business Services Inc. (electrical supplies). 16. Copier Outsourcing Agreement and Various Configuration Changes and Amendments dated as of May 8, 1996 by and between Xerox Business Services, a division of Xerox Corporation, and Tenneco Business Services Inc. (copiers). TENNECO DISTRIBUTION AGREEMENT I-1 104 SECTION 2. 1. Services Agreement dated as of November 30, 1998 by and between Aaron Security & Investigation, Inc. and Tenneco Business Services Inc. (security services). 2. Purchasing Card Agreement dated as of March 18, 1996 by and between Citibank (South Dakota) N.A. and Tenneco Business Services Inc., including its parent Tenneco Inc. (purchasing card/credit card). 3. Purchasing Card Agreement dated as of April 2, 1998 by and between Citibank Canada and Tenneco Business Services Inc. (Canadian purchasing card program). 4. Consultancy Services Agreement dated as of April 1, 1997 by and between Dames & Moore and Tenneco Business Services Inc. (environmental services/audits). 5. Central Travel System (CTS) Program Agreement dated as of July 11, 1996 by and between First Bank of South Dakota (National Association) and Tenneco Business Services Inc. (credit card/travel and entertainment card). 6. Corporate Card Program Agreement dated as of July 11, 1996 by and between First Bank of South Dakota (National Association) and Tenneco Business Services Inc. (corporate card program). 7. Agreement by and between Fuchs Lubricants Company and Tenneco Business Services Inc. (lubricants). 8. National Account Service Agreement dated as of February 3, 1999 by and between G&K Services and Tenneco Business Services Inc. (uniforms). 9. Amended and Restated Administrative Service Agreement dated as of April 9, 1999 by and between Hewitt Associates LLC and Tenneco Business Services Inc. (administrative services). 10. Supplier Management Agreement dated as of April 26, 1996 by and between Lyons Safety, Inc. and Tenneco Business Services Inc. (safety equipment). 11. Special Customer Arrangement dated as of March 5, 1999 by and between MCI Telecommunications Corporation and Tenneco Business Services Inc. (telecommunication services). 12. Performance Based Contract for Services dated as of March 17, 1997 by and between Price Waterhouse LLP and Tenneco Business Services Inc. (international assignment services). 13. Relocation Services Agreement dated as of March 15, 1996 by and between Prudential Residential Services Limited Partnership d/b/a Prudential Resources Management, Tennessee Gas Pipeline Company and Tenneco Business Services Inc. (relocation services). 14. Corporate Visa Card Agreement undated by and between Royal Bank of Canada and Tenneco Business Services Inc. (credit card/Canadian travel card). 15. Parts Washing and Waste Disposal Services Agreement dated as of 1997 by and between Safety-Kleen Corp. and Tenneco Business Services Inc. (parts washing/waste disposal services). 16. Corporate Volume Agreement dated as of September 22, 1998 by and between United Air Lines, Inc. and Tenneco Business Services Inc. (travel incentive). 17. Services Contract dated as of September 1, 1995 by and between The Wackenhut Corporation and Tenneco Business Services Inc. (security services). 18. Lease dated as of November 19, 1992 by and between Wheels, Inc. and Tenneco Business Services Inc. (original agreement with Tennessee Gas & Pipeline, assigned to TBS) (vehicle lease). TENNECO DISTRIBUTION AGREEMENT I-2 105 EXHIBIT J EXCEPTIONS TO RESIGNATIONS OF COMMON DIRECTORS, OFFICERS AND EMPLOYEES 1. Investment Committee of the Tenneco Inc. General Employee Benefit Trust (existing members may remain as members of the Committee until March 31, 2000). 2. Tenneco Packaging (UK) Limited (David E. Zerhusen and Urszula Kitchen to remain as directors). 3. Tenneco Rabbi Trust created in 1999 in connection with the spin-off (existing trustees may remain trustees after the Distribution). 4. Tenneco Inc. Project Committee appointed in connection with the spin-off (existing members may remain after the Distribution). TENNECO DISTRIBUTION AGREEMENT J-1 106 EXHIBIT K FORM OF TRADEMARK TRANSITION LICENSE AGREEMENT THIS TRADEMARK TRANSITION LICENSE AGREEMENT (this "Trademark Transition License Agreement") is made and entered into as of , 1999, (the "Effective Date") by and between Tenneco Inc., a Delaware company to be renamed Tenneco Automotive Inc., a corporation organized and existing under the laws of the State of Delaware, whose principal place of business is located at 500 North Field Drive, Lake Forest, IL 60045 ("Licensor"), and Tenneco Packaging Inc. (to be renamed), a corporation organized under the laws of the State of Delaware, whose principal place of business is located at 1900 West Field Court, Lake Forest, IL 60045 ("Licensee"). WHEREAS, Pursuant to the terms of that certain Distribution Agreement dated , 1999, (the "DISTRIBUTION AGREEMENT"), Licensee and Licensor have agreed to cause this Trademark Transition License Agreement to be entered into regarding the use of certain trademarks by Licensee. WHEREAS, Licensor has adopted and is using the name and mark "Tenneco", alone and in combination with other terms and/or symbols and variations thereof, in the United States and elsewhere throughout the world and is the owner of the U.S. Trademark Applications and the U.S. Trademark Registrations, listed on Exhibit A of this Agreement, from the United States Patent and Trademark Office, as well as their foreign counterparts, and other foreign trademarks listed on Exhibit A (hereinafter individually and collectively referred to as the "Trademark"); and WHEREAS, Licensee previously has used the Trademark and is desirous of continuing to use said Trademark with respect to the goods and services listed on Exhibit B, to assist Licensee during its transition to a new identity and for the limited purposes more fully described below; NOW, THEREFORE, in consideration of the foregoing Recitals which are hereby incorporated into the operative terms hereof, the mutual promises contained in this Agreement and good and valuable consideration from the Licensee to the Licensor, the receipt and sufficiency of which is hereby acknowledged by said Licensor, the parties hereby agree as follows: 1. LICENSE. Licensor grants to Licensee and its Subsidiaries (as such term is defined in the Distribution Agreement), the limited, non-exclusive right to use the Trademark under the common law and under the auspices and privileges provided by any of the registrations covering the same during the term of this Agreement, and Licensee hereby undertakes to use the Trademark as follows: a. For a period of sixty (60) days following the Effective Date of this Agreement, Licensee and its Subsidiaries may continue to use the Trademark in their corporate names. After sixty (60) days following the Effective Date of this Agreement, or as soon thereafter as reasonably practical in non-U.S. jurisdictions, Licensee shall change or cause to be changed, if necessary, such corporate names to delete the Trademark or any other word that is confusingly similar to the Trademark. b. For a period of nine (9) months following the Effective Date of this Agreement, Licensee and its Subsidiaries shall be entitled to use their supplies and documents which have imprinted thereon the Trademark to the extent that such supplies and documents were existing inventory prior to the Effective Date of this Agreement. Licensee shall not print or permit to be printed any new supplies or documents bearing the Trademark from and after the Effective Date of this Agreement. c. For a period of eighteen (18) months from the Effective Date of this Agreement, Licensee and its Subsidiaries may use the Trademark on signs, displays or other identifications or TENNECO DISTRIBUTION AGREEMENT K-1 107 advertising material (other than supplies or documents, which shall be governed by paragraph b above), in each case to the extent existing as of the date hereof. Licensee shall not, and shall not permit its Subsidiaries to, prepare or install any new signs, displays or other identifications or advertising material bearing the Trademark. Licensee shall remove or cause to be removed any and all references to the Trademark from any and all signs, displays or other identifications or advertising material by the end of the eighteen (18) month period. 2. QUALITY OF SERVICES. Licensee agrees to maintain and cause its Subsidiaries to maintain such quality standards as shall be prescribed by Licensor in the conduct of the business operations with which the Trademark is used. Licensee shall, and shall cause its Subsidiaries to, use the Trademark only with goods and services listed in Exhibit B rendered by Licensee and/or its Subsidiaries in accordance with the terms of this Agreement and with the guidance and directions furnished to the Licensee by the Licensor, or its authorized representatives or agents, from time to time, if any; but always the quality of the goods and services shall be satisfactory to the Licensor or as specified by it. 3. INSPECTION. Licensee will permit duly authorized representatives of the Licensor to inspect the premises of Licensee and/or its Subsidiaries using the Trademarks at all reasonable times, for the purpose of ascertaining or determining compliance with Paragraphs 1 and 2 hereof. 4. USE OF TRADEMARK. When using the Trademark under this Agreement, Licensee undertakes to, and shall cause its Subsidiaries to, comply with all laws pertaining to the Trademark. This provision includes compliance with marking requirements. Licensee represents and warrants that all goods and services to be sold under the Trademark and the marketing, sales, and distribution of them shall meet or exceed all federal, state, local and foreign laws, ordinances, standards, regulations, and guidelines pertaining to such products or activities, including, but not limited to those pertaining to product safety, quality, labeling and propriety. Licensee agrees that it will not package, market, sell, or distribute any goods or services or cause or permit any goods or services to be packaged, marketed, sold or distributed in violation of any such federal, state, local or foreign law, ordinance, standard, regulation or guideline. 5. EXTENT OF LICENSE. The license granted herein is for the sole purpose of assisting Licensee in its transition to a new identity and is not assignable or transferable in any manner whatsoever. Licensee has no right to grant any sublicenses or to use the Trademark for any other purpose. 6. INDEMNITY. Licensee acknowledges that neither it nor its Subsidiaries will have any claims against Licensor hereunder for any damage to property or injury to persons arising out of the operation of their business. Licensee agrees to indemnify, hold harmless, and defend Licensor and its Subsidiaries, affiliates and authorized representatives with legal counsel acceptable to Licensor from and against any and all demands, claims, injuries, losses, damages, actions, suits, causes of action, proceedings, judgments, liabilities and expenses, including attorneys' fees, court costs and other legal expenses, arising out of or connected with: a. the use of the Trademark by Licensee or any of its Subsidiaries or affiliates; or b. any breach by Licensee or any of its Subsidiaries of any provision of this Agreement or of any warranty made by Licensee in this Agreement. No approval by Licensor of any action by Licensee or any of its Subsidiaries or affiliates shall affect any right of Licensor to indemnification hereunder. 7. TERMINATION. Except as otherwise provided herein, this Agreement shall remain in full force and effect for the periods stated in Paragraph 1 above. However, Licensor retains the right to TENNECO DISTRIBUTION AGREEMENT K-2 108 immediately terminate this Agreement in the event of a material breach of any term of this Agreement by Licensee or any of its Subsidiaries, upon written notice to the Licensee. 8. OWNERSHIP OF TRADEMARK. The Licensee acknowledges Licensor's exclusive right, title and interest in and to the Trademark and will not at any time do or cause or permit to be done any act or thing contesting or in any way impairing or tending to impair any part or all of such right, title and interest. In connection with the use of the Trademark, Licensee and each of its Subsidiaries shall not in any manner represent that it has any ownership in the Trademark or registrations thereof, and acknowledges that use of the Trademark shall inure to the benefit of the Licensor. On termination of this Agreement or any portion hereof in any manner provided herein, the Licensee will destroy or cause to be destroyed all signs, displays or other identifications or advertising material, supplies and documents, and any other materials bearing the Trademark and will certify to Licensor in writing that it has done so. Furthermore, Licensee and each of its Subsidiaries will not at any time adopt or use without the Licensor's prior written consent, any word or mark which is likely to be similar to or confusing with the Trademark. 9. INFRINGEMENT OF TRADEMARK. If Licensee or any of its Subsidiaries learns of any actual or threatened infringement of the Trademark or of the existence, use, or promotion of any mark or design similar to the Trademark, Licensee shall promptly notify Licensor. Licensor has the right to decide at its sole discretion what legal proceedings or other action, if any, shall be taken, by who, how such proceedings or other action shall be conducted, and in whose name such proceedings or other action shall be performed. Any legal proceedings instituted pursuant to this Section shall be for the sole benefit of Licensor and all sums recovered in such proceedings whether by judgment, settlement, or otherwise, shall be retained solely and exclusively by Licensor. 10. INJUNCTIVE RELIEF. Licensee acknowledges that any breach or threatened breach of any of Licensee's covenants in this Agreement relating to the Trademark, including, without limitation, Licensee's and/or any of its Subsidiaries' failure to cease the manufacture, sale, marketing, or distribution of the goods bearing the Trademark at the termination or expiration of this Agreement will result in immediate and irreparable damage to Licensor and to the rights of any subsequent licensee of them. Licensee acknowledges and admits that there is no adequate remedy at law for failure to cease such activities, and Licensee agrees that in the event of such breach or threatened breach, Licensor shall be entitled to temporary and permanent injunctive relief and such other relief as any court with jurisdiction may deem just and proper. 11. SEVERABILITY. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law or any competent government or other authority, the remaining provisions shall be severable and enforceable in accordance with their terms so as this Agreement without such terms or provisions does not fail of its essential purpose or purposes. The parties will negotiate in good faith to replace any such illegal or unenforceable provision or provisions with suitable substitute provisions which maintain the economic purposes and intentions of this Agreement. 12. NOTICE. Any notices required or permitted to be given under this Agreement shall be deemed sufficiently given if mailed by registered mail, postage prepaid, addressed to the party to be notified at its address shown above (followed by facsimile) or at such other address as may be furnished in writing to the notifying party. 13. MISCELLANEOUS. a. CAPTIONS. The captions for each Section have been inserted for the sake of convenience and shall not be deemed to be binding upon the parties for the purpose of interpretation of this Agreement. b. INTERPRETATION. The parties agree that each party and its counsel has reviewed this Agreement and the normal rule of construction that any ambiguities are to be resolved TENNECO DISTRIBUTION AGREEMENT K-3 109 against the drafting party shall not be employed in the interpretation of this Agreement. c. WAIVER. The failure of Licensor to insist in any one or more instance upon the performance of any term, obligation, or condition of this Agreement by Licensee or any of its Subsidiaries or to exercise any right or privilege herein conferred upon Licensor shall not be construed as thereafter waiving such term, obligation, or condition, or relinquishing such right or privilege, and the acknowledged waiver or relinquishment by Licensor of any default or right shall not constitute waiver of any other default or right. No waiver shall be deemed to have been made unless expressed in writing. d. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Agreement, and Licensee shall use its best efforts to cause the transition of all existing materials, including signs and displays, bearing the Trademark to a new name and mark. e. RIGHTS CUMULATIVE. Except as expressly provided in this Agreement, and to the extent permitted by law, any remedies described in this Agreement are cumulative and not alternative to any other remedies available at law or in equity. f. GOVERNING LAW. ALL QUESTIONS OR DISPUTES CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE SCHEDULES AND EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY (i) AGREES TO BE SUBJECT TO, AND HEREBY CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE STATE OF DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE, (ii) TO THE EXTENT SUCH PARTY IS NOT OTHERWISE SUBJECT TO SERVICE OF PROCESS IN THE STATE OF DELAWARE, HEREBY APPOINTS THE CORPORATION TRUST COMPANY, AS SUCH PARTY'S AGENT IN THE STATE OF DELAWARE FOR ACCEPTANCE OF LEGAL PROCESS AND (iii) AGREES THAT SERVICE MADE ON ANY SUCH AGENT SET FORTH IN (ii) ABOVE SHALL HAVE THE SAME LEGAL FORCE AND EFFECT AS IF SERVED UPON SUCH PARTY PERSONALLY WITHIN THE STATE OF DELAWARE. Attest: LICENSOR - -------------------------------------------- By: -------------------------------------------- Attest: LICENSEE - -------------------------------------------- By: --------------------------------------------
TENNECO DISTRIBUTION AGREEMENT K-4 110 EXHIBIT A
REGISTRATION EXPIRATION TRADEMARK NO. DATE --------- ------------ ----------
APPLICATION APPLICATION TRADEMARK NO. NO. --------- ----------- -----------
TENNECO DISTRIBUTION AGREEMENT K-5 111 EXHIBIT B TENNECO DISTRIBUTION AGREEMENT K-6 EX-4.5 3 1ST SUPPLEMENTAL INDENTURE 1 EXHIBIT 4.5 - -------------------------------------------------------------------------------- TENNECO PACKAGING INC. AND THE CHASE MANHATTAN BANK, as Trustee --------------------- First Supplemental Indenture Dated as of [ ], 1999 TO Indenture Dated as of [ ], 1999 --------------------- Providing for the issuance of 7.20% Notes due 2005 - -------------------------------------------------------------------------------- 2 FIRST SUPPLEMENTAL INDENTURE dated as of [ ], 1999 between TENNECO PACKAGING INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter called the "Company", and THE CHASE MANHATTAN BANK, a New York banking corporation, as trustee (hereinafter called the "Trustee". WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture dated as of [ ], 1999 (hereinafter called the "Original Indenture", to provide for the issue of an unlimited amount of debentures, notes and/or other debt obligations of the Company (hereinafter referred to as the "Securities", the terms of which are to be determined as set forth in Section 2.3 of the Original Indenture; and WHEREAS, Section 8.1 of the Original Indenture provides, among other things, that the Company and the Trustee may enter into indentures supplemental to the Original Indenture for, among other things, the purpose of setting forth the terms of Securities of any series; and WHEREAS, the Company desires to create a series of the Securities in an aggregate principal amount of $299,690,000 to be designated the 7.20% Notes due 2005" (the "Notes", and all action on the part of the Company necessary to authorize the issuance of the Notes under the Original Indenture and this First Supplemental Indenture (the "Supplemental Indenture" has been duly taken; and WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee as in the Original Indenture provided, the valid and binding obligations of the Company, and to constitute these presents a valid and binding supplemental indenture and agreement according to its terms, have been done and performed; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and of the acceptance of this trust by the Trustee, and of the sum of one dollar to the Company duly paid by the Trustee at the execution and delivery of these presents, and of other valuable consideration the receipt whereof is hereby acknowledged and in order to authorize the authentication and delivery of and to set forth the terms of the Notes. IT IS HEREBY COVENANTED, DECLARED AND AGREED by and between the parties hereto, for the benefit of holders of the Notes issued under the Original Indenture, as follows: ARTICLE 1. TERMS AND ISSUANCE OF 7.20% NOTES DUE 2005 Section 1.1. Issue of Notes. A series of Securities which shall be designated the "7.20% Notes due 2005" shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, the terms, conditions and covenants of the Original Indenture, including without limitation the terms set forth in this Supplemental Indenture (including the form of Notes set forth in Section 1.3 hereof. The aggregate principal amount of Notes which may be authenticated and delivered under the Original Indenture shall not, except as permitted by the provisions of Sections 2.8, 2.9, 2.11, 8.5 and 12.3 of the Original Indenture, exceed 3 $299,690,000. The entire amount of Notes may forthwith be executed by the Company and delivered to the Trustee and shall be authenticated by the Trustee and delivered to or upon the order of the Company pursuant to Section 2.4 of the Original Indenture. Section 1.2. Registered Global Securities. All the Securities issued pursuant to this Supplemental Indenture shall be issued as a single Registered Global Security and no Securities issued pursuant to this Supplemental Indenture will be unregistered. The Registered Global Security shall bear the following Legend (the "Legend": "Unless this certificate is presented by an authorized representative of a Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of the nominee of such Depositary or such other name as requested by an authorized representative of such Depositary and any payment is made to the nominee of such Depositary, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, the nominee, has an interest herein." The initial Depositary (as defined in the Original Indenture for such Registered Global Security shall be The Depository Trust Company. Each Depositary must, at the time of its designation and at all times it serves as a depositary, be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and any other applicable statute or regulation. The Company shall execute and the Trustee shall, in accordance with Section 2.4 of the Original Indenture and the Issuer Order (as defined in the Original Indenture with respect to the Notes, authenticate and deliver the single Registered Global Security that (i shall represent and shall be denominated in the amount equal to the aggregate principal amount of all the Notes to be represented by the Registered Global Security, (ii shall be registered in the name of the Depositary for the Registered Global Security or the nominee of the Depositary, (iii shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions and (iv shall bear the Legend on the reverse of each of the Notes. Section 1.3. Forms of Notes and Authentication Certificate. The forms of the Notes and the Trustee's certificate of authentication shall be substantially as follows: [FORM OF FACE OF NOTE] TENNECO PACKAGING INC. 7.20% NOTE DUE 2005 No. $ CUSIP Tenneco Packaging Inc., a corporation organized and existing under the laws of the State of Delaware (hereinafter called the "Company," which term shall include any successor corporation as defined in the Indenture hereinafter referred to, for value received, hereby promises to pay to or registered assigns, the sum of Dollars on December 15, 2005, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay to the registered holder hereof as hereinafter provided interest thereon at the rate per annum specified in the title hereof in like coin or currency, from the June 15 or December 15 next preceding the date hereof to -2- 4 which interest has been paid, unless the date hereof is a June 15 or December 15 to which interest on the Notes has been paid, in which case from the date hereof, or unless no interest has been paid on the Notes since the original issue date (hereinafter referred to of this Note, in which case from the original issue date, semi-annually on June 15 and December 15 in each year commencing December 15, 1999, until payment of said principal sum has been made or duly provided for, and to pay interest on any overdue principal and (to the extent permitted by law on any overdue installment of interest at the rate of 7.20% per annum. Notwithstanding the foregoing, when there is no existing default in the payment of interest on the Notes, if the date hereof is after May 31 or November 30 and prior to the following June 15 or December 15, as the case may be, this Note shall bear interest from such June 15 or December 15, or, if no interest has been paid on the Notes since the original issue date of this Note, from the original issue date; provided, however, that if the Company shall default in the payment of interest due on such June 15 or December 15, then this Note shall bear interest from the June 15 or December 15 to which interest has been paid or, if no interest has been paid on the Notes since the original issue date of this Note, from the original issue date. The interest so payable on any June 15 or December 15 will, subject to certain exceptions provided in the Indenture hereinafter referred to, be paid to the person in whose name this Note is registered at the close of business on the May 31 or November 30, as the case may be, next preceding such June 15 or December 15, or if such May 31 or November 30 is not a business day, the business day next preceding such May 31 or November 30. Interest on this Note shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Both principal of and interest on this Note are payable at the principal office of the Trustee in the Borough of Manhattan, The City of New York, New York; provided, however, that payment of interest may be made, at the option of the Company, by check mailed to the address of the person entitled thereto as such address shall appear on the Note register. The original issue date in respect of the Notes is [ ], 1999. ADDITIONAL PROVISIONS OF THIS NOTE ARE CONTAINED ON THE REVERSE HEREOF AND SUCH PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS PLACE. This Note shall not be entitled to any benefit under the Indenture hereafter referred to, or become valid or obligatory for any purpose, until the Trustee under the Indenture shall have signed the form of certificate or authentication endorsed hereon. -3- 5 In Witness Whereof, Tenneco Packaging Inc. has caused this Instrument to be signed in its name by its Chairman of the Board or its President or a Vice President, and its corporate seal (or a facsimile thereof to be hereto affixed and attested by its Secretary or an Assistant Secretary. Dated --------------------------------- Tenneco Packaging Inc. By ----------------------------------- President Attest: - -------------------------------------- Secretary [FORM OF REVERSE OF NOTE] TENNECO PACKAGING INC. 7.20% NOTE DUE 2005 This Note is one of a duly authorized issue of Notes of the Company known as its 7.20% Notes due 2005 (herein called the "Notes", limited to the aggregate principal amount of $299,690,000, all issued under and equally entitled to the benefits of an Indenture (herein, together with any amendments and supplements thereto, including without limitation the form and terms of Securities issued pursuant thereto, called the "Indenture", dated as of [ ], 1999, executed by the Company to The Chase Manhattan Bank (herein, together with any successor thereto, called the "Trustee", as Trustee, to which Indenture reference is hereby made for a statement of the rights thereunder of the Trustee and of the registered holders of the Notes and of the duties thereunder and of the Trustee and the Company. The Notes will be redeemable as a whole or in part, at the option of the Company at any time, at a redemption price equal to the greater of (i 100% of their principal amount and (ii the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months at the Treasury Yield plus 10 basis points, plus in each case accrued interest to the date of redemption. -4- 6 "Treasury Yield" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Notes that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing appointed by the Trustee. "Comparable Treasury Price" means, with respect to any redemption date, (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:00 p.m. Quotations for U.S. Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such business day, (A) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Lehman Brothers Inc. and Salomon Smith Barney Inc.; and their respective successors; provided however, that if any of the foregoing cease to be a primary U.S. Government Securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer. Holders of Notes to be redeemed will receive notice thereof by first-class mail at least 30 and not more than 60 days prior to the date fixed for redemption. The Indenture permits the Company to issue unsecured debentures, notes and/or other evidences of indebtedness in one or more series ("Securities") up to such principal amount or amounts as may be authorized in accordance with the terms of the Indenture. To the extent permitted by, and as provided in, the Indenture, modifications or alterations of the Indenture and of the rights and obligations of the Company and of the holders of the Notes may be made with the consent of the Company and with the consent of the holders of not less than a majority in principal amount of the Securities of all series then outstanding under the Indenture (treated as a single class) which are affected by the modification or amendment thereto; provided, -5- 7 however, that without the consent of the holder hereof no such modification or alteration shall be made which will affect the terms of payment of the principal of or interest on this Note. In case a default, as defined in the Indenture, shall occur, the principal of all the Notes at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Notes outstanding in the case of payment defaults on the Notes and in certain other events by the holders of a majority in principal amount of the Securities of all series then outstanding under the Indenture (treated as a single class which are affected thereby. The Indenture provides that no holder or any Note may enforce any remedy under the Indenture except in the case of refusal or neglect of the Trustee to act after notice of default and after request by the holders of a majority in principal amount of the outstanding Notes in certain events (and in certain other events by the holders of a majority in principal amount of the Securities of all series then outstanding under the Indenture, treated as a single class, which are affected thereby and the offer to the Trustee of security and indemnity satisfactory to it; provided, however, that such provision shall not prevent the holder hereof from enforcing payment of the principal of or interest on this Note. Unless this certificate is presented by an authorized representative of a Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of the nominee of such Depositary or such other name as requested by an authorized representative of such Depositary and any payment is made to the nominee of such Depositary, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, the nominee, has an interest herein. The Company, the Trustee, any paying agent and any Registrar of the Notes may deem and treat the person in whose name this Note is registered as the absolute owner hereof for all purposes whatsoever, and neither the Company nor the Trustee nor any paying agent nor any Registrar of the Notes shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on, this Note, or for any claim based hereon or on the Indenture, against any incorporator, or against any stockholder, director or officer, as such, past, present or future, of the Company, or of any predecessor or successor corporation, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution, statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Note and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture; provided, however, that nothing herein or contained in the Indenture shall be taken to prevent recourse to and the enforcement of the liability, if any, of any stockholder or subscriber to capital stock of the Company upon or in respect of shares of capital stock not fully paid up. -6- 8 All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Note is one of the 7.20% Notes due 2005 described in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, Trustee, By ------------------------------ Authorized Officer. ARTICLE 2. MISCELLANEOUS Section 2.1. Execution as Supplemental Indenture. This Supplemental Indenture is executed and shall be construed as an indenture supplemental to the Original Indenture and, as provided in the Original Indenture, this Supplemental Indenture forms a part thereof. Except as herein expressly otherwise defined, the use of the terms and expressions herein is in accordance with the definitions, uses and constructions contained in the Original Indenture. Section 2.2. Responsibility for Recitals, Etc. The recitals herein and in the Notes (except in the Trustee's certificate of authentication shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representations as to the validity or sufficiency of this Supplemental Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of the Notes or of the proceeds thereof. Section 2.3. Additional Amounts. The Company will not pay any additional amounts on the Notes held by a person who is not a U.S. Person (as defined in the Original Indenture in respect of any tax, assessment or governmental charge withheld or deducted. Section 2.4. Provisions Binding on Company's Successors. All the covenants, stipulations, promises and agreements in this Supplemental Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. Section 2.5. NEW YORK CONTRACT. THIS SUPPLEMENTAL INDENTURE AND EACH NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF -7- 9 THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. Section 2.6. Execution and Counterparts. This Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, said TENNECO PACKAGING INC. has caused this Supplemental Indenture to be executed in its corporate name by its Chairman of the Board or its President or one of its Vice Presidents, and said THE CHASE MANHATTAN BANK has caused this Supplemental Indenture to be executed in its corporate name by one of its Vice Presidents as of [ ], 1999. TENNECO PACKAGING INC. By -------------------------------- THE CHASE MANHATTAN BANK By -------------------------------- -8- EX-4.6 4 2ND SUPPLEMENTAL INDENTURE 1 EXHIBIT 4.6 - -------------------------------------------------------------------------------- TENNECO PACKAGING INC. AND THE CHASE MANHATTAN BANK, as Trustee --------------------- Second Supplemental Indenture Dated as of [ ], 1999 TO Indenture Dated as of [ ], 1999 --------------------- Providing for the issuance of 7.95% Debentures due 2025 - -------------------------------------------------------------------------------- 2 SECOND SUPPLEMENTAL INDENTURE dated as of [ ], 1999 between TENNECO PACKAGING INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter called the "Company", and THE CHASE MANHATTAN BANK, a New York banking corporation, as trustee (hereinafter called the "Trustee". WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture dated as of [ ], 1999 (hereinafter called the "Original Indenture", to provide for the issue of an unlimited amount of debentures, notes and/or other debt obligations of the Company (hereinafter referred to as the "Securities", the terms of which are to be determined as set forth in Section 2.3 of the Original Indenture; and WHEREAS, Section 8.1 of the Original Indenture provides, among other things, that the Company and the Trustee may enter into indentures supplemental to the Original Indenture for, among other things, the purpose of setting forth the terms of Securities of any series; and WHEREAS, the Company desires to create a series of the Securities in an aggregate principal amount of $276,794,000 to be designated the "7.95% Debentures due 2025" (the "Debentures", and all action on the part of the Company necessary to authorize the issuance of the Debentures under the Original Indenture and this Second Supplemental Indenture (the "Supplemental Indenture" has been duly taken; and WHEREAS, all acts and things necessary to make the Debentures, when executed by the Company and authenticated and delivered by the Trustee as in the Original Indenture provided, the valid and binding obligations of the Company, and to constitute these presents a valid and binding supplemental indenture and agreement according to its terms, have been done and performed; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and of the acceptance of this trust by the Trustee, and of the sum of one dollar to the Company duly paid by the Trustee at the execution and delivery of these presents, and of other valuable consideration the receipt whereof is hereby acknowledged and in order to authorize the authentication and delivery of and to set forth the terms of the Debentures. IT IS HEREBY COVENANTED, DECLARED AND AGREED by and between the parties hereto, for the benefit of holders of the Debentures issued under the Original Indenture, as follows: ARTICLE 1. TERMS AND ISSUANCE OF 7.95% DEBENTURES DUE 2025 Section 1.1. Issue of Debentures. A series of Securities which shall be designated the "7.95% Debentures due 2025" shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, the terms, conditions and covenants of the Original Indenture including without limitation the terms set forth in this Supplemental Indenture (including the form of Debentures set forth in Section 1.3 hereof. The aggregate principal amount of Debentures which may be authenticated and delivered under the Original Indenture shall not, except as permitted by the provisions of Sections 2.8, 2.9, 2.11, 8.5 and 12.3 of the Original 3 Indenture, exceed $276,794,000. The entire amount of Debentures may forthwith be executed by the Company and delivered to the Trustee and shall be authenticated by the Trustee and delivered to or upon the order of the Company pursuant to Section 2.4 of the Original Indenture. Section 1.2. Registered Global Securities. All the Securities issued pursuant to this Supplemental Indenture shall be issued as a single Registered Global Security and no Securities issued pursuant to this Supplemental Indenture will be unregistered. The Registered Global Security shall bear the following Legend (the "Legend": "Unless this certificate is presented by an authorized representative of a Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of the nominee of such Depositary or such other name as requested by an authorized representative of such Depositary and any payment is made to the nominee of such Depositary, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, the nominee, has an interest herein." The initial Depositary (as defined in the Original Indenture for such Registered Global Security shall be The Depositary Trust Company. Each Depositary must, at the time of its designation and at all times it serves as a depositary, be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and any other applicable statute or regulation. The Company shall execute and the Trustee shall, in accordance with Section 2.4 of the Original Indenture and the Issuer Order (as defined in the Original Indenture with respect to the Debentures, authenticate and deliver the single Registered Global Security that (i shall represent and shall be denominated in the amount equal to the aggregate principal amount of all the Debentures to be represented by the Registered Global Security, (ii shall be registered in the name of the Depositary for the Registered Global Security or the nominee of the Depositary, (iii shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions and (iv shall bear the Legend on the reverse of each of the Debentures. Section 1.3. Forms of Debentures and Authentication Certificate. The forms of the Debentures and the Trustee's certificate of authentication shall be substantially as follows: [FORM OF FACE OF DEBENTURE] TENNECO PACKAGING INC. 7.95% DEBENTURE DUE 2025 No. CUSIP $ Tenneco Packaging Inc., a corporation organized and existing under the laws of the State of Delaware (hereinafter called the "Company," which term shall include any successor corporation as defined in the Indenture hereinafter referred to, for value received, hereby promises to pay to or registered assigns, the sum of Dollars on December 15, 2025, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay to the registered holder hereof as hereinafter provided interest thereon at the rate per annum specified in the title hereof in like coin or currency, from the June 15 or December 15 next preceding the date hereof to -2- 4 which interest has been paid, unless the date hereof is a June 15 or December 15 to which interest on the Debentures has been paid, in which case from the date hereof, or unless no interest has been paid on the Debentures since the original issue dated (hereinafter referred to of this Debenture, in which case from the original issue date, semi-annually on June 15 and December 15 in each year commencing December 15, 1999, until payment of said principal sum has been made or duly provided for, and to pay interest on any overdue principal and (to the extent permitted by law on any overdue installment of interest at the rate of 7.95% per annum. Notwithstanding the foregoing, when there is no existing default in the payment of interest on the Debentures, if the date hereof is after May 31 or November 30 and prior to the following June 15 or December 15, as the case may be, this Debenture shall bear interest from such June 15 or December 15, or, if no interest has been paid on the Debentures since the original issue date of this Debenture, from the original issue date; provided, however, that if the Company shall default in the payment of interest due on such June 15 or December 15, then this Debenture shall bear interest from the June 15 or December 15 to which interest has been paid or, if no interest has been paid on the Debentures since the original issue date of this Debenture, from the original issue date. The interest so payable on any June 15 or December 15 will, subject to certain exceptions provided in the Indenture hereinafter referred to, be paid to the person in whose name this Debenture is registered at the close of business on the May 31 or November 30, as the case may be, next preceding such June 15 or December 15, or if such May 31 or November 30 is not a business day, the business day next preceding such May 31 or November 30. Interest on this Debenture shall be computed on the basis of a 360-day year of twelve 30-day months. Both principal of and interest on this Debenture are payable at the principal office of the Trustee in the Borough of Manhattan, The City of New York, New York; provided, however, that payment of interest may be made, at the option of the Company, by check mailed to the address of the person entitled thereto as such address shall appear on the Debenture register. The original issue date in respect of the Debentures is [ ], 1999. ADDITIONAL PROVISIONS OF THIS DEBENTURE ARE CONTAINED ON THE REVERSE HEREOF AND SUCH PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS PLACE. This Debenture shall not be entitled to any benefit under the Indenture hereafter referred to, or become valid or obligatory for any purpose, until the Trustee under the Indenture shall have signed the form of certificate or authentication endorsed hereon. -3- 5 In Witness Whereof, Tenneco Packaging Inc. has caused this Instrument to be signed in its name by its Chairman of the Board or its President or a Vice President, and its corporate seal (or a facsimile thereof to be hereto affixed and attested by its Secretary or an Assistant Secretary. Dated -------------------------- Tenneco Packaging Inc. By ----------------------------------- President Attest: - -------------------------------------- Secretary [FORM OF REVERSE OF DEBENTURE] TENNECO PACKAGING INC. 7.95% DEBENTURE DUE 2025 This Debenture is one of a duly authorized issue of Debentures of the Company known as its 7.95% Debentures due 2025 (herein called the "Debentures", limited to the aggregate principal amount of $276,794,000, all issued under and equally entitled to the benefits of an Indenture (herein, together with any amendments and supplements thereto, including without limitation the form and terms of Securities issued pursuant thereto, called the "Indenture", dated as of [ ], 1999, executed by the Company to The Chase Manhattan Bank (herein, together with any successor thereto, called the "Trustee", as Trustee, to which Indenture reference is hereby made for a statement of the rights thereunder of the Trustee and or the registered holders of the Debentures and of the duties thereunder of the Trustee and the Company. The Debentures will not be redeemable prior to maturity. The Indenture permits the Company to issue unsecured debentures, notes and/or other evidences of indebtedness in one or more series ("Securities" up to such principal amount or amounts as may be authorized in accordance with the terms of the Indenture. -4- 6 To the extent permitted by, and as provided in, the Indenture, modifications or alterations of the Indenture and of the rights and obligations of the Company and of the holders of the Debentures may be made with the consent of the Company and with the consent of the holders of not less than a majority in principal amount of the Securities of all series then outstanding under the Indenture (treated as a single class which are affected by the modification or amendment thereto; provided, however, that without the consent of the holder hereof no such modification or alteration shall be made which will affect the terms of payment of the principal of or interest on this Debenture. In case a default, as defined in the Indenture, shall occur, the principal of all the Debentures at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Debentures outstanding in the case of payment defaults on the Debentures and in certain other events by the holders of a majority in principal amount of the Securities of all series then outstanding under the Indenture (treated as a single class which are affected thereby. The Indenture provides that no holder of any Debenture may enforce any remedy under the Indenture except in the case of refusal or neglect of the Trustee to act after notice of default and after request by the holders of a majority in principal amount of the outstanding Debentures in certain events (and in certain other events by the holders of a majority in principal amount of the Securities of all series then outstanding under the Indenture, treated as a single class, which are affected thereby and the offer to the Trustee of security and indemnity satisfactory to it; provided, however, that such provision shall not prevent the holder hereof from enforcing payment of the principal of or interest on this Debenture. Unless this certificate is presented by an authorized representative of a Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of the nominee of such Depositary or such other name as requested by an authorized representative of such Depositary and any payment is made to the nominee of such Depositary, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, the nominee, has an interest herein. The Company, the Trustee, any paying agent and any Registrar of the Debentures may deem and treat the person in whose name this Debenture is registered as the absolute owner hereof for all purposes whatsoever, and neither the Company nor the Trustee nor any paying agent nor any Registrar of the Debentures shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on, this Debenture, or for any claim based hereon or on the Indenture, against incorporator, or against any stockholder, director or officer, as such, past, present or future, or the Company, or of any predecessor or successor corporation, either directly or through the Company or any such predecessor of successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement or any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution, statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Debenture and as part of the consideration for the -5- 7 issue hereof, and being likewise released by the terms of the Indenture; provided, however, that nothing herein or contained in the Indenture shall be taken to prevent recourse to and the enforcement of the liability, if any, of any stockholder or subscriber to capital stock of the Company upon or in respect of shares of capital stock not fully paid up. All terms used in this Debenture which are defined in the Indenture shall have the meanings assigned to them in the Indenture. [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Debenture is one of the 7.95% Debentures due 2025 described in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, Trustee, By -------------------------------- Authorized Officer. ARTICLE 2. MISCELLANEOUS Section 2.1. Execution as Supplemental Indenture. This Supplemental Indenture is executed and shall be construed as an indenture supplemental to the Original Indenture and, as provided in the Original Indenture, this Supplemental Indenture forms a part thereof. Except as herein expressly otherwise defined, the use of the terms and expressions herein is in accordance with the definitions, uses and constructions contained in the Original Indenture. Section 2.2. Responsibility for Recitals, Etc. The recitals herein and in the Debentures (except in the Trustee's certificate of authentication shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representations as to the validity or sufficiency of this Supplemental Indenture or of the Debentures. The Trustee shall not be accountable for the use or application by the Company of the Debentures or of the proceeds thereof. Section 2.3. Additional Amounts. The Company will not pay any additional amounts on the Debentures held by a person who is not a U.S. Person (as defined in the Original Indenture in respect of any tax, assessment or governmental charge withheld or deducted. -6- 8 Section 2.4. Provisions Binding on Company's Successors. All the covenants, stipulations, promises and agreements in this Supplemental Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. Section 2.5. NEW YORK CONTRACT. THIS SUPPLEMENTAL INDENTURE AND EACH DEBENTURE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. Section 2.6. Execution and Counterparts. This Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, said TENNECO PACKAGING INC. has caused this Supplemental Indenture to be executed in its corporate name by its Chairman of the Board or its President or one of its Vice Presidents, and said THE CHASE MANHATTAN BANK has caused this Supplemental Indenture to be executed in its corporate name by one of its Vice Presidents as of [ ], 1999. TENNECO PACKAGING INC. By --------------------------------- THE CHASE MANHATTAN BANK By --------------------------------- -7- EX-4.7 5 3RD SUPPLEMENTAL INDENTURE 1 EXHIBIT 4.7 TENNECO PACKAGING INC. AND THE CHASE MANHATTAN BANK, as Trustee --------------------- Third Supplemental Indenture Dated as of [ ], 1999 TO Indenture Dated as of [ ], 1999 --------------------- Providing for the issuance of 8% Notes due 2007 2 THIRD SUPPLEMENTAL INDENTURE dated as of [ ], 1999 between TENNECO PACKAGING INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter called the "Company", and THE CHASE MANHATTAN BANK, a New York banking corporation, as trustee (hereinafter called the "Trustee". WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture dated as of [ ], 1999 (hereinafter called the "Original Indenture", to provide for the issue of an unlimited amount of debentures, notes and/or other debt obligations of the Company (hereinafter referred to as the "Securities", the terms of which are to be determined as set forth in Section 2.3 of the Original Indenture; and WHEREAS, Section 8.1 of the Original Indenture provides, among other things, that the Company and the Trustee may enter into indentures supplemental to the Original Indenture for, among other things, the purpose of setting forth the terms of Securities of any series; and WHEREAS, the Company desires to create a series of the Securities in an aggregate principal amount of $100,000,000 to be designated the "8% Notes due 2007" (the "Notes", and all action on the part of the Company necessary to authorize the issuance of the Notes under the Original Indenture and this Third Supplemental Indenture (the "Supplemental Indenture" has been duly taken; and WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee as in the Original Indenture provided, the valid and binding obligations of the Company, and to constitute these presents a valid and binding supplemental indenture and agreement according to its terms, have been done and performed; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and of the acceptance of this trust by the Trustee, and of the sum of one dollar to the Company duly paid by the Trustee at the execution and delivery of these presents, and of other valuable consideration the receipt whereof is hereby acknowledged and in order to authorize the authentication and delivery of and to set forth the terms of the Notes. IT IS HEREBY COVENANTED, DECLARED AND AGREED by and between the parties hereto, for the benefit of holders of the Notes issued under the Original Indenture, as follows: ARTICLE 1. TERMS AND ISSUANCE OF 8% NOTES DUE 2007 Section 1.1. Issue of Notes. A series of Securities which shall be designated the 8% Notes due 2007" shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, the terms, conditions and covenants of the Original Indenture, including without limitation the terms set forth in this Supplemental Indenture (including the form of Notes set forth in Section 1.3 hereof. The aggregate principal amount of Notes which may be authenticated and delivered under the Original Indenture shall not, except as permitted by the provisions of Sections 2.8, 2.9, 2.11, 8.5 and 12.3 of the Original Indenture, exceed $100,000,000. 3 The entire amount of Notes may forthwith be executed by the Company and delivered to the Trustee and shall be authenticated by the Trustee and delivered to or upon the order of the Company pursuant to Section 2.4 of the Original Indenture. Section 1.2. Registered Global Securities. All the Securities issued pursuant to this Supplemental Indenture shall be issued as a single Registered Global Security and no Securities issued pursuant to this Supplemental Indenture will be unregistered. The Registered Global Security shall bear the following Legend (the "Legend": "Unless this certificate is presented by an authorized representative of a Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of the nominee of such Depositary or such other name as requested by an authorized representative of such Depositary and any payment is made to the nominee of such Depositary, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, the nominee, has an interest herein." The initial Depositary (as defined in the Original Indenture for such Registered Global Security shall be The Depository Trust Company. Each Depositary must, at the time of its designation and at all times it serves as a depositary, be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and any other applicable statute or regulation. The Company shall execute and the Trustee shall, in accordance with Section 2.4 of the Original Indenture and the Issuer Order (as defined in the Original Indenture with respect to the Notes, authenticate and deliver the single Registered Global Security that (i shall represent and shall be denominated in the amount equal to the aggregate principal amount of all the Notes to be represented by the Registered Global Security, (ii shall be registered in the name of the Depositary for the Registered Global Security or the nominee of the Depositary, (iii shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions and (iv shall bear the Legend on the reverse of each of the Notes. Section 1.3. Forms of Notes and Authentication Certificate. The forms of the Notes and the Trustee's certificate of authentication shall be substantially as follows: [FORM OF FACE OF NOTE] TENNECO PACKAGING INC. 8% NOTE DUE 2007 No. CUSIP $ Tenneco Packaging Inc., a corporation organized and existing under the laws of the State of Delaware (hereinafter called the "Company," which term shall include any successor corporation as defined in the Indenture hereinafter referred to, for value received, hereby promises to pay to or registered assigns, the sum of Dollars on April 15, 2007, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay to the registered holder hereof as hereinafter provided interest thereon at the rate per annum specified in the title hereof in like coin or currency, -2- 4 from the April 15 or October 15 next preceding the date hereof to which interest has been paid, unless the date hereof is an April 15 or October 15 to which interest on the Notes has been paid, in which case from the date hereof, or unless no interest has been paid on the Notes since the original issue date (hereinafter referred to of this Note, in which case from the original issue date, semi-annually on April 15 and October 15 in each year commencing April 15, 2000 until payment of said principal sum has been made or duly provided for, and to pay interest on any overdue principal and (to the extent permitted by law on any overdue installment of interest at the rate of 8% per annum. Notwithstanding the foregoing, when there is no existing default in the payment of interest on the Notes, if the date hereof is after April 1 or October 1 and prior to the following April 15 or October 15, as the case may be, this Note shall bear interest from such April 15 or October 15, or, if no interest has been paid on the Notes since the original issue date of this Note, from the original issue date; provided, however, that if the Company shall default in the payment of interest due on such April 15 or October 15, then this Note shall bear interest from the April 15 or October 15 to which interest has been paid or, if no interest has been paid on the Notes since the original issue date of this Note, from the original issue date. The interest so payable on any April 15 or October 15 will, subject to certain exceptions provided in the Indenture hereinafter referred to, be paid to the person in whose name this Note is registered at the close of business on the April 1 or October 1, as the case may be, next preceding such April 15 or October 15, or if such April 1 or October 1 is not a business day, the business day next preceding such April 1 or October 1. Interest on this Note shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Both principal of and interest on this Note are payable at the principal office of the Trustee in the Borough of Manhattan, The City of New York, New York; provided, however, that payment of interest may be made, at the option of the Company, by check mailed to the address of the person entitled thereto as such address shall appear on the Note register. The original issue date in respect of the Notes is [ ], 1999. ADDITIONAL PROVISIONS OF THIS NOTE ARE CONTAINED ON THE REVERSE HEREOF AND SUCH PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS PLACE. This Note shall not be entitled to any benefit under the Indenture hereinafter referred to, or become valid or obligatory for any purpose, until the Trustee under the Indenture shall have signed the form of certificate of authentication endorsed hereon. -3- 5 In Witness Whereof, Tenneco Packaging Inc. has caused this Instrument to be signed in its name by its Chairman of the Board or its President or a Vice President, and its corporate seal (or a facsimile thereof to be hereto affixed and attested by its Secretary or an Assistant Secretary. Dated -------------------------- Tenneco Packaging Inc. By: -------------------------------- President Attest: --------------------------------- Secretary [FORM OF REVERSE OF NOTE] TENNECO PACKAGING INC. 8% NOTE DUE 2007 This Note is one of a duly authorized issue of Notes of the Company known as its 8% Notes due 2007 (herein called the "Notes", limited to the aggregate principal amount of $100,000,000, all issued under and equally entitled to the benefits of an Indenture (herein, together with any amendments and supplements thereto, including without limitation the form and terms of Securities issued pursuant thereto, called the "Indenture", dated as of [ ], 1999, executed by the Company to The Chase Manhattan Bank (herein, together with any successor thereto, called the "Trustee", as Trustee, to which Indenture reference is hereby made for a statement of the rights thereunder of the Trustee and of the registered holders of the Notes and of the duties thereunder of the Trustee and the Company. The Notes will be redeemable as a whole or in part, at the option of the Company at any time, at a redemption price equal to the greater of (i 100% of their principal amount and (ii the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months at the Treasury Yield plus 10 basis points, plus accrued interest to the date of redemption. "Treasury Yield" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount equal to the Comparable Treasury Price for such redemption date. -4- 6 "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Notes that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing appointed by the Trustee. "Comparable Treasury Price" means, with respect to any redemption date: (i) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (ii) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Lehman Brothers, Inc. and Salomon Smith Barney Inc.; provided however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer. Holders of Notes to be redeemed will receive notice thereof by first-class mail at least 30 and not more than 60 days prior to the date fixed for redemption. The Indenture permits the Company to issue unsecured debentures, notes, and/or other evidences of indebtedness in one or more series ("Securities") up to such principal amount or amounts as may be authorized in accordance with the terms of the Indenture. To the extent permitted by, and as provided in, the Indenture, modifications or alterations of the Indenture and of the rights and obligations of the Company and of the holders of the Notes may be made with the consent of the Company and with the consent of the holders of not less than a majority in principal amount of the Securities of all series then outstanding under the Indenture (treated as a single class) which are affected by the modification or amendment thereto; provided, however, that without the consent of the holder hereof no such modification or alteration shall be made which will affect the terms of payment of the principal of or interest on this Note. In case a default, as defined in the Indenture, shall occur, the principal of all the Notes at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Notes outstanding in the case of payment defaults on the Notes and in certain other events by the holders of a majority in principal amount of the Securities of all series then outstanding under the Indenture (treated as a single class) which are affected thereby. -5- 7 The Indenture provides that no holder of any Note may enforce any remedy under the Indenture except in the case of refusal or neglect of the Trustee to act after notice of default and after request by the holders of a majority in principal amount of the outstanding Notes in certain events (and in certain other events by the holders of a majority in principal amount of the Securities of all series then outstanding under the Indenture, treated as a single class, which are affected thereby and the offer to the Trustee of security and indemnity satisfactory to it; provided, however, that such provision shall not prevent the holder hereof from enforcing payment of the principal of or interest on this Note. Unless this certificate is presented by an authorized representative of a Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of the nominee of such Depositary or such other name as requested by an authorized representative of such Depositary and any payment is made to the nominee of such Depositary, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, the nominee, has an interest herein. The Company, the Trustee, any paying agent and any Registrar of the Notes may deem and treat the person in whose name this Note is registered as the absolute owner hereof for all purposes whatsoever, and neither the Company nor the Trustee nor any paying agent nor any Registrar of the Notes shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on, this Note, or for any claim based hereon or on the Indenture, against any incorporator or against any stockholder, director or officer, as such, past, present or future, of the Company, or of any predecessor or successor corporation, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution, statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Note and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture; provided, however, that nothing herein or in the Indenture contained shall be taken to prevent recourse to and the enforcement of the liability, if any, of any stockholder or subscriber to capital stock of the Company upon or in respect of shares of capital stock not fully paid up. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. -6- 8 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Note is one of 8% Notes due 2007 described in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, Trustee. By: ---------------------- Authorized Officer. ARTICLE 2. MISCELLANEOUS Section 2.1. Execution as Supplemental Indenture. This Supplemental Indenture is executed and shall be construed as an indenture supplemental to the Original Indenture and, as provided in the Original Indenture, this Supplemental Indenture forms a part thereof. Except as herein expressly otherwise defined, the use of the terms and expressions herein is in accordance with the definitions, uses and constructions contained in the Original Indenture. Section 2.2. Responsibility for Recitals, Etc. The recitals herein and in the Notes (except in the Trustee's certificate of authentication shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representations as to the validity or sufficiency of this Supplemental Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of the Notes or of the proceeds thereof. Section 2.3. Additional Amounts. The Company will not pay any additional amounts on the Notes held by a person who is not a U.S. Person (as defined in the Original Indenture in respect of any tax, assessment or governmental charge withheld or deducted. Section 2.4. Provisions Binding on Company's Successors. All the covenants, stipulations, promises and agreements in this Supplemental Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. Section 2.5. NEW YORK CONTRACT. THIS SUPPLEMENTAL INDENTURE AND EACH NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. -7- 9 Section 2.6. Execution and Counterparts. This Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, said TENNECO PACKAGING INC. has caused this Supplemental Indenture to be executed in its corporate name by its Chairman of the Board or its President or one of its Vice Presidents, and said THE CHASE MANHATTAN BANK has caused this Supplemental Indenture to be executed in its corporate name by one of its Vice Presidents as of [ ], 1999. TENNECO PACKAGING INC. By: --------------------------- THE CHASE MANHATTAN BANK By: --------------------------- -8- EX-4.8 6 4TH SUPPLEMENTAL INDENTURE 1 EXHIBIT 4.8 TENNECO PACKAGING INC. AND THE CHASE MANHATTAN BANK, as Trustee --------------------- Fourth Supplemental Indenture Dated as of [ ], 1999 TO Indenture Dated as of [ ], 1999 --------------------- Providing for the issuance of 8-1/8% Debentures due June 15, 2017 2 FOURTH SUPPLEMENTAL INDENTURE dated as of [ ], 1999 between TENNECO PACKAGING INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter called the "Company", and THE CHASE MANHATTAN BANK, a New York banking corporation, as trustee (hereinafter called the "Trustee". WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture dated as of [ ], 1999 (hereinafter called the "Original Indenture", to provide for the issue of an unlimited amount of debentures, notes and/or other debt obligations of the Company (hereinafter referred to as the "Securities", the terms of which are to be determined as set forth in Section 2.3 of the Original Indenture; and WHEREAS, Section 8.1 of the Original Indenture provides, among other things, that the Company and the Trustee may enter into indentures supplemental to the Original Indenture for, among other things, the purpose of setting forth the terms of Securities of any series; and WHEREAS, the Company desires to create a series of the Securities in an aggregate principal amount of $300,000,000 to be designated the 8-1/8% Debentures due June 15, 2017" (the "Debentures", and all action on the part of the Company necessary to authorize the issuance of the Debentures under the Original Indenture and this Fourth Supplemental Indenture (the "Supplemental Indenture" has been duly taken; and WHEREAS, all acts and things necessary to make the Debentures, when executed by the Company and authenticated and delivered by the Trustee as in the Original Indenture provided, the valid and binding obligations of the Company, and to constitute these presents a valid and binding supplemental indenture and agreement according to its terms, have been done and performed; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and of the acceptance of this trust by the Trustee, and of the sum of one dollar to the Company duly paid by the Trustee at the execution and delivery of these presents, and of other valuable consideration the receipt whereof is hereby acknowledged and in order to authorize the authentication and delivery of and to set forth the terms of the Debentures. IT IS HEREBY COVENANTED, DECLARED AND AGREED by and between the parties hereto, for the benefit of holders of the Debentures issued under the Original Indenture, as follows: ARTICLE 1. TERMS AND ISSUANCE OF 8-1/8% DEBENTURES DUE JUNE 15, 2017 Section 1.1. Issue of Debentures. A series of Securities which shall be designated the "8- 1/8% Debentures due June 15, 2017" shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, the terms, conditions and covenants of the Original Indenture, including without limitation the terms set forth in this Supplemental Indenture (including the form of Debentures set forth in Section 1.3 hereof. The aggregate principal amount of Debentures which may be authenticated and delivered under the Original Indenture shall not, except as permitted by the provisions of Sections 2.8, 2.9, 2.11, 8.5 and 12.3 of the Original 3 Indenture, exceed $300,000,000. The entire amount of Debentures may forthwith be executed by the Company and delivered to the Trustee and shall be authenticated by the Trustee and delivered to or upon the order of the Company pursuant to Section 2.4 of the Original Indenture. Section 1.2. Registered Global Securities. All the Securities issued pursuant to this Supplemental Indenture shall be issued as a single Registered Global Security and no Securities issued pursuant to this Supplemental Indenture will be unregistered. The Registered Global Security shall bear the following Legend (the "Legend": "Unless this certificate is presented by an authorized representative of a Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of the nominee of such Depositary or such other name as requested by an authorized representative of such Depositary and any payment is made to the nominee of such Depositary, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, the nominee, has an interest herein." The initial Depositary (as defined in the Original Indenture for such Registered Global Security shall be The Depository Trust Company. Each Depositary must, at the time of its designation and at all times it serves as a depositary, be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and any other applicable statute or regulation. The Company shall execute and the Trustee shall, in accordance with Section 2.4 of the Original Indenture and the Issuer Order (as defined in the Original Indenture with respect to the Debentures, authenticate and deliver the single Registered Global Security that (i shall represent and shall be denominated in the amount equal to the aggregate principal amount of all the Debentures to be represented by the Registered Global Security, (ii shall be registered in the name of the Depositary for the Registered Global Security or the nominee of the Depositary, (iii shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions and (iv shall bear the Legend on the reverse of each of the Debentures. Section 1.3. Forms of Debentures and Authentication Certificate. The forms of the Debentures and the Trustee's certificate of authentication shall be substantially as follows: [FORM OF FACE OF DEBENTURE] TENNECO PACKAGING INC. 8-1/8% DEBENTURE DUE JUNE 15, 2017 No. CUSIP $ ----------- Tenneco Packaging Inc., a corporation organized and existing under the laws of the State of Delaware (hereinafter called the "Company," which term shall include any successor corporation as defined in the Indenture hereinafter referred to, for value received, hereby promises to pay to or registered assigns, the sum of Dollars on June 15, 2017, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay to the registered holder hereof as hereinafter provided interest thereon at the rate per annum specified in the title hereof in like coin or currency, from the June 15 or December 15 next preceding the date hereof to which interest has been paid, -2- 4 unless the date hereof is a June 15 or December 15 to which interest on the Debenture has been paid, in which case from the date hereof, or unless no interest has been paid on the Debentures since the original issue date (hereinafter referred to of this Debenture, in which case from the original issue date semi-annually on June 15 and December 15 in each year commencing December 15, 1999, until payment of said principal sum has been made or duly provided for, and to pay interest on any overdue principal and (to the extent permittted by law on any overdue installment of interest at the rate of 8-1/8% per annum. Notwithstanding the foregoing, when there is no existing default in the payment of interest on the Debenture if the date hereof is after June 1 or December 1 and prior to the following June 15 or December 15, as the case may be, this Debenture shall bear interest from such June 15 or December 15, or, if no interest has been paid on the Debentures since the original issue date of this Debenture, from the original issue date; provided however, that if the Company shall default in the payment of interest due on such June 15 or December 15 then this Debenture shall bear interest from the June 15 or December 15 to which interest has been paid or if no interest has been paid on the Debentures since the original issue date of this Debenture, from the original issue date. The interest so payable on any June 15 or December 15 will, subject to certain exceptions provided in the Indenture hereinafter referred to, be paid to the person in whose name this Debenture is registered at the close of business on the June 1 or December 1, as the case may be, next preceding such June 15 or December 15, or if such June 1 or December 1 is not a business day, the business day next preceding such June 1 or December 1. Interest on this Debenture shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Both principal of and interest on this Debenture are payable at the principal office of the Trustee in the Borough of Manhattan, The City of New York, New York; provided, however, that payment of interest may be made, at the option of the Company, by check mailed to the address of the person entitled thereto as such address shall appear on the Debenture register. The original issue date in respect of the Debentures is [ ], 1999. ADDITIONAL PROVISIONS OF THIS DEBENTURE ARE CONTAINED ON THE REVERSE HEREOF AND SUCH PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS PLACE. This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, become valid or obligatory for any purpose, until the Trustee under the Indenture shall have signed the form of certificate of authentication endorsed hereon. -3- 5 In Witness Whereof, Tenneco Packaging Inc. has caused this Instrument to be signed in its name by its Chairman of the Board or its President or a Vice President, and its corporate seal (or a facsimile thereof to be hereto affixed and attested by its Secretary or an Assistant Secretary. Dated: ---------------------- Tenneco Packaging Inc. By ---------------------------------- President Attest: - ---------------------------------------- Assistant Secretary [FORM OF REVERSE OF DEBENTURE] TENNECO PACKAGING INC. 8-1/8% DEBENTURE DUE JUNE 15, 2017 This Debenture is one of a duly authorized issue of Debentures of the Company known as its 8-1/8% Debentures due June 15, 2017 (herein called the "Debentures", limited to the aggregate principal amount of $300,000,000, all issued under and equally entitled to the benefits of an Indenture (herein, together with any amendments and supplements thereto, including without limitation the form and terms of Securities issued pursuant thereto, called the "Indenture", dated as of [ ], 1999, executed by the Company to The Chase Manhattan Bank (herein, together with any successor thereto, called the "Trustee", as Trustee, to which Indenture reference is hereby made for a statement of the rights thereunder of the Trustee an of the registered holders of the Debentures and of the duties thereunder of the Trustee and the Company. The Debentures will be redeemable as a whole or in part, at the options of the Company at any time, at a redemption price equal to the greater of (i 100% of their principal amount and (ii the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months at the Treasury Yield plus 20 basis points, plus accrued interest to the date of redemption. "Treasury Yield" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount equal to the Comparable Treasury Price for such redemption date. -4- 6 "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Debentures that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Debentures. "Independent Investment Banker" means [Morgan Stanley & Co. Incorporated]or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing appointed by the Trustee. "Comparable Treasury Price" means, with respect to any redemption date, (i the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (ii if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Lehman Brothers, Inc. and Salomon Smith Barney Inc.]and; provided however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer", the Company shall substitute therefor another Primary Treasury Dealer. Holders of Debentures to be redeemed will receive notice thereof by first-class mail at least 30 and not more than 60 days prior to the date fixed for redemption. The Indenture permits the Company to issue unsecured debentures, notes, and/or other evidences of indebtedness is one or more series ("Securities" up to such principal amount or amounts as may be authorized in accordance with the terms of the Indenture. To the extent permitted by, and as provided in, the Indenture, modifications or alterations of the Indenture and of the rights and obligations of the Company and of the holders of the Debentures may be made with the consent of the Company and with the consent of the holders of not less than a majority in principal amount of the Securities of all series then outstanding under the Indenture (treated as a single class which are affected by the modification or amendment thereto; provided, however, that without the consent of the holder hereof no such modification or alteration shall be made which will affect the terms of payment of the principal of or interest on this Debenture. In case a default, as defined in the Indenture, shall occur, the principal of all the Debentures at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Debenture outstanding in the case of payment defaults on the Debentures and in certain other events by the holders of a majority in principal amount of the Securities of all series then outstanding under the Indenture (treated as a single class which are affected thereby. -5- 7 The Indenture provides that no holder of any Debenture may enforce any remedy under the Indenture except in the case of refusal or neglect of the Trustee to act after notice of default and after request by the holders of a majority in principal amount of the outstanding Debentures in certain events (and is certain other events by the holders of a majority in principal amount of the Securities of all series than outstanding under the Indenture, treated as a single class, which are affected thereby and the offer to the trustee of security and indemnity satisfactory to it; provided, however, that such provision shall not prevent the holder herein from enforcing payment of the principal of or interest on this Debenture. Unless this certificate is presented by an authorized representative of a Depository to the Issuer, its agent for registration of transfer, exchange or payments, and any certificate issued is registered in the name of the nominee of such Depositary or such other name as requested by an authorized representative of such Depositary and any payment is made to the nominee of such Depositary, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, the nominee, has an interest herein. The Company, the Trustee, any paying agent and any Registrar of the Debentures may deem and treat the person in whose name this Debenture is registered as the absolute owner hereof for all purposes whatsoever, and neither the Company nor the Trustee nor any paying agent nor any Registrar of Debentures shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on, this Debenture, or for any claim based hereon or on the Indenture, against any incorporator or against any stockholder, director or officer, as such, past present or future, of the Company, or of any predecessor or successor corporation, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution, statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Debenture and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture, provided, however, that nothing herein or contained in the Indenture shall be taken to prevent recourse to and the enforcement of the liability, if any, of any stockholder or subscribed to capital stock of the Company upon or in respect of shares of capital stock not fully paid up. All terms used in this Debenture which are defined in the Indenture shall have the meanings assigned to them in the Indenture. -6- 8 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Debenture is one of 8-1/8% Debentures due June 15, 2017 described in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, Trustee. By ---------------------------------- Authorized Officer. ARTICLE 2. MISCELLANEOUS Section 2.1. Execution as Supplemental Indenture. This Supplemental Indenture is executed and shall be construed as an indenture supplemental to the Original Indenture and, as provided in the Original Indenture, this Supplemental Indenture forms a part thereof. Except as herein expressly otherwise defined, the use of the terms and expressions herein is in accordance with the definitions, uses and constructions contained in the Original Indenture. Section 2.2. Responsibility for Recitals, Etc. The recitals herein and in the Debentures (except in the Trustee's certificate of authentication shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representations as to the validity or sufficiency of this Supplemental Indenture or of the Debentures. The Trustee shall not be accountable for the use or application by the Company of the Debentures or of the proceeds thereof. Section 2.3. Additional Amounts. The Company will not pay any additional amounts on the Debentures held by a person who is not a U.S. Person (as defined in the Original Indenture in respect of any tax, assessment or governmental charge withheld or deducted. Section 2.4. Provisions Binding on Company's Successors. All the covenants, stipulations, promises and agreements in this Supplemental Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. Section 2.5. NEW YORK CONTRACT. THIS SUPPLEMENTAL INDENTURE AND EACH DEBENTURE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. -7- 9 Section 2.6. Execution and Counterparts. This Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, said TENNECO PACKAGING INC. has caused this Supplemental Indenture to be executed in its corporate name by its Chairman of the Board or its President or one of its Vice Presidents, and said THE CHASE MANHATTAN BANK has caused this Supplemental Indenture to be executed in its corporate name by one of its Vice Presidents as of [ ], 1999. TENNECO PACKAGING INC. By --------------------------------- THE CHASE MANHATTAN BANK By ---------------------------------- -8- EX-4.9 7 5TH SUPPLEMENTAL INDENTURE 1 EXHIBIT 4.9 - -------------------------------------------------------------------------------- TENNECO PACKAGING INC. AND THE CHASE MANHATTAN BANK, as Trustee --------------------- Fifth Supplemental Indenture Dated as of [ ], 1999 TO Indenture Dated as of [ ], 1999 --------------------- Providing for the issuance of 8-3/8% Debentures due 2027 - -------------------------------------------------------------------------------- 2 FIFTH SUPPLEMENTAL INDENTURE dated as of [ ], 1999 between TENNECO PACKAGING INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter called the "Company", and THE CHASE MANHATTAN BANK, a New York banking corporation, as trustee (hereinafter called the "Trustee". WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture dated as of [ ], 1999 (hereinafter called the "Original Indenture", to provide for the issue of an unlimited amount of debentures, notes and/or other debt obligations of the Company (hereinafter referred to as the "Securities", the terms of which are to be determined as set forth in Section 2.3 of the Original Indenture; and WHEREAS, Section 8.1 of the Original Indenture provides, among other things, that the Company and the Trustee may enter into indentures supplemental to the Original Indenture for, among other things, the purpose of setting forth the terms of Securities of any series; and WHEREAS, the Company desires to create a series of the Securities in an aggregate principal amount of $200,000,000 to be designated the 8-3/8% Debentures due 2027" (the "Debentures", and all action on the part of the Company necessary to authorize the issuance of the Debentures under the Original Indenture and this Fifth Supplemental Indenture (the "Supplemental Indenture" has been duly taken; and WHEREAS, all acts and things necessary to make the Debentures, when executed by the Company and authenticated and delivered by the Trustee as in the Original Indenture provided, the valid and binding obligations of the Company, and to constitute these presents a valid and binding supplemental indenture and agreement according to its terms, have been done and performed; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and of the acceptance of this trust by the Trustee, and of the sum of one dollar to the Company duly paid by the Trustee at the execution and delivery of these presents, and of other valuable consideration the receipt whereof is hereby acknowledged and in order to authorize the authentication and delivery of and to set forth the terms of the Debentures. IT IS HEREBY COVENANTED, DECLARED AND AGREED by and between the parties hereto, for the benefit of holders of the Debentures issued under the Original Indenture, as follows: ARTICLE 1. TERMS AND ISSUANCE OF 8-3/8% DEBENTURES DUE 2027 Section 1.1. Issue of Debentures. A series of Securities which shall be designated the "8-3/8% Debentures due 2027" shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, the terms, conditions and covenants of the Original Indenture, including without limitation the terms set forth in this Supplemental Indenture (including the form of Debentures set forth in Section 1.3 hereof. The aggregate principal amount of Debentures which may be authenticated and delivered under the Original Indenture shall not, except as permitted by the provisions of Sections 2.8, 2.9, 2.11, 8.5 and 12.3 of the Original 3 Indenture, exceed $200,000,000. The entire amount of Debentures may forthwith be executed by the Company and delivered to the Trustee and shall be authenticated by the Trustee and delivered to or upon the order of the Company pursuant to Section 2.4 of the Original Indenture. Section 1.2. Registered Global Securities. All the Securities issued pursuant to this Supplemental Indenture shall be issued as a single Registered Global Security and no Securities issued pursuant to this Supplemental Indenture will be unregistered. The Registered Global Security shall bear the following Legend (the "Legend": "Unless this certificate is presented by an authorized representative of a Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of the nominee of such Depositary or such other name as requested by an authorized representative of such Depositary and any payment is made to the nominee of such Depositary, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, the nominee, has an interest herein." The initial Depositary (as defined in the Original Indenture for such Registered Global Security shall be The Depository Trust Company. Each Depositary must, at the time of its designation and at all times it serves as a depositary, be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and any other applicable statute or regulation. The Company shall execute and the Trustee shall, in accordance with Section 2.4 of the Original Indenture and the Issuer Order (as defined in the Original Indenture with respect to the Debentures, authenticate and deliver the single Registered Global Security that (i shall represent and shall be denominated in the amount equal to the aggregate principal amount of all the Debentures to be represented by the Registered Global Security, (ii shall be registered in the name of the Depositary for the Registered Global Security or the nominee of the Depositary, (iii shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions and (iv shall bear the Legend on the reverse of each of the Debentures. Section 1.3. Forms of Debentures and Authentication Certificate. The forms of the Debentures and the Trustee's certificate of authentication shall be substantially as follows: [FORM OF FACE OF DEBENTURE] TENNECO PACKAGING INC. 8-3/8% DEBENTURE DUE 2027 No. CUSIP $ ------------- Tenneco Packaging Inc., a corporation organized and existing under the laws of the State of Delaware (hereinafter called the "Company," which term shall include any successor corporation as defined in the Indenture hereinafter referred to, for value received, hereby promises to pay to or registered assigns, the sum of Dollars on April 15, 2027, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay to the registered holder hereof as hereinafter provided interest thereon at the rate per annum specified in the title hereof in like coin or currency, -2- 4 from the April 15 or October 15 next preceding the date hereof to which interest has been paid, unless the date hereof is an April 15 or October 15 to which interest on the Debentures has been paid, in which case from the date hereof, or unless no interest has been paid on the Debentures since the original issue date (hereinafter referred to of this Debenture, in which case from the original issue date, semi-annually on April 15 and October 15 in each year commencing April 15, 2000, until payment of said principal sum has been made or duly provided for, and to pay interest on any overdue principal and (to the extent permitted by law on any overdue installment of interest at the rate of 8-3/8% per annum. Notwithstanding the foregoing, when there is no existing default in the payment of interest on the Debentures, if the date hereof is after April 1 or October 1 and prior to the following April 15 or October 15, as the case may be, this Debenture shall bear interest from such April 15 or October 15, or, if no interest has been paid on the Debentures since the original issue date of this Debenture, from the original issue date; provided, however, that if the Company shall default in the payment of interest due on such April 15 or October 15, then this Debenture shall bear interest from the April 15 or October 15 to which interest has been paid or, if no interest has been paid on the Debentures since the original issue date of this Debenture, from the original issue date. The interest so payable on any April 15 or October 15 will, subject to certain exceptions provided in the Indenture hereinafter referred to, be paid to the person in whose name this Debenture is registered at the close of business on the April 1 or October 1, as the case may be, next preceding such April 15 or October 15, or if such April 1 or October 1 is not a business day, the business day next preceding such April 1 or October 1. Interest on this Debenture shall be computed on the basis of a 360-day year consisting of twelve 30-day months. Both principal of and interest on this Debenture are payable at the principal office of the Trustee in the Borough of Manhattan, The City of New York, New York; provided, however, that payment of interest may be made, at the option of the Company, by check mailed to the address of the person entitled thereto as such address shall appear on the Debenture register. The original issue date in respect of the Debentures is [ ], 1999. ADDITIONAL PROVISIONS OF THIS DEBENTURE ARE CONTAINED ON THE REVERSE HEREOF AND SUCH PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS PLACE. This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, or become valid or obligatory for any purpose, until the Trustee under the Indenture shall have signed the form of certificate of authentication endorsed hereon. -3- 5 In Witness Whereof, Tenneco Packaging Inc. has caused this Instrument to be signed in its name by its Chairman of the Board or its President or a Vice President, and its corporate seal (or a facsimile thereof to be hereto affixed and attested by its Secretary or an Assistant Secretary. Dated ----------------- Tenneco Packaging Inc. By ---------------------------------------- President Attest: - -------------------------- Secretary [FORM OF REVERSE OF DEBENTURE] TENNECO PACKAGING INC. 8-3/8% DEBENTURE DUE 2027 This Debenture is one of a duly authorized issue of Debentures of the Company known as its 8-3/8% Debentures due 2027 (herein called the "Debentures", limited to the aggregate principal amount of $200,000,000, all issued under and equally entitled to the benefits of an Indenture (herein, together with any amendments and supplements thereto, including without limitation the form and terms of Securities issued pursuant thereto, called the "Indenture", dated as of [ ], 1999, executed by the Company to The Chase Manhattan Bank (herein, together with any successor thereto, called the "Trustee", as Trustee, to which Indenture reference is hereby made for a statement of the rights thereunder of the Trustee and of the registered holders of the Debentures and of the duties thereunder of the Trustee and the Company. The Debentures will be redeemable as a whole or in part, at the option of the Company at any time, at a redemption price equal to the greater of (i 100% of their principal amount and (ii the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months at the Treasury Yield plus 25 basis points, plus accrued interest to the date of redemption. "Treasury Yield" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount equal to the Comparable Treasury Price for such redemption date. -4- 6 "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Debentures that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Debentures. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing appointed by the Trustee. "Comparable Treasury Price" means, with respect to any redemption date: (i) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (ii) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, Lehman Brothers, Inc. and Salomon Smith Barney Inc.; provided however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer. Holders of Debentures to be redeemed will receive notice thereof by first-class mail at least 30 and not more than 60 days prior to the date fixed for redemption. The Indenture permits the Company to issue unsecured debentures, notes, and/or other evidences of indebtedness in one or more series ("Securities") up to such principal amount or amounts as may be authorized in accordance with the terms of the Indenture. To the extent permitted by, and as provided in, the Indenture, modifications or alterations of the Indenture and of the rights and obligations of the Company and of the holders of the Debentures may be made with the consent of the Company and with the consent of the holders of not less than a majority in principal amount of the Securities of all series then outstanding under the Indenture (treated as a single class) which are affected by the modification or amendment thereto, provided, however, that without the consent of the holder hereof no such modification or alteration shall be made which will affect the terms of payment of the principal of or interest on this Debenture. In case a default, as defined in the Indenture, shall occur, the principal of all the Debentures at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Debentures outstanding in the case of payment defaults on the Debentures and in certain other events by the holders of a majority in principal amount of the Securities of all series then outstanding under the Indenture (treated as a single class) which are affected thereby. -5- 7 The Indenture provides that no holder of any Debenture may enforce any remedy under the Indenture except in the case of refusal or neglect of the Trustee to act after notice of default and after request by the holders of a majority in principal amount of the outstanding Debentures in certain events (and in certain other events by the holders of a majority in principal amount of the Securities of all series then outstanding under the Indenture, treated as a single class, which are affected thereby and the offer to the Trustee of security and indemnity satisfactory to it; provided, however, that such provision shall not prevent the holder hereof from enforcing payment of the principal of or interest on this Debenture. Unless this certificate is presented by an authorized representative of a Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of the nominee of such Depositary or such other name as requested by an authorized representative of such Depositary and any payment is made to the nominee of such Depositary, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, the nominee, has an interest herein. The Company, the Trustee, any paying agent and any Registrar of the Debentures may deem and treat the person in whose name this Debenture is registered as the absolute owner hereof for all purposes whatsoever, and neither the Company nor the Trustee nor any paying agent nor any Registrar of the Debentures shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on, this Debenture, or for any claim based hereon or on the Indenture, against any incorporator or against any stockholder, director or officer, as such, past, present or future, of the Company, or of any predecessor or successor corporation, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution, statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Debenture and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture; provided, however, that nothing herein or in the Indenture contained shall be taken to prevent recourse to and the enforcement of the liability, if any, of any stockholder or subscriber to capital stock of the Company upon or in respect of shares of capital stock not fully paid up. All terms used in this Debenture which are defined in the Indenture shall have the meanings assigned to them in the Indenture. -6- 8 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Debenture is one of 8-3/8% Debentures due 2027 described in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, Trustee. By ------------------------ Authorized Officer. ARTICLE 2. MISCELLANEOUS Section 2.1. Execution as Supplemental Indenture. This Supplemental Indenture is executed and shall be construed as an indenture supplemental to the Original Indenture and, as provided in the Original Indenture, this Supplemental Indenture forms a part thereof. Except as herein expressly otherwise defined, the use of the terms and expressions herein is in accordance with the definitions, uses and constructions contained in the Original Indenture. Section 2.2. Responsibility for Recitals, Etc. The recitals herein and in the Debentures (except in the Trustee's certificate of authentication shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representations as to the validity or sufficiency of this Supplemental Indenture or of the Debentures. The Trustee shall not be accountable for the use or application by the Company of the Debentures or of the proceeds thereof. Section 2.3. Additional Amounts. The Company will not pay any additional amounts on the Debentures held by a person who is not a U.S. Person (as defined in the Original Indenture in respect of any tax, assessment or governmental charge withheld or deducted. Section 2.4. Provisions Binding on Company's Successors. All the covenants, stipulations, promises and agreements in this Supplemental Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. Section 2.5. NEW YORK CONTRACT. THIS SUPPLEMENTAL INDENTURE AND EACH DEBENTURE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. -7- 9 Section 2.6. Execution and Counterparts. This Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, said TENNECO PACKAGING INC. has caused this Supplemental Indenture to be executed in its corporate name by its Chairman of the Board or its President or one of its Vice Presidents, and said THE CHASE MANHATTAN BANK has caused this Supplemental Indenture to be executed in its corporate name by one of its Vice Presidents as of [ ], 1999. TENNECO PACKAGING INC. By -------------------------------- THE CHASE MANHATTAN BANK By -------------------------------- -8- EX-5 8 OPINION OF JENNER 1 EXHIBIT 5 October 4, 1999 Tenneco Packaging Inc. 500 West Field Court Lake Forest, Illinois 60045 Ladies and Gentlemen: We have acted as counsel to Tenneco Packaging Inc. (the "Company") in connection with the Registration Statement on Form S-4 (Reg. No. 333-82923) filed with the Securities and Exchange Commission (the "Registration Statement"), for the purpose of registering under the Securities Act of 1933, as amended (the "Act"), up to $1,300,000,000 aggregate principal amount of the Company's notes and debentures (the "New Securities"). The New Securities are to be issued pursuant to an Indenture dated as of September 29, 1999 (the "Indenture") between the Company and The Chase Manhattan Bank, as trustee (the "Trustee"), as proposed to be supplemented. We are familiar with the Registration Statement and the exhibits thereto. We, or attorneys under our supervision, have also examined originals or copies, certified or otherwise, of such other documents, evidence of corporate action and instruments, including the Indenture and the form of the New Securities, as we have deemed necessary or advisable for the purpose of rendering this opinion. As to questions of fact relevant to this opinion, we have relied upon certificates or written statements from officers and other appropriate representatives of the Company and its subsidiaries and affiliates or public officials. In all such examinations we have assumed the genuineness of all signatures, the authority to sign, and the authenticity of all documents submitted to us as originals. We have also assumed the conformity with the originals of all documents submitted to us as copies. Based on and subject to the foregoing, we are of the opinion that the Indenture and the New Securities have been duly authorized by the Company. We are also of the opinion that, assuming: (i) the Indenture is duly executed by the Trustee; (ii) the Registration Statement has become effective under the Act; (iii) the New Securities are duly authorized, executed and authenticated in accordance with the Indenture; and (iv) delivery of the New Securities to the purchasers thereof in exchange for certain debt securities of Tenneco Inc. in the manner described in the Registration Statement, the New Securities will be valid and binding obligations of the Company. 2 Tenneco Packaging Inc. October 4, 1999 2 The opinions expressed above are limited to the federal laws of the United States, the laws of the State of Illinois and, to the extent relevant thereto, the corporate law of the State of Delaware as currently in effect. We assume no obligation to supplement this opinion if any applicable laws change after the date hereof or if we become aware of any facts that might change the opinions expressed herein after the date hereof. We hereby consent to the use of our name under the caption "Legal Matters" in the Prospectus forming a part of the Registration Statement and to the filing, as an exhibit to the Registration Statement, of this opinion. In giving this consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission. Very truly yours, /s/ Jenner & Block JENNER & BLOCK -2- EX-8 9 TAX OPINION OF JENNER 1 EXHIBIT 8 October 4, 1999 Tenneco Inc. Tenneco Packaging Inc. 1275 King Street Greenwich, Connecticut 06831 Re: Federal Income Tax Consequences of the Exchange Offers Ladies and Gentlemen: You have requested our opinion as to certain federal income tax consequences of the exchange of up to $1,300,000,000 aggregate principal amount of newly issued notes and debentures (the "New Securities") of Tenneco Packaging Inc., a Delaware corporation ("Tenneco Packaging"), for any and all of the $1,300,000,000 aggregate principal amount of certain outstanding notes and debentures (the "Original Securities") issued by Tenneco Inc., a Delaware corporation ("Tenneco") (the "Exchange Offers"), as described in the Registration Statement on Form S-4 (Reg. No. 333-82923), filed by Tenneco Packaging with the Securities and Exchange Commission (the "Registration Statement"). In rendering our opinion, we have examined and relied upon the accuracy and completeness of the facts, information, covenants and representations contained in originals or copies, certified or otherwise identified to our satisfaction, of the Prospectus and Consent Solicitation filed as part of the Registration Statement (the "Prospectus"), and such other documents and representations of representatives of Tenneco and Tenneco Packaging as we have deemed necessary or appropriate. In our examination we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such documents. We have also assumed the transactions related to the Exchange Offers will be consummated as described in the Prospectus. 2 Tenneco Inc. Tenneco Packaging Inc. October 4, 1999 Two In rendering our opinion, we have considered the applicable provisions of the Internal Revenue Code of 1986, as amended, proposed, temporary and final Treasury Regulations promulgated thereunder, pertinent judicial authorities, interpretive rulings of the Internal Revenue Service and other authorities as we have considered relevant. We caution that statutes, regulations, judicial decisions and administrative interpretations are subject to change at any time and, in some circumstances, with retroactive effect. A change in the authorities upon which our opinion is based could affect the conclusions stated herein. Based on the foregoing, we are of the opinion that the statements and legal conclusions contained in the Prospectus under the caption "U.S. FEDERAL INCOME TAX CONSEQUENCES", to the extent that they constitute matters of law or legal conclusions, are correct in all material respects. In addition, we consent to the reference to Jenner & Block in the Prospectus under the caption "Legal Matters" and "U.S. FEDERAL INCOME TAX CONSEQUENCES" and to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission. Except as expressly set forth in the Prospectus, we express no opinion as to the tax consequences, whether federal, state, local or foreign, of the Exchange Offers or of any transaction related to the Exchange Offers. This opinion is given for inclusion in the Registration Statement and is not to be used for any other purpose without our express prior written permission. Very truly yours, /s/ Jenner & Block JENNER & BLOCK EX-12.1 10 COMPUTATION OF RATIOS 1 EXHIBIT 12.1 THE BUSINESSES OF TENNECO PACKAGING COMBINED WITH 50% OWNED UNCONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------------- --------------------- PRO PRO FORMA FORMA 1998 1998 1997 1996 1995 1994 1999 1999 1998 ----- ----- ----- ----- ---- ----- ----- ----- ----- (DOLLARS IN MILLIONS) Income (loss) from continuing operations......................... $ 66 $ 82 $ 106 $ 65 $(55) $ 18 $ 46 $ 52 $ 69 Add: Interest........................... 164 133 124 102 91 48 81 68 67 Portion of rentals representative of interest factor.............. 12 12 12 8 2 1 8 8 5 Preferred stock dividend requirements of majority-owned subsidiaries.................... 1 1 -- -- -- -- -- -- 1 Income tax expense (benefit) and other taxes on income........... 57 67 75 67 (3) 19 20 24 37 Amortization of interest capitalized..................... -- -- -- 1 1 -- -- -- -- Undistributed (earnings) losses of affiliated companies in which less than a 50% voting interest is owned........................ -- -- -- -- -- -- -- -- -- ----- ----- ----- ----- ---- ----- ----- ----- ----- Earnings as defined........ $ 300 $ 295 $ 317 $ 243 $ 36 $ 86 $ 155 $ 152 $ 179 ===== ===== ===== ===== ==== ===== ===== ===== ===== Interest............................. $ 164 $ 133 $ 124 $ 102 $ 91 $ 48 $ 81 $ 68 $ 67 Interest capitalized................. 1 1 1 3 2 1 -- -- -- Portion of rentals representative of interest factor.................... 12 12 12 8 2 1 8 8 5 Preferred stock dividend requirements of majority-owned subsidiaries on a pre-tax basis...................... 2 2 -- -- -- -- -- -- 1 ----- ----- ----- ----- ---- ----- ----- ----- ----- Fixed charges as defined... $ 179 $ 148 $ 137 $ 113 $ 95 $ 50 $ 89 $ 76 $ 73 ===== ===== ===== ===== ==== ===== ===== ===== ===== Ratio of earnings to fixed charges... 1.68 1.99 2.31 2.15 NM 1.72 1.74 2.00 2.45 ===== ===== ===== ===== ==== ===== ===== ===== =====
In 1995 earnings were inadequate to cover fixed charges by $59 million. -----END PRIVACY-ENHANCED MESSAGE-----