-----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, NChv5tfK6gglxg5brBJs1Hl0tqqgba1M6kFfpKYJ7VUcBOr7lX9IEJeIhTg/6kRj he5k8YEPHokG8OiRkWzvUA== 0000899243-98-000357.txt : 19980318 0000899243-98-000357.hdr.sgml : 19980318 ACCESSION NUMBER: 0000899243-98-000357 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980313 SROS: CSE SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENNECO INC /DE CENTRAL INDEX KEY: 0001024725 STANDARD INDUSTRIAL CLASSIFICATION: 3523 IRS NUMBER: 760515284 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12387 FILM NUMBER: 98565308 BUSINESS ADDRESS: STREET 1: 1275 KING STREET CITY: GREENWICH STATE: CT ZIP: 06831 BUSINESS PHONE: 2038631000 MAIL ADDRESS: STREET 1: 1010 MILAM STREET STREET 2: ROOM T 2560B CITY: HOUSTON STATE: TX ZIP: 77002 FORMER COMPANY: FORMER CONFORMED NAME: NEW TENNECO INC DATE OF NAME CHANGE: 19961011 10-K405 1 FORM 10-K405 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (mark one) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-12387 TENNECO INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0515284 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 06831 1275 KING STREET, GREENWICH, CT (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 863-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------------------- 6.70% Notes due 2005; 7.45% Debentures due 2025; 8.075% Notes due 2002; 8.20% Notes due 1999; 9.20% Debentures due 2012; 10.075% Notes due 2001; 10.20% Debentures due 2008. New York Stock Exchange Common Stock, par value $.01 per share................................ New York, Chicago, Pacific and London Stock Exchanges
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT. THE AGGREGATE MARKET VALUE SHALL BE COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE BID AND ASKED PRICES OF SUCH STOCK, AS OF A SPECIFIED DATE WITHIN 60 DAYS PRIOR TO THE DATE OF FILING.
CLASS OF VOTING STOCK AND NUMBER MARKET VALUE OF SHARES HELD HELD BY NON-AFFILIATES AT BY NON- JANUARY 31, 1998 AFFILIATES -------------------------------- --------------- Common Stock, 169,409,746 shares $6,882,270,931*
- - -------- *Based upon the closing sale price on the Composite Tape for the Common Stock on January 30, 1998. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, par value $.01 per share, 169,812,786 shares outstanding as of January 31, 1998. DOCUMENTS INCORPORATED BY REFERENCE:
PART OF THE FORM 10-K DOCUMENT INTO WHICH INCORPORATED -------- ----------------------- Tenneco Inc.'s Definitive Proxy Statement for the Part III Annual Meeting of Stockholders to be Held May 12, 1998
- - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, the prospects and developments of the Company (as defined) and business strategies for its operations, all of which are subject to risks and uncertainties. These forward-looking statements are identified as "forward- looking statements" or by their use of terms (and variations thereof) and phrases such as "anticipates," "intend," "goal," "continued," "estimate," "expects," "project," "potential," "forecast," "plans," "should," "designed to," "foreseeable future," "outlook," "believe," and "scheduled" and similar terms (and variations thereof) and phrases. When a forward-looking statement includes a statement of the assumptions or basis underlying the forward-looking statement, the Company cautions that, while it believes such assumptions or basis to be reasonable and makes them in good faith, assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, the Company or its management expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include the following: Changes in Consumer Demand and Prices. Demand for Tenneco Automotive original equipment products is subject to the level of consumer demand for new vehicles that are equipped with Tenneco Automotive parts. The level of new car purchases is cyclical, affected by such factors as interest rates, consumer confidence, patterns of consumer spending and the automobile replacement cycle. Demand for Tenneco Automotive aftermarket products varies based upon such factors as the level of new vehicle purchases, which initially displaces demand for aftermarket products, the severity of winter weather, which increases the demand for aftermarket products, and other factors including the average useful life of parts and number of miles driven. Demand for certain Tenneco Packaging products is also cyclical. For example, demand for protective packaging is driven by trends in the building, construction, automotive and durable goods markets. Demand for packaging products is also subject to changes in consumer preferences. Demand and pricing of Tenneco Automotive and Tenneco Packaging products are subject to economic conditions and other factors present in the various domestic and international markets where the products are sold. For example, lower containerboard prices in Tenneco Packaging's markets had an adverse influence on its results of operations in 1997 and 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Years 1997 and 1996" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Years 1996 and 1995-- Tenneco Packaging." Changes in Prices of Raw Materials. Significant increases in the cost of certain raw materials used in the Company's products, to the extent they are not timely reflected in the Company's prices or mitigated through long- term supply contracts, could adversely impact the Company's results. For example, the cost of plastic resin and paper materials in Tenneco Packaging products can be volatile. Possible Labor Interruptions. Substantially all of the hourly employees of North American original equipment manufacturers are represented by the United Automobile, Aerospace and Agricultural Implement Workers of America (the "UAW") under similar collective bargaining agreements. Original equipment manufacturers in other countries are also subject to labor agreements. A work stoppage or strike at the production facilities of a significant customer, at the Company's facilities, or at a supplier of a customer or the Company could have an adverse impact on the Company. Risks Associated with International Operations. Both Tenneco Packaging and Tenneco Automotive operate facilities and sell products in countries throughout the world. As a result, the Company is subject to i 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, imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries, hyperinflation in certain foreign countries, and imposition or increase of investment and other restrictions by foreign governments. Other Factors. In addition to the factors described above, the Company may be impacted by a number of other matters and uncertainties, including: (i) potential legislation or regulatory changes; (ii) material substitution; (iii) the ability of the Company and those with which it conducts business to timely resolve the Year 2000 issue (relating to potential computer and equipment failures by or at the change in the century), unanticipated costs of resolving the Year 2000 issue, and the costs and impacts if the Year 2000 issue is not timely resolved; (iv) new technologies; (v) changes in distribution channels or competitive conditions in the markets and countries where the Company operates; (vi) changes in capital availability or costs, such as changes in interest rates, market perceptions of the industries in which the Company operates or ratings of securities; (vii) increases in the cost of compliance with regulations, including environmental regulations, and environmental liabilities in excess of the amount reserved; and (viii) changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies. ii TABLE OF CONTENTS PART I Item 1. Business....................................................... 1 Tenneco Inc................................................... 1 Contributions of Major Businesses............................. 1 Tenneco Automotive............................................ 2 Tenneco Packaging............................................. 9 Tenneco Business Services..................................... 16 Environmental Matters......................................... 16 Certain Reorganization Agreements............................. 17 Item 2. Properties..................................................... 17 Item 3. Legal Proceedings.............................................. 18 Item 4. Submission of Matters to a Vote of Security Holders............ 19 Item 4.1. Executive Officers of the Registrant........................... 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................ 21 Item 6. Selected Financial Data........................................ 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 24 Item 8. Financial Statements and Supplementary Data.................... 36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 69 PART III Item 10. Directors and Executive Officers of the Registrant............. 69 Item 11. Executive Compensation......................................... 69 Item 12. Security Ownership of Certain Beneficial Owners and Management. 69 Item 13. Certain Relationships and Related Transactions................. 69 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8- K.............................................................. 69
iii PART I ITEM 1. BUSINESS. TENNECO INC. Tenneco Inc., a Delaware corporation, is a global manufacturing company with operations in automotive parts ("Tenneco Automotive") and packaging ("Tenneco Packaging"). Tenneco Automotive is one of the world's leading manufacturers of automotive exhaust and ride control systems for both the original equipment market and the replacement market, or aftermarket. Tenneco Packaging is among the world's leading and most diversified packaging companies, manufacturing packaging products for consumer, institutional and industrial markets. As used herein, the term "Tenneco" or the "Company" refers to Tenneco Inc. and its consolidated subsidiaries. The Company was incorporated August 26, 1996, under the name "New Tenneco Inc." as a wholly-owned subsidiary of the company then known as Tenneco Inc. ("Old Tenneco"). The Company was formed to facilitate Old Tenneco's corporate transformation from a highly diversified industrial corporation to a global manufacturing company focused on its automotive and packaging businesses. As part of this transformation, Old Tenneco undertook a series of transactions during the latter portion of 1996 whereby the businesses and assets of Old Tenneco were restructured so that the assets, liabilities and operations of Tenneco Automotive, Tenneco Packaging and Old Tenneco's administrative services businesses were owned and operated by the Company and the assets, liabilities and operations of Old Tenneco's shipbuilding business were owned and operated by Newport News Shipbuilding Inc., another wholly-owned subsidiary of Old Tenneco ("Newport News"). Following this internal restructuring, on December 11, 1996, Old Tenneco spun-off the Company and Newport News by distributing all of the common stock of each company to Old Tenneco's common stockholders (the "Distributions"). Following the Distributions, on December 12, 1996, a subsidiary of El Paso Natural Gas Company ("El Paso") was merged (the "Merger") into Old Tenneco (which then consisted solely of Old Tenneco's remaining active businesses and certain discontinued operations), with Old Tenneco surviving the Merger as a subsidiary of El Paso, and with the Company succeeding to the name "Tenneco Inc." Unless the context otherwise requires, references to "Tenneco" and the "Company" for periods prior to the Distributions are to Old Tenneco. The separation of the Company from the remainder of the businesses, operations and companies then constituting Old Tenneco was structured as a spin-off of the Company for legal, tax and other reasons. However, the Company succeeded to certain important aspects of the Old Tenneco business, organization and affairs, namely: (i) the Company succeeded to the name "Tenneco Inc.;" (ii) the business conducted by the Company principally consists of Tenneco Automotive and Tenneco Packaging, which combined represented over half of the assets, revenues, and operating income of the businesses, operations, and companies previously constituting Old Tenneco; (iii) the Company's Board of Directors consisted of those individuals comprising the Old Tenneco Board of Directors immediately prior to the Distributions; (iv) the Company's executive management consisted substantially of those individuals comprising Old Tenneco's executive management; and (v) the Company retained as its headquarters the former headquarters of Old Tenneco in Greenwich, Connecticut. CONTRIBUTIONS OF MAJOR BUSINESSES Information concerning Tenneco's principal industry segments and geographic areas is set forth in Note 12 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. The following tables summarize for each of the major business groups of Tenneco for the periods indicated: (i) net sales and operating revenues from continuing operations; (ii) income from continuing operations before interest expense, income taxes and minority interest; and (iii) capital expenditures for continuing operations. 1 NET SALES AND OPERATING REVENUES FROM CONTINUING OPERATIONS:
1997 1996 1995 ----------- ----------- ----------- (DOLLAR AMOUNTS IN MILLIONS) Automotive............................... $3,226 45% $2,980 45% $2,479 47% Packaging................................ 3,995 55 3,602 55 2,752 53 Intergroup sales and other............... (1) -- (10) -- (10) -- ------ --- ------ --- ------ --- Total.................................. $7,220 100% $6,572 100% $5,221 100% ====== === ====== === ====== ===
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST:
1997 1996 1995 --------- --------- -------- (DOLLAR AMOUNTS IN MILLIONS) Automotive.................................... $407 53 % $249 40 % $240 36% Packaging..................................... 371 49 401 64 430 64 Other......................................... (14) (2) (22) (4) 2 -- ---- --- ---- --- ---- --- Total....................................... $764 100 % $628 100 % $672 100% ==== === ==== === ==== ===
CAPITAL EXPENDITURES FOR CONTINUING OPERATIONS:
1997 1996 1995 -------- -------- -------- (DOLLAR AMOUNTS IN MILLIONS) Automotive........................................ $211 38% $177 31% $208 37% Packaging......................................... 335 60 341 60 316 56 Other............................................. 12 2 55 9 38 7 ---- --- ---- --- ---- --- Total........................................... $558 100% $573 100% $562 100% ==== === ==== === ==== ===
Interest expense, income taxes, and minority interest related to continuing operations that were not allocated to the major business groups of Tenneco are:
1997 1996 1995 ---- ---- ---- (MILLIONS) Interest expense (net of interest capitalized).................. $216 $195 $160 Income tax expense.............................................. 163 194 231 Minority interest............................................... 24 21 23
TENNECO AUTOMOTIVE Tenneco Automotive is one of the world's largest manufacturers and marketers of automotive exhaust and ride control systems for the original equipment ("OE") market and aftermarket. Tenneco Automotive is a global business that sells its products in over 100 countries, manufacturing and marketing its automotive exhaust systems primarily under the Walker(R) brand name and its ride control equipment primarily under the Monroe(R) brand name. Tenneco Automotive is headquartered in Lake Forest, Illinois. OVERVIEW OF AUTOMOTIVE PARTS INDUSTRY The global market for automotive parts was estimated at approximately $500 billion in 1996, the most recent year for which industry data is available. This market was comprised of approximately $400 billion in OE sales and approximately $100 billion in aftermarket sales. With the North American and Western European automotive markets becoming relatively mature, OE manufacturers and automotive parts suppliers are increasingly focusing 2 on emerging markets for additional growth opportunities, particularly China, Eastern Europe, India and Latin America. The automotive parts industry is generally separated into two categories: (i) OE sales, in which parts are sold as original equipment in large quantities directly to the vehicle manufacturers; and (ii) aftermarket sales, in which parts are sold as replacement parts in varying quantities to a wide range of wholesalers, retailers and repair shops. Demand for automotive parts in the OE market is driven by the number of new vehicle sales, which in turn is determined by prevailing economic conditions. Demand for aftermarket products varies based upon such factors as the level of new automobile purchases, which initially displaces demand for aftermarket products, the severity of winter weather, which increases the demand for aftermarket products, and other factors including the average useful life of parts and number of miles driven. The operations of Tenneco Automotive face competition from other manufacturers of automotive equipment, including affiliates of certain of its customers, in both the OE market and the aftermarket. ANALYSIS OF TENNECO AUTOMOTIVE'S REVENUES The following table sets forth for each of the years 1995 through 1997 certain information relating to the net sales of Tenneco Automotive, the two primary product lines of Tenneco Automotive and the aftermarket and OE market within each primary product line:
NET SALES (MILLIONS) ---------------------- YEAR ENDED DECEMBER 31, ---------------------- 1997 1996 1995 ------ ------ ------ EXHAUST SYSTEMS PRODUCTS Aftermarket........................................... $ 686 $ 710 $ 637 OE Market............................................. 1,067 989 829 ------ ------ ------ 1,753 1,699 1,466 ------ ------ ------ RIDE CONTROL PRODUCTS Aftermarket........................................... 782 768 687 OE Market............................................. 691 513 326 ------ ------ ------ 1,473 1,281 1,013 ------ ------ ------ Total Tenneco Automotive............................ $3,226 $2,980 $2,479 ====== ====== ====== PERCENTAGE OF NET SALES ---------------------- YEAR ENDED DECEMBER 31, ---------------------- 1997 1996 1995 ------ ------ ------ EXHAUST SYSTEMS PRODUCTS Aftermarket........................................... 39% 42% 43% OE Market............................................. 61 58 57 ------ ------ ------ 100% 100% 100% ====== ====== ====== RIDE CONTROL PRODUCTS Aftermarket........................................... 53% 60% 68% OE Market............................................. 47 40 32 ------ ------ ------ 100% 100% 100% ====== ====== ======
3 Brands Tenneco Automotive manufactures and markets leading brand names. Monroe(R) ride control products and Walker(R) exhaust systems are two of the most recognized brand names in the automotive parts industry. As Tenneco Automotive acquires related product lines, it is anticipated that they will be incorporated within these existing Monroe(R) and Walker(R) brand name families. Customers Tenneco Automotive has developed long-standing business relationships with many of its customers around the world, working together in all stages of production, including design, development, component sourcing, quality assurance, manufacturing and delivery. Tenneco Automotive has a strong and established reputation with its customers for providing high quality products at competitive prices as well as for timely delivery and customer service. Tenneco Automotive serves both the OE market and the aftermarket. Tenneco Automotive serves over 25 different OE customers on a global basis, and has its products on 11 of the 15 top selling global models. Its OE customers include the following: NORTH AMERICA EUROPE INDIA CAMI BMW Chrysler Chrysler Maruti Suzuki Ford DAF General Motors Daihatsu AUSTRALIA Honda Fiat Ford Mazda Ford General Mitsubishi Jaguar Motors/Holden Nissan Lada Mitsubishi NUMMI Leyland Toyota Toyota Mercedes-Benz Mitsubishi JAPAN SOUTH AMERICA Nissan Mazda Chrysler Opel Nissan Fiat Peugeot/Citroen Suzuki Ford Porsche Toyota General Motors Renault/Matra Renault Rover/Land Rover OTHER ASIA Toyota Saab/Scania Chrysler Volkswagen Toyota Citroen Volkswagen/Audi/SEAT/Skoda Volvo Tenneco Automotive's aftermarket customers include such wholesalers and retailers as National Auto Parts Association ("NAPA"), Midas International Corp. ("Midas"), Speedy Muffler King and Western Auto in North America and Midas, Pit Stop and Kwik-Fit in Europe. EXHAUST SYSTEMS Automotive exhaust systems play a critical role in safely conveying noxious exhaust gases away from the passenger compartment, reducing the level of pollutants and reducing engine exhaust noise to an acceptable level. Precise engineering of the manifold, pipe, catalytic converter and muffler leads to a pleasant, tuned engine sound, reduced pollutants and optimized engine performance. Tenneco Automotive designs, manufactures and distributes exhaust systems primarily under the Walker(R) brand name. These products include a variety of automotive exhaust systems and emission control products, including mufflers, catalytic converters, tubular exhaust manifolds, pipes, exhaust accessories and electronic 4 noise cancellation products. Tenneco entered this product line in 1967 with the acquisition of Walker Manufacturing Company which was founded in 1888 (the affiliates of Tenneco that produce exhaust and emission control products are collectively referred to herein as "Walker"). Walker is the aftermarket leader for exhaust systems in North America, Europe and Australia. Walker is a leading supplier in the OE market in the U.S. as well, supplying exhaust systems used in 11 of the 15 top-selling 1997 new car models worldwide and all of the ten top-selling light trucks in the U.S. Walker has long been the European aftermarket leader for exhaust systems, and with the acquisition of Heinrich Gillet GmbH & Co. ("Gillet") in 1994, Walker became one of Europe's leading OE exhaust systems supplier. Manufacturing and Engineering Walker operates 28 manufacturing facilities outside the U.S. In the U.S., Walker operates ten manufacturing facilities and seven distribution centers. See Item 2, "Properties." It also has a controlling interest in a joint venture that owns a manufacturing facility in China. Walker locates manufacturing facilities in close proximity to its OE customers to provide just-in-time delivery opportunities. Strategic Acquisitions/Joint Ventures As part of its international growth strategy, Tenneco Automotive acquired ownership of Gillet, a manufacturer of exhaust systems, in November 1994. The acquisition of Gillet recast Tenneco Automotive as a market leader in exhaust systems for the OE market in Europe and brought many new OE customers to the Walker business. In 1995, Tenneco Automotive acquired ownership of Manufacturas Fonos, S.L. ("Fonos"), Spain's largest participant in the exhaust systems aftermarket, and Perfection Automotive Products, a U.S. catalytic converter producer, further expanding Tenneco Automotive's presence in the exhaust systems replacement market. In 1996, Tenneco Automotive established a joint venture in China (Dalian) to supply exhaust systems to the northern Chinese automotive market, expanded its North American heavy duty truck aftermarket business through the acquisition of Stemco Inc. and acquired the second largest manufacturer of exhaust products in Argentina. In 1997, Tenneco 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 exhaust systems for passenger cars in Eastern Europe, including Poland, Hungary, the Czech Republic and Slovakia. The following table sets forth for each of the years 1995 through 1997 information relating to Tenneco Automotive's sales of exhaust systems:
PERCENTAGE OF NET SALES --------------------------- YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 1995 ------- ------- ------- United States Sales Aftermarket..................................... 43% 46% 46% OE Market....................................... 57 54 54 ------- ------- ------- 100% 100% 100% ======= ======= ======= Foreign Sales Aftermarket..................................... 36% 38% 42% OE Market....................................... 64 62 58 ------- ------- ------- 100% 100% 100% ======= ======= ======= Total Sales by Geographic Area(a) United States................................... 44% 44% 42% European Union.................................. 41 43 45 Canada.......................................... 7 6 7 Other areas..................................... 8 7 6 ------- ------- ------- 100% 100% 100% ======= ======= =======
- - -------- (a) See Note 12 to the Tenneco Inc. and Consolidated Subsidiaries Financial Statements for certain information about foreign and domestic operations and export sales. 5 RIDE CONTROL PRODUCTS Tenneco Automotive designs, manufactures and distributes ride control products primarily under the Monroe(R) brand name. Tenneco Automotive's ride control products consist of hydraulic shock absorbers, air adjustable shock absorbers, gas charged shock absorbers and struts, electronically adjustable suspension systems, vibration control components, bushings, springs and modular assemblies. Tenneco Automotive manufactures and markets replacement shock absorbers for virtually all North American, European and Asian makes of automobiles. In addition, Tenneco 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 other recreational equipment. Tenneco entered the ride control product line in 1977 with the acquisition of Monroe Auto Equipment, which was founded in 1916, and introduced the world's first automotive shock absorber in 1926 (the affiliates of Tenneco that produce ride control products are collectively referred to herein as "Monroe"). Monroe is the market leader for ride control equipment in the aftermarket in North America, Europe and Australia, as well as in the OE market in Australia. Superior ride control is governed by a vehicle's suspension system, including its shocks and struts. Shocks and struts are components that 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. Adhesion is directly influenced by shock absorber and strut performance. Worn shocks and struts can allow weight to transfer from side to side (roll), from front to rear (sway) and up and down (bounce). Shocks are designed to maintain vertical loads placed on tires by providing resistance to vehicle roll, sway and bounce. Variations in tire to road contact can affect a vehicle's handling and braking performance and the safe operation of a vehicle; thus, by maintaining the tire-to-road contact, Monroe's ride control products are designed to function as safety components of a vehicle in addition to providing a comfortable ride. Manufacturing and Engineering Monroe has ten manufacturing facilities in the United States and 16 manufacturing operations in other jurisdictions. Monroe also has controlling interests in joint ventures that own manufacturing operations in China, India and South Africa as described below. See also Item 2, "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 state-of-the-art testing equipment and advanced computer aided design equipment. Monroe's dedication to innovative solutions has led to such technological advances as adaptive dampening systems; manual, hydraulic and electronically adjustable suspensions and semi-active systems; and air and hydraulic leveling systems. Conventional shocks and struts were only able to provide either ride comfort or vehicle control. Monroe's innovative new grooved-tube, gas-charged shocks and struts provide both ride comfort and vehicle control, resulting in improved handling (less roll), reduced vibration, a wider range of vehicle control and a lessening of the reduction in performance as the units become overheated (fade). This technology can be found in Monroe's premium quality Sensa-Trac(R) shocks. Strategic Acquisitions/Joint Ventures As a means of expanding its product lines and offering OE manufacturers a more complete modular ride control system, in July 1996, Tenneco Automotive acquired The Pullman Company and its Clevite products division ("Clevite"). Clevite is a leading OE manufacturer of elastomeric vibration control components, including bushings and engine mounts, for the auto, light truck and heavy truck markets. With this acquisition, Tenneco Automotive now has full capability to deliver complete suspension systems to the OE manufacturers. The Clevite acquisition also complemented Tenneco Automotive's interest in global growth opportunities, as both Clevite and Monroe have manufacturing operations in Mexico and Brazil. 6 In August 1995, Tenneco Automotive purchased a ride control manufacturing facility near Prague in the Czech Republic. In September 1996, Tenneco Automotive acquired full ownership of a shock absorber company in Turkey in which it previously held a 16.7% ownership interest. In December 1996, Tenneco 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, Tenneco Automotive increased its interest in Fric-Rot to more than 99% through the purchase of additional shares. In 1996, Tenneco Automotive also expanded its presence in Australia's ride control product market with the acquisition of National Springs. And in 1997, Tenneco Automotive entered into a joint venture which resulted in its acquisition of majority ownership of the leading South African manufacturer of ride control products. Tenneco Automotive has a 51% interest in a joint venture that has three ride control manufacturing facilities in India and has a 51% interest in a joint venture that has one ride control manufacturing facility in China. It is anticipated that the joint venture in India will also manufacture exhaust systems. The following table sets forth information relating to Tenneco Automotive's sales of ride control equipment:
PERCENTAGE OF NET SALES --------------------------- YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 1995 ------- ------- ------- United States Sales Aftermarket..................................... 50% 62% 70% OE Market....................................... 50 38 30 ------- ------- ------- 100% 100% 100% ======= ======= ======= Foreign Sales Aftermarket..................................... 56% 59% 66% OE Market....................................... 44 41 34 ------- ------- ------- 100% 100% 100% ======= ======= ======= Total Sales by Geographic Area(a) United States................................... 48% 48% 48% European Union.................................. 27 34 36 Canada.......................................... 3 3 3 Other areas..................................... 22 15 13 ------- ------- ------- 100% 100% 100% ======= ======= =======
- - -------- (a) See Note 12 to Tenneco Inc. and Consolidated Subsidiaries Financial Statements for certain information about foreign and domestic operations and export sales. SALES AND MARKETING Tenneco Automotive's sales and marketing systems utilize a dedicated sales force and consumer brand marketing professionals together with extensive marketing support, including trade and consumer marketing, promotions and general advertising. Tenneco Automotive maintains a customer order fill rate exceeding 95%. Tenneco Automotive sells its OE products directly. With respect to the aftermarket, Tenneco Automotive employs three primary distribution techniques: (i) the traditional three-step distribution system: warehouse distributors, jobbers and installers; (ii) direct sales to retailers; and (iii) sales to programmed marketing groups. BUSINESS STRATEGY Tenneco Automotive's primary goal is to grow and enhance its position as a global leader in the manufacture of exhaust and ride control systems. Tenneco Automotive intends to capitalize on certain significant existing and emerging trends in the automotive industry, including (i) the consolidation and globalization of the 7 OE supplier base, (ii) increased outsourcing by OE manufacturers, particularly of more complex components, assemblies, modules and complete systems to sophisticated, independent suppliers, and (iii) growth of emerging markets for both OE and replacement markets. Key components of Tenneco Automotive's strategy include: Branding Tenneco Automotive, whose major strategic strength is the performance of its leading Monroe(R) and Walker(R) brand names and their market shares, intends to emphasize product differentiation to give consumers added reasons for specifying their brands. For example, in 1994, Monroe introduced a premium grade Sensa-Trac(R) shock and strut which helped it gain its technological leadership in the ride control market. In 1997, Monroe enhanced its Sensa- Trac(R) product line through the introduction of its new Safe-Tech(TM) System technology. This technology incorporates a new piston band and piston and valving design to improve performance and durability. Rancho(R) ride control products are the leading ride control brand in the high performance light truck market. The DynoMax(TM) high performance exhaust system is the leader in its product category. The Walker Advantage(R) muffler was also the leader in its product category until it was replaced in 1997 by Walker's new Quiet- Flow(TM) muffler, a premium exhaust product that features a new, open-flow design that increases exhaust flow and results in improved sound quality and significantly less exhaust backpressure when compared to other replacement mufflers. Tenneco Automotive is also capitalizing on its brand strength by incorporating newly acquired product lines within existing product families, as it did with Gillet. Maintain Focus on Core Business Tenneco Automotive intends to solidify its core businesses with its primary customers while increasing market share with customers with whom it has not fully realized its potential market penetration. These objectives are designed to enable Tenneco Automotive to respond better to the OE manufacturers' evolving purchasing requirements, where in addition to manufacturing, the supplier is required to provide design, engineering and project management support for a complete package of integrated products. Continue to Develop Value-Added Products Tenneco Automotive, a first tier supplier to many customers, intends to continue to manufacture value-added products and to develop strategic alliances with other suppliers to OE customers in order to facilitate development of these products, including the development of highly engineered or complex assemblies or modular systems. Tenneco 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 Tenneco Automotive and by establishing strategic alliances with other suppliers. Increase Ability to Provide Full-System Capabilities The automotive parts industry is encountering a consolidation of parts suppliers as OE manufacturers require suppliers to provide design assistance and innovation and full-system capabilities rather than just specific parts. In response to this trend, the Company plans to dedicate more resources towards strengthening technical capability and design expertise and to pursue appropriate strategic acquisitions, joint ventures and strategic alliances in order to increase Tenneco Automotive's ability to deliver such full-system capabilities. For example, the acquisition of Clevite provided Tenneco Automotive the ability to deliver more complete suspension systems to OE manufacturers. International Expansion As Tenneco Automotive's OE customers expand their assembly operations globally and in response to the development of global aftermarkets, Tenneco Automotive plans to continue its international expansion through internal growth as well as joint ventures, acquisitions and strategic alliances. For example, since August 1995, 8 Tenneco Automotive has made ten international acquisitions and entered into four international joint ventures. These strategic initiatives have given Tenneco Automotive an enhanced presence in Argentina, Brazil, China, Australia, the Czech Republic, Mexico, New Zealand, Poland, South Africa, Spain, India and Turkey. The recent international acquisitions complement the November 1994 acquisition of Gillet, Europe's largest supplier of automotive exhaust equipment for the OE market, which has already been successfully integrated into Tenneco Automotive. Rather than segment the world, Tenneco Automotive is integrating its international operations through the standardization of products and processes, improvements in information technology and the global coordination of purchasing, costing and quoting procedures. Strategic Acquisitions Strategic acquisitions have also been an important element of Tenneco Automotive's growth. Through such acquisitions, Tenneco Automotive can expand its product portfolio, gain access to new customers and achieve leadership positions within new geographic markets. Where appropriate, Tenneco Automotive intends to continue to pursue acquisition opportunities in order to achieve these objectives and enhance profitability. Operating Cost Leadership Tenneco Automotive will continue to seek cost reductions as it standardizes its product and processes throughout its international operations, improves its information technology, increases efficiency through employee training, invests in more efficient machinery and enhances the global coordination of purchasing, costing and quoting procedures. OTHER As of January 1, 1998, Tenneco Automotive had approximately 26,000 employees. The principal raw material utilized by Tenneco Automotive is steel. Tenneco Automotive believes that an adequate supply of steel can presently be obtained from a number of different domestic and foreign suppliers. Tenneco 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. The patents, trademarks and other intellectual property owned by Tenneco Automotive are important in the manufacturing and distribution of its products. TENNECO PACKAGING Tenneco Packaging is among the world's leading and most diversified packaging companies, manufacturing and selling packaging products for consumer, institutional and industrial markets. The paperboard business manufactures corrugated containers, folding cartons, containerboard, and lumber and building products, has a 20% equity investment in a recycled paperboard business, and offers value-added products such as enhanced graphics packaging and displays. Its specialty products business produces disposable aluminum and plastic food containers; molded fiber and pressed paperboard products; polyethylene bags; and industrial stretch wrap. The specialty products business also includes protective packaging and flexible products such as kraft honeycomb products, foam and bubble packaging and multi-color flexible film packaging. Tenneco Packaging's consumer products include the Hefty(R), Baggies(R), Hefty OneZip(R), and E-Z Foil(R) brand names. Tenneco Packaging is headquartered in Lake Forest, Illinois. OVERVIEW OF PACKAGING INDUSTRY The global packaging market is estimated at $400 billion, with nearly one- third of the market in North America, slightly less in Europe and the balance spread throughout the rest of the world. Packaging as an 9 industry remains one of the most fragmented major industries, with the top five companies comprising only a 10% worldwide market share. Tenneco Packaging ranks by sales as one of the largest packaging manufacturers in North America and in the world. Within packaging material categories, Tenneco Packaging participates in the three growing categories of paper, plastic and aluminum, with substantial or leading market shares in virtually all of its product categories. The operations of Tenneco Packaging face competition from other manufacturers of packaging products, including manufacturers of alternative products, in each of its geographic and product markets. BUSINESS STRATEGY Tenneco Packaging has embarked upon an aggressive growth plan to be the leading specialty packaging company offering a broad line of products to provide customers with the best packaging solutions. Since 1994, Tenneco Packaging has nearly doubled its size to $4.0 billion in revenues through acquisitions, internal growth in its base businesses and productivity gains. As a result of the following business development activities, Tenneco Packaging has reduced its sensitivity to cyclicality in the paperboard business: . Tenneco Packaging's business is now 64% specialty packaging (including the full year impact of the Amoco Foam Products Company ("Amoco Foam Products") purchase completed in August 1996, as well as the part-year results of the protective and flexible packaging businesses of NV Koninklijke KNP BT acquired in the second quarter of 1997), which reduces exposure to business cycles. In addition, the November 1995 purchase of Hexacomb Corporation, the world's largest supplier of kraft paper honeycomb products used for protective packaging, is another example of Tenneco Packaging's pursuit of non-cyclical growth opportunities. . On the paperboard side, nine acquisitions in specialty corrugated graphics products and services have reduced its sensitivity to raw material prices and offer greater opportunities to add value. Currently, nearly 27% of Tenneco Packaging's paperboard business is in higher margin, enhanced graphics including folding cartons, point-of- purchase displays and point-of-sale packaging. In the future, Tenneco Packaging intends to continue to pursue value-added growth opportunities which reduce sensitivity to economic cyclicality, maintain market leadership positions in its primary businesses and actively market its new product development expertise. As with other manufacturing companies whose results of operations are subject to general economic and market conditions and other factors, Tenneco Packaging's business results may be adversely impacted by raw material cost fluctuations, changes in consumer preferences and other matters. See "Cautionary Statement for Purposes of "Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995." Tenneco Packaging believes it has positioned itself to deal strategically with these economic and market challenges through its: . Multi-material focus, broad product line and concentration of growth in packaging that offers customers greater functionality and value; . Fiber flexibility, which enables Tenneco Packaging's paperboard business to manage its mix of virgin and recycled fiber sources to take advantage of changing market conditions; . Raw material purchasing leverage in both fiber and plastic resin; . Technology and new product development expertise, offering innovative packaging design and materials applications; and . Global expansion strategy of growing its international business through value-added acquisitions, joint ventures, and multi-national customer partnerships. Tenneco Packaging believes that factors key to its success include a focused strategic direction, operating cost leadership, management expertise, a committed and skilled workforce and a systems infrastructure designed 10 to meet stringent customer quality requirements and service needs. Tenneco Packaging had spent approximately $72 million through December 31, 1997, and plans to spend an additional $74 million by the end of 1998, to provide state- of-the-art customer linked manufacturing systems, shop floor scheduling and real-time data for marketing and production management. ANALYSIS OF TENNECO PACKAGING'S REVENUES Tenneco Packaging is an industry leader in the manufacture and sale of packaging products, offering a wide range of fiber- and plastic-based materials and packaging for institutional and industrial applications, as well as aluminum and plastic-based specialty packaging for consumer, retail, food service and food processing applications. The following tables set forth information relating to the net sales of Tenneco Packaging's primary businesses, in dollars and by percentages:
NET SALES (MILLIONS) ----------------------- YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ------- ------- ------- PAPERBOARD BUSINESS Corrugated shipping containers and containerboard products............................................ $ 1,257 $ 1,354 $ 1,582 Folding cartons and recycled paperboard mill products............................................ 104 149 204 Paper stock and other................................ 84 119 135 ------- ------- ------- 1,445 1,622 1,921 ------- ------- ------- SPECIALTY BUSINESS Disposable plastic and aluminum packaging products... 1,935 1,669 593 Molded fiber products................................ 170 193 191 Plastic and fiber protective packaging products...... 399 78 7 Other................................................ 46 40 40 ------- ------- ------- 2,550 1,980 831 ------- ------- ------- Total Tenneco Packaging............................ $ 3,995 $ 3,602 $ 2,752 ======= ======= =======
PERCENTAGE OF NET SALES --------------------------- YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 1995 ------- ------- ------- PAPERBOARD BUSINESS Corrugated shipping containers and containerboard products......................................... 31% 38% 58% Folding cartons and recycled paperboard mill products......................................... 3 4 7 Paper stock and other............................. 2 3 5 ------- ------- ------- 36 45 70 ------- ------- ------- SPECIALTY BUSINESS Disposable plastic and aluminum packaging products......................................... 49 47 22 Molded fiber products............................. 4 5 7 Plastic and fiber protective packaging products... 10 2 -- Other............................................. 1 1 1 ------- ------- ------- 64 55 30 ------- ------- ------- Total Tenneco Packaging......................... 100% 100% 100% ======= ======= ======= SALES BY GEOGRAPHIC AREA(A) United States..................................... 86% 91% 91% European Union.................................... 10 5 5 Canada............................................ 2 2 1 Other areas....................................... 2 2 3 ------- ------- ------- 100% 100% 100% ======= ======= =======
- - -------- (a) See Note 12 to Tenneco Inc. and Consolidated Subsidiaries Financial Statements for certain information about foreign and domestic operations and export sales. 11 PAPERBOARD BUSINESS The paperboard business manufactures and sells corrugated containers, folding cartons, containerboard, and lumber and building products, and has a 20% equity investment in a recycled paperboard business. A portion of the container and folding carton business includes value-added products such as enhanced graphics packaging and displays. The paperboard business produces over two million tons of containerboard annually that is converted by its corrugated container plants and sold to both domestic and export customers. Tenneco Packaging's container plants consume over 80% of its mills' containerboard production, which is either shipped directly to the plants or traded for containerboard produced by the mills of other companies. Such trades provide the various grades and widths of containerboard needed by the container plants and help reduce freight costs through shipments of containerboard to plants closest to each mill. The balance of Tenneco Packaging's containerboard production is exported or sold to other domestic converters and users. The paperboard business also produces high quality, innovative folding carton products utilizing the latest in printing and cutting technology for the sheet-fed offset and narrow-web flexo processes. Finally, Tenneco Packaging participates in the wood products business and has access to approximately one million acres of timberland in the United States through both owned and leased properties. Sales and Marketing and New Product Development Tenneco Packaging's paperboard business maintains a direct sales and marketing organization of over 400 sales personnel serving both local and national accounts. The sales organization consists primarily of sales representatives and a sales manager at each facility serving local and regional accounts, while corporate account managers are positioned to correspond to customer locations. Division marketing support is maintained at Packaging's corporate headquarters. Tenneco Packaging's paperboard business has established a nationwide network of new product development and creative packaging design centers to develop and manufacture product packaging and product display solutions to meet more sophisticated, complex customer needs. This network includes eight regional design centers, 10 primary and mid-range graphics facilities and approximately 70 sales personnel, new product development engineers, and product graphics and design specialists. These centers offer state-of-the-art computers and equipment for 24-hour design turnaround and reduced product delivery times. Manufacturing and Engineering Tenneco Packaging has two kraft linerboard mills and two medium mills, located in Tennessee, Georgia, Michigan and Wisconsin, respectively, which in 1997 collectively accounted for 6% of the industry's annual U.S. production, or 2.1 million tons. Over the last three years, Tenneco Packaging has invested $77 million at the Counce, Tennessee mill, which added 50,000 tons annually of capacity and enabled the mill to meet a growing demand for lighter weight board. Each of the mills has a strong focus on quality and is ISO 9002 certified. Tenneco Packaging's two paperstock recycling facilities provide some of the Counce, Tennessee mill's recycled fiber requirements. Domestically, Tenneco Packaging's corrugated container network includes 68 geographically dispersed plants in 26 states. Based on 1997 revenue, these plants manufacture approximately 6% of the industry's total annual U.S. corrugated shipments, making Tenneco Packaging one of the top six integrated producers. Tenneco Packaging also operates five folding carton plants in western and midwestern states. As of January 1, 1998, Tenneco Packaging owned, leased, managed or had cutting rights on approximately one million acres of timberland in Alabama, Florida, Georgia, Mississippi, Tennessee, and Wisconsin. In 1997, 1996 and 1995, approximately 44%, 32% and 30%, respectively, of the virgin fiber used by Tenneco Packaging in its mill operations was obtained from timberlands owned or utilized by Tenneco Packaging. The balance of virgin fiber was purchased from numerous open market wood sellers. 12 To maximize the value of the timber harvested or purchased, Tenneco Packaging operates a wood drying facility and three wood products operations which produce hardwood and pine lumber. Tenneco Packaging is also a party to a joint venture in a chip mill. Tenneco Packaging's paperboard business operates a manufacturing and technical support center located in Skokie, Illinois which provides engineering, manufacturing and technical support to its corrugated operations. In addition, Tenneco Packaging has design capability throughout its manufacturing organization which includes over 100 structural, graphic and package engineering specialists for its corrugated and folding carton converting operations. Strategic Acquisitions/Joint Ventures As part of Tenneco Packaging's value-added growth strategy, seven acquisitions were made during 1995 in the paperboard business. Tenneco Packaging expanded its graphics and printing capabilities to that of a full service supplier of point-of-purchase displays and point-of-sale packaging by acquiring four facilities with expertise in high impact graphics and design. The addition of Lux Packaging, in Waco, Texas; the United Group in Los Angeles, California; Menasha Corporation's South Brunswick, New Jersey plant; and DeLine Box in Windsor, Colorado have broadened Tenneco Packaging's offering of products and services to include permanent point-of-purchase displays, rotogravure preprint, litho-lamination and advanced graphics design. In 1995, Tenneco Packaging also added to its network of specialty sheet plants by acquiring Mid-Michigan Container in Michigan; Sun King Container in El Paso, Texas; and Domtar Packaging's Watertown, New York facility. In June 1996, Tenneco Packaging and Caraustar entered into a joint venture pursuant to which Tenneco Packaging contributed its two recycled paperboard mills (Rittman, Ohio and Tama, Iowa) and a recovered paper stock and brokerage operation for cash and a 20% equity position in the business. The mills will continue to supply recycled paperboard to Tenneco Packaging's five folding carton plants. In 1997, Tenneco Packaging acquired an additional specialty sheet plant, CorriAcres Design & Packaging in Allentown, Pennsylvania, and a set-up box plant from Eastman Kodak in Rochester, New York. SPECIALTY BUSINESS Tenneco Packaging's specialty business provides packaging solutions that provide convenience to consumers and institutions, protect products during transportation and storage, and enhance product display at point of purchase.The business produces foam and clear plastic packaging products for the food service industry, polyethylene bags, industrial stretch film, plastic protective and flexible packaging, paperboard honeycomb products, molded fiber, pressed paperboard and aluminium containers, industrial aluminum, plastic building products, and disposable cookware, dinnerware and storage and waste bags. The specialty plants convert paper, aluminum, polystyrene, polyolefins (such as polyethylene and polypropylene) and PVC polymers into value-added clear, foamed, flexible or rigid products. Tenneco Packaging's lightweight, rigid plastic packaging for in-store deli, produce, bakery and catering applications maintain quality and enhance presentation. Consumer products such as plastic food storage and trash bags, foam and molded fiber dinnerware, disposable aluminum baking pans and related products are sold through a variety of retail outlets. Consumer products are sold under such recognized brand names as Hefty(R), Baggies(R), Hefty OneZip(R) and E-Z Foil(R). Tenneco Packaging also manufactures molded fiber for produce and egg packaging, food service items and institutional tableware. Tenneco Packaging also manufactures protective and flexible packaging that serves multiple industries including food, medical, electronics, furniture, durable goods, building and construction. Products such as air cushion plastic packaging and very light weight polyethylene and polypropylene foam sheets are used for cushioning and surface protection. Paperboard honeycomb and foamed plank products protect against shock, vibration and thermal damage and also have structural and mechanical cooling applications. Other converted 13 protective packaging products include padded mailers and a variety of laminated protective coverings. Flexible products include value added printed barrier films for the protection, storage and display of food products, as well as polypropylene medical bags used for sterile intravenous fluid delivery. Sales and Marketing The disposable plastic and aluminum products, stretch film, and molded fiber and pressed paperboard products of the specialty business are marketed to five primary market categories: food service, supermarkets, institutional, packer processor and industrial users. The specialty business serves these markets through a sales and marketing organization of approximately 350 sales personnel. The sales organization is specialized by market category and its teams work in alliance with strategic customers to build sales. Approximately 85% of these specialty business products are sold to distributors, while the remainder are sold directly to retailers. Plastic protective and flexible packaging products are marketed throughout North America and Europe. Approximately 60% of the products are sold through a well-developed network of packaging distributors and fabricators, and the remaining 40% are sold directly to end users. Approximately 80% of paperboard honeycomb products are designed and sold by a sales and marketing organization of approximately 45 employees directly to end-use customers; the remaining 20% are sold to fabricators for further processing. Tenneco Packaging markets consumer products primarily through three classes of retailers or channels of trade: (i) grocery (supermarkets and convenience stores); (ii) non-food (mass merchandisers, drug stores, hardware stores, home centers); and (iii) warehouse clubs. Tenneco Packaging's approximately 100 consumer products' internal sales management personnel are augmented by a national network of grocery brokers and manufacturing representatives to provide headquarter and in-store sales coverage for the grocery channel. Tenneco Packaging's consumer products personnel cover warehouse clubs and selected non-food retailers on a direct basis. Manufacturing and Engineering In North America, Tenneco Packaging operates 58 specialty business facilities in 18 states and Canada. Plastic disposable food service and consumer products, stretch films and building products are manufactured at 21 plants. Aluminum rolls are converted at five locations, including two locations shared with polystyrene production. A sixth aluminum facility packages disposable containers for sale to the consumer. The protective packaging operations convert paperboard into honeycomb products at 12 plants, and 12 other 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), PVC polymers, and kraft papers. Molded fiber packaging is produced in six locations; a seventh location manufactures tooling for the molded fiber plants. Finally, pressed paperboard products are manufactured at one facility in Columbus, Ohio. Research and development centers for packaging and process development are currently located in Macedon, New York and Northbrook, Illinois and will be consolidated in a new facility in Canandaigua, New York in 1998. Tenneco Packaging currently operates or has an ownership interest in 29 international manufacturing operations. Eight protective packaging plants in Belgium, England, France, Germany, Italy, The Netherlands and Poland make plastic air cushion 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 Europe's leading manufacturer of molded fiber packaging with facilities in Elsfleth, Germany and Great Yarmouth, England. Tenneco Packaging's Alupak operation in Belp, Switzerland is a major producer of smoothwall aluminum portion packs. In plastics, Tenneco Packaging has the leading share of single-use thermoformed plastic food containers in the United Kingdom, with five manufacturing facilities in England, Scotland and Wales. Tenneco Packaging also operates a folding carton plant in Budapest, Hungary and has built a wood products operation in Romania. It participates in several international joint 14 ventures, including folding carton plants in Donngguan, China and Bucharest, Romania, paperboard honeycomb products operations in Israel and Japan, and a corrugated converting facility in Shaoxing, China. Strategic Acquisitions/Joint Ventures Tenneco Packaging acquired Mobil Plastics in late 1995, which more than doubled the size of its specialty business and added new technologies and product development capabilities. The acquisition provided strong consumer branded products such as Hefty(R) trash bags and tableware, Baggies(R) food bags, and Hefty OneZip(R) food storage bags. The plastics division acquired from Mobil also manufactures clear and foam polystyrene food service containers; plates and meat trays; and polyethylene film products, including can liners, produce and retail bags, and industrial disposable packaging. Tenneco Packaging also increased its protective packaging capabilities through the purchase of Hexacomb Corporation, the world's largest supplier of paperboard honeycomb products used for protective packaging, materials handling, and specialized structural applications. In Europe, Tenneco Packaging purchased Penlea and Delyn, two plastic thermoforming operations in the United Kingdom. In August 1996, Tenneco Packaging purchased Amoco Foam Products which manufactures foam polystyrene tableware including cups, plates, carrying trays; hinged-lid food containers; packaging trays, primarily for meat and poultry; and industrial products for residential and commercial construction applications. In addition, during 1996 Tenneco Packaging entered into two honeycomb joint ventures. In April 1997, Tenneco acquired the protective and flexible packaging businesses of NV Koninklijke KNP BT. The acquisition consisted of a protective packaging business with operations in Europe and North America and a European flexible packaging business. The combined operations accounted for $542 million in 1996 sales and employ approximately 3,000 worldwide. The protective packaging honeycomb business grew in 1997 with the acquisition of two plants in Tillsonburg, Ontario, and Columbia, South Carolina, and two new joint ventures in Israel. In Romania, Tenneco Packaging is negotiating for rights to harvest timber and has built a wood processing plant for value-added furniture components, to be supported by a full sawmill operation. OTHER As of January 1, 1998, Tenneco Packaging had approximately 23,000 employees. Tenneco Packaging holds a number of domestic and foreign patents and trademarks relating to its products and businesses. The patents, trademarks and other intellectual property owned by Tenneco Packaging are important in the manufacturing, marketing and distribution of its products. The principal raw materials used by Tenneco Packaging in its manufacturing operations are virgin pulp, recycled fiber, plastic resin and aluminum roll stock. Tenneco Packaging obtains its virgin pulp from timberland owned or controlled by it as well as from outside purchases. Recycled fiber is supplied from both outside contractual sources as well as internally from its two recycling centers and its own containerboard clippings and trim. Tenneco Packaging obtains plastic resin and aluminum roll stock from various suppliers. 15 TENNECO BUSINESS SERVICES Tenneco Business Services ("TBS") designs, implements and administers shared administrative service programs for Tenneco's businesses as well as on an "as requested" basis for former Tenneco business entities and affiliates. Primary service areas of TBS include (i) Financial Accounting Services, including asset management, general accounting, purchasing and payables, travel and entertainment, and systems support; (ii) Employee Benefits Administration for all major salaried and hourly benefit plans; (iii) Human Resources and Payroll Services, including payroll processing, relocation services, government compliance services and expatriate relocation and repatriation services; and (iv) Technology Services, including main frame computing services and telecommunication services. TBS has to date only serviced other Tenneco businesses and, on an as requested basis, former Tenneco businesses and affiliates such as Newport News. However, TBS continues to evaluate the possibility of providing similar services to outside businesses. In connection with its operations, TBS holds numerous software licenses, owns and operates computer equipment and has agreements with numerous vendors for supplies and services. As of January 1, 1998, TBS had approximately 335 employees. Although to date TBS has provided its administrative programs exclusively to current and former Tenneco businesses, should TBS attempt to provide similar services to outside businesses it will face intense competition from other providers of administrative services, many of whom are larger and have more experience providing administrative services in a competitive environment. TBS is headquartered in The Woodlands, Texas. ENVIRONMENTAL MATTERS The Company estimates that its subsidiaries will make capital expenditures for environmental matters of approximately $25 million in 1998 and that capital expenditures for environmental matters will be approximately $105 million in the aggregate for the years 1998 through 2008. For information regarding environmental matters, see Item 3, "Legal Proceedings," Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 13 to the Financial Statements of the Tenneco Inc. and Consolidated Subsidiaries. 16 CERTAIN REORGANIZATION AGREEMENTS In connection with the Distributions, described on page 1 of this Annual Report, Tenneco, Old Tenneco and Newport News entered into certain agreements, described below, governing their relationship following the Distributions and providing for the allocation of tax and certain other liabilities and obligations arising from periods prior to the Distributions. Tenneco, Old Tenneco and Newport News entered into a Distribution Agreement, dated November 1, 1996, pursuant to which the Distributions and certain corporate transactions required to effect the Distributions were accomplished. The Distribution Agreement provides for, among other things, the assumption of liabilities and cross indemnities designed to allocate generally, effective as of the date of the Distributions, financial responsibility for the liabilities of Old Tenneco arising out of or in connection with (i) Tenneco Automotive, Tenneco Packaging and TBS to the Company, (ii) Old Tenneco's shipbuilding businesses to Newport News and its subsidiaries, and (iii) Old Tenneco's remaining active businesses (consisting primarily of the transportation and marketing of natural gas) and certain discontinued operations to Old Tenneco and its subsidiaries. In addition, as contemplated by the Distribution Agreement, the Company entered into certain ancillary agreements (collectively, the "Ancillary Agreements") with Old Tenneco and/or Newport News prior to the consummation of the Distributions which further effectuated the restructuring of Old Tenneco and govern various aspects of the post-Distributions relationship among the parties. The Ancillary Agreements include: (i) the Benefits Agreement, which provides for allocations of responsibilities among the Company, Old Tenneco and Newport News with respect to employee compensation, benefit and labor matters; (ii) the Tax Sharing Agreement, pursuant to which the Company, Old Tenneco and Newport News will allocate liabilities for taxes arising prior to, as a result of, and subsequent to the Distributions; (iii) the Debt and Cash Allocation Agreement which provided for, among other things, the allocation of cash among, and the restructuring and refinancing of certain of the debt of Tenneco existing prior to the Distributions by (or with the funds provided by) the Company, Old Tenneco and Newport News; (iv) the TBS Services Agreement pursuant to which TBS will continue to provide certain administrative and other services to Newport News until December 31, 1998; (v) Trademark Transition License Agreements allowing Old Tenneco and Newport News to use certain of the trademarks and tradenames of Tenneco for certain specified periods of time for certain purposes; and (vi) the Insurance Agreement, which provides for the continuing rights and obligations of the Company, Old Tenneco and Newport News with respect to various pre-Distributions insurance programs. With respect to certain obligations under the Benefits Agreement, see Item 3, "Legal Proceedings--Other Proceedings" and Note 13 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. ITEM 2. PROPERTIES. Corporate Headquarters The Company's executive offices are located at 1275 King Street, Greenwich, Connecticut 06831, and its telephone number at that address is (203) 863-1000. Tenneco Automotive In the United States, Walker operates ten manufacturing facilities and two engineering and technical facilities. In addition, Walker operates 28 manufacturing facilities located in Argentina, Australia, Brazil, Canada, China, the Czech Republic, Denmark, France, Germany, Mexico, Poland, Portugal, South Africa, Spain, Sweden, and the United Kingdom. Walker also has engineering and technical centers in Australia and Germany which are located at manufacturing facilities. In the United States, Monroe has ten manufacturing facilities and three engineering and technical facilities, one of which is located at a manufacturing facility. In addition, Monroe has 16 manufacturing operations in Argentina, Australia, Belgium, Brazil, Canada, China, the Czech Republic, India, Mexico, New Zealand, Spain, 17 Turkey and the United Kingdom. Monroe also has engineering and technical facilities in Australia and Belgium which are located at manufacturing facilities. Tenneco Automotive has a sales office in Japan. Of the 69 properties described above, 55 are owned and 14 are leased. Five of the properties are held through joint ventures. Tenneco Automotive also has distribution facilities at its manufacturing sites and at a few offsite locations, substantially all of which are leased. Tenneco Packaging In North America, Tenneco Packaging operates a total of 143 manufacturing facilities, of which 88 are owned, 54 are leased, and one is held by a joint venture. The paperboard business group has 68 corrugated products plants, one machine rebuild facility, five folding carton plants and nine containerboard machines at four mills. Two of the mills (located in Georgia and Wisconsin), including substantially all of the equipment associated with both mills, are held under lease. Additionally, the paperboard business group operates four wood products facilities and participates in a joint venture chip mill. Two recycled paperstock facilities provide raw materials for the mills. Tenneco Packaging also has a minority equity position in two recycled paperboard mills and one recycling center. The 58 North American manufacturing facilities of the specialty business include seven molded fiber products plants and a molded fiber tooling fabrication facility, 12 paperboard honeycomb products plants, one pressed paperboard plant, and 37 plants that manufacture disposable plastic and aluminum packaging products, protective packaging, and other plastic and aluminum products. Internationally, Tenneco Packaging operates 23 manufacturing facilities in Belgium, Egypt, France, Germany, Hungary, Italy, The Netherlands, Poland, Romania, Spain, Switzerland, and the United Kingdom, of which 20 are owned and three are leased. In addition, Tenneco Packaging participates in six joint venture operations in China, Israel, Japan and Romania. The international operations include three folding carton operations, four paperboard honeycomb products operations, one corrugated container plant, a wood products operation, 17 plants for the manufacture of protective, flexible, or thermoformed plastics products and specialty films, one aluminum portion pack operation, and two molded fiber products plants. TBS TBS operates out of its headquarters in The Woodlands, Texas, as well as offices in Newport News, Virginia and Houston, Texas. The properties utilized by TBS are leased. General Tenneco 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. Tenneco also believes that its subsidiaries have generally satisfactory title to the properties owned and used in their respective businesses, subject to liens for current taxes and easements, restrictions and other liens which do not materially detract from the value of such property or the interests therein or the use of such properties in their businesses. ITEM 3. LEGAL PROCEEDINGS. (1) Potential Superfund Liability. At February 18, 1998, the Company had been designated as a potentially responsible party in 4 "Superfund" sites. The Company has estimated its share of the remediation costs for these sites to be approximately $5 million in the aggregate and has established reserves that it believes are adequate for such costs. Because the clean-up costs are estimates and are subject to revision as more information becomes available 18 about the extent of remediation required, the Company's estimate of its remediation costs could change. Moreover, liability under the Comprehensive Environmental Response, Compensation and Liability Act is joint and several, meaning that the Company could be required to pay in excess of its share of remediation costs. The Company's understanding of the financial strength of other potentially responsible parties has been considered, where appropriate, in the Company's determination of its estimated liability. The Company believes that the costs associated with its current status as a potentially responsible party in the Superfund sites referenced above will not be material to its consolidated financial position or results of operations. For additional information concerning environmental matters, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," Item 1. "Business and Properties" and the caption "Environmental Matters" under Note 13, to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. (2) Other Proceedings. The Company and Newport News have received letters from the Defense Contract Audit Agency (the "DCAA"), inquiring about certain aspects of the Distributions, including the disposition of the Tenneco Inc. Retirement Plan (the "TRP") and the 1986 asset valuation for the TRP and its cost accounting treatment. The DCAA has been advised that (i) the TRP will retain the liability for all benefits accrued by the Newport News salaried employees through December 31, 1996, (ii) the Newport News salaried employees will not accrue additional benefits under the TRP after December 31, 1996, and (iii) no liabilities or assets of the TRP will be transferred from the TRP to any plan maintained by Newport News. A determination of the ratio of assets to liabilities of the TRP attributable to Newport News will be based on facts, assumptions and legal issues that are complicated and uncertain; however, it is likely that the U.S. Government will assert a claim against Newport News with respect to the amount, if any, by which the assets of the TRP attributable to its employees are alleged to exceed the liabilities. The Company, with the full cooperation of Newport News, will defend against any claim by the U.S. Government, and in the event there is a determination that an amount is due to the U.S. Government, the Company and Newport News will share the obligation for such amount plus the amount of related defense expenses, in the ratio of 80% and 20%, respectively. At this preliminary stage, it is impossible to predict with certainty any eventual outcome regarding this matter; however, the Company does not believe that this matter will have a material adverse effect on its consolidated financial position or results of operations. The Company and its subsidiaries are parties to numerous other legal proceedings arising from their operations. The Company believes that the outcome of these other proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1997. 19 ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below is a list of the executive officers of Tenneco Inc. at March 1, 1998. Each of such executive officers has served in the capacities indicated below with Tenneco Inc. (or, for periods prior to the Distributions, with Old Tenneco) since the dates indicated below:
NAME (AND AGE AT DECEMBER 31, 1997) OFFICES HELD* EFFECTIVE DATE OF TERM ----------------------------------- ------------- ---------------------- Dana G. Mead (61)..... Chairman May 1994 Chief Executive Officer February 1994 Director April 1992 Chairman of the Executive Committee February 1994 Member of the Executive Committee May 1992 Paul T. Stecko (53)... Chief Operating Officer January 1997 Theodore R. Tetzlaff (53)................. General Counsel July 1992 Stacy S. Dick (41).... Executive Vice President January 1996 Robert T. Blakely (56)................. Executive Vice President May 1996 Chief Financial Officer July 1981 John J. Castellani (46)................. Executive Vice President January 1997 Barry R. Schuman (56). Senior Vice President--Human Resources March 1993 Karl A. Stewart (54).. Vice President May 1991 Secretary May 1986
- - -------- * Unless otherwise indicated, all offices held are with Tenneco Inc. (or, for periods prior to (i) the Distributions, Old Tenneco, and (ii) December 1987, the Company which at the time was known as Tenneco Inc.). Each of the executive officers of Tenneco has been continuously engaged in the business of Tenneco, its subsidiaries, affiliates or predecessor companies during the past five years in the positions indicated except that: (i) Dana G. Mead has served as an executive officer of Tenneco since March 1992, when he joined Tenneco as Chief Operating Officer and was elected President one month later; (ii) since 1993 Paul T. Stecko has also been serving as the President and Chief Executive Officer of Tenneco Packaging; from 1977 to 1993, he was employed by International Paper Co., last serving as Vice President and General Manager of Publications Papers, Bristols and Converting Papers; (iii) Theodore R. Tetzlaff has been a partner in the law firm of Jenner & Block, Chicago, for more than five years; (iv) from August 1992 to January 1996, Stacy S. Dick served as Senior Vice President--Strategy of Tenneco; and (v) from August 1992 to March 1995 John J. Castellani served as Vice President-- Government Relations of Tenneco and from March 1995 to January 1997 he served as Senior Vice President--Government Relations of Tenneco. For purposes of the preceding sentence, "Tenneco" refers to Old Tenneco for periods prior to the Distributions and to Tenneco Inc. for periods after the Distributions. Tenneco Inc.'s Board of Directors is divided into three classes of directors serving staggered three-year terms, with a minimum of eight directors and a maximum of sixteen directors. At each annual meeting of stockholders, successors to the directors whose terms expire at such meeting are elected. Officers are elected at the annual meeting of directors held immediately following the annual meeting of stockholders. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The outstanding shares of Common Stock, par value $.01 per share, of Tenneco Inc. (the "Common Stock") are listed on the New York, Chicago, Pacific and London Stock Exchanges. The Common Stock began "regular way" trading on the New York Stock Exchange on December 12, 1996 (the business day immediately following the Distributions). See "Business--Tenneco Inc." The following table sets forth the high and low sales prices of Common Stock on the New York Stock Exchange Composite Transactions Tape, and the dividends paid per share of Common Stock: (i) for the Company after the Distributions and Merger and (ii) for Old Tenneco prior to the Distributions and Merger.
SALE PRICES ---------- DIVIDENDS QUARTER HIGH LOW PAID ------- ------ --- --------- 1997 1st 46 38 .30 2nd 46 3/4 38 .30 3rd 50 3/4 43 11/16 .30 4th 52 1/8 37 5/16 .30 1996 1st 57 7/8 47 5/8 .45 2nd 57 5/8 49 5/8 .45 3rd 51 7/8 45 5/8 .45 4th (thru 12/11) 52 5/8 46 1/2 .45 4th (after 12/11) 47 1/2 43 3/8 --
As of January 31, 1998, there were approximately 88,044 holders of record, including brokers and other nominees. The declaration of dividends on Tenneco capital stock is at the discretion of its Board of Directors. The Board has not adopted a dividend policy as such; subject to legal and contractual restrictions, its decisions regarding dividends are based on all considerations that in its business judgment are relevant at the time, including past and projected earnings, cash flows, economic, business and securities market conditions and anticipated developments concerning Tenneco's business and operations. For additional information concerning the payment of dividends by Tenneco, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Under applicable corporate law, dividends may be paid by Tenneco out of "surplus" (as defined under the law) or, if there is not a surplus, out of net profits for the year in which the dividends are declared or the preceding fiscal year. At December 31, 1997, Tenneco had surplus of approximately $2.8 billion for the payment of dividends, and Tenneco will also be able to pay dividends out of any net profits for the current and prior fiscal year. 21 ITEM 6. SELECTED FINANCIAL DATA. TENNECO INC. AND CONSOLIDATED SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA YEARS ENDED DECEMBER 31, (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
1997(A) 1996(A) 1995(A) 1994 1993 ----------- ----------- ----------- ----------- ----------- STATEMENTS OF INCOME DATA(B): Net sales and operating revenues from continuing operations-- Automotive............ $ 3,226 $ 2,980 $ 2,479 $ 1,989 $ 1,785 Packaging............. 3,995 3,602 2,752 2,184 2,042 Intergroup sales and other................ (1) (10) (10) (7) (7) ----------- ----------- ----------- ----------- ----------- Total................ $ 7,220 $ 6,572 $ 5,221 $ 4,166 $ 3,820 =========== =========== =========== =========== =========== Income from continuing operations before interest expense, income taxes, and minority interest-- Automotive............ $ 407 $ 249 $ 240 $ 223 $ 222 Packaging............. 371 401 430 209 139 Other................. (14) (22) 2 24 20 ----------- ----------- ----------- ----------- ----------- Total................ 764 628 672 456 381 Interest expense (net of interest capitalized)(g)....... 216 195 160 104 101 Income tax expense..... 163 194 231 114 115 Minority interest...... 24 21 23 -- -- ----------- ----------- ----------- ----------- ----------- Income from continuing operations............ 361 218 258 238 165 Income from discontinued operations, net of income tax(c)......... -- 428 477 214 286 Extraordinary loss, net of income tax(d)...... -- (236) -- (5) (25) Cumulative effect of changes in accounting principles, net of income tax(e)......... (46) -- -- (39) -- ----------- ----------- ----------- ----------- ----------- Net income............. 315 410 735 408 426 Preferred stock dividends............. -- 12 12 60 64 ----------- ----------- ----------- ----------- ----------- Net income to common stock................. $ 315 $ 398 $ 723 $ 348 $ 362 =========== =========== =========== =========== =========== Average number of shares of common stock outstanding(f)-- Basic................. 170,264,731 169,609,373 172,764,198 162,307,189 149,392,887 Diluted............... 170,801,636 170,526,112 173,511,654 162,912,425 150,061,478 Earnings per average share of common stock(f)-- Basic: Continuing operations.......... $ 2.12 $ 1.29 $ 1.49 $ 1.17 $ .76 Discontinued operations(c)....... -- 2.45 2.70 1.25 1.82 Extraordinary loss(d)............. -- (1.39) -- (.03) (.16) Cumulative effect of changes in accounting principles(e)....... (.27) -- -- (.24) -- ----------- ----------- ----------- ----------- ----------- $ 1.85 $ 2.35 $ 4.19 $ 2.15 $ 2.42 =========== =========== =========== =========== =========== Diluted: Continuing operations.......... $ 2.11 $ 1.28 $ 1.48 $ 1.17 $ .76 Discontinued operations(c)....... -- 2.44 2.69 1.24 1.81 Extraordinary loss(d)............. -- (1.38) -- (.03) (.16) Cumulative effect of changes in accounting principles(e)....... (.27) -- -- (.24) -- ----------- ----------- ----------- ----------- ----------- $ 1.84 $ 2.34 $ 4.17 $ 2.14 $ 2.41 =========== =========== =========== =========== =========== Cash dividends per common share.......... $ 1.20 $ 1.80 $ 1.60 $ 1.60 $ 1.60 BALANCE SHEET DATA(B): Net assets of discontinued operations............ $ -- $ -- $ 1,045 $ 1,858 $ 1,878 Total assets........... 8,332 7,587 7,413 5,853 5,097 Short-term debt(g)..... 278 236 384 108 94 Long-term debt(g)...... 2,633 2,067 1,648 1,039 1,178 Minority interest...... 424 304 301 301 1 Shareowners' equity.... 2,528 2,646 3,148 2,900 2,601 STATEMENT OF CASH FLOWS DATA(B): Net cash provided (used) by operating activities............ $ 519 $ 253 $ 1,443 $ 450 $ 1,615 Net cash provided (used) by investing activities............ (897) (693) (1,146) (117) (338) Net cash provided (used) by financing activities............ 354 147 (356) (151) (1,166) Capital expenditures for continuing operations............ (558) (573) (562) (280) (217)
22 - - -------- (a) For a discussion of the significant items affecting comparability of the financial information for 1997, 1996 and 1995, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." See also Notes 1 and 3 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for a discussion of the Merger and Distributions transactions. (b) During the years presented, Tenneco completed numerous acquisitions, the most significant of which were Tenneco Packaging's 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 businesses of NV Koninklijke KNP BT for $380 million in April 1997 and Tenneco Automotive's acquisition of Clevite for $328 million in July 1996. See Note 2 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. (c) Discontinued operations reflected in the above periods include Tenneco's energy and shipbuilding operations, which were discontinued in December 1996, its farm and construction equipment operations, which were discontinued in March 1996, and its chemicals and brakes operations, which were discontinued during 1994. (d) Represents Tenneco's costs related to prepayment of debt, including the 1996 loss recognized in the realignment of Tenneco's consolidated indebtedness preceding the Merger and Distributions. See Note 3 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. (e) In 1997, Tenneco implemented 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 Note 1 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for additional information regarding changes in accounting principles. (f) All earnings per share amounts have been restated to reflect the adoption of FAS No. 128, "Earnings per Share," effective December 15, 1997. See Note 1 and Note 7 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for information regarding the computation of earnings per share of common stock. (g) Debt amounts for 1995 and prior years are net of allocations for corporate debt to the net assets of discontinued energy and shipbuilding operations. Interest expense for 1996 and prior years is net of interest expense allocated to income from discontinued operations. The allocation is based on the proportion of Tenneco's investment in the energy operations' and shipbuilding operations' net assets to Tenneco consolidated net assets plus debt. See Note 1 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The year ended December 31, 1997, represents the first full year of Tenneco Inc. and consolidated subsidiaries' operation as a global manufacturing company focused on its automotive parts and packaging businesses. Tenneco Inc. was spun-off from the company previously known as Tenneco Inc. ("Old Tenneco") on December 11, 1996, following a series of transactions undertaken to realign the assets, liabilities and operations of Old Tenneco such that the automotive parts ("Tenneco Automotive"), packaging ("Tenneco Packaging") and the administrative services ("Tenneco Business Services") businesses were owned by Tenneco Inc. and the shipbuilding business was owned by Newport News Shipbuilding Inc. ("Newport News"). Old Tenneco distributed the shares of Tenneco Inc. and Newport News to its shareowners on December 11, 1996. On December 12, 1996, Old Tenneco, which then consisted primarily of the energy business ("Energy") and certain previously discontinued operations of Old Tenneco, merged with a subsidiary of El Paso Natural Gas Company. Although the separation of Tenneco Inc. from Old Tenneco was structured as a spin-off for legal, tax and other reasons, Tenneco Inc. kept certain important aspects of Old Tenneco, including its executive management, Board of Directors and headquarters. Most importantly, the combined assets, revenues, and operating income of Tenneco Automotive and Tenneco Packaging represented more than half the assets, revenues and operating income of Old Tenneco prior to the distributions and merger. Consequently, this Management's Discussion and Analysis of Financial Condition and Results of Operations and Tenneco's financial statements for periods prior to the distributions and merger present the net assets and results of operations of Old Tenneco's shipbuilding and energy businesses, as well as its farm and construction equipment business which was disposed of before the distributions and merger, as discontinued operations. Refer to Note 3 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries for further discussion. For purposes of this Management's Discussion and Analysis "Tenneco" or the "Company" refers to Old Tenneco and its subsidiaries before the above described corporate reorganization transactions and to Tenneco Inc., formerly known as New Tenneco Inc., and its subsidiaries after those transactions. The following review of Tenneco's financial condition and results of operations should be read in conjunction with the financial statements and related notes of Tenneco Inc. and Consolidated Subsidiaries. YEARS 1997 AND 1996 RESULTS OF CONTINUING OPERATIONS Tenneco reported income from continuing operations for the year ended December 31, 1997, of $361 million compared to $218 million for the same period in 1996. The improvement resulted from record operating results at Tenneco Automotive and at Tenneco Packaging's specialty packaging business, offset by lower results at Tenneco Packaging's paperboard packaging business reflecting lower containerboard pricing. A lower effective tax rate for 1997 compared to 1996 also contributed to the improved results. NET SALES AND OPERATING REVENUES
% 1997 1996 CHANGE ------ ------ ------ (MILLIONS) Tenneco Automotive....................................... $3,226 $2,980 8% Tenneco Packaging........................................ 3,995 3,602 11% Intergroup sales and other............................... (1) (10) NM ------ ------ --- $7,220 $6,572 10% ====== ====== ===
Tenneco Automotive's revenue increase over 1996 resulted from acquisition performance, volume gains, and improved pricing and product mix. Companies acquired in 1996 and 1997 contributed $238 million to 24 revenue gains during 1997. For companies acquired in 1996, these revenue gains include only revenues earned through the first anniversary of the 1996 acquisition. Performance following the first year of ownership is included in the other year over year measures of performance. Volume growth with both existing and new customers resulted in revenue increases of $128 million, while improved price realizations and a more favorable product mix added $35 million to 1997 revenues. These revenue gains were partially offset by the impact of the strong U.S. dollar in overseas markets, which resulted in $141 million in lower revenues than would have been realized had the U.S. dollar not strengthened during the year. Revenue growth at Tenneco Packaging was driven by strong growth in the specialty packaging business, which experienced revenue gains of $570 million during 1997 over 1996. A decline in revenues in the paperboard packaging business of $177 million was primarily attributable to lower linerboard and medium prices. Revenue growth in the specialty packaging business, from $1,980 million in 1996 to $2,550 million in 1997, 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 NV Koninklijke KNP BT (KNP) in late April 1997, along with revenues from the foam products business calculated through the first anniversary of its August 1996 acquisition, contributed $491 million to specialty packaging's revenue growth during 1997. Unit volume sales increases, primarily in specialty packaging's consumer markets and clear plastic containers, accounted for significant revenue increases as well. Partially offsetting revenue growth from acquisitions and volumes was lower pricing in the specialty packaging consumer market which negatively impacted revenues by $53 million. The revenue decline in the paperboard packaging business resulted primarily from lower linerboard and medium prices during 1997 compared to 1996. Paperboard packaging implemented price increases during the second half of 1997, resulting in greater average fourth quarter 1997 prices for linerboard and medium than the comparable period in 1996. Consequently, in the fourth quarter of 1997, the paperboard packaging business experienced a slight increase in revenues of $8 million compared to the fourth quarter of 1996. INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST (OPERATING INCOME)
% 1997 1996 CHANGE ----- ----- ------ (MILLIONS) Tenneco Automotive......................................... $ 407 $ 249 63% Tenneco Packaging.......................................... 371 401 (7%) Other...................................................... (14) (22) NM ----- ----- --- $ 764 $628 22% ===== ===== ===
During 1996, Tenneco Automotive recorded a pre-tax charge of $64 million to streamline certain exhaust operations and realign the ride control product line. Absent this charge, 1996 operating income would have been $313 million. The remaining increase in operating income during 1997 is primarily attributable to acquisition performance, cost reduction initiatives, and improved realizations, partially offset by the impact of the strong U.S. dollar in overseas markets. Acquisitions, including the impact of 1996 transactions calculated through the first anniversary of the date of each acquisition, added $35 million to 1997 operating income. Cost reduction initiatives contributed more than $40 million to the 1997 operating income improvement while improved pricing realization and product mix combined with volume growth resulted in higher 1997 operating income of more than $30 million. During the third quarter of 1997, Tenneco Automotive benefited from a net reduction of $4 million in certain reserves, primarily related to ongoing reorganization initiatives which have proceeded more rapidly and efficiently than planned, allowing Tenneco Automotive to adjust its cost estimates for completing these initiatives. Additionally, favorable resolution of a legal action contributed $10 million to third quarter 1997 results. Partially offsetting these operating income gains was the impact of the strong U.S. dollar on overseas earnings, which reduced 1997 operating income by $22 million, and fourth quarter charges totaling $4 million related to a customer bankruptcy and a prior asset sale. 25 Tenneco Packaging's overall operating income decline was composed of higher operating income in the specialty packaging business, where operating income grew from $242 million in 1996 to $307 million in 1997, offset by lower operating income in the paperboard packaging business, which posted 1997 operating income of $64 million compared to 1996 operating income of $159 million. The higher operating income for the specialty packaging business 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 foam products acquisition calculated through the first anniversary of its August 1996 acquisition. A portion of the 1997 earnings from the foam products acquisition resulted from cost savings realized by the integration of the acquired company into specialty packaging's existing business. The positive impact on operating income of the volume gains described previously under "Net Sales and Operating Revenues" was largely offset by lower pricing particularly in the consumer market. The operating income of the paperboard packaging business in 1996 included a $50 million gain on the sale of certain recycled paperboard assets to a joint venture with Caraustar Industries and a charge of $6 million to reorganize Tenneco Packaging's folding carton operations. Operating income in 1997 included a one-time $38 million gain which resulted from the refinancing of two containerboard mill leases. Absent these transactions, operating income for the paperboard packaging business declined $89 million in 1997 compared to 1996. The single largest factor contributing to this decline was linerboard and medium pricing, which on an annual basis were 15 percent and 19 percent, respectively, lower in 1997 than in 1996. In total, pricing for the paperboard packaging business, which includes containerboard mills and corrugated and folding carton facilities, reduced 1997 operating income by $120 million. Partially offsetting this lower pricing was $40 million in cost reductions at the mills and the $5 million positive impact from a third quarter 1997 timberland management transaction. As previously reported, Tenneco management has been studying various possible strategic alternatives (including divestitures, spin-offs and joint venture arrangements) concerning some or all of the Company's containerboard mills, timberlands and other related operations. To date, management has not identified any acceptable alternatives and there can be no assurance as to whether or when any such alternatives will be identified or implemented. Tenneco's Other operating loss increased in 1997 compared to 1996 before a charge of $17 million related to the acceleration of certain employee benefits in connection with the December 1996 corporate reorganization. The increase resulted from a higher level of unallocated administrative costs primarily related to Tenneco's administrative services unit which began operation in late 1996. OUTLOOK Tenneco Automotive is supplying original equipment for more than 40 product launches around the world, which should contribute to revenue growth in 1998. In the aftermarket, Tenneco Automotive will introduce the all-new Walker(R) Quiet-FlowTM premium replacement muffler line as well as the next generation of Monroe's(R) highly successful Sensa-Trac(R) premium shock and strut line featuring "Safe-Tech" technology for enhanced ride control and comfort. Tenneco Automotive expects that its superior product offerings and premium product mix will permit it to outperform a soft aftermarket. In addition, Tenneco Automotive expects to complete the final piece of its worldwide restructuring effort in early 1998. These actions are expected to generate more than $80 million in annual cost savings when complete; more than $40 million was realized in 1997 as the actions were undertaken. The outlook for Tenneco Packaging's specialty packaging business is positive as volume growth, new product introductions, mix management, and cost reductions are expected to provide continued operating income gains. Resin prices are forecast to remain relatively stable in 1998 while revenues should benefit from continued strong, 4 to 5 percent growth in specialty packaging's market segment. Tenneco Packaging's paperboard packaging business should benefit from favorable industry dynamics, including lower containerboard inventories and continued strong demand for corrugated boxes. In addition, ongoing cost reduction efforts, which yielded $40 million in cost reductions during 1997, should result in additional cost savings in 1998. 26 This "Outlook" section contains forward-looking statements. See "Cautionary Statement for Purposes of 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995" for a description of certain factors that could cause actual results to differ from anticipated results and other matters. INTEREST EXPENSE (NET OF INTEREST CAPITALIZED) Tenneco incurred interest expense of $216 million during 1997, an increase of $21 million over 1996. The increase reflects a higher level of borrowings during 1997, resulting primarily from acquisitions made in both Tenneco Packaging and Tenneco Automotive, as well as Tenneco's share repurchase activity. INCOME TAXES Tenneco's effective tax rate for 1997 was 30 percent, compared to 45 percent for 1996. The 1997 tax rate was lower than the statutory rate due to the non- recurring impact of certain foreign tax benefits and the benefit of previously unrecognized deferred tax assets. For 1996, the effective tax rate was in excess of the statutory rate primarily as a result of the realignment charges recorded for Tenneco Automotive's European operations which were not fully benefited for tax purposes. MINORITY INTEREST Minority interest in 1997 was $24 million compared to $21 million in 1996. This primarily represents dividends on the preferred stock of a U.S. subsidiary. In December 1997, this subsidiary issued additional preferred stock. See Note 9 to Tenneco Inc. and Consolidated Subsidiaries Financial Statements for additional information. CHANGE IN ACCOUNTING PRINCIPLE As required by the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reeingineering and Information Technology Transformation," Tenneco recorded an after-tax charge of $46 million in the fourth quarter of 1997, which was reported as a cumulative effect of a change in accounting principle. EARNINGS PER SHARE Income from continuing operations was $2.11 per share on a diluted basis in 1997, up from $1.28 per share in 1996. (All references to earnings per share in this Management's Discussion and Analysis are on a diluted basis unless otherwise noted). Tenneco also recorded the cumulative effect of a change in accounting principle discussed above of $.27 per share, resulting in net income of $1.84 per share for 1997. During 1996, discontinued operations earned $2.44 per share while Tenneco recorded an extraordinary loss on retirement of debt of $1.38. Net income in 1996 was $2.34 per share. Discontinued operations and extraordinary loss are discussed below. Average shares of common stock outstanding increased slightly during 1997. For further information regarding the calculation of earnings per share, refer to Note 7 to the Financial Statements of Tenneco Inc. and Consolidated Subsidiaries. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS
1997 1996 ----- ----- (MILLIONS) Cash provided (used) by: Operating activities............................................ $ 519 $ 253 Investing activities............................................ (897) (693) Financing activities............................................ 354 147
27 OPERATING ACTIVITIES Cash flow provided by operating activities was $266 million higher in 1997 than 1996. Tenneco's discontinued operations used $250 million in operating cash flow in 1996, resulting in a 1997 increase in operating cash flow from continuing operations of $16 million. Tenneco experienced higher operating cash flow during 1997 from several sources. Income before depreciation was higher in 1997 by $199 million. Tenneco also generated 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 partially offset by changes in the components of working capital, reflecting higher levels of activity and reduction of certain liabilities, including those incurred in connection with the December 1996 transactions. INVESTING ACTIVITIES During 1997, Tenneco's investing cash flows included expenditures of $314 million for businesses acquired, primarily the flexible and protective packaging businesses of KNP in late April 1997. This compares to cash expended for business acquisitions of $748 million in 1996, when Tenneco Automotive acquired Clevite and Tenneco Packaging acquired the foam products business. There were other less significant acquisitions in both years at both Tenneco Automotive and Tenneco Packaging. Capital expenditures for continuing operations in 1997 were $15 million lower than 1996, reflecting lower activity in Tenneco's "Other" segment. During 1996, the sale of discontinued operations provided $1,051 million of investing cash flow, primarily from Tenneco's remaining Case Corporation shares and a business owned by Energy. Tenneco also spent $398 million in 1996 for capital expenditures and business acquisitions at Energy and Newport News. FINANCING ACTIVITIES During 1997, Tenneco refinanced a portion of its short term debt by issuing $100 million of 10 year 7 1/2% notes, $200 million of 30 year 7 7/8% debentures, and $300 million of 20 year 7 5/8% debentures. The net proceeds to Tenneco of these debt offerings was $593 million. Tenneco retired $23 million in long-term debt during 1997 according to its terms and reduced short-term debt by a net $31 million. A subsidiary of Tenneco also issued preferred stock, the net proceeds of which were $99 million. During 1996, financing activities included the debt realignment executed in December to facilitate the separation of New Tenneco, Energy, and Newport News, as well as the issuance of $296 million in preferred stock by Old Tenneco which remained with Old Tenneco in the Energy merger. During 1997, Tenneco issued $48 million in common stock, related to employee benefit plans, and repurchased $132 million in common stock under its common stock repurchase plan. Tenneco also paid 1997 dividends on its common stock of $204 million. Activity in 1996 included common stock issued of $164 million, common stock repurchases of $172 million, common and preferred stock dividends of $313 million and cash of $99 million transferred to Energy and Newport News in the December 1996 corporate reorganization. LIQUIDITY At December 31, 1997, Tenneco's principal credit facility was a $1.75 billion committed financing arrangement with a syndicate of banks which expires in 2001. Committed borrowings under this credit facility bear interest at an annual rate equal to, at the borrower's option, either (i) a rate consisting of the higher of Morgan Guaranty Trust Company of New York's prime rate or the federal funds rate plus 50 basis points; (ii) the London Interbank Offering Rate plus a margin determined based on the credit rating of Tenneco's unsecured senior debt; or (iii) a rate based on money market rates pursuant to competitive bids by the syndicate banks. Tenneco maintains unused availability under this line of credit at least equal to 100 percent of its commercial paper notes outstanding which were $203 million at December 31, 1997. There were no borrowings under this credit facility at December 31, 1997. The credit facility requires that Tenneco's ratio of debt to total capitalization, as defined in the credit facility, not exceed 70%. Compliance with this requirement is a condition for any incremental borrowings under the credit 28 facility, and failure to meet the requirement enables the syndicate banks to require repayment of any outstanding loans after a 30-day cure period. At December 31, 1997, Tenneco's ratio of debt to total capitalization as defined in the credit facility was 53.5 percent. In addition, the credit facility imposes certain other restrictions, none of which are expected to limit Tenneco's ability to operate its businesses in the ordinary course. CAPITAL COMMITMENTS Tenneco estimates that expenditures of approximately $380 million will be required after December 31, 1997, to complete facilities and projects authorized at such date, and substantial commitments have been made in connection therewith. Tenneco believes it has adequate resources available to finance its future requirements, including capital expenditures for existing operations plus potential strategic acquisitions. CAPITALIZATION
% 1997 1996 CHANGE ------ ------ ------ (MILLIONS) Short-term debt and current maturities..................... $ 278 $ 236 18% Long-term debt............................................. 2,633 2,067 27% Minority interest.......................................... 424 304 39% Common shareowners' equity................................. 2,528 2,646 (4%) ------ ------ --- Total capitalization..................................... $5,863 $5,253 12% ====== ====== ===
Tenneco's debt to capitalization ratio was 49.7 percent at December 31, 1997, compared to 43.8 percent at December 31, 1996. The increase in the ratio is attributable to the additional debt issued during 1997 as described under "Cash Flow-Financing Activities" above, as well as a decline in equity resulting from net income in 1997 being more than offset by dividends, share repurchases, and cumulative translation adjustments resulting from the strong U.S. dollar. DIVIDENDS ON COMMON STOCK Tenneco Inc. declared dividends on its common shares of $.30 per share for each quarter in 1997. Declaration of dividends is at the discretion of the Board of Directors. The Board has not adopted a dividend policy as such. Subject to legal and contractual restrictions, its decisions regarding dividends are based on all considerations that in its business judgment are relevant at the time, including past and projected earnings, cash flows, economic, business and securities market conditions, and anticipated developments concerning Tenneco's business and operations. ENVIRONMENTAL MATTERS Tenneco and certain 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 balance sheet at their undiscounted amounts. Recoveries 29 are evaluated separately from the liability and, when assured, are recorded and reported separately from the associated liability in the financial statements. At February 18, 1998, Tenneco had been designated as a potentially responsible party in 4 "Superfund" sites. Tenneco has estimated its share of the remediation costs for these sites to be approximately $5 million in the aggregate and has established reserves that it believes are adequate for such costs. Because the clean-up costs are estimates and are subject to revision as more information becomes available about the extent of remediation required, Tenneco's estimate of its remediation costs could change. Moreover, liability under the Comprehensive Environmental Response, Compensation and Liability Act is joint and several, meaning that Tenneco could be required to pay in excess of its share of remediation costs. Tenneco's understanding of the financial strength of other potentially responsible parties has been considered, where appropriate, in Tenneco's determination of its estimated liability. Tenneco believes that the costs associated with its current status as a potentially responsible party in the Superfund sites referenced above will not be material to its consolidated financial position or results of operations. Tenneco estimates that it will make capital expenditures for environmental matters of approximately $25 million in 1998 and that capital expenditures for environmental matters will be approximately $105 million in the aggregate for the years 1998 through 2008. DERIVATIVE FINANCIAL INSTRUMENTS Foreign Currency Exchange Rate Risk Tenneco 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. Tenneco's primary exposure to changes in foreign currency rates results from intercompany loans made between Tenneco affiliates to minimize the need for borrowings from third parties. Additionally, Tenneco 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. Tenneco has from time to time also entered into forward contracts to hedge its net investment in foreign subsidiaries. Tenneco does not currently enter into derivative financial instruments for speculative purposes. 30 In managing its foreign currency exposures, Tenneco identifies and aggregates naturally occurring offsetting positions and then hedges residual exposures through third party derivative contracts. The following table summarizes by major currency the notional amounts, weighted average settlement rates, and fair value for foreign currency forward purchase and sale contracts as of December 31, 1997. All contracts in the following table mature in 1998.
DECEMBER 31, 1997 ---------------------------------------------- FAIR VALUE NOTIONAL AMOUNT IN WEIGHTED AVERAGE IN U.S. FOREIGN CURRENCY SETTLEMENT RATES DOLLARS ------------------ ---------------- ---------- (MILLIONS EXCEPT SETTLEMENT RATES) Belgian Francs --Purchase......... 883 0.0270 $ 24 --Sell............. (238) 0.0270 (6) British Pounds --Purchase......... 95 1.6508 156 --Sell............. (156) 1.6508 (257) Canadian Dollars --Purchase......... 83 0.6992 58 --Sell............. (23) 0.6992 (16) Danish Krone --Purchase......... 152 0.1460 22 --Sell............. -- -- -- French Francs --Purchase......... 312 0.1663 52 --Sell............. (6) 0.1663 (1) German Marks --Purchase......... 7 0.5561 4 --Sell............. (218) 0.5561 (121) Italian Lire --Purchase......... 1,850 0.0006 1 --Sell............. -- 0.0006 -- Portuguese Escudo--Purchase......... 1,029 0.0054 6 --Sell............. (196) 0.0054 (1) Spanish Pesetas --Purchase......... 1,823 0.0066 12 --Sell............. (224) 0.0066 (1) U.S. Dollars --Purchase......... 92 1.0000 92 --Sell............. -- -- -- Other --Purchase......... 138 0.2318 32 --Sell............. (667) 0.0803 (54) ----- $ 2 =====
Interest Rate Risk 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 which matures over periods ranging up to 30 years. All of Tenneco's existing long-term debt obligations have fixed interest rates, and Tenneco has no current plans to redeem its long-term debt obligations before their stated maturities. Consequently, Tenneco is not exposed to cash flow or fair value risk from market interest rate changes on its long-term debt portfolio. Should Tenneco decide to redeem its long-term debt securities prior to their stated maturities, it would generally incur costs based on the fair value of the debt at that time. 31 The table below provides information about Tenneco's financial instruments that are sensitive to interest rate risk.
FAIR VALUE ESTIMATED MATURITY DATES AT ---------------------------------------- DECEMBER 31, 1998 1999 2000 2001 2002 THEREAFTER TOTAL 1997(A) ---- ---- ---- ---- ---- ---------- ------ ------------ (DOLLARS IN MILLIONS) Short-term debt (excluding current maturities)............ $272 $ -- $ -- $ -- $ -- $ -- $ 272 $ 272 Average effective interest rate......... 6.1% --% --% --% --% --% Long-term debt (including current maturities)............ $ 6 $260 $ 12 $188 $496 $1,586 $2,548 $2,606 Average effective interest rate......... 10.2% 6.6% 11.7% 6.8% 6.7% 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, 1997. Tenneco also has other obligations which are sensitive to changes in the market rate of interest. A subsidiary has issued preferred stock with a face amount of $400 million which pays a dividend based upon the current market rate of interest. See Note 9 to Tenneco Inc. and Consolidated Subsidiaries Financial Statements. Tenneco also has certain lease obligations which require lease payments that vary with market rates of interest. The underlying value of the leased assets on which the lease payments vary with interest rates is approximately $770 million. See Note 13 to Tenneco Inc. and Consolidated Subsidiaries Financial Statements. 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 certain hardware and equipment containing date sensitive data, were structured to utilize a two-digit date field meaning that they may not be able to properly recognize dates in the Year 2000. This could result in significant system and equipment failures. Tenneco has a detailed process in place to identify potential Year 2000 problems and implement solutions. Tenneco's significant technology transformation projects are addressing the Year 2000 issue in those areas where replacement systems are being installed for other business reasons. Where existing systems are expected to remain in place beyond 1999, Tenneco is implementing systems changes utilizing a combination of internal and external resources. In addition, Tenneco has begun to communicate with its major suppliers, financial institutions, and others with whom it conducts business to determine that they will be able to resolve the Year 2000 issue in matters affecting Tenneco. While Tenneco believes it will be able to resolve the Year 2000 issue in a timely manner, if it is unable to complete the installation of replacement systems and the required changes to existing critical systems, or if those with whom Tenneco conducts business are unsuccessful in implementing timely solutions, the Year 2000 issue could have a material adverse effect on Tenneco's results of operations. Based upon current estimates, Tenneco believes that it will incur costs which may range from approximately $20 million to $30 million during 1998 and 1999 to implement the necessary changes to its existing systems. These costs are being expensed as they are incurred. As Tenneco implements solutions to the Year 2000 issue, in certain instances it may determine that replacing existing systems, hardware, or equipment may be more efficient and effective, particularly where additional functionality is available. Replacement of systems, hardware, or equipment would be capitalized and would reduce the estimated 1998 and 1999 expense associated with the Year 2000 issue. YEARS 1996 AND 1995 NET SALES AND OPERATING REVENUES
% 1996 1995 CHANGE ------- ------ ------ (MILLIONS) Tenneco Automotive...................................... $ 2,980 $2,479 20% Tenneco Packaging....................................... 3,602 2,752 31% Intergroup sales and other.............................. (10) (10) -- ------- ------ --- $ 6,572 $5,221 26% ======= ====== ===
32 Net sales and operating revenues for 1996 increased $1,351 million to $6,572 million, compared with $5,221 million in 1995. This increase was due primarily to strong market conditions in the automotive parts industry and revenues from businesses acquired in late 1995 and 1996. Record revenues were reported at Tenneco Automotive and by the specialty business of Tenneco Packaging. INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST (OPERATING INCOME)
% 1996 1995 CHANGE ----- ----- ------ (MILLIONS) Tenneco Automotive.......................................... $ 249 $240 4% Tenneco Packaging........................................... 401 430 (7%) Other....................................................... (22) 2 NM ----- ----- --- $628 $672 (7%) ===== ===== ===
Operating income for 1996 decreased $44 million to $628 million, compared with $672 million in 1995. Tenneco Packaging's specialty business reported record results due primarily to the results of the recent acquisitions of the foam products and plastics businesses. See Note 2 to Tenneco Inc. and Consolidated Subsidiaries Financial Statements. Tenneco Automotive reported record operating income as a result of strong volumes, recent acquisitions, and operating cost initiatives in both the ride control and exhaust systems businesses. Also, Tenneco realized gains on sales of assets and businesses in 1996 that were in excess of amounts earned in 1995. These increases were offset by lower operating income at Tenneco Packaging's paperboard business due to lower containerboard prices, costs related to the realignment actions at Tenneco Automotive and Tenneco Packaging, and costs related to the acceleration of certain employee benefits in connection with the distributions and merger. The results of Tenneco Automotive and Tenneco Packaging are separately discussed below. TENNECO AUTOMOTIVE Tenneco Automotive's 1996 revenue increase resulted primarily from higher sales volumes and an improved product mix combined with benefits from acquisitions. New product launches and higher sales volumes to manufacturers, including revenue earned from Clevite after its acquisition, contributed $335 million to 1996 revenue growth. Revenue from companies acquired included $96 million in the North American original equipment market earned by Clevite. Market share growth in the aftermarket and aggressive Sensa-Trac(R) marketing programs contributed $129 million. Revenue growth in the European aftermarket exhaust business of $25 million was mainly due to a 1995 third quarter acquisition in Spain. Tenneco Automotive's 1996 operating income included $64 million in charges to streamline certain exhaust operations and realign the ride control product line. Absent these charges and the 1995 higher than usual start-up costs of $10 million, the operating income increase was $63 million. The improvement results from the volume and product mix improvements discussed above as well as manufacturing and distribution efficiencies and continued focus on operating cost leadership. Tenneco Automotive's margins decreased to 8.4 percent in 1996, compared with 9.7 percent in 1995 due to the 1996 realignment charges. Excluding the realignment charges, margins improved to 10.5 percent in 1996. TENNECO PACKAGING Tenneco Packaging's specialty business reported record results in 1996 as revenues increased $1,149 million to $1,980 million, compared with $831 million in 1995. This increase was driven by the acquisition of the plastics and foam products businesses which combined contributed revenues of $1,165 million in 1996, compared with $106 million of revenues contributed by the plastics business in 1995. 33 The specialty business earned $242 million in operating income for 1996, an increase of $180 million, excluding a 1995 restructuring charge of $30 million for molded fiber and aluminum foil packaging operations. The plastics and foam products businesses contributed operating income of $150 million in 1996, compared with only $15 million contributed by the plastics business in 1995. Excluding the 1995 restructuring charge, operating margins improved 5 percentage points to 12.2 percent as a result of three major factors: volume growth, primarily through acquisitions, enriched product mix, and reduced costs by combining acquired businesses with pre-existing operations. The major contributors to reduced operating costs were lower prices for both polystyrene and aluminum. The paperboard business reported revenues in 1996 of $1,622 million, compared with $1,921 million in 1995. Revenues were lower as a result of weaker containerboard prices, which averaged 27 percent less compared with 1995. As a result, 1996 operating income declined $269 million to $115 million, compared with $384 million in 1995, excluding gains on asset sales and a $6 million realignment charge for the folding carton operations. Including asset sales and the 1996 realignment charge, operating income was $159 million in 1996, compared with $398 million in 1995. Volume increases of 2 percent and a better mix of higher value added and enhanced graphics business partially offset the softness in containerboard prices. The paperboard business reported a $50 million pre-tax gain in 1996 from the sale of the two recycled paperboard mills and a recycling center and brokerage operation to a joint venture with Caraustar Industries, while 1995 included a $14 million pre-tax gain from the sale of a recycled medium mill in North Carolina. OTHER Tenneco reported an Other operating loss of $22 million for 1996, compared with $2 million of operating income in 1995. The 1996 loss included a $17 million charge related to the acceleration of certain employee benefits in connection with the distributions and merger. INTEREST EXPENSE (NET OF INTEREST CAPITALIZED) Tenneco's 1996 interest expense was $195 million, compared with $160 million in 1995. This increase resulted primarily from the funding of acquisitions, including Clevite and the foam products business in 1996 and the plastics business in late 1995. INCOME TAXES The effective tax rate was 45 percent in both 1996 and 1995. The 1996 effective tax rate was higher than the federal statutory tax rate due primarily to the realignment costs incurred in the European operations of Tenneco Automotive's exhaust systems business, which were not fully tax benefited, nondeductible goodwill, and state income taxes. MINORITY INTEREST Minority interest was $21 million in 1996, compared with $23 million in 1995, which primarily related to dividends on preferred stock of a U.S. subsidiary for both years. DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS Income from discontinued operations in 1996 of $428 million, net of income tax expense of $129 million, or $2.44 per share, reflected the net income of Energy and Newport News through December 11, 1996, prior to the consummation of the corporate reorganization. Income from discontinued operations for 1996 also included Tenneco's share of the net loss of the farm and construction equipment business. Additionally, income from discontinued operations included a $340 million gain, net of income tax expense of $83 million, on the sale of Tenneco's remaining investment in Case, and transaction costs--consisting primarily of financial advisory, legal, accounting, printing, and other costs--of $108 million, net of an income tax benefit of $17 million, that were incurred in connection with the corporate reorganization. 34 Income from discontinued operations for Energy in 1996 was $127 million, net of income tax expense of $32 million. Income from discontinued operations for Newport News in 1996 was $70 million, net of income tax expense of $32 million. Loss from discontinued operations for the farm and construction equipment business was $1 million for 1996, net of an income tax benefit of $1 million. Income from discontinued operations in 1995 was $477 million, net of income tax expense of $30 million, or $2.69 per share, and was attributable to the operations of Energy, Newport News, and the farm and construction equipment business. The 1995 discontinued operations also included a gain from the sale of Case stock of $101 million and a $32 million gain from the sale of a Case subordinated note, net of income tax expense of $2 million. Income from discontinued operations for Energy in 1995 was $158 million, net of an income tax benefit of $11 million. Income from discontinued operations for Newport News in 1995 was $73 million, net of income tax expense of $58 million. Income from discontinued operations for the farm and construction equipment business in 1995 was $113 million, net of an income tax benefit of $19 million. Extraordinary loss for 1996 was $236 million, net of income tax benefit of $126 million, or $1.38 per share. The extraordinary loss was incurred as a result of the debt realignment undertaken before the December 1996 corporate reorganization and consists principally of the fair value paid in the cash tender offers and the fair value of debt exchanged in the debt exchange offers in excess of the historical net carrying value for the debt tendered and exchanged. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS
1996 1995 ---- ------ (MILLIONS) Cash provided (used) by: Operating activities............................................ $253 $1,443 Investing activities............................................ (693) (1,146) Financing activities............................................ 147 (356)
OPERATING ACTIVITIES Operating cash flows from continuing operations for 1996 increased $113 million, compared with 1995. This increase was due primarily to improvements in the working capital of continuing businesses which contributed $131 million to the higher operating cash flows. Inventory growth declined in 1996 at both Tenneco Automotive and Tenneco Packaging from streamlining product distribution and implementing new programs to minimize inventory levels. Operating cash flows from discontinued operations declined $1,303 million in 1996, compared with 1995, due to tax payments for the settlement of prior year tax liabilities, lower sales of trade accounts receivable, and gas contract settlements at Energy of $318 million. INVESTING ACTIVITIES Cash used for acquisitions of businesses during 1996 of $789 million resulted primarily from the acquisitions of the foam products business for $310 million and Clevite for $328 million. Tenneco also invested $573 million in capital expenditures in its continuing businesses and $398 million in its discontinued operations during 1996. Capital expenditures in continuing businesses included $177 million for Tenneco Automotive, $341 million for Tenneco Packaging, and $55 million for Tenneco Business Services and other operations. 35 For Tenneco Packaging, these expenditures included $14 million for a sawmill and wood products business in Romania, $36 million to expand production capacity of polystyrene foam products for the foodservice disposables and consumer plate businesses, $12 million for the customer-linked manufacturing system of the specialty business, and $10 million to complete improvements to a paper machine at the Counce, Tennessee, mill. Tenneco Automotive's capital spending included $22 million related to new OE business and $32 million for systems integration and automation projects. In addition, Tenneco Automotive's spending also included $8 million to expand capacity and take advantage of synergies related to recent acquisitions. Net proceeds related to the sale of discontinued operations of $1,051 million in 1996 resulted primarily from the sale of the remaining Case common stock for $788 million along with proceeds from the sale of a pipeline interest. Net proceeds related to the sale of discontinued operations in 1995 resulted from the sale of Albright & Wilson chemicals operations, the sale of Case common stock, and the sale of a Case subordinated note. Net proceeds from sales of businesses and assets during 1996 were $149 million, which included $115 million from the sale of two recycled paperboard mills and a recycling center and brokerage operation to a joint venture with Caraustar Industries. FINANCING ACTIVITIES Cash flows from financing activities were $147 million in 1996, which included the issuance of $2.8 billion of long-term debt, issuance of preferred stock of $296 million assumed by El Paso in the corporate reorganization, repayment of net short-term debt of $221 million, and the early retirement of $2.3 billion of long-term debt in connection with the consummation of the debt realignment and the other components of the corporate reorganization. Tenneco also used cash flows during 1996 to reacquire its common stock for $172 million and to pay $313 million in dividends on its common and preferred stock. In 1995, Tenneco had a net increase of $503 million in debt (primarily related to the funding of acquisitions), reacquired common stock of $655 million, and paid dividends on its common and preferred stock of $286 million. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS OF TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
PAGE ---- Report of independent public accountants................................... 37 Statements of income for each of the three years in the period ended December 31, 1997......................................................... 38 Balance sheets--December 31, 1997 and 1996................................. 39 Statements of cash flows for each of the three years in the period ended December 31, 1997......................................................... 40 Statements of changes in shareowners' equity for each of the three years in the period ended December 31, 1997..................................... 41 Notes to financial statements.............................................. 42
36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Tenneco Inc.: We have audited the accompanying balance sheets of Tenneco Inc. (a Delaware corporation) and consolidated subsidiaries (see Note 1) as of December 31, 1997 and 1996, and the related statements of income, cash flows and changes in shareowners' equity for each of the three years in the period ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of Tenneco Inc.'s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tenneco Inc. and consolidated subsidiaries as of December 31, 1997 and 1996, and the results of their operations, cash flows and changes in shareowners' equity for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in the fourth quarter of 1997, Tenneco Inc. and consolidated subsidiaries 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 financial statements taken as a whole. The supplemental schedule listed in the index to Part IV, Item 14 relating to Tenneco Inc. and consolidated subsidiaries is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic 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 financial statements of Tenneco Inc. and consolidated subsidiaries taken as a whole. Arthur Andersen LLP Houston, Texas February 17, 1998 37 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) REVENUES Net sales and operating revenues-- Automotive.......................... $ 3,226 $ 2,980 $ 2,479 Packaging........................... 3,995 3,602 2,752 Intergroup sales and other.......... (1) (10) (10) ----------- ----------- ----------- 7,220 6,572 5,221 Other income, net..................... 98 76 39 ----------- ----------- ----------- 7,318 6,648 5,260 ----------- ----------- ----------- COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)............ 5,206 4,762 3,737 Engineering, research, and development.......................... 68 92 67 Selling, general, and administrative.. 915 857 588 Depreciation, depletion, and amortization......................... 365 309 196 ----------- ----------- ----------- 6,554 6,020 4,588 ----------- ----------- ----------- INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST 764 628 672 Interest expense (net of interest capitalized)......................... 216 195 160 Income tax expense.................... 163 194 231 Minority interest..................... 24 21 23 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS....... 361 218 258 Income from discontinued operations, net of income tax.......................... -- 428 477 ----------- ----------- ----------- Income before extraordinary loss........ 361 646 735 Extraordinary loss, net of income tax... -- (236) -- ----------- ----------- ----------- Income before cumulative effect of change in accounting principle......... 361 410 735 Cumulative effect of change in accounting principle, net of income tax.................................... (46) -- -- ----------- ----------- ----------- NET INCOME.............................. 315 410 735 Preferred stock dividends............... -- 12 12 ----------- ----------- ----------- NET INCOME TO COMMON STOCK.............. $ 315 $ 398 $ 723 =========== =========== =========== EARNINGS PER SHARE Average shares of common stock outstanding-- Basic................................. 170,264,731 169,609,373 172,764,198 Diluted............................... 170,801,636 170,526,112 173,511,654 Basic earnings per share of common stock-- Continuing operations................. $ 2.12 $ 1.29 $ 1.49 Discontinued operations............... -- 2.45 2.70 Extraordinary loss.................... -- (1.39) -- Cumulative effect of change in accounting principle................. (.27) -- -- ----------- ----------- ----------- $ 1.85 $ 2.35 $ 4.19 =========== =========== =========== Diluted earnings per share of common stock-- Continuing operations................. $ 2.11 $ 1.28 $ 1.48 Discontinued operations............... -- 2.44 2.69 Extraordinary loss.................... -- (1.38) -- Cumulative effect of change in accounting principle................. (.27) -- -- ----------- ----------- ----------- $ 1.84 $ 2.34 $ 4.17 =========== =========== =========== Cash dividends per share of common stock.................................. $ 1.20 $ 1.80 $ 1.60 =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements of income. 38 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES BALANCE SHEETS
DECEMBER 31, -------------- ASSETS 1997 1996 ------ ------ ------ (MILLIONS) Current assets: Cash and temporary cash investments.............................. $ 41 $ 62 Receivables-- Customer notes and accounts, net............................... 729 561 Income taxes................................................... 63 -- Other.......................................................... 17 138 Inventories...................................................... 950 878 Deferred income taxes............................................ 63 95 Prepayments and other............................................ 252 189 ------ ------ 2,115 1,923 ------ ------ Other assets: Long-term notes receivable, net.................................. 49 20 Goodwill and intangibles, net.................................... 1,577 1,341 Deferred income taxes............................................ 55 60 Pension assets................................................... 747 547 Other............................................................ 334 444 ------ ------ 2,762 2,412 ------ ------ Plant, property, and equipment, at cost............................ 5,284 4,870 Less--Reserves for depreciation, depletion, and amortization..... 1,829 1,618 ------ ------ 3,455 3,252 ------ ------ $8,332 $7,587 ====== ====== LIABILITIES AND SHAREOWNERS' EQUITY ----------------------------------- Current liabilities: Short-term debt (including current maturities on long-term debt). $ 278 $ 236 Trade payables................................................... 687 651 Taxes accrued.................................................... 96 91 Accrued liabilities.............................................. 344 308 Other............................................................ 256 335 ------ ------ 1,661 1,621 ------ ------ Long-term debt..................................................... 2,633 2,067 ------ ------ Deferred income taxes.............................................. 614 476 ------ ------ Postretirement benefits............................................ 228 168 ------ ------ Deferred credits and other liabilities............................. 244 305 ------ ------ Commitments and contingencies Minority interest.................................................. 424 304 ------ ------ Shareowners' equity: Common stock..................................................... 2 2 Premium on common stock and other capital surplus................ 2,679 2,642 Cumulative translation adjustments............................... (122) 23 Retained earnings (accumulated deficit).......................... 89 (21) ------ ------ 2,648 2,646 Less--Shares held as treasury stock, at cost..................... 120 -- ------ ------ 2,528 2,646 ------ ------ $8,332 $7,587 ====== ======
The accompanying notes to financial statements are an integral part of these balance sheets. 39 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ----- ------- ------- (MILLIONS) OPERATING ACTIVITIES Income from continuing operations.................... $ 361 $ 218 $ 258 Adjustments to reconcile income from continuing operations to cash provided (used) by continuing operations-- Depreciation, depletion, and amortization.......... 365 309 196 Deferred income taxes.............................. 235 23 75 (Gain) loss on sale of businesses and assets, net.. 21 (64) (15) Changes in components of working capital-- (Increase) decrease in receivables............... (56) 104 30 (Increase) decrease in inventories............... (31) 18 (102) (Increase) decrease in prepayments and other current assets.................................. (108) 45 (39) Increase (decrease) in payables.................. 74 (70) 7 Increase (decrease) in taxes accrued............. (45) 31 23 Increase (decrease) in interest accrued.......... 29 5 -- Increase (decrease) in other current liabilities. (136) (98) (15) Other.............................................. (190) (18) (28) ----- ------- ------- Cash provided (used) by continuing operations........ 519 503 390 Cash provided (used) by discontinued operations...... -- (250) 1,053 ----- ------- ------- Net cash provided (used) by operating activities..... 519 253 1,443 ----- ------- ------- INVESTING ACTIVITIES Net proceeds related to the sale of discontinued operations.......................................... -- 1,051 1,539 Net proceeds from sale of businesses and assets...... 29 149 56 Expenditures for plant, property, and equipment...... (558) (573) (562) Acquisitions of businesses........................... (314) (748) (1,461) Expenditures for plant, property, and equipment and business acquisitions--discontinued operations...... -- (398) (659) Investments and other................................ (54) (174) (59) ----- ------- ------- Net cash provided (used) by investing activities..... (897) (693) (1,146) ----- ------- ------- FINANCING ACTIVITIES Issuance of common, treasury, and SECT shares........ 48 164 102 Purchase of common stock............................. (132) (172) (655) Issuance of NPS Preferred Stock...................... -- 296 -- Issuance of equity securities by a subsidiary........ 99 -- -- Redemption of preferred stock........................ -- (20) (20) Issuance of long-term debt........................... 597 2,800 595 Retirement of long-term debt......................... (23) (2,288) (513) Net increase (decrease) in short-term debt excluding current maturities on long-term debt................ (31) (221) 421 Cash transferred in Merger and Distributions......... -- (99) -- Dividends (common and preferred)..................... (204) (313) (286) ----- ------- ------- Net cash provided (used) by financing activities..... 354 147 (356) ----- ------- ------- Effect of foreign exchange rate changes on cash and temporary cash investments.......................... 3 1 8 ----- ------- ------- Increase (decrease) in cash and temporary cash investments......................................... (21) (292) (51) Cash and temporary cash investments, January 1....... 62 354 405 ----- ------- ------- Cash and temporary cash investments, December 31 (Note).............................................. $ 41 $ 62 $ 354 ===== ======= ======= Cash paid during the year for interest............... $ 206 $ 489 $ 459 Cash paid during the year for income taxes (net of refunds)............................................ $(145) $ 685 $ 168
- - -------- 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 financial statements are an integral part of these statements of cash flows. 40 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1997 1996 1995 ------------------- ------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- ------ ----------- ------ ----------- ------ (MILLIONS EXCEPT SHARE AMOUNTS) PREFERRED STOCK Balance January 1....... -- $ -- -- $ -- -- $ -- Issuance of NPS Preferred Stock....... -- -- 6,000,000 296 -- -- Merger of energy business.............. -- -- (6,000,000) (296) -- -- ----------- ------ ----------- ------ ----------- ------ Balance December 31..... -- -- -- -- -- -- =========== ------ =========== ------ =========== ------ COMMON STOCK Balance January 1....... 171,567,658 2 191,351,615 957 191,335,193 957 Issued pursuant to benefit plans......... 1,002,231 -- 84,796 -- 3,761 -- Recapitalization of New Tenneco........... -- -- (19,868,753) (955) -- -- Other.................. -- -- -- -- 12,661 -- ----------- ------ ----------- ------ ----------- ------ Balance December 31..... 172,569,889 2 171,567,658 2 191,351,615 957 =========== ------ =========== ------ =========== ------ STOCK EMPLOYEE COMPENSATION TRUST (SECT) Balance January 1....... -- (215) (298) Shares issued.......... -- 216 118 Adjustment to market value................. -- (1) (35) ------ ------ ------ Balance December 31..... -- -- (215) ------ ------ ------ PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS Balance January 1....... 2,642 3,602 3,553 Premium on common stock issued pursuant to benefit plans...... 37 28 -- Adjustment of SECT to market value.......... -- 1 35 Merger of energy business.............. -- (372) -- Distribution of shipbuilding business.............. -- (270) -- Recapitalization of New Tenneco........... -- (348) -- Other.................. -- 1 14 ------ ------ ------ Balance December 31..... 2,679 2,642 3,602 ------ ------ ------ CUMULATIVE TRANSLATION ADJUSTMENTS Balance January 1....... 23 26 (237) Translation of foreign currency statements... (160) 39 25 Disposition of investments in foreign subsidiaries.. -- (11) 235 Hedges of net investment in foreign subsidiaries (net of income taxes)......... 15 (31) 3 ------ ------ ------ Balance December 31..... (122) 23 26 ------ ------ ------ RETAINED EARNINGS (ACCUMULATED DEFICIT) Balance January 1....... (21) (469) (905) Net income............. 315 410 735 Dividends-- Preferred stock...... -- (9) (9) Common stock......... (205) (312) (287) Accretion of excess of redemption value of preferred stock over fair value at date of issue................. -- (3) (3) Recapitalization of New Tenneco........... -- 362 -- ------ ------ ------ Balance December 31..... 89 (21) (469) ------ ------ ------ LESS--COMMON STOCK HELD AS TREASURY STOCK, AT COST Balance January 1....... -- -- 16,422,619 753 3,617,510 170 Shares acquired........ 3,280,755 134 5,118,904 267 14,066,214 641 Shares issued to acquire businesses.... -- -- -- -- (1,229,614) (56) Shares issued pursuant to benefit and dividend reinvestment plans.... (352,566) (14) (1,672,770) (79) (31,491) (2) Recapitalization of New Tenneco........... -- -- (19,868,753) (941) -- -- ----------- ------ ----------- ------ ----------- ------ Balance December 31..... 2,928,189 120 -- -- 16,422,619 753 =========== ------ =========== ------ =========== ------ Total.................. $2,528 $2,646 $3,148 ====== ====== ======
The accompanying notes to financial statements are an integral part of these statements of changes in shareowners' equity. 41 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES Consolidation and Presentation The financial statements of Tenneco Inc. and consolidated subsidiaries ("Tenneco") include all majority-owned subsidiaries. Investments in 20% to 50% owned companies where Tenneco has the ability to exert significant influence over operating and financial policies are carried at cost plus equity in undistributed earnings since the date of acquisition and cumulative translation adjustments. All significant intercompany transactions have been eliminated. In December 1996, Tenneco Inc. was spun-off from the company formerly known as Tenneco Inc. ("Old Tenneco") in a series of transactions (the "Transaction"), which included distributions (the "Distributions") to Old Tenneco shareowners and a subsequent merger (the "Merger"). Following the Transaction, Tenneco owned the automotive parts ("Tenneco Automotive"), packaging ("Tenneco Packaging") and administrative services ("Tenneco Business Services") businesses of Old Tenneco. These transactions and their accounting treatment are described in more detail in Note 3, "Discontinued Operations, Disposition of Assets, and Extraordinary Loss." For purposes of these financial statements, "Tenneco" or the "Company" refers to Old Tenneco and its subsidiaries before the Transaction and to Tenneco Inc., formerly known as New Tenneco Inc. ("New Tenneco"), and its subsidiaries subsequent to the Transaction. Income Taxes Tenneco 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 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. Tenneco does not provide for U.S. 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 $740 million at December 31, 1997. It is not practicable to determine the amount of U.S. income taxes that would be payable upon remittance of the assets that represent those earnings. Changes in Accounting Principles As required by the Financial Accounting Standards Board'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," Tenneco recorded an after-tax charge of $46 million ($.27 per common share on both the basic and diluted bases), net of a tax benefit of $28 million, in the fourth quarter of 1997. EITF 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. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings Per Share," which established new standards for computing and presenting earnings per share. The provisions of the statement are effective for fiscal years ending after December 15, 1997, and accordingly have been adopted in the accompanying financial statements including the restatement 42 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) of previously reported earnings per share. Basic and diluted earnings per share, as reported, are not materially different from earnings per share as calculated in accordance with Accounting Principles Board Opinion No. 15, the previous earnings per share standard. Effective January 1, 1997, Tenneco adopted the American Institute of Certified Public Accountants Statement of Position 96-1, "Environmental Remediation Liabilities." This statement established new accounting and reporting standards for recognizing and disclosing environmental remediation liabilities. Tenneco also adopted FAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This new statement established new accounting and reporting standards for transfers and servicing of financial assets and extinguishing liabilities. The adoption of these new standards did not have a significant effect on Tenneco's financial position or results of operations. Tenneco adopted FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in the first quarter of 1996. FAS No. 121 establishes new accounting standards for measuring the impairment of long-lived assets. The adoption of this new standard did not have a significant effect on Tenneco's financial position or results of operations. Inventories At December 31, 1997 and 1996, inventory by major classification was as follows:
1997 1996 ------ ------ (MILLIONS) Finished goods.............................................. $ 467 $ 408 Work in process............................................. 100 118 Raw materials............................................... 265 245 Materials and supplies...................................... 118 107 ------ ------ $ 950 $878 ====== ====== Inventories are stated at the lower of cost or market. A portion of total inventories (44% and 46% at December 31, 1997 and 1996, respectively) is valued using the "last-in, first-out" method. All other 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 Tenneco for all inventories, inventories would have been $45 million and $54 million higher at December 31, 1997 and 1996, respectively. Goodwill and Intangibles At December 31, 1997 and 1996, goodwill and intangibles by major category were as follows: 1997 1996 ------ ------ (MILLIONS) Goodwill.................................................... $1,212 $ 963 Trademarks.................................................. 182 187 Patents..................................................... 160 156 Other....................................................... 23 35 ------ ------ $1,577 $1,341 ====== ======
Goodwill is being amortized on a straight-line basis over periods ranging from 20 years to 40 years. Such amortization amounted to $36 million, $21 million, and $10 million for 1997, 1996, and 1995, respectively, and is included in the statements of income caption, "Depreciation, depletion and amortization." 43 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Tenneco 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 $24 million and $26 million in 1997 and 1996, was not significant during 1995, and is included in the statements of income caption, "Depreciation, depletion and amortization." Plant, Property, and Equipment, at Cost At December 31, 1997 and 1996, plant, property, and equipment, at cost, by major category was as follows:
1997 1996 ------ ------ (MILLIONS) Land, buildings, and improvements.......................... $1,371 $1,339 Machinery and equipment.................................... 3,411 2,956 Other, including construction in progress.................. 502 575 ------ ------ $5,284 $4,870 ====== ======
Depreciation of Tenneco'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. Depletion of timber and timberlands is provided on a unit-of- production basis. Notes Receivable and Allowance for Doubtful Accounts Short and long-term notes receivable of $60 million and $65 million were outstanding at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, the short and long-term allowance for doubtful accounts on accounts and notes receivable was $35 million and $32 million, respectively. 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 financial statements. For further information on this subject, refer to Note 13, "Commitments and Contingencies." Earnings Per Share According to the requirements of FAS No. 128, "Earnings Per Share," basic earnings per share are computed by dividing income available to common shareowners by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings 44 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) per share except that the weighted-average number of shares outstanding is adjusted to include estimates of additional shares that would be issued if potentially dilutive common shares had been issued. In addition, income available to common shareowners is adjusted to include any changes in income or loss that would result from the assumed issuance of the dilutive common shares. Tenneco's preferred stock outstanding before the Merger was converted into El Paso Natural Gas Company ("El Paso") common stock as part of the Merger; therefore, preferred stock dividends have been deducted from income from discontinued operations in determining earnings per share. For more information regarding the Merger, see Note 3, "Discontinued Operations, Disposition of Assets, and Extraordinary Loss." Allocation of Corporate Debt and Interest Expense 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 outstanding before the Transaction has been allocated to discontinued operations based upon the ratio of the discontinued operations' net assets to Tenneco's consolidated net assets plus debt. Interest expense, net of tax, has been allocated to Tenneco's discontinued operations based on the same allocation methodology. See Note 3, "Discontinued Operations, Disposition of Assets, and Extraordinary Loss," for further discussion regarding the Transaction. Research and Development Research and development costs are expensed as incurred. Research and development expenses were $53 million, $60 million, and $42 million for 1997, 1996, and 1995, respectively, and are included in the income statement caption "Engineering, research, and development expenses." Realignment Charges In 1996, the Company recorded charges of approximately $70 million in connection with the reorganization of Tenneco Packaging's folding carton operations and the realignment of Tenneco Automotive's: (i) Walker exhaust system original equipment and aftermarket manufacturing operations in Europe, (ii) Walker aftermarket operations in North America, and (iii) Monroe ride control product line. In 1995, Tenneco Packaging recorded charges of approximately $30 million in connection with the realignment of molded fiber and aluminum foil operations. 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 balance sheet caption "Cumulative translation adjustments." Risk Management Activities Tenneco 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. Tenneco's primary exposure to changes in foreign currency rates results from intercompany loans made between Tenneco affiliates to minimize the need for borrowings from third parties. Net gains or losses on these foreign currency exchange contracts that are designated as hedges are recognized in the income statement to offset the 45 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) foreign currency gain or loss on the underlying transaction. Additionally, Tenneco 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. Since these anticipated transactions are not firm commitments, Tenneco marks these forward contracts to market each period and records any gain or loss in the income statement. Tenneco 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 balance sheet caption "Cumulative translation adjustments." 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. Tenneco 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 Tenneco's assets, liabilities, revenues, and expenses. Reference is made to the "Income Taxes" section of this footnote and Notes 10, 11, and 13 for additional information on significant estimates included in Tenneco's financial statements. Reclassifications Prior years' financial statements have been reclassified where appropriate to conform to 1997 presentations. 2. ACQUISITIONS In March 1997, Tenneco entered into an agreement to acquire the protective and flexible packaging division of NV 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 a seller. Upon completion of the KNP acquisition in late April 1997, KNP became a part of Tenneco Packaging. Also during 1997, Tenneco completed acquisitions or investments in other businesses and joint ventures, principally, in the automotive parts industry, for total consideration of approximately $38 million. A preliminary allocation of the purchase price has been made for these acquisitions. A final determination of the purchase price allocation will be made upon the completion of certain ongoing appraisals; however, management does not believe that any adjustments to the preliminary purchase price allocation will be material to Tenneco's financial position or results of operations. In June 1996, Tenneco entered into agreements to acquire Clevite for $328 million and Amoco Foam Products for $310 million. Clevite makes suspension bushings and other elastomeric parts for cars and trucks. Upon completion of the Clevite acquisition in July 1996, Clevite's operations became part of Tenneco Automotive. Amoco Foam Products manufactures expanded polystyrene tableware, hinged-lid food containers, packaging trays, and industrial products for residential and commercial construction applications. Tenneco closed the acquisition of Amoco Foam Products in August 1996, and Amoco Foam Products became part of Tenneco Packaging. Also during 1996, Tenneco completed the acquisitions of or investments in various other businesses and joint ventures, principally in the automotive parts industry, for total consideration of approximately $110 million. In November 1995, Tenneco Packaging acquired the plastics division of Mobil Corporation for $1.3 billion. The plastics business is one of the largest North American producers of polyethylene and polystyrene consumer and food service packaging. 46 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Also during 1995, Tenneco Packaging completed additional acquisitions of seven paperboard packaging businesses and three specialty packaging businesses for a total purchase price of approximately $196 million. In addition, Tenneco Automotive completed four acquisitions in 1995 for a total purchase price of approximately $54 million. 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 balance sheet caption "Goodwill and intangibles, net." 3. DISCONTINUED OPERATIONS, DISPOSITION OF ASSETS, AND EXTRAORDINARY LOSS Discontinued Operations The Energy Business and Shipbuilding Business Tenneco Inc. was spun-off from Old Tenneco on December 11, 1996, following a series of transactions undertaken to realign the assets, liabilities, and operations of Old Tenneco such that Tenneco Automotive, Tenneco Packaging, and Tenneco Business Services were owned by New Tenneco and the shipbuilding business was owned by Newport News Shipbuilding Inc. ("Newport News"). On December 11, 1996, Old Tenneco distributed the shares of New Tenneco and Newport News to its shareowners. On December 12, 1996, Old Tenneco, which then consisted primarily of the energy business and certain previously discontinued operations of Old Tenneco, merged with a subsidiary of El Paso. Although the separation of Tenneco Inc. from Old Tenneco was structured as a spin-off for legal, tax and other reasons, Tenneco Inc. kept certain important aspects of Old Tenneco, including its executive management, Board of Directors, and headquarters. Most importantly, the combined assets, revenues, and operating income of Tenneco Automotive and Tenneco Packaging represented more than half the assets, revenues, and operating income of Old Tenneco before the Distributions and Merger. Consequently, Tenneco Inc.'s financial statements for periods before the Distributions and Merger present the net assets and results of operations of Old Tenneco's shipbuilding and energy businesses, as well as its farm and construction equipment business which was disposed of before the Distributions and Merger, as discontinued operations. In connection with the Distributions, one share of New Tenneco common stock ($.01 par value) was issued for each share of Old Tenneco common stock ($5.00 par value) and one share of Newport News common stock was issued for each five shares of Old Tenneco common stock. Also, in connection with the Merger, Old Tenneco shareowners received shares of El Paso common stock valued at approximately $914 million in the aggregate in exchange for their shares of Old Tenneco common and preferred stock. The treasury shares held by Old Tenneco did not participate in the Merger and Distributions and were retained by Old Tenneco in the Merger. Subsequent to the Transaction, the common equity of Tenneco Inc. relates solely to the shares of New Tenneco common stock issued in the Distributions. In connection with the Transaction, the retained earnings (accumulated deficit) of Old Tenneco was eliminated. Retained earnings (accumulated deficit) shown on the balance sheets represents net earnings (losses) accumulated after the date of the Transaction. The effects of the issuance of New Tenneco common stock in the Distributions, the retention of treasury shares by Old Tenneco, and the elimination of Old Tenneco's retained earnings (accumulated deficit) have been reflected in the statements of changes in shareowners' equity as "Recapitalization of New Tenneco." 47 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Net assets as of December 31, 1995, and results of operations for the years ended December 31, 1996 and 1995, for the energy business were as follows:
1996 1995 ------ ------ (MILLIONS) Net assets at December 31 (Note)................................ $ -- $ 452 ====== ====== Net sales and operating revenues................................ $2,512 $1,921 ====== ====== Income before income taxes and interest allocation.............. $ 291 $ 269 Income tax expense.............................................. (78) (32) ------ ------ Income before interest allocation............................... 213 237 Allocated interest expense, net of income tax (Note)............ (86) (79) ------ ------ Income from discontinued operations before transaction costs.... $ 127 $ 158 ====== ======
- - -------- Note: Reference is made to Note 1, "Summary of Accounting Policies--Allocation of Corporate Debt and Interest Expense," for a discussion of the allocation of corporate debt and interest expense to discontinued operations. On December 11, 1996, one day before the Merger, Old Tenneco completed the distribution of the common stock of Newport News to the holders of Old Tenneco common stock. As part of the Distributions, Newport News retained the net assets of the shipbuilding business, including approximately $600 million of debt that had been issued during November 1996. Net assets as of December 31, 1995, and results of operations for the years ended December 31, 1996 and 1995, for the shipbuilding business were as follows:
1996 1995 ------ ------ (MILLIONS) Net assets at December 31 (Note)................................ $ -- $ 270 ====== ====== Net sales and operating revenues................................ $1,822 $1,756 ====== ====== Income before income taxes and interest allocation.............. $ 133 $ 160 Income tax expense.............................................. (43) (68) ------ ------ Income before interest allocation............................... 90 92 Allocated interest expense, net of income tax (Note)............ (20) (19) ------ ------ Income from discontinued operations before transaction costs.... $ 70 $ 73 ====== ======
- - -------- Note: Reference is made to Note 1, "Summary of Accounting Policies--Allocation of Corporate Debt and Interest Expense," for a discussion of the allocation of corporate debt and interest expense to discontinued operations. The costs incurred to complete the Transaction, consisting primarily of financial advisory, legal, accounting, printing, and other costs, of approximately $108 million, net of a $17 million income tax benefit, were recorded as a component of 1996 income from discontinued operations. Farm and Construction Equipment Operations In June 1994, Tenneco completed an initial public offering ("IPO") of approximately 29% of the common stock of Case Corporation ("Case"), the holder of Tenneco's farm and construction equipment segment. In November 1994, a secondary offering of Case common stock reduced Tenneco's ownership interest in Case to approximately 44%. Combined proceeds from the two transactions was $694 million, net of commissions and 48 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) offering expenses. The combined gain on the transactions was $36 million, including a $7 million tax benefit. In an August 1995 public offering, Tenneco sold an additional 16.1 million shares of Case common stock for net proceeds of approximately $540 million. The sale resulted in a gain of $101 million and reduced Tenneco's ownership in Case from 44% to 21%. In December 1995, Tenneco sold to a third party a subordinated note receivable due from Case, which was received as part of the reorganization preceding the Case IPO, for net proceeds of $298 million and recognized a gain of $32 million. In March 1996, Tenneco sold its remaining 15.2 million shares of common stock of Case in a public offering. Net proceeds of approximately $788 million were received, resulting in a gain of $340 million, net of $83 million in income tax expense. Net assets as of December 31, 1995, and results of operations for the years ended December 31, 1996 and 1995, for the farm and construction equipment segment are as follows:
1996 1995 ----- ----- (MILLIONS) Net assets at December 31......................................... $ -- $ 323 ===== ===== Net sales and operating revenues.................................. $ -- $ -- ===== ===== Income before income taxes and interest allocation................ $ 1 $ 126 Income tax benefit................................................ -- 8 ----- ----- Income before interest allocation................................. 1 134 Allocated interest expense, net of income tax (Note).............. (2) (21) ----- ----- Income (loss) from operations..................................... (1) 113 ----- ----- Gains on dispositions............................................. 423 135 Income tax expense from disposition............................... (83) (2) ----- ----- Net gains on dispositions......................................... 340 133 ----- ----- Income from discontinued operations............................... $ 339 $ 246 ===== =====
- - -------- Note: Reference is made to Note 1, "Summary of Accounting Policies--Allocation of Corporate Debt and Interest Expense," for a discussion of the allocation of corporate debt and interest expense to discontinued operations. Chemicals Operations In March 1995, Tenneco completed an IPO of 100% of its Albright & Wilson chemicals segment which was reflected as discontinued operations in the 1994 financial statements. The offering was underwritten in the United Kingdom and was offered primarily in the United Kingdom. Net proceeds from the sale of the chemicals operations were approximately $700 million. Disposition of Assets In the second quarter of 1996, Tenneco Packaging entered into an agreement to form a joint venture with Caraustar Industries whereby Tenneco Packaging sold its two recycled paperboard mills and a fiber recycling operation and brokerage business to the joint venture in return for cash and an equity interest in the joint venture. Proceeds from the sale were approximately $115 million and the Company recognized a $50 million pre-tax gain in the second quarter of 1996. In 1995, Tenneco sold certain facilities and assets, principally at its Tenneco Packaging segment. Proceeds from these dispositions totaled approximately $56 million, resulting in a pre-tax gain of $15 million. Gains and losses on the sale of businesses and assets have been included in the caption "Other income, net" in the accompanying statements of income. 49 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Extraordinary Loss In preparation for the Transaction, Old Tenneco realigned $3.8 billion of indebtedness (the "Debt Realignment") through various cash tender offers, debt exchanges, defeasances, and other retirements. The cash funding required to consummate the Debt Realignment was financed through internally generated cash, borrowings under new credit facilities of both Old Tenneco and New Tenneco, borrowings under a new credit facility and other financings at Newport News, and proceeds from the issuance of 8 1/4% cumulative junior preferred stock ("NPS Preferred Stock"), which was retained by Old Tenneco in the Merger. As a result of the Merger, El Paso indirectly acquired approximately $2.8 billion of debt and preferred stock obligations as well as certain liabilities related to operations previously discontinued by Old Tenneco. As a result of the Debt Realignment, Tenneco recognized an extraordinary loss of approximately $236 million, net of a tax benefit of approximately $126 million. This extraordinary loss consists principally of the fair value paid in the cash tender offers and the fair value of debt exchanged in the debt exchange offers in excess of the historical net carrying value for the debt tendered and exchanged. 4. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS Long-Term Debt A summary of long-term debt obligations of Tenneco at December 31, 1997 and 1996, is set forth in the following table:
1997 1996 ------ ------ (MILLIONS) Tenneco Inc.-- Debentures due 2008 through 2027, average effective interest rate 7.5% in 1997 and 7.3% in 1996 (net of $68 million in 1997 and $76 million in 1996 of unamortized premium)............... $1,217 $ 725 Notes due 1999 through 2007, average effective interest rate 6.7% in 1997 and 1996 (net of $47 million in 1997 and $60 million in 1996 of unamortized premium)....................... 1,358 1,271 Other subsidiaries-- Notes due 1998 through 2016, average effective interest rate 11.2% in 1997 and 7.2% in 1996 (net of $24 million in 1997 and $23 million in 1996 of unamortized discount).................. 64 79 ------ ------ 2,639 2,075 Less--current maturities........................................ 6 8 ------ ------ Total long-term debt............................................ $2,633 $2,067 ====== ======
Approximately $70 million of gross plant, property, and equipment at December 31, 1997 and 1996, was pledged as collateral to secure $26 million and $25 million, respectively, principal amounts of long-term debt. The aggregate maturities and sinking fund requirements applicable to the issues outstanding at December 31, 1997 are $6 million, $260 million, $12 million, $188 million, and $496 million for 1998, 1999, 2000, 2001, and 2002, respectively. 50 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Short-Term Debt Tenneco uses commercial paper, lines of credit, and overnight borrowings to finance its short-term capital requirements. Information regarding short-term debt as of and for the years ended December 31, 1997 and 1996, are as follows:
1997 1996 ---------------------- ---------------------- COMMERCIAL CREDIT COMMERCIAL CREDIT PAPER AGREEMENTS* PAPER AGREEMENTS* ---------- ----------- ---------- ----------- (DOLLARS IN MILLIONS) Outstanding borrowings at end of year............................ $203 $ 69 $219 $ 9 Weighted average interest rate on outstanding borrowings at end of year............................ 5.9% 6.7% 5.6% 6.5% Approximate maximum month-end outstanding borrowings during year............................ $613 $123 $336 $2,580 Approximate average month-end outstanding borrowings during year............................ $372 $ 52 $108 $ 800 Weighted average interest rate on approximate average month-end outstanding borrowings during year............................ 5.7% 8.4% 5.7% 6.5%
- - -------- * Includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements. Financing Arrangements
COMMITTED CREDIT FACILITIES(A) ------------------------------- TERM COMMITMENTS UTILIZED AVAILABLE ------- ----------- -------- --------- (MILLIONS) Tenneco Inc. credit agreements.......... 2001 $1,750 $203(b) $1,547 Subsidiaries' credit agreements......... Various 56 29 27 ------ ---- ------ $1,806 $232 $1,574 ====== ==== ======
- - -------- Notes: (a) Tenneco and its subsidiaries generally are required to pay commitment fees on the unused portion of the total commitment and facility fees on the total commitment. (b) Tenneco's committed long-term credit facilities support its commercial paper borrowings; consequently, the amount available under the committed long-term credit facilities is reduced by outstanding commercial paper borrowings. At December 31, 1997, Tenneco's principal credit facility, which expires in 2001, was a $1.75 billion committed financing arrangement with a syndicate of banks and other financial institutions. Committed borrowings under this credit facility bear interest at an annual rate equal to, at the borrower's option, either (i) a rate consisting of the higher of Morgan Guaranty Trust Company of New York's prime rate or the federal funds rate plus 50 basis points; (ii) a rate of LIBOR plus a margin determined based on the credit rating of Tenneco's long-term debt; or (iii) a rate based on money market rates pursuant to competitive bids by the syndicate banks. The credit facility requires that the Company's consolidated ratio of debt to total capitalization, as defined in the credit facility, not exceed 70%. Compliance with this requirement is a condition for any incremental borrowings under the credit facility and failure to meet the requirement enables the syndicate banks to require repayment of any outstanding loans after a 30-day cure period. At December 31, 1997, Tenneco's ratio of debt to total capitalization as defined in the credit facility was 53.5%. In addition, the credit facility imposes certain other restrictions, none of which are expected to limit the Company's ability to operate its business in the ordinary course. 51 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. FINANCIAL INSTRUMENTS The carrying and estimated fair values of Tenneco's financial instruments by class at December 31, 1997 and 1996, were as follows:
1997 1996 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------- (MILLIONS) ASSETS (LIABILITIES) Long-term debt (including current maturities)............................... $(2,639) $(2,606) $(2,075) $(2,069) Instruments With Off-Balance-Sheet Risk.... Foreign currency contracts............... 2 2 1 1 Financial guarantees..................... -- (15) -- (15)
Asset and Liability Instruments The fair value of cash and temporary cash investments, short and long-term receivables, accounts payable, and short-term debt was considered to be the same as or was not determined to be materially different from the carrying amount. At December 31, 1997 and 1996, respectively, Tenneco's aggregate customer and long-term receivable balance was concentrated by industry segment as follows: Tenneco Automotive, 63% and 69%, respectively, and Tenneco Packaging, 37% and 31%, respectively. Long-term debt--The fair value of fixed-rate long-term debt was based on the market value of debt with similar maturities and interest rates. Instruments With Off-Balance-Sheet Risk Foreign Currency Contracts--Note 1, "Summary of Accounting Policies--Risk Management Activities" describes Tenneco's use of and accounting for foreign currency exchange contracts. The following table summarizes by major currency the contractual amounts of foreign currency contracts utilized by Tenneco:
NOTIONAL AMOUNT --------------------------------------- DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------- ------------------- PURCHASE SELL PURCHASE SELL ---------- -------- ---------- -------- (MILLIONS) Foreign currency contracts (in US$): Belgian Francs....................... $ 24 $ 6 $ 34 $ -- British Pounds....................... 156 257 344 153 Canadian Dollars..................... 58 16 128 120 Danish Krone......................... 22 -- 37 1 French Francs........................ 52 1 47 22 German Marks......................... 4 121 73 110 U.S. Dollars......................... 92 -- 65 304 Other................................ 51 56 53 70 -------- -------- -------- -------- $ 459 $ 457 $ 781 $ 780 ======== ======== ======== ========
Based on exchange rates at December 31, 1997 and 1996, the cost of replacing these contracts in the event of non-performance by the counterparties would not have been material. Guarantees--Tenneco had guaranteed payment and performance of approximately $15 million at December 31, 1997 and 1996, primarily with respect to letters of credit and other guarantees supporting various financing and operating activities. 52 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. INCOME TAXES The domestic and foreign components of income from continuing operations before income taxes are as follows:
YEARS ENDED DECEMBER 31, -------------- 1997 1996 1995 ---- ---- ---- (MILLIONS) U.S. income before income taxes................................. $259 $248 $361 Foreign income before income taxes.............................. 289 185 151 ---- ---- ---- Income before income taxes...................................... $548 $433 $512 ==== ==== ====
Following is a comparative analysis of the components of income tax expense applicable to continuing operations:
YEARS ENDED DECEMBER 31, ----------------- 1997 1996 1995 ----- ---- ----- (MILLIONS) Current-- U.S........................................................ $(133) $ 92 $ 54 State and local............................................ 2 23 38 Foreign.................................................... 59 56 64 ----- ---- ----- (72) 171 156 ----- ---- ----- Deferred-- U.S........................................................ 190 15 61 Foreign, state and other................................... 45 8 14 ----- ---- ----- 235 23 75 ----- ---- ----- Income tax expense........................................... $ 163 $194 $ 231 ===== ==== =====
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 statements of income:
YEARS ENDED DECEMBER 31, --------------- 1997 1996 1995 ---- ---- ---- (MILLIONS) Tax expense computed at the statutory U.S. federal income tax rate.......................................................... $192 $152 $179 Increases (reductions) in income tax expense resulting from: Foreign income taxed at different rates and foreign losses with no tax benefit......................................... (33) 7 17 State and local taxes on income, net of U.S. federal income tax benefit................................................. 23 15 25 Recognition of previously unbenefited loss carryforwards..... (11) -- -- Amortization of nondeductible goodwill....................... 6 7 4 Other........................................................ (14) 13 6 ---- ---- ---- Income tax expense............................................. $163 $194 $231 ==== ==== ====
53 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The components of Tenneco's net deferred tax liability were as follows:
DECEMBER 31, ------------ 1997 1996 ----- ----- (MILLIONS) Deferred tax assets-- Tax loss carryforwards: U.S......................................................... $ 101 $ -- Foreign..................................................... 81 102 Postretirement benefits other than pensions.................. 53 51 Other........................................................ 31 59 Valuation allowance.......................................... (29) (60) ----- ----- Net deferred tax asset..................................... 237 152 ----- ----- Deferred tax liabilities-- Tax over book depreciation................................... 371 215 Pensions..................................................... 229 184 Other........................................................ 133 74 ----- ----- Total deferred tax liability............................... 733 473 ----- ----- Net deferred tax liability................................... $ 496 $ 321 ===== =====
As reflected by the valuation allowance in the table above, Tenneco had potential tax benefits of $29 million and $60 million at December 31, 1997 and 1996, respectively, which were not recognized in the 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. All of the U.S. tax loss carryforwards, $289 million at December 31, 1997, expire in 2012. Of the foreign tax loss carryforwards at December 31, 1997, $3 million will expire in 2001, $21 million will expire in 2003, and $175 million do not expire. In connection with the corporate reorganization transactions discussed in Note 3, "Discontinued Operations, Disposition of Assets and Extraordinary Loss," Tenneco entered into a tax sharing agreement with Newport News, Old Tenneco and El Paso. The tax sharing agreement provides, among other things, for the allocation among the parties of tax liabilities arising before, as a result of, and after the Distributions. For periods after the Distributions, Tenneco will be liable for taxes imposed on its businesses, Old Tenneco will be liable for taxes imposed on the energy business, and Newport News will be liable for taxes imposed on the shipbuilding business. In the case of federal income taxes imposed on the activities of the Old Tenneco consolidated group before the Distributions, Tenneco and Newport News are generally liable to Old Tenneco for federal income taxes attributable to their respective businesses, and those entities have been allocated an agreed-upon share of estimated tax payments made by Old Tenneco. 7. COMMON STOCK Tenneco Inc. has authorized 350 million shares ($ .01 par value) of common stock, of which 172,569,889 shares and 171,567,658 shares were issued at December 31, 1997 and 1996, respectively. Tenneco Inc. held 2,928,189 shares of treasury stock at December 31, 1997, and no shares of treasury stock at December 31, 1996. Stock Repurchase Plans During 1997, Tenneco initiated a common stock repurchase program to acquire up to 8.5 million shares. Approximately 3.2 million shares have been acquired under this program at a total cost of approximately $132 million. 54 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Under common stock repurchase programs announced in 1994 and 1995, approximately 17 million shares of Old Tenneco stock were acquired at a total cost of over $750 million. All treasury stock purchased under these programs became the treasury stock of Old Tenneco. All purchases executed through these programs were in the open market or negotiated purchases. Reserved The total number of shares of Tenneco Inc. common stock reserved at December 31, 1997 and 1996, were as follows:
DECEMBER 31, --------------------- ORIGINAL ISSUE SHARES 1997 1996 --------------------- ---------- ---------- Thrift Plan..................................... 167,223 476,372 Restricted Stock Plans.......................... 33,796 62,000 Stock Ownership Plan............................ 16,556,126 17,000,000 Employee Stock Purchase Plan.................... 2,255,232 2,500,000 ---------- ---------- 19,012,377 20,038,372 ========== ========== TREASURY STOCK -------------- Thrift Plan..................................... 42,434 -- ========== ==========
Stock Plans Tenneco Inc. Stock Ownership Plan--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 shares, stock appreciation rights, and stock options to directors, officers, and employees of Tenneco. Tenneco can issue up to 17,000,000 shares of common stock under the 1996 Stock Ownership Plan, which will terminate December 31, 2001. All Old Tenneco stock options granted to New Tenneco employees before the Distributions were, in connection with the Distributions, cancelled and replaced with options to purchase New Tenneco common stock according to the provisions of the 1996 Stock Ownership Plan. The options were replaced with the appropriate number of New Tenneco options so that the aggregate option value immediately after the Distributions equaled the aggregate value immediately before the Distributions. The 1994 Stock Ownership Plan was terminated effective as of December 11, 1996. Restricted Stock and Performance Shares--Tenneco has granted restricted stock and restricted units under the 1996 Stock Ownership Plan to certain key employees. These awards generally require, among other things, that the employee remain an employee of Tenneco during the restriction period. Tenneco has also granted performance shares to certain key employees which will vest based upon the attainment of specified performance goals within four years from the date of grant. During 1997, 1996, and 1995, Tenneco granted 494,350, 465,075, and 481,625 shares and units, respectively, with a weighted average fair value based on the price of Tenneco's stock on the grant date of $43.06, $48.54, and $43.62 per share, respectively. Any restricted stock and performance shares awarded after the Distributions are issued under the 1996 Stock Ownership Plan. At December 31, 1997, 127,270 restricted shares at an average price of $42.53 per share, 324,395 performance shares at an average price of $43.26 per share, and no restricted units were outstanding under this plan. Under another arrangement, restricted stock or restricted units are issued annually to each member of the Board of Directors who is not also an officer of Tenneco. During 1996 and 1995, 3,300, and 3,000 restricted shares were issued with a weighted average fair value based on the price of Tenneco's stock on the grant date of $48.25 and $42.88 per share, respectively. On November 1, 1996, all outstanding restricted shares were vested. 55 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In December 1996, Tenneco adopted a new restricted stock and unit plan for each member of the Board of Directors who is not also an officer of Tenneco. During 1997 and 1996, 5,040 and 23,464 restricted shares were issued under the new plan at a weighted average fair value of Tenneco Inc.'s stock on the grant date of $45.19 and $45.31 per share, respectively. At December 31, 1997, 28,504 restricted shares at an average price of $45.29 per share were outstanding under the new plan. In conjunction with the Transaction, all outstanding restricted shares and performance shares as of November 1, 1996, were vested and Tenneco recognized an after-tax compensation expense of $18 million, of which approximately $7 million related to restricted stock and performance shares awarded to employees of the energy business and shipbuilding business. Employee Stock Purchase Plan--In June 1992, Tenneco initiated an Employee Stock Purchase Plan (the "1992 ESPP"). The 1992 ESPP was terminated as of the date of the Distributions. Effective April 1, 1997, Tenneco adopted a new ESPP with provisions similar to the 1992 ESPP. The ESPP allows U.S. and Canadian Tenneco employees to purchase Tenneco Inc. common stock at a 15% discount. Each year employees participating in the ESPP may purchase shares with a discounted value not to exceed $21,250. Under the respective ESPPs, Tenneco sold 244,768, 657,936, and 633,495 shares to employees in 1997, 1996, and 1995, respectively. 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 $11.16, $10.84, and $9.39 in 1997, 1996, and 1995, respectively. Stock Options--The following table reflects the status and activity for all stock options issued by Tenneco Inc., including those outside the option plans discussed above, for the periods indicated:
1997 1996 1995 -------------------- -------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED SHARES AVG. SHARES AVG. SHARES AVG. UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE STOCK OPTIONS OPTION PRICES OPTION PRICES OPTION PRICES ------------- ---------- -------- ---------- -------- --------- -------- Outstanding, beginning of year................ 10,877,758 $43.41 3,019,116 $46.99 2,084,942 $51.08 Granted--Options...... 2,928,669 42.91 8,178,600 46.17 1,493,505 43.01 Exercised--Options.... (312,979) 39.64 (817,212) 45.29 (2,700) 41.30 --SARs....... -- -- (25,741) 36.23 (45,215) 40.47 Issuance of New Tenneco options...... -- -- 5,015,258 41.19 -- -- Cancelled............. (1,569,376) 43.19 (4,492,263) 46.01 (511,416) 52.63 ---------- ------ ---------- ------ --------- ------ Outstanding, end of year................... 11,924,072 $43.42 10,877,758 $43.41 3,019,116 $46.99 ========== ====== ========== ====== ========= ====== Options exercisable at end of year............ 2,703,948 $40.84 1,809,596 $41.67 846,889 $47.80 ========== ====== ========== ====== ========= ====== Weighted average fair value of options granted during the year................... $ 12.62 $ 11.37 $ 11.82 ========== ========== =========
The fair value of each option granted during 1997, 1996, and 1995 is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions for grants in 1997, 1996, and 1995, respectively: (i) risk-free interest rates of 6.6%, 5.9%, and 7.1%; (ii) expected lives of 7.5, 5.0, and 5.0 years; (iii) expected volatility 25.6%, 25.1%, and 28.9%; and (iv) dividend yield of 2.8%, 3.4%, and 3.6%. 56 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following table reflects summarized information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------- -------------------- WEIGHTED AVG. WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVG. NUMBER AVG. EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE PRICE AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE -------- ----------- ----------- -------- ----------- -------- $31 to $38................ 1,025,863 6.1 years $35.36 767,724 $34.83 $38 to $44................ 2,995,118 12.8 40.90 1,104,075 40.93 $44 to $51................ 7,903,091 12.9 45.42 832,149 46.25 ---------- --------- 11,924,072 2,703,948 ========== =========
Tenneco applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," to account for its stock-based compensation plans. Tenneco recognized after-tax stock-based compensation expense in 1997 of $5 million and in 1996 of $27 million, of which $9 million related to restricted stock and performance shares awarded to employees of the energy business and the shipbuilding business. Stock-based compensation expense recognized in 1995 was not material. Had compensation costs for Tenneco'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 the awards under those plans, Tenneco's pro forma net income to common stock and earnings per share of common stock for the years ended December 31, 1997 and 1996, would have been lower by $34 million, or $.20 per both basic and diluted common share, and $14 million, or $.08 per both basic and diluted common share, respectively. The increase in compensation expense was primarily the result of stock options issued subsequent to the Transaction. Stock Employee Compensation Trust (SECT) In November 1992, Tenneco established the SECT to fund a portion of its obligations arising from its various employee compensation and benefit plans. Tenneco issued 12 million shares of treasury stock to the SECT in exchange for a promissory note of $432 million that accrued interest at the rate of 7.8% per annum. At December 31, 1996, all shares had been utilized. Shareholder Rights Plan In connection with the Distributions, Tenneco Inc. adopted a Shareholder Rights Plan (the "Plan"), which is substantially the same as the provisions of the Old Tenneco Shareholder Rights Plan adopted in 1988. The Plan was adopted to deter coercive takeover tactics and to prevent a potential acquiror from gaining control of Tenneco in a transaction which is not in the best interests of Tenneco Inc. shareholders. Under the Plan, each outstanding share of Tenneco Inc. common stock receives one Right, exercisable at $130, subject to adjustment. In the event a person or group (i) acquires 20% or more of the outstanding Tenneco Inc. common stock other than pursuant to an offer for all shares of such common stock that a majority of the members of the Board of Directors who are not officers of the Company determines is fair and in the best interests of Tenneco Inc. and its shareholders, or (ii) has in the judgment of the Tenneco Inc. Board of Directors acquired 10% or more of the outstanding Tenneco Inc. common stock under certain motives deemed adverse to Tenneco's best interests, each Right entitles the holder to purchase shares of common stock or other securities of Tenneco Inc. or, under certain circumstances, of the acquiring person, having a value of twice the exercise price. The Rights, under certain circumstances, are redeemable by Tenneco Inc. at a price of $.02 per Right. The Plan is scheduled to terminate in 1998. 57 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Dividend Reinvestment and Stock Purchase Plan Under the Tenneco Inc. Dividend Reinvestment and Stock Purchase Plan, holders of Tenneco Inc. common stock may apply their cash dividends and optional cash investments to the purchase of additional shares of Tenneco Inc. common stock. Earnings Per Share Earnings per share of common stock outstanding were computed as follows:
YEARS ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 ----------- ----------- ----------- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) Basic Earnings Per Share-- Income from continuing operations(a)..... $ 361 $ 218 $ 258 =========== =========== =========== Average shares of common stock outstanding(b).......................... 170,264,731 169,609,373 172,764,198 =========== =========== =========== Earnings from continuing operations per average share of common stock........... $ 2.12 $ 1.29 $ 1.49 =========== =========== =========== Diluted Earnings Per Share-- Income from continuing operations(a)..... $ 361 $ 218 $ 258 Impact of assumed conversion of convertible debt(c)..................... -- -- -- ----------- ----------- ----------- Income from continuing operations including assumed conversion............ $ 361 $ 218 $ 258 =========== =========== =========== Average shares of common stock outstanding(b).......................... 170,264,731 169,609,373 172,764,198 Effect of dilutive securities: Restricted stock....................... -- 516,336 626,732 Stock options.......................... 452,867 400,403 64,329 Performance shares..................... 84,038 -- 27,625 Convertible debt(c).................... -- -- 28,770 ----------- ----------- ----------- Average shares of common stock outstanding including dilutive securities.............................. 170,801,636 170,526,112 173,511,654 =========== =========== =========== Earnings from continuing operations per average share of common stock........... $ 2.11 $ 1.28 $ 1.48 =========== =========== ===========
- - -------- Notes: (a) All preferred stock outstanding before the Merger was acquired by El Paso. Therefore, preferred stock dividends are included in the computation of earnings per share from discontinued operations for 1996 and 1995. There was no preferred stock outstanding in 1997. (b) In 1992, 12 million shares of common stock were issued to the SECT. Shares of common stock issued to a related trust are not considered to be outstanding in the computation of average shares until the shares are used to fund the obligations of the trust. During each of the years ended December 31, 1996 and 1995, the SECT used 4,358,084 and 2,697,770 shares, respectively. At December 31, 1996, all shares were used. Stock repurchase plans also affect common stock outstanding. See Note 7 for additional information regarding these plans. (c) During 1995, Tenneco Inc. 10% loan stock outstanding was convertible into common stock. The impact of the assumed conversion on income from continuing operations was $12,746 and on average shares of common stock outstanding was 28,770 shares. At December 31, 1995, all loan stock was converted. 58 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. PREFERRED STOCK Tenneco had 50 million shares of preferred stock ($.01 par value) authorized at December 31, 1997 and 1996. No shares of preferred stock were outstanding at the respective dates. Tenneco has designated and reserved 3.5 million shares of the preferred stock as junior preferred stock for the Shareholder Rights Plan. As part of the Merger, Tenneco's $7.40 and $4.50 preferred stock (the "Preferred Stock") was acquired by El Paso in exchange for El Paso common stock. Consequently the $7.40 and $4.50 preferred stock dividends have been subtracted from discontinued operations to compute basic and diluted earnings per share. Before the Merger, Tenneco made periodic accretions of the excess of the redemption value over the fair value of the Preferred Stock at the date of issue. Such accretions have been included in the statements of income caption, "Preferred stock dividends" as a reduction of net income to arrive at net income to common stock. In connection with the Transaction and as part of the Debt Realignment, Old Tenneco issued the NPS Preferred Stock in November 1996 for proceeds of approximately $296 million. The proceeds from the issuance were used to fund a portion of the cash tender offers made in connection with the Debt Realignment and other cash requirements preceding the Merger. As a result of the Merger, the obligations relating to the NPS Preferred Stock remained with Old Tenneco. Changes in Preferred Stock with Mandatory Redemption Provisions
1996 1995 ------------------ ----------------- SHARES AMOUNT SHARES AMOUNT ---------- ------ --------- ------ (MILLIONS EXCEPT SHARE AMOUNTS) Balance January 1......................... 1,390,993 $130 1,586,764 $147 Shares redeemed.......................... (195,751) (20) (195,771) (20) Merger of energy business................ (1,195,242) (113) -- -- Accretion of excess of redemption value over fair value at date of issue........ -- 3 -- 3 ---------- ---- --------- ---- Balance December 31....................... -- $ -- 1,390,993 $130 ========== ==== ========= ====
9. MINORITY INTEREST At December 31, 1997 and 1996, Tenneco reported minority interest in the balance sheet of $424 million and $304 million, respectively. At December 31, 1997, $392 million of minority interest resulted from the December 1994 and December 1997 sales of preferred stock ($300 million and $100 million, respectively) of Tenneco International Holding Corp. ("TIHC") to a financial investor. Subsequent to each sale, the investor had approximately a 25% interest in TIHC, consisting of 100% of the issued and outstanding variable rate voting preferred stock of TIHC. Tenneco and certain of its subsidiaries hold 100% of the issued and outstanding $8.00 junior preferred stock and common stock of TIHC. TIHC holds certain assets including the capital stock of Alupack A.G., a subsidiary included in the Tenneco Packaging segment, Tenneco Canada Inc., S.A. Monroe Europe N.V., Monroe Australia Proprietary Limited, Walker France S.A., and other subsidiaries included in the Tenneco Automotive segment. For financial reporting purposes, the assets, liabilities, and earnings of TIHC and its subsidiaries are consolidated in Tenneco's financial statements, and the investor's preferred stock interest has been recorded as "Minority interest" in the balance sheet. As of December 31, 1997, dividends on the TIHC preferred stock are based on the aggregate issue price of $400 million times a rate per annum equal to .92% over LIBOR and are payable quarterly in arrears on the last business day of each quarter. The weighted average rate paid on TIHC preferred stock was 6.92% and 6.83% for 1997 and 1996, respectively. Additionally, the holder of the preferred stock is entitled to receive, when and if 59 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) declared by the Board of Directors of TIHC, participating dividends based on the operating income growth rate of TIHC and its subsidiaries. For financial reporting purposes, dividends paid by TIHC to its financial investor have been recorded in Tenneco's statements of income as "Minority interest." 10. POSTRETIREMENT BENEFITS Tenneco has postretirement health care and life insurance plans that cover substantially all of its domestic employees. For salaried employees, the plans cover employees retiring from Tenneco on or after attaining age 55 who have had at least 10 years service with Tenneco after attaining age 45. For hourly employees, the postretirement benefit plans generally cover employees who retire according to one of Tenneco's hourly employee retirement plans. All of these benefits may be subject to deductibles, copayment provisions, and other limitations, and Tenneco has reserved the right to change these benefits. Tenneco's postretirement benefit plans are not funded. The funded status of the postretirement benefit plans reconciles with amounts recognized in the balance sheet at December 31, 1997 and 1996, as follows (Note):
1997 1996 ----- ----- (MILLIONS) Actuarial present value of accumulated postretirement benefit obligation at September 30: Retirees....................................................... $ 107 $ 98 Fully eligible active plan participants........................ 27 28 Other active plan participants................................. 44 41 ----- ----- Total accumulated postretirement benefit obligation.............. 178 167 Plan assets at fair value at September 30........................ -- -- ----- ----- Accumulated postretirement benefit obligation in excess of plan assets at September 30.......................................... (178) (167) Claims paid during the fourth quarter............................ 3 3 Unrecognized reduction of prior service obligations resulting from plan amendments............................................ (8) (10) Unrecognized net loss resulting from plan experience and changes in actuarial assumptions........................................ 33 29 ----- ----- Accrued postretirement benefit cost at December 31............... $(150) $(145) ===== =====
- - -------- Note:The accrued postretirement 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. The net periodic postretirement benefit cost from continuing operations for the years 1997, 1996, and 1995 consist of the following components:
1997 1996 1995 ---- ---- ---- (MILLIONS) Service cost for benefits earned during the year................ $ 5 $ 4 $ 3 Interest cost on accumulated postretirement benefit obligation.. 12 11 10 Net amortization of unrecognized amounts........................ (1) (1) (1) --- --- --- Net periodic postretirement benefit cost........................ $16 $14 $12 === === ===
The initial weighted average assumed health care cost trend rate used in determining the 1997, 1996, and 1995 accumulated postretirement benefit obligation was 5%, 6%, and 7%, respectively, remaining at 5% thereafter. Increasing the assumed health care cost trend rate by one percentage-point in each year would increase the 1997, 1996, and 1995 accumulated postretirement benefit obligations by approximately $14 million, $13 million, 60 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) and $12 million, respectively, and would increase the aggregate of the service cost and interest cost components of the net postretirement benefit cost for 1997, 1996, and 1995 by approximately $2 million, $2 million, and $1 million, respectively. The discount rate (which is based on long-term market rates) used in determining the accumulated postretirement benefit obligation was 7.75% for 1997, 1996, and 1995. 11. PENSION PLANS Tenneco has retirement plans that cover substantially all of its employees. Benefits are based on years of service and, for most salaried employees, on final average compensation. Tenneco's funding policies 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. Also included in the table below are pension obligations and assets retained by Tenneco related to certain employees of Tenneco's discontinued operations. The funded status of the plans reconcile with amounts on the balance sheet at December 31, 1997 and 1996, as follows:
PLANS IN PLANS IN WHICH WHICH ASSETS ACCUMULATED EXCEED BENEFITS ACCUMULATED EXCEED ALL PLANS BENEFITS ASSETS (NOTE) -------------- ------------ -------------- 1997 1996 1997 1996 1997 1996 ------ ------ ----- ----- ------ ------ (MILLIONS) Actuarial present value of benefits based on service to date and present pay levels at September 30: Vested benefit obligation..... $2,892 $2,555 $ 43 $ 92 $2,935 $2,647 Non-vested benefit obligation. 72 41 7 9 79 50 ------ ------ ----- ----- ------ ------ Accumulated benefit obligation................... 2,964 2,596 50 101 3,014 2,697 Additional amounts related to projected salary increases..... 129 104 2 4 131 108 ------ ------ ----- ----- ------ ------ Total projected benefit obligation at September 30..... 3,093 2,700 52 105 3,145 2,805 Plan assets at fair value at September 30................... 4,099 3,402 10 57 4,109 3,459 ------ ------ ----- ----- ------ ------ Plan assets in excess of (less than) total projected benefit obligation at September 30..... 1,006 702 (42) (48) 964 654 Contributions during the fourth quarter........................ 2 1 -- -- 2 1 Unrecognized net (gain) loss resulting from plan experience and changes in actuarial assumptions.................... (328) (87) -- 2 (328) (85) Unrecognized prior service obligations resulting from plan amendments..................... 67 70 4 4 71 74 Remaining unrecognized net obligation (asset) at initial application.................... (73) (94) -- -- (73) (94) Adjustment recorded to recognize minimum liability.............. -- -- (4) (5) (4) (5) ------ ------ ----- ----- ------ ------ Prepaid (accrued) pension cost at December 31................. $ 674 $ 592 $ (42) $ (47) $ 632 $ 545 ====== ====== ===== ===== ====== ======
- - -------- Note: Assets of one plan may not be utilized to pay benefits of other plans. Additionally, the prepaid (accrued) pension 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. 61 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Net periodic pension costs (income) from continuing operations for the years 1997, 1996, and 1995 consist of the following components:
1997 1996 1995 ----------- ----------- ----------- (MILLIONS) Service cost--benefits earned during the year................................... $ 35 $ 31 $ 23 Interest accrued on prior years projected benefit obligation........... 211 148 144 Expected return on plan assets-- Actual (return) loss.................. (835) (349) (387) Unrecognized excess (deficiency) of actual return over expected return... 525 141 188 ---- ---- ---- (310) (208) (199) Net amortization of unrecognized amounts................................ (9) -- (3) ----- ----- ----- Net pension income...................... $ (73) $ (29) $ (35) ===== ===== =====
The weighted average discount rate (which is based on long-term market rates) used in determining the actuarial present value of the benefit obligation was 7.75% for 1997, 1996, and 1995. The rate of increase in future compensation was 5.0%, 5.0%, and 5.1% for 1997, 1996, and 1995, respectively. The weighted average expected long-term rate of return on plan assets was 10% for 1997, 1996, and 1995. 12. SEGMENT AND GEOGRAPHIC AREA INFORMATION Tenneco is a global manufacturer with the following major business segments: Tenneco Automotive Manufacture and sale of exhaust and ride control systems for both the original equipment and replacement markets. Tenneco Packaging Manufacture and sale of packaging materials, cartons, containers, and specialty and protective packaging products for consumer, institutional, and industrial markets. 62 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following tables summarize certain segment and geographic information of Tenneco's businesses:
SEGMENT RECLASS ------------------------------------------- AND DISCONTINUED ELIMINA- CONSOL- AUTOMOTIVE PACKAGING OPERATIONS(A) OTHER(B) TION IDATED ---------- --------- ------------- -------- -------- ------- (MILLIONS) AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED Net sales and operating revenues............... $3,226 $3,995 $ -- $ 10 $ (11) $7,220 ====== ====== ===== ===== ===== ====== Operating profit........ 420 382 -- (13) -- 789 Equity in net income of affiliated companies... -- 3 -- -- -- 3 General corporate expenses............... (13) (14) -- (1) -- (28) ------ ------ ----- ----- ----- ------ Income before interest expense, income taxes, and minority interest.. 407 371 -- (14) -- 764 ====== ====== ===== ===== ===== ====== Identifiable assets..... 2,752 4,606 -- 1,166 (219) 8,305 Investment in affiliated companies.............. 2 25 -- -- -- 27 ------ ------ ----- ----- ----- ------ Total assets........... 2,754 4,631 -- 1,166 (219) 8,332 ====== ====== ===== ===== ===== ====== Depreciation, depletion, and amortization....... 110 233 -- 22 -- 365 ====== ====== ===== ===== ===== ====== Capital expenditures for continuing operations.. 211 335 -- 12 -- 558 ====== ====== ===== ===== ===== ====== AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED Net sales and operating revenues............... $2,980 $3,602 $ -- $ -- $ (10) $6,572 ====== ====== ===== ===== ===== ====== Operating profit........ 262 415 -- (15) -- 662 Equity in net income of affiliated companies... -- -- -- -- -- -- General corporate expenses............... (13) (14) -- (7) -- (34) ------ ------ ----- ----- ----- ------ Income before interest expense, income taxes, and minority interest.. 249 401 -- (22) -- 628 ====== ====== ===== ===== ===== ====== Identifiable assets..... 2,555 3,878 -- 1,235 (108) 7,560 Investment in affiliated companies.............. 2 24 -- 1 -- 27 ------ ------ ----- ----- ----- ------ Total assets........... 2,557 3,902 -- 1,236 (108) 7,587 ====== ====== ===== ===== ===== ====== Depreciation, depletion, and amortization....... 94 205 -- 10 -- 309 ====== ====== ===== ===== ===== ====== Capital expenditures for continuing operations.. 177 341 -- 55 -- 573 ====== ====== ===== ===== ===== ====== AT DECEMBER 31, 1995, AND FOR THE YEAR THEN ENDED Net sales and operating revenues............... $2,479 $2,752 $ -- $ -- $ (10) $5,221 ====== ====== ===== ===== ===== ====== Operating profit........ 248 440 -- 7 -- 695 Equity in net income of affiliated companies... 1 -- -- -- -- 1 General corporate expenses............... (9) (10) -- (5) -- (24) ------ ------ ----- ----- ----- ------ Income before interest expense, income taxes, and minority interest.. 240 430 -- 2 -- 672 ====== ====== ===== ===== ===== ====== Identifiable assets..... 1,874 3,405 -- 1,176 (94) 6,361 Investment in affiliated companies.............. 3 4 -- -- -- 7 Identifiable net assets related to discontinued operations............. -- -- 433 -- -- 433 Investment in affiliated companies related to discontinued operations............. -- -- 612 -- -- 612 ------ ------ ----- ----- ----- ------ Total assets........... 1,877 3,409 1,045 1,176 (94) 7,413 ====== ====== ===== ===== ===== ====== Depreciation, depletion, and amortization....... 84 110 -- 2 -- 196 ====== ====== ===== ===== ===== ====== Capital expenditures for continuing operations.. 208 316 -- 38 -- 562 ====== ====== ===== ===== ===== ======
See Notes on page 65. 63 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
GEOGRAPHIC AREA(D) ------------------------------- UNITED EUROPEAN OTHER RECLASS AND STATES CANADA UNION FOREIGN ELIMINATION CONSOLIDATED ------ ------ -------- ------- ----------- ------------ (MILLIONS) AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED Net sales and operating revenues: Sales to unaffiliated customers............. $5,049 $207 $1,475 $489 $ -- $7,220 Transfers among geographic areas(c)... 116 52 52 41 (261) -- ------ ---- ------ ---- ----- ------ Total................ 5,165 259 1,527 530 (261) 7,220 ====== ==== ====== ==== ===== ====== Operating profit........ 482 38 208 61 -- 789 Equity in net income of affiliated companies... 3 -- -- -- -- 3 General corporate expenses............... (28) -- -- -- -- (28) ------ ---- ------ ---- ----- ------ Income before interest expense, income taxes, and minority interest.. 457 38 208 61 -- 764 ====== ==== ====== ==== ===== ====== Identifiable assets..... 6,328 191 1,398 491 (103) 8,305 Investment in affiliated companies.............. 17 -- 2 8 -- 27 ------ ---- ------ ---- ----- ------ Total assets......... 6,345 191 1,400 499 (103) 8,332 ====== ==== ====== ==== ===== ====== AT DECEMBER 31, 1996, AND FOR THE YEAR THEN ENDED Net sales and operating revenues: Sales to unaffiliated customers............. $4,708 $194 $1,295 $375 $ -- $6,572 Transfers among geographic areas(c)... 99 49 29 36 (213) -- ------ ---- ------ ---- ----- ------ Total................ 4,807 243 1,324 411 (213) 6,572 ====== ==== ====== ==== ===== ====== Operating profit........ 475 30 121 36 -- 662 Equity in net income of affiliated companies... 1 -- -- (1) -- -- General corporate expenses............... (34) -- -- -- -- (34) ------ ---- ------ ---- ----- ------ Income before interest expense, income taxes, and minority interest.. 442 30 121 35 -- 628 ====== ==== ====== ==== ===== ====== Identifiable assets..... 5,960 173 1,079 449 (101) 7,560 Investment in affiliated companies.............. 17 -- 2 8 -- 27 ------ ---- ------ ---- ----- ------ Total assets......... 5,977 173 1,081 457 (101) 7,587 ====== ==== ====== ==== ===== ====== AT DECEMBER 31, 1995, AND FOR THE YEAR THEN ENDED Net sales and operating revenues: Sales to unaffiliated customers............. $3,683 $149 $1,140 $249 $ -- $5,221 Transfers among geographic areas(c)... 75 43 27 21 (166) -- ------ ---- ------ ---- ----- ------ Total................ 3,758 192 1,167 270 (166) 5,221 ====== ==== ====== ==== ===== ====== Operating profit........ 548 20 102 25 -- 695 Equity in net income of affiliated companies... 1 -- 1 (1) -- 1 General corporate expenses............... (24) -- -- -- -- (24) ------ ---- ------ ---- ----- ------ Income before interest expense, income taxes, and minority interest.. 525 20 103 24 -- 672 ====== ==== ====== ==== ===== ====== Identifiable assets..... 4,915 207 1,077 241 (79) 6,361 Investment in affiliated companies.............. 3 -- 2 2 -- 7 Identifiable net assets related to discontinued operations............. 168 -- -- 265 -- 433 Investment in affiliated companies related to discontinued operations............. 574 2 -- 36 -- 612 ------ ---- ------ ---- ----- ------ Total assets......... 5,660 209 1,079 544 (79) 7,413 ====== ==== ====== ==== ===== ======
See Notes on following page. 64 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) - - -------- Notes: (a) Tenneco's energy business, shipbuilding business, farm and construction equipment operations, and chemicals operations have been reflected as discontinued operations in the accompanying financial statements. Reference is made to Note 3, "Discontinued Operations, Disposition of Assets, and Extraordinary Loss," for further information. (b) Included in "Other" are the operations of Tenneco Business Services ("TBS"). TBS designs, implements, and administers shared administrative service programs for Tenneco and performs certain administrative services for certain other former Tenneco businesses. (c) Products are transferred between geographic areas on a basis intended to reflect as nearly as possible the "market value" of the products. (d) As reflected above, Tenneco's segments principally market their products and services in the United States, with significant sales in the European Union and other foreign countries. Tenneco is engaged in the sale of products for export from the United States. Such sales are reflected in the table below:
GEOGRAPHIC AREA PRINCIPAL PRODUCTS 1997 1996 1995 --------------- --------------------------------------------- ---- ---- ---- (MILLIONS) Canada......... Ride control systems, exhaust systems, paperboard products, molded and pressed pulp goods, corrugated boxes, aluminum, and plastics $182 $119 $ 72 European Union. Ride control systems, exhaust systems, molded and pressed pulp goods, paperboard products, corrugated boxes, aluminum, and plastics 35 24 23 Other Foreign.. Ride control systems, exhaust systems, molded and pressed pulp goods, paperboard products, corrugated boxes, aluminum, and plastics 139 124 69 ---- ---- ---- Total Export Sales............................................ $356 $267 $164 ==== ==== ====
13. COMMITMENTS AND CONTINGENCIES Capital Commitments Tenneco estimates that expenditures aggregating approximately $380 million will be required after December 31, 1997, to complete facilities and projects authorized at such date, and substantial commitments have been made in connection therewith. Lease Commitments Tenneco 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 $135 million, $123 million, $110 million, $104 million, and $50 million for the years 1998, 1999, 2000, 2001, and 2002, respectively, and $233 million for subsequent years. Of these amounts, $78 million for 1998, $78 million for 1999, $78 million for 2000, $77 million for 2001, $27 million for 2002, and $74 million for subsequent years are lease payment commitments to financial investors (the "Lessor") for certain mill and timberlands assets. Following the initial mill asset lease period, Tenneco may, under the provisions of the lease agreements, extend the leases on terms mutually negotiated with the Lessor or purchase the leased assets under conditions specified in the lease agreements. If the purchase options are not exercised or the leases are not extended, Tenneco will make a residual guarantee payment to the Lessor of approximately $658 million, which will be refunded up to the total amount of the residual guarantee payment based on the Lessor's subsequent sales price for the leased assets. Throughout the lease period, Tenneco is required to maintain the leased properties. 65 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In January 1997, Tenneco refinanced two mill asset leases resulting in a pre-tax gain of $38 million which is included in the caption "Other income, net." Commitments under capital leases were not significant to the accompanying financial statements. Total rental expense for continuing operations for the years 1997, 1996, and 1995, was $163 million, $179 million, and $171 million, respectively, including minimum rentals under non-cancelable operating leases of $155 million, $151 million, and $148 million for the corresponding periods. Tenneco Packaging's various lease agreements require that it comply with certain covenants and restrictions, including financial ratios that, among other things, place limitations on incurring additional "funded debt" as defined by the agreements. Under the provisions of the timber lease agreements, in order to incur funded debt, Tenneco Packaging must maintain a pre-tax cash flow coverage ratio, as defined, on a cumulative four quarter basis of a minimum of 2.0, subsequently modified to 1.25 through December 31, 1996. Tenneco Packaging was in compliance with all of its covenants at December 31, 1997. Litigation Tenneco Inc. and Newport News have received letters from the Defense Contract Audit Agency (the "DCAA"), inquiring about certain aspects of the Distributions, including the disposition of the Tenneco Inc. Retirement Plan ("TRP") and the 1986 asset valuation for the TRP and its cost accounting treatment. The DCAA has been advised that (i) the TRP will retain the liability for all benefits accrued by the Newport News salaried employees through December 31, 1996, (ii) the Newport News salaried employees will not accrue additional benefits under the TRP after December 31, 1996, and (iii) no liabilities or assets of the TRP will be transferred from the TRP to any plan maintained by Newport News. A determination of the ratio of assets to liabilities of the TRP attributable to Newport News will be based on facts, assumptions, and legal issues that are complicated and uncertain; however, it is likely that the U.S. Government will assert a claim against Newport News with respect to the amount, if any, by which the assets of the TRP attributable to its employees are alleged to exceed the liabilities. Tenneco, with the full cooperation of Newport News, will defend against any claim by the U.S. Government, and in the event there is a determination that an amount is due to the U.S. Government, Tenneco and Newport News will share the obligation for such amount plus the amount of related defense expenses, in the ratio of 80% and 20%, respectively. At this preliminary stage, it is impossible to predict with certainty any eventual outcome regarding this matter; however, Tenneco does not believe that this matter will have a material adverse effect on its consolidated financial position or results of operations. Tenneco Inc. and its subsidiaries are parties to various other legal proceedings arising from their operations. Tenneco 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 Tenneco Inc. and its subsidiaries. Environmental Matters Tenneco Inc. and its subsidiaries are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which they operate. Tenneco has provided reserves for compliance with these laws and regulations where it is probable that a liability exists and where Tenneco 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, Tenneco believes that any additional costs which arise as more information becomes available will not have a material effect on the financial condition or results of operations of Tenneco. 66 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
CUMULATIVE INCOME BEFORE INCOME (LOSS) EFFECT OF INTEREST FROM CHANGE IN NET SALES EXPENSE, INCOME (LOSS) DISCONTINUED ACCOUNTING AND INCOME TAXES, FROM OPERATIONS, EXTRAORDINARY PRINCIPLE, NET OPERATING AND MINORITY CONTINUING NET OF LOSS, NET OF NET OF INCOME QUARTER REVENUES INTEREST OPERATIONS INCOME TAX INCOME TAX INCOME TAX (LOSS) ------- --------- ------------- ------------- ------------ ------------- ---------- ------ (MILLIONS) 1997 1st................ $1,629 $159 $ 76 $ -- $ -- $ -- $ 76 2nd................... 1,892 212 104 -- -- -- 104 3rd................... 1,831 226 105 -- -- -- 105 4th................... 1,868 167 76 -- -- (46) 30 ------ ---- ---- ---- ----- ---- ----- $7,220 $764 $361 $ -- $ -- $(46) $ 315 ====== ==== ==== ==== ===== ==== ===== 1996 1st................ $1,539 $161 $ 60 $435 $ -- $ -- $ 495 2nd................... 1,694 253 118 43 -- -- 161 3rd................... 1,653 171 76 40 (1) -- 115 4th................... 1,686 43 (36) (90) (235) -- (361) ------ ---- ---- ---- ----- ---- ----- $6,572 $628 $218 $428 $(236) $ -- $ 410 ====== ==== ==== ==== ===== ==== =====
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK ----------------------------------------------------------- CUMULATIVE EFFECT OF CHANGE IN CONTINUING DISCONTINUED EXTRAORDINARY ACCOUNTING NET INCOME QUARTER OPERATIONS OPERATIONS LOSS PRINCIPLE (LOSS) ------- ---------- ------------ ------------- ---------- ---------- 1997 1st........... $ .44 $ -- $ -- $ -- $ .44 2nd.............. .61 -- -- -- .61 3rd.............. .62 -- -- -- .62 4th.............. .45 -- -- (.27) .18 ----- ----- ------ ----- ------ $2.12 $ -- $ -- $(.27) $ 1.85 ===== ===== ====== ===== ====== 1996 1st........... $ .34 $2.57 $ -- $ -- $ 2.91 2nd.............. .71 .23 -- -- .94 3rd.............. .45 .22 (.01) -- .66 4th.............. (.21) (.56) (1.37) -- (2.14) ----- ----- ------ ----- ------ $1.29 $2.45 $(1.39) $ -- $ 2.35 ===== ===== ====== ===== ======
67 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK ----------------------------------------------------------- CUMULATIVE EFFECT OF CHANGE IN CONTINUING DISCONTINUED EXTRAORDINARY ACCOUNTING NET INCOME QUARTER OPERATIONS OPERATIONS LOSS PRINCIPLE (LOSS) ------- ---------- ------------ ------------- ---------- ---------- 1997 1st........... $ .44 $ -- $ -- $ -- $ .44 2nd.............. .61 -- -- -- .61 3rd.............. .62 -- -- -- .62 4th.............. .44 -- -- (.27) .17 ----- ----- ------ ----- ------ $2.11 $ -- $ -- $(.27) $ 1.84 ===== ===== ====== ===== ====== 1996 1st........... $ .34 $2.55 $ -- $ -- $ 2.89 2nd.............. .70 .23 -- -- .93 3rd.............. .45 .22 (.01) -- .66 4th.............. (.21) (.56) (1.37) -- (2.14) ----- ----- ------ ----- ------ $1.28 $2.44 $(1.38) $ -- $ 2.34 ===== ===== ====== ===== ======
- - -------- Notes: Reference is made to Notes 1, 2, 3 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 financial statements.) 68 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There has been no change in accountants, nor has there been any disagreement on any matter of accounting principles or practices or financial disclosure, which in either case is required to be reported pursuant to this Item 9. PART III Item 10, "Directors and Executive Officers of the Registrant," Item 11, "Executive Compensation," Item 12, "Security Ownership of Certain Beneficial Owners and Management," and Item 13, "Certain Relationships and Related Transactions," have been omitted from this report inasmuch as Tenneco Inc. will file with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report a definitive Proxy Statement for the Annual Meeting of Shareowners of Tenneco Inc. to be held on May 12, 1998, at which meeting the shareowners will vote upon the election of directors. The information under the caption "Election of Directors" in such Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. FINANCIAL STATEMENTS INCLUDED IN ITEM 8 See "Index to Financial Statements of Tenneco Inc. and Consolidated Subsidiaries" set forth in Item 8, "Financial Statements and Supplementary Data." INDEX TO FINANCIAL STATEMENTS AND SCHEDULES INCLUDED IN ITEM 14
PAGE ---- Schedules of Tenneco Inc. and Consolidated Subsidiaries--Schedule II-- Valuation and qualifying accounts--three years ended December 31, 1997.. 70
SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE Schedule I-- Condensed financial information of registrant Schedule III-- Real estate and accumulated depreciation Schedule IV-- Mortgage loans on real estate Schedule V-- Supplemental information concerning property--casualty insurance operations 69 SCHEDULE II TENNECO INC. AND CONSOLIDATED SUBSIDIARIES 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 DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR - - ------------------------------------------------------------------------------ Allowance for Doubtful Accounts and Notes Deducted from Assets to Which it Applies: Year Ended December 31, 1997.................. $32 $ 7 $ 7 $11 $35 === === === === === Year Ended December 31, 1996.................. $24 $12 $-- $ 4 $32 === === === === === Year Ended December 31, 1995.................. $15 $20 $-- $11 $24 === === === === ===
70 REPORTS ON FORM 8-K On October 23, 1997, the Company filed a Current Report on Form 8-K with respect to a press release issued on October 21, 1997 announcing the Company's earnings in the quarter ended September 30, 1997 and other matters. EXHIBITS The following exhibits are filed with Tenneco Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, or incorporated therein by reference (exhibits designated by an asterisk are filed with the Report; all other exhibits are incorporated by reference): INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION -------- ----------- 2 --None. *3.1(a) --Restated Certificate of Incorporation of Tenneco Inc. dated December 11, 1996. *3.1(b) --Certificate of Designation, Preferences and Rights of Series A Participating Junior Preferred Stock, dated December 11, 1996. *3.1(c) --Certificate of Amendment, dated December 11, 1996. *3.1(d) --Certificate of Ownership and Merger, dated July 8, 1997. 3.2 --Amended and Restated By-laws of Tenneco Inc. (incorporated herein by reference from Exhibit 3.2 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.1 --Form of Specimen Stock Certificate of Tenneco Inc. Common Stock (incorporated herein by reference from Exhibit 4.1 of Tenneco Inc.'s Form 10, File No. 1-12387). 4.2 --Rights Agreement, dated as of December 11, 1996, by and between Tenneco Inc. (formerly New Tenneco Inc.) and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference from Exhibit 4.2 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.3(a) --Indenture, dated as of November 1, 1996, between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of Tenneco Inc.'s Form S-4, Registration No. 333-14003). 4.3(b) --First Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(b) of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.3(c) --Second Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(c) of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.3(d) --Third Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(d) of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.3(e) --Fourth Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(e) of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387).
71
EXHIBIT NUMBER DESCRIPTION -------- ----------- 4.3(f) --Fifth Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(f) of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.3(g) --Sixth Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(g) of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.3(h) --Seventh Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(h) of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.3(i) --Eighth Supplemental Indenture, dated as of April 28, 1997, to Indenture, dated as of November 1, 1996, between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of Tenneco Inc.'s Current Report on Form 8-K dated April 23, 1997, File No. 1-12387). 4.3(j) --Ninth Supplemental Indenture, dated as of April 28, 1997, to Indenture, dated as of November 1, 1996, between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.2 of Tenneco Inc.'s Current Report on Form 8-K dated April 23, 1997, File No. 1-12387). 4.3(k) --Tenth Supplemental Indenture, dated as of July 16, 1997, to Indenture, dated as of November 1, 1996, between Tenneco Inc. (formerly New Tenneco Inc.) and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of Tenneco Inc.'s Current Report on Form 8-K dated June 11, 1997, File No. 1-12387). 9 --None. 10.1 --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. (incorporated herein by reference from Exhibit 2 of Tenneco Inc.'s Form 10, File No. 1-12387). 10.2 --Amendment No. 1 to Distribution Agreement, dated as of 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. (incorporated herein by reference from Exhibit 10.2 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.3 --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. (incorporated herein by reference from Exhibit 10.3 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.4 --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. (incorporated herein by reference from Exhibit 10.4 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.5 --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. (incorporated herein by reference from Exhibit 10.5 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.6 --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 (incorporated herein by reference from Exhibit 10.6 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387).
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.7 --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. (incorporated herein by reference from Exhibit 10.7 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.8 --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 (incorporated herein by reference from Exhibit 10.8 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.9 --Trademark Transition License Agreement, dated December 11, 1996, by and between Newport News Shipbuilding Inc. and Tenneco Inc. (formerly New Tenneco Inc.) (incorporated herein by reference from Exhibit 10.9 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.10 --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.) (incorporated herein by reference from Exhibit 10.10 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). *10.11 --1997 Tenneco Inc. Board of Directors Deferred Compensation Plan. *10.12 -- Executive Incentive Compensation Plan. *10.13 --Tenneco Inc. Deferred Compensation Plan. 10.14 --Amended and Restated Tenneco Inc. Supplemental Executive Retirement Plan (incorporated herein by reference from Exhibit 10.12 of Tenneco's Form 10, File No. 1-12387). 10.15 --Amended and Restated Tenneco Inc. Benefit Equalization Plan (incorporated herein by reference from Exhibit 10.13 of Tenneco's Form 10, File No. 1-12387). 10.16 --Amended and Restated Supplemental Pension Agreement, dated September 12, 1995 between Dana G. Mead and Tenneco Inc. (incorporated herein by reference from Exhibit 10.15 of Tenneco's Form 10, File No. 1- 12387). 10.17 --Amended and Restated Tenneco Inc. Change in Control Severance Benefit Plan for Key Executives (incorporated herein by reference from Exhibit 10.16 of Tenneco's Form 10, File No. 1-12387). 10.18 --Amended and Restated Tenneco Benefits Protection Trust (incorporated herein by reference from Exhibit 10.17 of Tenneco's Form 10, File No. 1-12387). 10.19 --Employment Agreement, dated June 29, 1992 between Stacy S. Dick and Tenneco Inc. (incorporated herein by reference from Exhibit 10.18 of Tenneco's Form 10, File No. 1-12387). 10.20 --Employment Agreement, dated March 12, 1992 between Dana G. Mead and Tenneco Inc. (incorporated herein by reference from Exhibit 10.19 of Tenneco's Form 10, File No. 1-12387). 10.21 --Employment Agreement, dated December 3, 1993 between Paul T. Stecko and Tenneco Packaging Inc. (incorporated herein by reference from Exhibit 10.20 of Tenneco's Form 10, File No. 1-12387). 10.22 --Agreement, dated September 9, 1992 between Theodore R. Tetzlaff and Tenneco Inc. (incorporated herein by reference from Exhibit 10.21 of Tenneco's Form 10, File No. 1-12387). *10.23 --1996 Tenneco Inc. Stock Ownership Plan, as amended. 10.24 --Amended and Restated Mill I Lease, dated as of November 4, 1996, between Credit Suisse Leasing 92A, L.P. and Tenneco Packaging Inc. (incorporated herein by reference from Exhibit 10.28 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.25 --Amended and Restated Mill II Lease, dated as of November 4, 1996, between Credit Suisse Leasing 92A, L.P. and Tenneco Packaging Inc. (incorporated herein by reference from Exhibit 10.28 of Tenneco Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). *10.26 --Timberland Lease, dated January 31, 1991, by and between Four States Timber Venture and Packaging Corporation of America, as amended.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.27 --Professional Services Agreement, dated August 22, 1996, by and between Tenneco Business Services Inc. and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.28 of Tenneco Inc.'s Form 10, File No. 1-12387). 11 --None. *12 --Computation of Ratio of Earnings to Fixed Charges. 13 --None. 16 --None. 18 --None. *21 --Subsidiaries of Tenneco Inc. 22 --None. *23 --Consent of Arthur Andersen LLP. *24 --Powers of Attorney of the following directors of Tenneco Inc.: Mark Andrews W. Michael Blumenthal Larry D. Brady M. Kathryn Eickhoff Peter T. Flawn Henry U. Harris, Jr. Belton K. Johnson Sir David Plastow Roger B. Porter William L. Weiss Clifton R. Wharton, Jr. *27.1 --Financial Data Schedule, 12/31/97. *27.2 --Restated Financial Data Schedule, 9/30/97. *27.3 --Restated Financial Data Schedule, 6/30/97. *27.4 --Restated Financial Data Schedule, 3/31/97. *27.5 --Restated Financial Data Schedule, 12/31/96. *27.6 --Restated Financial Data Schedule, 9/30/96. *27.7 --Restated Financial Data Schedule, 6/30/96. *27.8 --Restated Financial Data Schedule, 3/31/96. *27.9 --Restated Financial Data Schedule, 12/31/95. 28 --None. 99 --None.
74 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Tenneco Inc. /s/ Dana G. Mead By___________________________________ Dana G. Mead Chairman and Chief Executive Officer Date: March 13, 1998 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Dana G. Mead Principal Executive March 13, 1998 ___________________________________________ Officer and Director Dana G. Mead /s/ Robert T. Blakely Principal Financial and March 13, 1998 ___________________________________________ Accounting Officer Robert T. Blakely Mark Andrews, W. Michael Blumenthal, Larry Directors D. Brady, M. Kathryn Eickhoff, Peter T. Flawn, Henry U. Harris, Jr., Belton K. Johnson, Sir David Plastow, Roger B. Porter, William L. Weiss, Clifton R. Wharton, Jr.
/s/ Theodore R. Tetzlaff By __________________________________ March 13, 1998 Attorney-in-fact 75 EX-3.1A 2 RESTATED CERTIFICATE OF INCORPORATION OF TENNECO EXHIBIT 3.1(a) RESTATED CERTIFICATE OF INCORPORATION OF NEW TENNECO INC. * * * * * The present name of the corporation is New Tenneco Inc. The corporation was incorporated under that name by the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware on August 26, 1996. This Restated Certificate of Incorporation of the corporation, which both restates and further amends the provisions of the corporation's Certificate of Incorporation, was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware and by the written consent of its sole stockholder in accordance with Section 228 of the General Corporation Law of the State of Delaware. The Certificate of Incorporation of the corporation is hereby amended and restated to read in its entirety as follows: FIRST: The name of the corporation is New Tenneco Inc. SECOND: The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: A. The total number of shares of all classes of stock which the corporation shall be authorized to issue is 400,000,000 shares, divided into 350,000,000 shares of Common Stock, par value $.01 per share (herein called "Common Stock"), and 50,000,000 shares of Preferred Stock, par value $.01 per share (herein called "Preferred Stock"). B. The Board of Directors of the corporation (the "Board of Directors") is hereby expressly authorized, by resolution or resolutions thereof, to provide, out of the unissued shares of Preferred Stock, for series of Preferred Stock and, with respect to each such series, to fix the number of shares constituting such series and the designation of such series, the voting powers (if any) of the shares of such series, and the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The powers, preferences and relative, participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. C. Except as may otherwise be provided in this Restated Certificate of Incorporation (including any certificate filed with the Secretary of State of the State of Delaware establishing the terms of a series of Preferred Stock in accordance with Section B of this Article FOURTH) or by applicable law, each holder of Common Stock, as such, shall be entitled to one vote for each share of Common Stock held of record by such holder on all matters on which stockholders generally are entitled to vote, and no holder of any series of Preferred Stock, as such, shall be entitled to any voting powers in respect thereof. D. Subject to applicable law and the rights, if any, of the holders of any outstanding series of Preferred Stock, dividends may be declared and paid on the Common Stock at such times and in such amounts as the Board of Directors in its discretion shall determine. E. Upon the dissolution, liquidation or winding up of the corporation, subject to the rights, if any, of the holders of any outstanding series of Preferred Stock, the holders of the Common Stock shall be entitled to receive the assets of the corporation available for distribution to its stockholders ratably in proportion to the number of shares held by them. 1 F. The corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the corporation shall have notice thereof, except as expressly provided by applicable law. FIFTH: A. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors consisting of not less than eight nor more than sixteen directors, with the exact number of directors constituting the entire Board of Directors to be determined from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors. For purposes of this Restated Certificate of Incorporation, "the entire Board of Directors" shall mean the number of directors that would be in office if there were no vacancies nor any unfilled newly created directorships. The Board of Directors shall be divided into three classes, Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the number of directors constituting the entire Board of Directors. Class I directors shall be initially elected for a term expiring at the first succeeding annual meeting of stockholders, Class II directors shall be initially elected for a term expiring at the second succeeding annual meeting of stockholders, and Class III directors shall be initially elected for a term expiring at the third succeeding annual meeting of stockholders. At each annual meeting of the stockholders following 1996, successors to the class of directors whose term expires at that annual meeting shall be elected for a term expiring at the third succeeding annual meeting of stockholders. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a newly created directorship resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any vacancy on the Board of Directors that results from an increase in the number of directors may be filled by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring in the Board of Directors may be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Directors chosen to fill any such vacancy shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. Notwithstanding the foregoing, whenever the holders of any one or more series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, the election, removal, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Restated Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article FIFTH unless expressly provided by such terms. B. The Board of Directors shall be authorized to adopt, make, amend, alter, change, add to or repeal the By-Laws of the corporation, subject to the power of the stockholders to amend, alter, change, add to or repeal the By-Laws made by the Board of Directors. C. Unless and except to the extent that the By-Laws of the corporation shall so require, the election of directors of the corporation need not be by written ballot. SIXTH: A. In addition to any affirmative vote required by law or this Restated Certificate of Incorporation or the By-Laws of the corporation, and except as otherwise expressly provided in Section B of this Article SIXTH, a Business Combination (as hereinafter defined) with, or proposed by or on behalf of, any Interested Stockholder (as hereinafter defined) or any Affiliate or Associate (as hereinafter defined) of any Interested Stockholder or any person who thereafter would be an Affiliate or Associate of such Interested Stockholder shall, except as otherwise prohibited by applicable law, require the affirmative vote of not less than 66 2/3% of the votes 2 entitled to be cast by the holders of all the then outstanding shares of Voting Stock (as hereinafter defined), voting together as a single class, excluding Voting Stock beneficially owned by any Interested Stockholder. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage or separate class vote may be specified, by law or in any agreement with any national securities exchange or otherwise. B. The provisions of Section A of this Article SIXTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law or by any other provision of this Restated Certificate of Incorporation or the By-Laws of the corporation, or any agreement with any national securities exchange, if all of the conditions specified in either of the following Paragraphs 1 or 2 are met or, in the case of a Business Combination not involving the payment of consideration to the holders of the corporation's outstanding Capital Stock (as hereinafter defined), if the condition specified in the following Paragraph 1 is met: 1. The Business Combination shall have been approved, either specifically or as a transaction which is within an approved category of transactions, by a majority (whether such approval is made prior to or subsequent to the acquisition of, or announcement or public disclosure of the intention to acquire, beneficial ownership of the Voting Stock that caused the Interested Stockholder to become an Interested Stockholder) of the Continuing Directors (as hereinafter defined). 2. All of the following conditions shall have been met: a. the aggregate amount of cash and the Fair Market Value (as hereinafter defined), as of the date of the consummation of the Business Combination, of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest amount determined under clauses (i) and (ii) below: (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any share of Common Stock in connection with the acquisition by the Interested Stockholder of beneficial ownership of shares of Common Stock (x) within the two-year period immediately prior to the first public announcement of the proposed Business Combination (the "Announcement Date") or (y) in the transaction in which it became an Interested Stockholder, whichever is higher, in either case as adjusted for any subsequent stock split, stock dividend, subdivision or reclassification with respect to Common Stock; and (ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (the "Determination Date"), whichever is higher, as adjusted for any subsequent stock split, stock dividend, subdivision or reclassification with respect to Common Stock. b. The aggregate amount of cash and the Fair Market Value, as of the date of the consummation of the Business Combination, of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Capital Stock, other than Common Stock, shall be at least equal to the highest amount determined under clauses (i), (ii), (iii) and (iv) below: (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any share of such class or series of Capital Stock in connection with the acquisition by the Interested Stockholder of beneficial ownership of shares of such class or series of Capital Stock (x) within the two- year period immediately prior to the Announcement Date, or (y) in the transaction in which it became an Interested Stockholder, whichever is higher, in either case as adjusted for any subsequent stock split, stock dividend, subdivision or reclassification with respect to such class or series of Capital Stock; (ii) the Fair Market Value per share of such class or series of Capital Stock on the Announcement Date or on the Determination Date, whichever is higher, as adjusted for any 3 subsequent stock split, stock dividend, subdivision or reclassification with respect to such class or series of Capital Stock; (iii) (if applicable) the price per share equal to the Fair Market Value per share of such class or series of Capital Stock determined pursuant to the immediately preceding clause (ii), multiplied by the ratio of (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Stockholder for any share of such class or series of Capital Stock in connection with the acquisition by the Interested Stockholder of beneficial ownership of shares of such class or series of Capital Stock within the two-year period immediately prior to the Announcement Date, as adjusted for any subsequent stock split, stock dividend, subdivision or reclassification with respect to such class or series of Capital Stock to (y) the Fair Market Value per share of such class or series of Capital Stock on the first day in such two-year period on which the Interested Stockholder acquired beneficial ownership of any share of such class or series of Capital Stock, as adjusted for any subsequent stock split, stock dividend, subdivision or reclassification with respect to such class or series of Capital Stock; and (iv) (if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Capital Stock would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation regardless of whether the Business Combination to be consummated constitutes such an event. The provisions of this Paragraph 2 shall be required to be met with respect to every class or series of outstanding Capital Stock, whether or not the Interested Stockholder has previously acquired beneficial ownership of any shares of a particular class or series of Capital Stock. c. The consideration to be received by holders of a particular class or series of outstanding Capital Stock shall be in cash or in the same form as previously has been paid by or on behalf of the Interested Stockholder in connection with its direct or indirect acquisition of beneficial ownership of shares of such class or series of Capital Stock. If the consideration so paid for shares of any class or series of Capital Stock varied as to form, the form of consideration for such class or series of Capital Stock shall be either cash or the form used to acquire beneficial ownership of the largest number of shares of such class or series of Capital Stock previously acquired by the Interested Stockholder. d. After the Determination Date and prior to the consummation of such Business Combination: (i) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) payable in accordance with the terms of any outstanding Capital Stock; (ii) there shall have been no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any stock split, stock dividend or subdivision of the Common Stock), except as approved by a majority of the Continuing Directors; (iii) there shall have been an increase in the annual rate of dividends paid on the Common Stock as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (iv) such Interested Stockholder shall not have become the beneficial owner of any additional shares of Capital Stock except as part of the transaction that results in such Interested Stockholder becoming an Interested Stockholder and except in a transaction that, after giving effect thereto, would not result in any increase in the Interested Stockholder's percentage beneficial ownership of any class or series of Capital Stock. e. A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (the "Act") (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to all stockholders of the corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). The proxy or information statement shall contain on 4 the first page thereof, in a prominent place, any statement as to the advisability (or inadvisability) of the Business Combination that the Continuing Directors, or any of them, may choose to make and, if deemed advisable by a majority of the Continuing Directors, the opinion of an investment banking firm selected by a majority of the Continuing Directors as to the fairness (or not) of the terms of the Business Combination from a financial point of view to the holders of the outstanding shares of Capital Stock other than the Interested Stockholder and its Affiliates or Associates (as hereinafter defined), such investment banking firm to be paid a reasonable fee for its services by the corporation. f. Such Interested Stockholder shall not have made any major change in the corporation's business or equity capital structure without the approval of a majority of the Continuing Directors. C. The following definitions shall apply with respect to this Article SIXTH: 1. The term "Business Combination" shall mean: a. any merger or consolidation of the corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Stockholder or (ii) any other company (whether or not itself an Interested Stockholder) which is or after such merger or consolidation would be an Affiliate or Associate of an Interested Stockholder; or b. any sale, lease, exchange, mortgage, pledge, transfer or other disposition or security arrangement, investment, loan, advance, guarantee, agreement to purchase, agreement to pay, extension of credit, joint venture participation or other arrangement (in one transaction or a series of transactions) with or for the benefit of any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder involving any assets, securities or commitments of the corporation, any Subsidiary or any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder which (except for any arrangement, whether as employee, consultant or otherwise, other than as a director, pursuant to which any Interested Stockholder or any Affiliate or Associate thereof shall, directly or indirectly, have any control over or responsibility for the management of any aspect of the business or affairs of the corporation, with respect to which arrangements the value tests set forth below shall not apply), together with all other such arrangements (including all contemplated future events), has an aggregate Fair Market Value and/or involves aggregate commitments of $25,000,000 or more or constitutes more than five percent of the book value of the total assets (in the case of transactions involving assets or commitments other than capital stock) or five percent of the stockholders' equity (in the case of transactions in capital stock) of the entity in question (the "Substantial Part"), as reflected in the most recent fiscal year-end consolidated balance sheet of such entity existing at the time the stockholders of the corporation would be required to approve or authorize the Business Combination involving the assets, securities and/or commitments constituting any Substantial Part; or c. the adoption of any plan or proposal for the liquidation or dissolution of the corporation or for any amendment to the corporation's By-Laws; or d. any reclassification of securities (including any reverse stock split), or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its Subsidiaries or any other transaction (whether or not with or otherwise involving an Interested Stockholder) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder, or e. any agreement, contract or other arrangement providing for any one or more of the actions specified in the foregoing clauses (a) to (d). 2. The term "Capital Stock" shall mean all capital stock of the corporation authorized to be issued from time to time under Article FOURTH of this Restated Certificate of Incorporation, and the term "Voting Stock" shall mean all Capital Stock which by its terms may be voted on all matters submitted to stockholders of the corporation generally. 5 3. The term "person" shall mean any individual, firm, company or other entity and shall include any group comprised of any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Capital Stock. 4. The term "Interested Stockholder" shall mean any person (other than (i) the corporation or any Subsidiary, any profit-sharing, employee stock ownership or other employee benefit plan of the corporation or any Subsidiary or any trustee or fiduciary with respect to any such plan or holding Voting Stock for the purpose of funding any such plan or funding other employee benefits for employees of the corporation or any Subsidiary when acting in such capacity, and (ii) until immediately following the Industrial Distribution (as defined in the Distribution Agreement, dated as of November 1, 1996, among the corporation, Newport News Shipbuilding Inc., a Delaware corporation, and the corporation known as of the date thereof as Tenneco Inc., a Delaware corporation ("Old Tenneco")), Old Tenneco or any subsidiary of Old Tenneco) who (a) is or has announced or publicly disclosed a plan or intention to become the beneficial owner of Voting Stock representing five percent or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock; or (b) is an Affiliate or Associate of the corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of Voting Stock representing five percent or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock. 5. A person shall be a "beneficial owner" of any Capital Stock (a) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; (b) which such person or any of its Affiliates or Associates has, directly or indirectly, (i) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding; or (c) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Capital Stock. For the purposes of determining whether a person is an Interested Stockholder pursuant to Paragraph 4 of this Section C, the number of shares of Capital Stock deemed to be outstanding shall include shares deemed beneficially owned by such person through application of this Paragraph 5 of Section C, but shall not include any other shares of Capital Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. Notwithstanding the foregoing, for purposes of this Article SIXTH, a person shall not be deemed a "beneficial owner" of any Capital Stock which such person has the right to acquire upon exercise of the Rights issued pursuant to the Rights Agreement, dated as of December 11, 1996, between the corporation and First Chicago Trust Company of New York (including any successor rights plan thereto, the "Rights Agreement"), if such person would not be deemed the beneficial owner of such Capital Stock under the terms of such Rights Agreement. 6. The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Act as in effect on December 11, 1996 (the term "registrant" in said Rule 12b-2 meaning in this case the corporation). 7. The term "Subsidiary" means any company of which a majority of any class of equity securities are beneficially owned by the corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in Paragraph 4 of this Section C, the term "Subsidiary" shall mean only a company of which a majority of each class of equity security is beneficially owned by the corporation. 8. The term "Continuing Director" means any member of the Board of Directors, while such person is a member of the Board of Directors, who is not an Affiliate or Associate or representative of the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director while such successor is a member of the Board of Directors, who is not an Affiliate or Associate or representative of the Interested 6 Stockholder and is recommended or elected to succeed the Continuing Director by a majority of Continuing Directors. 9. The term "Fair Market Value" means (a) in the case of cash, the amount of such cash; (b) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange- Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Act on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on The Nasdaq Stock Market or any similar system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith; and (c) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors. 10. In the event of any Business Combination in which the corporation survives, the phrase "consideration other than cash to be received" as used in Paragraphs 2.a and 2.b of Section B of this Article SIXTH shall include the shares of Common Stock and/or the shares of any other class or series of Capital Stock retained by the holders of such shares. D. A majority of the Continuing Directors shall have the power and duty to determine for the purposes of this Article SIXTH, on the basis of information known to them after reasonable inquiry, all questions arising under this Article SIXTH, including, without limitation, (a) whether a person is an Interested Stockholder, (b) the number of shares of Capital Stock or other securities beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another, (d) whether a Proposed Action is with, or proposed by, or on behalf of an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder, (e) whether the assets that are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $25,000,000 or more, and (f) whether the assets or securities that are the subject of any Business Combination constitute a Substantial Part. Any such determination made in good faith shall be binding and conclusive on all parties. E. Nothing contained in this Article SIXTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. F. The fact that any Business Combination complies with the provisions of Section B of this Article SIXTH shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Combination or recommend its adoption or approval to the stockholders of the corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board of Directors, or any member thereof, with respect to evaluations of or actions and responses taken with respect to such Business Combination. G. For the purposes of this Article SIXTH, a Business Combination or any proposal to amend or repeal, or to adopt any provision of this Restated Certificate of Incorporation inconsistent with, this Article SIXTH (collectively, "Proposed Action"), is presumed to have been proposed by or on behalf of an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder or a person who thereafter would become such if (1) after the Interested Stockholder became such, the Proposed Action is proposed following the election of any director of the corporation who with respect to such Interested Stockholder would not qualify to serve as a Continuing Director or (2) such Interested Stockholder, Affiliate, Associate or person votes for or consents to the adoption of any such Proposed Action, unless as to such Interested Stockholder, Affiliate, Associate or person a majority of the Continuing Directors makes a good faith determination that such Proposed Action is not proposed by or on behalf of such Interested Stockholder, Affiliate, Associate or person, based on information known to them after reasonable inquiry. 7 H. Notwithstanding any other provisions of this Restated Certificate of Incorporation or the By-Laws of the corporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law, this Restated Certificate of Incorporation or the By-Laws of the corporation), any proposal to amend or repeal, or to adopt any provision of this Restated Certificate of Incorporation inconsistent with, this Article SIXTH which is proposed by or on behalf of an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder shall require the affirmative vote of the holders of not less than 66 2/3% of the votes entitled to be cast by the holders of all the then outstanding shares of Voting Stock, voting together as a single class, excluding Voting Stock beneficially owned by any Interested Stockholder, provided, however, that this Section H shall not apply to, and such 66 2/3% vote shall not be required for, any amendment or repeal of, or the adoption of any provision inconsistent with, this Article SIXTH unanimously recommended by the Board of Directors if all of such directors are persons who would be eligible to serve as Continuing Directors within the meaning of Paragraph 8 of Section C of this Article SIXTH. SEVENTH: A director of the corporation shall not be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended. Any amendment, modification or repeal of the foregoing sentence shall not adversely affect any right or protection of a director of the corporation hereunder in respect of any act or omission occurring prior to the time of such amendment, modification or repeal. EIGHTH: Subject to the provisions of this Restated Certificate of Incorporation and applicable law, the corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article EIGHTH. IN WITNESS WHEREOF, the undersigned has executed this Restated Certificate of Incorporation this 11th day of December, 1996. NEW TENNECO INC. By: /s/ Dana G. Mead __________________________________ Name: Dana G. Mead Office: Chairman and Chief Executive Officer 8 EX-3.1B 3 CERTIFICATE OF DESIGNATION EXHIBIT 3.1(b) CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF SERIES A PARTICIPATING JUNIOR PREFERRED STOCK NEW TENNECO INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware The undersigned, Chairman of the Board and Secretary of New Tenneco Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors by the Restated Certificate of Incorporation of the said Corporation, the said Board of Directors on December 11, 1996, adopted the following resolution creating a series of 3,500,000 shares of Preferred Stock designated as Series A Participating Junior Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Restated Certificate of Incorporation, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Participating Junior Preferred Stock" and the number of shares constituting such series shall be 3,500,000. Section 2. Dividends and Distributions. (A) The dividend rate on the shares of Series A Participating Junior Preferred Stock for each quarterly dividend period (hereinafter referred to as a "quarterly dividend period"), which quarterly dividend periods shall commence on January 1, April 1, July 1 and October 1 in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date") (or in the case of original issuance, from the date of original issuance) and shall end on and include the day next preceding the first date of the next quarterly dividend period, shall be equal (rounded to the nearest cent) to the greater of (a) $5.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in cash, based upon the fair market value at the time the non-cash dividend or other distribution is declared as determined in good faith by the Board of Directors) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared (but not withdrawn) on the common stock, par value $.01 per share, of this Corporation (the "Common Stock") during the immediately preceding quarterly dividend period, or, with respect to the first quarterly dividend period, since the first issuance of any share or fraction of a share of Series A Participating Junior Preferred Stock. In the event the Corporation shall at any time after December 11, 1996 (the "Record Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Participating Junior Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Participating Junior Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Participating Junior Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Participating Junior Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in each of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Participating Junior Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share- by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Participating Junior Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 45 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Participating Junior Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Participating Junior Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation and will vote together with the shares of Common Stock as one class on all such matters. In the event the Corporation shall at any time after the Record Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Participating Junior Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) (i) If at any time dividends on any Series A Participating Junior Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, the holders of the Series A Participating Junior Preferred Stock, voting as a separate series from all other series of Preferred Stock and classes of capital stock, shall be entitled to elect two members of the Board of Directors in addition to any Directors elected by any other series, class or classes of securities and the authorized number of Directors will automatically be increased by two. Promptly thereafter, the Board of Directors of this Corporation shall, as soon as may be practicable, call a special meeting of holders of Series A Participating Junior Preferred Stock for the purpose of electing such members of the Board of Directors. Said special meeting shall in any event be held within 45 days of the occurrences of such arrearage. (ii) During any period when the holders of Series A Participating Junior Preferred Stock, voting as a separate series, shall be entitled and shall have exercised their right to elect two Directors, then and during such time as such right continues (a) the then authorized number of Directors shall be increased by two, and the holders of Series A Participating Junior Preferred Stock, voting as a separate series, shall be entitled to elect the additional Directors so provided for, and (b) each additional Director shall not be a member of Class I, Class II or Class III of the Board of Directors, but shall serve until the next annual meeting of stockholders for the election of Directors, or until his successor shall be elected and shall qualify, or until his right to hold such office terminates pursuant to the provisions of this Section 3B. (iii) A Director elected pursuant to the terms hereof may be removed without cause by the holders of Series A Participating Junior Preferred Stock entitled to vote in an election of such Director. (iv) If, during any interval between annual meetings of stockholders for the election of Directors and while the holders of Series A Participating Junior Preferred Stock shall be entitled to elect two Directors, there is no such Director in office by reason of resignation, death or removal, then, promptly thereafter, the Board of Directors shall cause a special meeting of the holders of Series A Participating Junior Preferred Stock for the purpose of filling such vacancy and such vacancy shall be filled at such special meeting. Such special meeting shall in any event be held within 45 days of the occurrence of such vacancy. (v) At such time as the arrearage is fully cured, and all dividends accumulated and unpaid on any shares of Series A Participating Junior Preferred Stock outstanding are paid, and, in addition thereto, at least one regular dividend has been paid subsequent to curing such arrearage, the term of office of any Director elected pursuant hereto, or his successor, shall automatically terminate, and the authorized number of Directors shall automatically decrease by two, the rights of the holders of the shares of the Series A Participating Junior Preferred Stock to vote as provided in this Section 3(B) shall cease, subject to renewal from time to time upon the same terms and conditions, and the holders of shares of the Series A Participating Junior Preferred Stock shall have only the voting rights elsewhere herein set forth. Section 4. Reacquired Shares. Any shares of Series A Participating Junior Preferred Stock Purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 5. Liquidation, Dissolution or Winding Up. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the Series A Participating Junior Preferred Stock shall be entitled to receive the greater of (a) $100.00 per share, plus accrued dividends to the date of distribution, whether or not earned or declared, or (b) an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock. In the event the Corporation shall at any time after the Record Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Participating Junior Preferred Stock were entitled immediately prior to such event pursuant to clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 6. Optional Redemption. (a) The Company shall have the option to redeem the whole or any part of the Series A Participating Junior Preferred Stock at any time at a redemption price equal to, subject to the provision for adjustment hereinafter set forth, 100 times the "current per share market price" of the Common Stock on the date of the mailing of the notice of redemption, together with unpaid accumulated dividends to the date of such redemption. In the event the Company shall at any time after the Record Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Participating Junior Preferred Stock were otherwise entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. The "current per share market price" on any date shall be deemed to be the average of the closing price per share of such Common Stock for the 10 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted the average of the high bid and low asked prices in the over-the-counter market, as reported by The Nasdaq Stock Market ("NASDAQ") or such other system then in use or, if on any such date, the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Board of Directors of the Company. If on such date no such market maker is making a market in the Common Stock, the fair value of the Common Stock on such date as determined in good faith by the Board of Directors of the Company shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for the transaction of business or, if the Common Stock is not listed or admitted to trading on any national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the State of New York are not authorized or obligated by law or executive order to close. (b) Notice of any such redemption shall be given by mailing to the holders of the Series A Participating Junior Preferred Stock a notice of such redemption, first class postage prepaid, not later than the thirtieth day and not earlier than the sixtieth day before the date fixed for redemption, at their last address as the same shall appear upon the books of the Company. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the shareholder received such notice, and failure duly to give such notice by mail, or any defect in such notice, to any holder of Series A Participating Junior Preferred Stock shall not affect the validity of the proceedings for the redemption of such Series A Participating Junior Preferred Stock. If less than all the outstanding shares of Series A Participating Junior Preferred Stock are to be redeemed, the redemption shall be made by lot as determined by the Board of Directors. (c) The notice of redemption to each holder of Series A Participating Junior Preferred Stock shall specify (a) the number of shares of Series A Participating Junior Preferred Stock of such holder to be redeemed, (b) the date fixed for redemption, (c) the redemption price and (d) the place of payment of the redemption price. (d) If any such notice of redemption shall have been duly given or if the Company shall have given to the bank or trust company hereinafter referred to irrevocable written authorization promptly to give or complete such notice, and if on or before the redemption date specified therein the funds necessary for such redemption shall have been deposited by the Company with the bank or trust company designated in such notice, doing business in Greenwich, Connecticut, and having a capital, surplus and undivided profits aggregating at least $25,000,000 according to its last published statement of condition, in trust for the benefit of the holders of Series A Participating Junior Preferred Stock called for redemption, then, notwithstanding that any certificate for such shares so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit all such shares called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall no longer be deemed outstanding and shall forthwith cease and terminate, except the right of the holders thereof to receive from such bank or trust company at any time after the time of such deposit the funds so deposited, without interest, and the right to exercise, up to the close of business on the fifth day before the date fixed for redemption. In case less than all the shares represented by any surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. Any interest accrued on such funds shall be paid to the Company from time to time. Any funds so deposited and unclaimed at the end of six years from such redemption date shall be repaid to the Company, after which the holders of shares of Series A Participating Junior Preferred Stock called for redemption shall look only to the Company for payment thereof. Section 7. Fractional Shares. Series A Participating Junior Preferred Stock may be issued in fractions of a share that shall entitle the holder, in proportion to such holders fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Participating Junior Preferred Stock. IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do affirm the foregoing as true under the penalties of perjury as of the 11th day of December, 1996. NEW TENNECO INC. /s/ DANA G. MEAD ____________________________________ Dana G. Mead Chairman and Chief Executive Officer Attest: /s/ KARL A. STEWART ____________________________ Karl A. Stewart Vice President and Secretary EX-3.1C 4 CERTIFICATE OF AMENDMENT EXHIBIT 3.1(c) CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF NEW TENNECO INC. New Tenneco Inc., a corporation duly organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that: 1. The Restated Certificate of Incorporation of the Corporation is hereby amended by deleting Article FIRST thereof and inserting the following in lieu thereof: "FIRST: The name of the corporation is Tenneco Inc." 2. The foregoing amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware and by written consent of the then sole stockholder of the Corporation in accordance with 228 of the General Corporation Law of the State of Delaware. 3. The foregoing amendment to the Restated Certificate of Incorporation of the Corporation shall be effective at 8:00 a.m. Eastern Standard Time on December 12, 1996. IN WITNESS WHEREOF, said New Tenneco Inc. has caused this Certificate to be signed as of the 11th day of December, 1996. NEW TENNECO INC. By: /s/ Karl A. Stewart ---------------------------------- Name: Karl A. Stewart Office: Vice President and Secretary EX-3.1D 5 CERTIFICATE OF OWNERSHIP AND MERGER EXHIBIT 3.1(d) CERTIFICATE OF OWNERSHIP AND MERGER MERGING TENNECO UNITED KINGDOM HOLDINGS LIMITED WITH AND INTO TENNECO INC. - - -------------------------------------------------------------------------------- Pursuant to Section 253 of the General Corporation of Law of the States of Delaware - - -------------------------------------------------------------------------------- TENNECO INC., a Delaware corporation (the "Company"), does hereby certify to the following facts relating to the merger (the "Merger") of TENNECO UNITED KINGDOM HOLDINGS LIMITED, a Delaware corporation (the "Subsidiary") with and into the Company, with the Company remaining as the surviving corporation: FIRST: The Company is incorporated pursuant to the General Corporation Law of the State of Delaware (the "DGCL"). The Subsidiary is incorporated pursuant to the DGCL. SECOND: The Company owns all of the outstanding shares of each class of capital stock of the Subsidiary. THIRD: The Board of Directors of the Company, by the following resolutions duly adopted on July 8, 1997, determined to merge the Subsidiary with and into the Company pursuant to Section 253 of the DGCL: WHEREAS, TENNECO INC., a Delaware corporation (the "Company"), owns all of the outstanding shares of the capital stock of TENNECO UNITED KINGDOM HOLDINGS LIMITED, a Delaware corpora- tion ("Subsidiary");and WHEREAS, the Board of Directors of the Company has deemed it advisable that the Subsidiary be merged with and into the Com- pany pursuant to Section 253 of the General Corporation Law of the State of Delaware; NOW, THEREFORE, BE IT AND IT HEREBY IS RESOLVED, that the Subsidiary be merged with and into the Company (the "Merger"); and it is further RESOLVED, that by virtue of the Merger and without any action on the part of the holder thereof, each then outstanding share of common stock of the Company shall remain unchanged and continue to remain outstanding as one share of common stock of the Com- pany immediately prior to the Merger; and it is further RESOLVED, that by virtue of the Merger and without any action on the part of the holder thereof, each then outstanding share of common stock of the Subsidiary shall be cancelled and no consideration shall be issued in respect thereof; and it is further -2- RESOLVED, that the proper officers of the Company be and they hereby are autho- rized and directed to make, execute and ac- knowledge, in the name and under the corpo- rate seal of the Company, a certificate of ownership and merger for the purpose of effecting the Merger and to file the same in the office of the Secretary of State of the State of Delaware, and to do all other acts and things that may be necessary to carry out and effectu- ate the purpose and intent of the resolutions relating to the Merger; and it is further FOURTH: The Company shall be the surviving corporation of the Merger. FIFTH: The certificate of incorporation of the Company as in effect immediately prior to the effective time of the Merger shall be the certificate of incorporation of the surviving corporation. IN WITNESS WHEREOF, the Company has caused this Certificate of Ownership and Merger to be executed by its duly authorized officer this 8th day of July, 1997. TENNECO INC. By: /s/ Karl A. Stewart ---------------------------- Name: Karl A. Stewart Office: Vice President and Secretary -3- EX-10.11 6 1997 TENNECO INC. COMPENSATION PLAN EXHIBIT 10.11 12/97 1997 TENNECO INC. BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN 1. Purpose. Each member of the Board of Directors of Tenneco Inc., (the "Board") who is not also an employee of Tenneco Inc. (the "Company") or any of its subsidiaries, is entitled to receive cash compensation from the Company for service on the Board and, if applicable, on one or more of the committees of the Board and/or on the Board of Managers of the Tenneco Foundation ("Director's Compensation"). Generally, Director's Compensation is paid on a current basis. It is the purpose of this plan to provide a method to defer the payment of Director's Compensation, with deferred compensation subject to adjustment for interest at prime rate, changes in the value of selected mutual funds, or changes in the value of Tenneco stock during the period of deferral, in order to enhance the ability of the Company to attract and retain individuals of experience, ability, industry, loyalty and inventiveness to serve on the Board. 2. Participation. Any director of the Company who is not also a salaried employee of the Company or any of its subsidiaries may become a Participant in this Plan by electing to defer all or any portion of Director's Compensation otherwise payable for a particular calendar year (the "Deferred Year"), provided, however, that any election, occurring after August 26, 1996 by a Participant who is subject to the reporting and short swing profits liability provisions of Section 16 of the Securities Exchange Act of 1934, as amended including an election relating to the form of distribution or, to defer income into a "Tenneco stock index account" shall not be effective until such election and the transactions contemplated thereby shall have been specifically approved by the Committee to the extent such approval is required to avoid liability under said Section 16 and the regulations thereunder. Amounts deferred under this Section 2 shall be referred to as the "Deferred Amounts". Once received by the Committee, an election cannot be revoked. Such election shall be made in writing in such form as shall be approved for such purpose by the Senior Vice President - Human Resources of the Company, which form shall, among other things, specify: the Deferred Year; the amount of Director's Compensation to be deferred; the investment elections; the time at which distribution of the Participant's Account for the Deferred Year shall commence; and the form of distribution. To be effective, the completed election form must be filed with the Senior Vice President - Human Resources of the Company prior to the first day of the Deferred Year. 3. Accounting. The Company shall establish a Director's deferred compensation ledger under which a Participant's Account for the Deferred Year shall be created in the name of each participant who elects to defer Director's Compensation for a particular Deferred Year. Each Participant's Account for a Deferred Year shall be maintained in accordance with the following rules: A. Crediting of Deferred Director's Compensation. Director's Compensation deferred pursuant to this Plan shall be credited to the Participant's Account for the Deferred Year as of the last day of the month within the Deferred Year during which the compensation would otherwise have been payable. B. Adjustments to Deferred Amounts. The Committee shall credit the balance of the Participant's Deferred Compensation Account with an earnings factor. The earnings factor will equal the amount the Participant's Deferred Compensation Account would have earned if it had been invested in the investment options listed below. The Participant is permitted to select the investment option used to determine the earnings factor and may change the selection at any time. The Participant may choose more than one investment option in increments of at least one (1) percent. The company reserves the right to change or amend any of the investment options at any time. The investment options used to determine the earnings factor are: (1) The prime rate of interest as reported by The Chase Manhattan Bank at the first day of each calendar month. (2) Tenneco Stock Index Account A - amount of deferral will be invested in Tenneco Stock Equivalent Unit Account. Any investment in this account will be measured solely by the performance of the company's common stock (including dividends that will be reinvested). This investment option will be settled in cash. (3) Tenneco Stock Index Account B - amount of deferral will be invested in Tenneco Stock Equivalent Unit Account. Any investments in this account will be measured solely by the performance of the company's common stock (including dividends that will be reinvested). This investment option will be settled in Tenneco stock. (4) The return for selected Mutual Funds currently offered in the Tenneco Inc. Thrift Plan: (a) Fidelity Growth Company Fund (b) BZW Barclays U.S. Debt Index Fund (Bond) (c) BZW Barclays Daily Equity Index Fund Tenneco is under no obligation to acquire or provide any of the investments designated by a Participant, and any investment actually made by Tenneco will be made solely in the name of Tenneco and will remain the property of Tenneco. The crediting of an earnings factor shall occur so long as there is a balance in the Participant's Deferred Compensation Account regardless of whether the Participant has terminated employment with Tenneco. C. Statement. The Company shall furnish each Participant with an annual statement showing the closing balance for the respective calendar year of each Participant's Accounts. 4. Distribution From Account A. Form of Distribution. Distribution of a Participant's Account for a Deferred Year shall be made in whichever of the following payment forms was designated by the Participant in the election form which deferred Director's Compensation to the Account: 1. Single sum; 2. Two annual installments; 3. Three annual installments; 4. Four annual installments; or 5. Five annual installments. The amount of any installment shall be determined by dividing the net balance of the Participant's Account for the Deferred Year by the number of installments then unpaid. B. Payment Date. Distribution of a Participant's Account for a Deferred Year shall commence as soon as administratively feasible following the earliest of (i) the expiration of the calendar year during which the Participant ceases to be a director of the Company, or (ii) the date for commencement of payment designated in the election form which deferred Director's Compensation to the Account. If an installment type payment form has been designated, each subsequent installment shall be made as soon as administratively feasible in the calendar year in which such installment falls due. C. Designation of Beneficiary. A Participant may at any time designate the beneficiary or beneficiaries to whom any payment made from the Participant's Accounts shall be made after the Participant's death. Such designation shall be in writing and shall not become effective until filed with the Senior Vice President - Human Resources of the Company. If no designation is on file with the Senior Vice President - Human Resources of the Company or if the person so designated is not living or otherwise in existence at the time of the Participant's death, then the deceased Participant's estate shall be deemed to be the Participant's designated beneficiary. If the designated beneficiary survives the Participant's death but dies thereafter before all distributions from the Participant's Accounts have been made, any remaining distribution shall be made to the estate of the designated beneficiary. Distribution of a Participant's Account for a Deferred Year to the designated beneficiary or the estate of the designated beneficiary shall be made in such payment form and at such time as has been designated by the Participant in the election form which deferred Director's Compensation to the Account. 5. Nature and Source of Payments. Any amount credited by the Company to Participant's Accounts shall constitute a liability of the Company to the Participant or, after the Participant's death, to the designated beneficiary. Any payment with respect to a Participant's Accounts shall be made from the general funds of the Company. No special or separate fund shall be established or segregation of assets made to assure such payment and no Participant and/or designated beneficiary shall have any interest in any particular asset of the Company by virtue of the existence of a credit balance in the Participant's Accounts. 6. Administration. The Board has authorized the Senior Vice President - Human Resources of the Company to administer, construe and interpret this Plan and his construction and interpretation of any provision of this Plan shall be final, conclusive and binding upon the Company and any Participant and/or designated beneficiary. The Senior Vice President - Human Resources of the Company shall not be liable for any act done or determination made in good faith. 7. Non-Alienation of Benefits. No benefit under this Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt at such shall be void. Benefits under this Plan shall not in any way be subject to the debts, contracts, liabilities, engagements, or torts of the person who shall be entitled to the payment thereof, nor shall such benefits be subject to attachment, garnishment, or legal process for or against such person. 8. Plan Amendment or Termination. The Board may terminate this Plan at any time or may amend or modify this Plan at any time and from time to time; provided, however, that the amendment or termination of this Plan shall in no way affect the right of a Participant and/or, following the Participant's death, the designated beneficiary to the receipt of the then credit balances of the Participant's Accounts. EX-10.12 7 EXECUTIVE INCENTIVE COMPENSATION PLAN EXHIBIT 10.12 TENNECO INC. ----------- 1997 EXECUTIVE INCENTIVE COMPENSATION PLAN ------------------------------------------ PLAN DOCUMENT ------------- EFFECTIVE: JANUARY 1, 1997 TENNECO INC. ----------- EXECUTIVE INCENTIVE COMPENSATION PLAN ------------------------------------- Section 1. Establishment and Purpose ------------------------------------- 1.1 Establishment of the Plan. Tenneco Inc. hereby establishes the "TENNECO INC. EXECUTIVE INCENTIVE COMPENSATION PLAN" (The "Plan"), set forth herein, effective January 1, 1997. 1.2 Purpose. The objectives of the Plan are to: (a) Reinforce a results-oriented management culture with executive pay that varies according to corporate, division, and individual performance against extraordinarily aggressive goals. (b) Provide incentives, in the form of substantial reward potential, for executives to remain employees of the Company. (c) Focus on business results that include financial measures such as net income, cash flow, working capital, and economic value added (EVA) with improvement in quality, safety, environmental, risk management, effective leadership and equal employment opportunities performance. (d) De-emphasize fixed compensation in the form of base salary and place greater emphasis on variable performance-based compensation. (e) Provide key executives with competitive levels of total current compensation and incentive earning opportunities commensurate with the results achieved and individual performance. (f) Provide plans that are simple and easy to describe and understand. Section 2. Plan Definitions ---------------------------- (a) Company means Tenneco Inc. and any successor employer which adopts the Plan and any subsidiary corporation designated by the Board as eligible to participate in the Plan; except that when used with reference to authority under the Plan, Company shall mean Tenneco Inc. exclusively. (b) Board means the Board of Directors of the Company. (c) Compensation and Benefits Committee means those members of the Compensation and Benefits Committee of the Board who are not employees of the Company. This Committee is charged with the overall responsibility for this Plan. (d) Corporate means the entity which is responsible for the overall management and staff support functions of the Company. (e) Division means each operating organizational entity which, through the conduct of its business, produces revenues for the Company. (f) Executive means a regular, full-time salaried employee of the Company who is in a position meeting the defined eligibility criteria for participation in the Plan. (g) Participant means an executive who has been approved for participation in the Plan. (h) Effective Date means January 1, 1997. (i) Plan Year means the calendar year. (j) Salary grade means the position classification assigned to the Participant in accordance with the position evaluation system adopted by Tenneco Management for Plan purposes. (k) EICP Objectives means the "Target" (Budget) level of financial objectives (e.g., net income, cash flow, and economic value added (EVA) or other operating measurements for the Plan Year, assigned annually by the Company to each Division. This represents the expected level of achievement for the Plan Year. The target goal (budget) for Corporate will be the Company's consolidated operating measurements. (l) Individual Incentive Target Award means the anticipated individual incentive award to be allocated to a Participant in the event EICP objectives are met and his/her individual performance is fully satisfactory. The schedule of individual incentive target awards applicable to the various salary grades shall be determined by the Company. Section 3. Eligibility and Participation ----------------------------------------- 3.1 Eligibility and Participation. Eligibility for participants in the Plan will be limited to those key executives who, by the nature and scope of their positions, regularly and directly make or influence policy decisions which significantly impact the overall results or success of the Company. The Company will receive recommendations for participation from Division Chief Executive Officers and appropriate Corporate Staff Officers. Each such nominated executive shall become a Participant upon being approved by the Company. All such executives approved for participation shall be notified of their selection as soon as practical following approval. 3.2 Cessation of Participation. The Company may withdraw its approval of an existing position at any time during the Plan Year. Participants whose employment is terminated during the Plan Year for reasons other than disability, death, or retirement under a Company retirement plan shall forfeit participation in the Plan unless otherwise authorized by the Company. At the sole discretion of the Company, participation may be prorated for participants who become disabled, die, retire or are assigned to non-eligible position during the Plan Year. Section 4. Fund Generation --------------------------- 4.1 Division/Corporate Incentive Amounts. Annually, the Company shall establish Division and Corporate EICP Objectives (Target/Budget) applicable to each participating Division. In addition, the Company shall determine for each participating Division a target incentive amount equal to the sum of individual incentive targets. The Company may adjust the target incentive amount during the Plan Year to accommodate the admission or elimination of Participants to the Plan and to incorporate adjustments to individual incentive targets of Participants whose salary grade changes during the Plan Year. Division and corporate incentive funds will be determined based on the budgeted financial objectives (e.g., net income, cash flow, and EVA) with each weighted to reflect appropriate emphasis. The size of the incentive fund applicable to each division will be determined as follows: FINANCIAL OBJECTIVES -------------------- A preliminary fund will be established based on performance against financial objectives from the Annual Operating Plan (AOP). - Performance on AOP will generate a fund equal to the sum of individual target awards. - Performance below AOP will not result in an incentive fund except as determined by Tenneco Management taking into consideration the reasons that AOP was not attained. - Performance above AOP may result in a higher than target level fund as determined by Tenneco Management taking into consideration the reasons that AOP was exceeded. NON-FINANCIAL OBJECTIVES ------------------------ Quantitative Adjustments ------------------------ Once the preliminary fund is established, the following quantitative adjustment factors will be applied to determine a final incentive fund: - Working Capital Performance - Environmental Performance - Safety & Health Performance - Quality Performance - EEO Performance Each of these quantitative adjustment factors will be applied a maximum of 5% for a total increase/decrease to the fund of as much as 25%. Qualitative Adjustments ---------------------- The following qualitative adjustment factors for overall leadership will also be applied. - Global Market Development - Customer Satisfaction - Leadership of Change - Leadership Development (Recruiting/Staffing/Training) - Operational Considerations (Quality of Earnings) Theses qualitative factors will be applied a maximum of 2% for a total increase/decrease to the fund as much as 10%. 4.2 Committee Authority. The Committee shall have the right at any time in its sole discretion to modify, eliminate or withdraw for such period or periods as it may determine, the incentive amounts, in part or in whole, to be made available under this Section 4 for payment of awards to any or all participating Corporate or Division entities or any Participant or Participants hereunder. Section 5. Determination of Individual Awards ---------------------------------------------- 5.1 Determination of Individual Incentive Target Awards. Annually, the Compensation and Benefits Committee shall determine the Salary Grade applicable to the Chairman and CEO of the Company and the Company shall determine the salary grade applicable to all other Participants. Each Participant's individual incentive target award will be determined by the Company. 5.2 Determination of Individual Incentive Awards. Actual individual awards to be paid to Participants will vary above or below the assigned individual incentive target awards dependent upon each individual's performance in accordance with guidelines prescribed by the Company. The actual award to a Participant must be approved by both the Company and the Compensation and Benefits Committee (or only the Committee for awards applicable to the Chairman and President of the Company) and shall not exceed 100% of the Participant's annual base salary without approval of the Committee. Section 6. Form of Timing of Awards ------------------------------------ Payment of Individual Awards. The actual awards to be paid to participants in accordance with Section 5.2 shall be paid in cash as soon as practical once final operating performance is available. Section 7. Administration -------------------------- This Plan shall be administered by the Company in accordance with rules that may be established from time to time by the Compensation and Benefits Committee. The determination of the Company as to any disputed question arising under this Plan, including any question of construction or interpretation, shall be final, binding, and conclusive upon all persons. Section 8. Amendment and Termination -------------------------------------- The Committee, in its absolute discretion and without notice, may at any time and from time to time modify or amend, in whole or in part, any or all of the provisions of this Plan, or suspend or terminate it entirely. Section 9. Applicable Laws --------------------------- This Plan shall be construed, administered and governed in all respects under and by the laws of the State of Connecticut. EX-10.13 8 TENNECO INC. DEFERRED COMPENSATION PLAN EXHIBIT 10.13 12/97 TENNECO INC. DEFERRED COMPENSATION PLAN 1. PURPOSE The purpose of the Tenneco Inc. Deferred Compensation Plan (the "Plan") is to provide to a select group of management or highly compensated employees of Tenneco Inc. and its subsidiaries and affiliates (hereinafter collectively referred to as "Tenneco") an opportunity to defer compensation received by them from Tenneco in accordance with the terms and conditions set forth herein. 2. ADOPTION AND ADMINISTRATION The Plan shall be adopted by the Board of Directors of Tenneco, Inc. and administered by the Compensation and Benefits Committee of the Tenneco Inc. Board of Directors (the "Committee"). The Committee shall have sole and complete authority and discretion to interpret the terms and provisions of the Plan and to adopt, alter and repeal such administrative rules, regulations and practices governing the operation of the Plan, and to determine facts under the Plan as it shall from time to time deem advisable. 3. ELIGIBILITY U.S. paid participants in the Tenneco Inc. Executive Incentive Compensation Plan shall be eligible to participate in the Plan. Such persons shall be collectively referred to as the "Participant" or "Participants" as the case may be. 4. ELECTION TO DEFER (a) A Participant may elect in writing to defer receipt of all or a specified portion of his or her bonuses or incentive compensation to be received during a calendar year, provided, however, that any election, occurring after August 15, 1996 by a Participant who is subject to the reporting and short swing profits liability provisions of Section 16 of the Securities Exchange Act of 1934, as amended including an election relating to the form of distribution or to defer income into a "Tenneco stock index account" pursuant to Section 6 of the Plan shall not be effective until such election and the transactions comtemplated thereby shall have been specifically approved by the Committee to the extent such approval is required to avoid liability under Section 16 and the regulations thereunder. Amounts deferred under this Section 4(a) shall be referred to as the "Deferred Amounts". Once received by the Committee, an election cannot be revoked. (b) Except as provided in this Section 4(b) or in Section 14, the election must be made prior to September 30 of the calendar year in which the bonus or incentive compensation will be awarded. A Participant must make a separate election with respect to each calendar year of participation in the Plan. A new Participant in the Plan shall have 30 days following his or her notification by the Committee of his or her eligibility to participate in the Plan to make an election with respect to bonus or incentive compensation to be awarded within the calendar year. (c) As specified by the Participant in the election to defer, the period of deferral shall be until the Participant dies, terminates employment with Tenneco, or until a specific date selected by the Participant in the election to defer. 5. ESTABLISHMENT OF DEFERRED COMPENSATION ACCOUNT At the time of the Participant's initial election to defer pursuant to Section 4 or 13, the Tenneco company which employed the Participant shall establish a memorandum account (a "Deferred Compensation Account") for such Participant on its books. The Deferred Account shall be credited to the Participant's Deferred Compensation Account as of the day on which the Participant would otherwise be entitled to receive the bonus or incentive compensation. Any required withholding for taxes (e.g. Social Security taxes) on the Deferred Amount shall be made from other compensation of the Participant. Adjustments as provided in Section 6 below, shall be made to the Participant's Deferred Compensation Account. 6. ADJUSTMENTS TO DEFERRED AMOUNTS The Committee shall credit the balance of the Participant's Deferred Compensation Account with an earnings factor. The earnings factor will equal the amount the Participant's Deferred Compensation Account would have earned if it had been invested in the investment options listed below. The Participant is permitted to select the investment option used to determine the earnings factor and may change the selection at any time. The Participant may choose more than one investment option in increments of at least one (1) percent. The company reserves the right to change or amend any of the investment options at any time. The investment options used to determine the earnings factor are: (a) The prime rate of interest as reported by The Chase Manhattan Bank at the first day of each calendar month. 2 (b) Tenneco stock index account -- amount of deferral will be invested in Tenneco stock equivalent unit account. Any investment in this account will be measured solely by the performance of the company's common stock (including dividends that will be reinvested). (c) The return for selected Mutual Funds currently offered in the Tenneco Inc. Thrift Plan: (1) Fidelity Growth Company Fund (2) Barclays U.S. Debt Index Fund (Bond) (3) Barclays Daily Equity Index Fund Tenneco is under no obligation to acquire or provide any of the investments designated by a Participant, and any investments actually made by Tenneco will be made solely in the name of Tenneco and will remain the property of Tenneco. The crediting of an earnings factor shall occur so long as there is a balance in the Participant's Deferred Compensation Account regardless of whether the Participant has terminated employment with Tenneco. 7. PAYMENT OF DEFERRED AMOUNTS (a) Except as otherwise provided in subsection (b), (c) or (d) below, a Participant's Deferred Amount shall be paid, or commence to be paid, to the Participant, or the Participant's beneficiary, as soon as practicable after: (i) the Participant's death (ii) the termination of Participant's Tenneco employment, or (iii) the date specified in the election made by the Participant. In the event of the Participant's death, payment of the balance in the Participant's Deferred Compensation Account shall be made,either (i) in a lump sum or (ii) in a number of annual installments, not to exceed five, as soon as administratively feasible to the Participant's designated beneficiary, or if none, to the Participant's estate. (b) The Participant may elect to receive payment of the balance of his or her Deferred Compensation Account either (i) in a lump sum upon termination or (ii) in a single payment at a specified date prior to termination or (iii) in a number of post termination annual installments, not to exceed five, as the Participant shall elect. The distribution election must be made at least one year before the Deferred Amount is payable and must have approval of the Committee. If no election is made, a lump sum payment will be made upon a Participant's termination. 3 (c) Anything contained in this Section to the contrary not withstanding, in the event a Participant incurs a severe financial hardship, the Committee, in its sole discretion and upon written application of such Participant, may direct immediate payment of all or a portion of the then current value of such Participant's Deferred Compensation Account; provided that such payment shall in no event exceed the amount necessary to alleviate such financial hardship; and provided further that in the case of such payment, the Participant's Deferred Compensation Account will be reduced by 110% of the amount of such payment. 8. PARTICIPANT REPORTS The Committee shall provide a statement to the Participant quarterly concerning the status of his or her Deferred Compensation Account. 9. TRANSFERABILITY OF INTEREST During the period of deferral, all Deferred Amounts shall be considered as general assets of the Tenneco companies which employ or have employed the Participant for use as they deem necessary and shall be subject to the claims of the companies' creditors. The rights and interests of a Participant during the period of deferral shall be those of a general creditor except that such Participant's rights and interests may not be reached by the creditors of the Participant or the beneficiary, or anticipated, assigned, pledged, transferred or otherwise encumbered except in the event of the death of the Participant, and then only by will or the laws of descent and distribution. 10. AMENDMENT, SUSPENSION AND TERMINATION Tenneco Inc. at any time may amend, suspend or terminate the Plan or any portion thereof in such manner and to such extent as it may deem advisable and in the best interests of Tenneco. No amendment, suspension and termination shall reduce the amount then credited to a Participant's Deferred Compensation Account. 11. UNFUNDED OBLIGATION The Plan shall not be funded; no trust, escrow or other provisions shall be established to secure payments due under the Plan; and the Plan shall be regarded as unfunded for purposes of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code. A Participant shall be treated as a general, unsecured creditor at all times under the Plan, and shall have no rights to any specific assets of any Tenneco company. All amounts credited to the memorandum accounts of the Participants will remain general assets of the respective companies. 4 12. NO RIGHT TO EMPLOYMENT OR OTHER BENEFITS Nothing contained herein shall be construed as conferring upon any Participant the right to continue in the employ of Tenneco. Any compensation deferred and any payments made under this Plan shall not be included in creditable compensation in computing benefits under any employee benefit plan of Tenneco except to the extent expressly provided for therein. 13. DISPUTE RESOLUTION By participating in the Plan, the Participant agrees that any dispute arising under the Plan shall be resolved by binding arbitration in Greenwich, Connecticut under the rules of the American Arbitration Association and that there will be no remedy besides the disputed deferred compensation amount at issue. 14. EFFECTIVE DATE The Plan shall be effective on January 1, 1997 if previously approved by the Board of Directors of Tenneco Inc.; otherwise it shall be effective immediately after such approval. After such effective date, eligible Participants shall be permitted to make within 30 days an initial election to defer under Section 4 with respect to the bonus or incentive compensation to be awarded within the first calendar year of the Plan. 5 EX-10.23 9 1996 TENNECO INC. STOCK OWNERSHIP PLAN EXHIBIT 10.23 12/97 1996 TENNECO INC. STOCK OWNERSHIP PLAN 1. PURPOSE The purpose of the Plan is to promote the long-term success of the Company for the benefit of shareholders by encouraging its directors, officers and key employees to have meaningful investments in the Company so that, as stockholders themselves, those individuals will be more likely to represent the views and interest of other stockholders and by providing incentives to such directors, officers and key employees for continued service. The Company believes that the possibility of participation under the Plan will provide this group of directors, officers and employees an incentive to perform more effectively and will assist the Company in attracting and retaining people of outstanding training, experience and ability. 2. DEFINITIONS "Authorized Plan Shares" has the meaning set forth in Section 6(a). "Award" means an award or grant made to a Participant under Section 8. "Award Agreement" means the agreement provided in connection with an Award under Section 12. "Award Date" means the date that an Award is made, as specified in an Award Agreement. "Board of Directors" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended, or any successor legislation. "Company" means Tenneco Inc. "Committee" means the Compensation and Benefits Committee of the Board of Directors, or any successor committee thereto. "Common Stock" means the Company's common stock, $.01 par value per share. "Covered Employees" shall have the meaning specified in Section 162(m)(3) of the Code. "Dividend Equivalent" means an amount equal to the amount of the cash dividends that are declared and become payable after the Award Date for the Award to which it relates and on or before the Settlement Date for such Award. 1 "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" on any date means the average of the highest and the lowest sales prices of a share of Common Stock on the Composite Tape for such date, as reported by the National Quotation Bureau Incorporated, provided that if (i) no sales of Common Stock are included on the Composite Tape for such date, or (ii) in the opinion of the Committee, the sales of Common Stock on such date are insufficient to constitute a representative market, then the Fair Market Value of a share of Common Stock on such date shall be deemed to be the average of the highest and lowest prices of a share of Common Stock as reported on said Composite Tape for the next preceding day on which (x) sales of Common Stock are included and (y) the circumstances described in this clause (ii) do not exist. "ISO" means any Stock Option designated in an Award Agreement as an "Incentive Stock Option" within the meaning of Section 422 of the Code. "Non-Qualified Stock Option" means any Stock Option that is not an ISO. "Option Price" means the purchase price of one share of Common Stock under a Stock Option. "Participant" means a director, employee or officer of a Tenneco Company who has been selected by the Committee to receive an Award under the Plan. "Performance Unit" means an Award denominated in cash, the amount of which may be based on performance of the Participant of Tenneco Inc. or of any subsidiary or division thereof. "Plan" means this 1996 Tenneco Inc. Stock Ownership Plan, as amended from time to time. "Reload Stock Option" means a Stock Option (i) that is awarded, either automatically in accordance with the terms of an Award Agreement in which one or more other Awards are made or by separate Award, upon the exercise of a stock option granted under this Plan or otherwise where the option price is paid by the option holder by delivery of shares of Common Stock on the Settlement Date for such exercise and (ii) that entitles such holder to purchase the number of shares so delivered for an Option Price equal to the Fair Market Value of a share of Common Stock on such Settlement Date. "Restricted Stock" means shares of Common Stock subject to restrictions and conditions pursuant to Section 8(c). "Rule 16b-3" means Regulation Section 240.16b-3 of the rules and regulations of the Securities and Exchange Commission promulgated under the Exchange Act. 2 "Settlement Date" means, (i) with respect to any Stock Option that has been exercised in whole or in part, the date or dates upon which shares of Common Stock are to be delivered to the Participant and the Option Price therefor paid, (ii) with respect to any SARs that have been exercised, the date or dates upon which a cash payment is to be made to the Participant, or in the case of SARs that are to be settled in shares of Common Stock, the date or dates upon which such shares are to be delivered to the Participant, (iii) with respect to Performance Units, the date or dates upon which cash or shares of Common Stock are to be delivered to the Participant, (iv) with respect to Dividend Equivalents, the date upon which payment thereof is to be made, and (v) with respect to Stock Equivalent Units, the date upon which payment thereof is to be made, in each case, determined in accordance with the terms of the Award Agreement under which any such Award was made. "Stock Appreciation Right" or "SAR" means an Award that entitles the Participant to receive on the Settlement Date an amount equal to the excess of (i) the Fair Market Value of a share of Common Stock on the date of exercise of the SAR over (ii) the Fair Market Value of one share of Common Stock on the Award Date or any other higher amount specified in the Award Agreement. "Stock Equivalent Unit" means an Award that entitles the Participant to receive on the Settlement Date an amount equal to the Fair Market Value of one share of Common Stock on such date. "Stock Option" or "Option" means any right to purchase shares of Common Stock (including a Reload Stock Option) awarded pursuant to Section 8(a). "Tenneco Company" means the Company, any stock corporation of which a majority of the capital stock generally entitled to vote for directors is owned directly or indirectly by the Company, and any other company designated as such by the Committee, but only during the period of such ownership or designation. 3. TERM The Plan shall be effective as of October 8, 1996, and shall remain in effect through December 31, 2001. After termination of the Plan, no further Awards may be granted other than Reload Stock Options granted in accordance with Award Agreements existing as of December 31, 2001, but outstanding Awards shall remain effective in accordance with their terms and the terms of the Plan. 3 4. PLAN ADMINISTRATION (a) The Committee shall be responsible for administering the Plan. (i) Composition of the Committee. The Committee shall be comprised of two or more members of the Board of Directors, all of whom shall be "non- employee directors" as defined in Rule 16b-3 and "outside directors" as that term is used in Section 162 of the Code and the regulations promulgated thereunder. (ii) Powers. The Committee shall have full and exclusive discretionary power to interpret the Plan and to determine eligibility for benefits and to adopt such rules, regulations and guidelines for administering the Plan as the Committee may deem necessary or proper. Such power shall include, but not be limited to, selecting Award recipients, establishing all Award terms and conditions and, subject to Section 13, adopting modifications and amendments to the Plan or any Award Agreement, including without limitation, any that are necessary to comply with the laws of the countries in which the Company or its affiliates operate. (iii) Delegation. The Committee may delegate to one or more of its members or to one or more agents or advisors such non-discretionary administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. (b) The Committee may employee attorneys, consultants, accountants and other persons, and the Committee, the Company and it officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Participants, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or Awards, and all members of the Committee shall be fully protected by the Company, to the fullest extent permitted by applicable law, in respect of any such action, determination and interpretation. 5. ELIGIBILITY Awards will be limited to persons who are directors, officers, or key employees of the Tenneco Companies. In determining the persons to whom Awards shall be made, the Committee shall, in its discretion, take into account the nature of the person's duties, past and potential contributions to the success of the Tenneco Companies and such other factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. A person who has received an Award or Awards may receive an additional Award or Awards. For purposes of this Section 5, the terms "director", "employee" and "officer" shall also include any former director, employee or former 4 officer of a Tenneco Company eligible to receive a replacement award as contemplated in the third sentence of Section 8. 6. AUTHORIZED AWARDS; LIMITATIONS (a) Except for adjustments pursuant to Section 7, the maximum number of shares of Common Stock that shall be available for issuance under the Plan (the "Authorized Plan Shares") shall be 17,000,000 (approximately 10% of the issued and outstanding shares of Common Stock on the effective date of the Plan). (b) Except for adjustments pursuant to Section 7, in no event (i) shall more than 6.0 million of the Authorized Plan Shares be available for issuance pursuant to the exercise of ISOs awarded under the Plan; and (ii) shall more than 5.0 million of the Authorized Plan Shares be available for issuance pursuant to Restricted Stock Awards. (c) If an Award expires unexercised or is forfeited, surrendered, canceled, terminated or settled in cash in lieu of Common Stock, the shares of Common Stock that were theretofore subject (or potentially subject) to such Award may again be made subject to an Award Agreement. (d) Common Stock that may be issued under the Plan may be either authorized and unissued shares, or issued shares that have been reacquired by the Company and that are being held as treasury shares. No fractional shares of Common Stock shall be issued under the Plan; provided, however, that cash, in an amount equal to the Fair Market Value of a fractional share of Common Stock as of the Settlement Date of the Award, shall be paid in lieu of any fractional shares in the settlement of Awards payable in shares of Common Stock. (e) In no event shall the number of shares of Common Stock subject to Stock Options plus the number of shares underlying SARs awarded to any one Participant during the period from October 8, 1996, through December 31, 2001, exceed 10% of the Authorized Plan Shares. In all events, determinations under the preceding sentence shall be made in a manner that is consistent with Code Section 162 and the regulations promulgated thereunder. 7. ADJUSTMENTS AND REORGANIZATIONS The Committee may make such adjustments to Awards granted under the Plan (including the terms, exercise price and otherwise) as it deems appropriate in the event of changes that impact the Company, the Company's share price, or share status, provided that any such actions are consistently and equitable applied to all affected Participants; provided, that, notwithstanding any other provision hereof, insofar as any Award is subject to performance goals established to qualify payments thereunder as "performance-based compensation" as described in Section 162(m) of the Code, the Committee shall have no power to adjust such Awards other than (i) negative discretion and (ii) the power to adjust Awards for corporate transactions, in either case to the extent permissible under regulations interpreting Code Section 162(m). 5 In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, extraordinary dividend, spin-off, split-off, rights offering, share combination, or other change in the corporate structure of the Company affecting the Common Stock, the number and kind of shares that may be delivered under the Plan shall be subject to such equitable adjustment as the Committee, in its sole discretion, may deem appropriate in order to preserve the benefits or potential benefits to be made available under the Plan, and the number and kind and price of shares subject to outstanding Awards and any other terms of outstanding Awards shall be subject to such equitable adjustment as the Committee, in its sole discretion, may deem appropriate in order to prevent dilution or enlargement of outstanding Awards. 8. AWARDS The Committee shall determine the type and amount of any Award to be made to any Participant; provided, however, that, except as provided in paragraph (g), no Awards granted pursuant to this Plan shall vest in less than six months after the date the Award is granted. Awards may be granted singly, in combination, or in tandem. Awards may also be made in combination or in tandem with, in replacement of, as alternatives to, or as the payment form for, grants or rights under any other employee benefit or compensation plan of the Tenneco Companies, including any such employee benefit or compensation plan of any acquired entity. (a) Stock Options. (i) Grants. Stock Options (including Reload Stock Options) granted under this Plan may be either of the following: (1) an ISO or (2) a Non-Qualified Stock Option The Committee may grant any Participant one or more ISOs, Non-Qualified Stock Options, or both types of Stock Options, in each case with or without SARs or Reload Stock Options or any other form of Award. Stock Options granted pursuant to this Plan shall be subject to such additional terms, conditions, or restrictions as may be provided in the Award Agreement relating to such Stock Option. (ii) Option Price. The Option Price of a Stock Option shall not be less than 100% of the Fair Market Value of a share of Common Stock on the Award Date; provided, however, that in the case of a Stock Option granted retroactively in tandem with or as a substitution for another Award, the Option Price shall be not less than 100% of the Fair Market Value of a share of Common Stock on the date of such other Award; and provided further that in any case ISOs shall have a price equal to 100% of the Fair Market Value of a share of Common Stock on the Award Date. (iii) ISOs. Anything in this Plan to the contrary notwithstanding, no term of this Plan relating to ISOs shall be interpreted, amended or altered, nor shall any discretion or authority awarded under 6 the Plan be exercised,so as to disqualify this Plan under Section 422 of the Code, or, without the consent of the Participants affected, to disqualify any ISO under Section 422 of the Code. An ISO shall not be granted to an individual who, on the date of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the employing Company or of its parent or any subsidiary corporation. The aggregate Fair Market Value, determined on the Award Date, of the shares of Common Stock or other stock with respect to which one or more ISOs (or other "incentive stock options," within the meaning of Subsection (b) of Section 422 of the Code, under all other stock option plans of the Participant's employing Company and its parent and subsidiary corporation) that are exercisable for the first time by the Participant during any particular calendar year shall not exceed the $100,000 limitation imposed by Section 422(d) of the Code. (iv) Manner of Payment of Option Price. The Option Price shall be paid in full at the time of the exercise of the Stock Option and may be paid in any of the following methods or combinations thereof; (A) In United States dollars in cash, check, bank draft or money order payable to the order of the Company; (B) By the delivery of shares of Common Stock having an aggregate Fair Market Value on the date of such exercise to the Option Price; (C) Participants may simultaneously exercise Stock Option and sell their shares of Common Stock acquired thereby and apply the proceeds to the payment of the Option Price pursuant to the procedures established by the Committee; and (D) In any other manner that the committee shall approve. (E) Any shares of Common Stock required or permitted to be sold by an executive officer of the Company in connection with the payment of the Option Price shall be transferred to the Company. (v) Reload Stock Options. The Committee may award Reload Stock Options to any Participant either in combination with other Awards or in separate Award Agreements that grant Reload Stock Options upon exercise of outstanding stock options granted under this Plan or otherwise. (b) Stock Appreciation Rights. (i) Grants. The Committee may award any Participant SARs, which shall be subject to such additional terms, conditions, or restrictions as may be provided in the Award Agreement 7 relating to such SAR Award, including any limits on aggregate appreciation. SARs may be settled in Common Stock or cash or both. (ii) Award Price. The Award Price per share of Common Stock of a SAR shall be fixed in the Award Agreement and shall be not less than 100% of the Fair Market Value of a share of Common Stock on the date of the award; provided, however, that in the case of a SAR awarded retroactively in tandem with or as a substitution for another Award, the Award Price per share of a SAR shall be not less than 100% of the Fair Market Value of a share of Common Stock on the date of such other Award. (iii) Distribution of SARs. SARs shall be exercisable in accordance with the conditions and procedures set out in the Award Agreement relating to such SAR Award. (c) Restricted Stock. The Committee may award Restricted Stock to any Participant. Awards of Restricted Stock shall be subject to such conditions and restrictions as are established by the Committee and set forth in the Award Agreement, which may include, but are not limited to, continued service with the Company, achievement of specific business objectives, and other measurements of individual or business unit or Company performance. (d) Stock Equivalent Units. The Committee may award Stock Equivalent Units to any Participant. All or part of any Stock Equivalent Units Award may be subject to conditions and restrictions established by the Committee, and set forth in the Award Agreement, which may include some or all of the following; continued service with the Company, achievement of specific business objectives, and other measurements of individual or business unit or Company performance that may include but shall not be limited to, earnings per share, net profits, total shareholder return, cash flow, return on shareholders' equity, EVA, and cumulative return on net assets employed. Without limiting the generality of the foregoing, it is intended that the Committee shall establish performance goals applicable to Stock Equivalent Units granted to participants who, in the judgment of the Committee, may be Covered Employees in such manner as shall permit it to qualify as "performance-based compensation" as described in Section 162(m)(4)(C) of the Code. The maximum number of Stock Equivalent Units that may be granted to any Participant in any one calendar year shall not exceed 100,000. (e) Dividend Equivalents. The Committee may provide in any Award Agreement in which Stock Equivalent Units are awarded that such Stock Equivalent Units may accrue Dividend Equivalents. In lieu of awarding Dividend Equivalents, the Committee may provide for automatic awards of additional Stock Equivalent Units on each date that cash dividends are paid on the Common Stock in an amount equal to (i) the product of the dividend per share on the Common Stock times the total number of Stock Equivalent Units then held by the Participant, divided by (ii) the Fair Market Value of the Common Stock on the dividend payment date. (f) Performance Units. Performance Units shall be based on attainment over a specified period of individual performance targets or on other parameters that may include but shall not be 8 limited to, earnings per share, net profits, total shareholder return, cash flow, return on shareholders' equity, EVA, and cumulative return on net assets employed. Performance Units may be settled in Common Stock or cash or both. Without limiting the generality of the foregoing, it is intended that the Committee shall establish performance goals applicable to Performance Units granted to Participants who, in the judgment of the Committee, may be Covered Employees in such a manner as shall permit payments with respect thereto to qualify as "performance-based compensation" as described in Section 162(m)(4)(C) of the Code. The maximum amount of compensation that may be paid to any one Participant with respect to any one year shall be $2,000,000. (g) The Committee may also, in its sole discretion, shorten or terminate the restricted period or waive any other conditions for the lapse of restrictions with respect to all or any portion of any Award. Notwithstanding the foregoing, all restricted periods shall terminate and the Awards shall be fully vested with respect to any Participant upon the Participant's Retirement, death, or Total Disability, coincident with termination of employment with Tenneco Companies. For purposes of this Section 8: "Retirement" means the Participants termination of employment with the Tenneco Company at a time when, under the Tenneco Inc. Retirement Plan or under any other retirement plan that is maintained by a Tenneco Company and that is determined by the Committee to be the functional equivalent of the Tenneco Inc. Retirement Plan, the Participant is eligible to receive an immediately payable normal retirement benefit, or, if approved by the Committee, the Participant is eligible to receive an immediately payable early retirement benefit under such plans; and "Total Disability" means the permanent inability of the Participant, which is a result of accident or sickness, to perform such Participant's occupation or employment for which the Participant is suited by reason of the Participant's previous training, education and experience and which results in the termination of the Participant's employment with any Tenneco Company. 9. DIVIDENDS The Committee may provide in the appropriate Award Agreement that dividends on Restricted Stock may be paid currently in cash or credited to a Participant's account for subsequent distribution as determined by the Committee. The Award Agreement may provide for the reinvestment of dividends paid on Restricted Stock in shares of Common Stock. 10. DEFERRALS AND SETTLEMENTS Settlement of Awards may be in the form of cash, Common Stock, other Awards, or in combinations thereof as the Committee shall determine, and which such other restrictions as it may impose. The Committee may also require or permit Participants to defer the issuance or vesting of shares or the settlement of Awards under such rules and procedures as it may establish under the Plan. The Committee may also provide that deferred settlements include the payment of or crediting 9 of interest on, the deferral amounts or the payment or crediting of Dividend Equivalents on deferred settlements denominated in shares. 11. TRANSFERABILITY AND BENEFICIARIES No Awards under the Plan shall be assignable, alienable, saleable or otherwise transferable other than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order (as defined by the Code) or Title I of the Employee Retirement Income Security Act, or the rules thereunder unless otherwise determined by the Committee. The Committee may determine that options granted to a participant who is a director or an officer or employee with a rank of Corporate Senior Vice President or above may be transferred to his or her children or trusts for the benefit of such children. 12. AWARD AGREEMENTS Awards under the Plan shall be evidenced by Award Agreements that set forth the details, conditions and limitations for each Award, which may include the term of an Award (except that (i) except as provided in Section 8(g), no Award shall vest in less than six months after the date the Award is granted and (ii) in no event shall the term of any ISO exceed a period of ten years from the date of its grant), the provisions applicable in the event the Participant's employment terminates, and the Company's authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind any Award. 13. AMENDMENTS; COMPLIANCE WITH RULE 16b-3 The Committee may suspend, terminate, or amend the Plan as it deems necessary or appropriate to better achieve the purposes of the Plan, except that, without the approval of the Company's shareholders, no such amendment shall be made for which shareholder approval is necessary to comply with any applicable tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief under Section 16b of the Exchange Act. 14. TAX WITHHOLDING The Company shall have the right to (i) make deductions from any settlement of an Award made under the Plan, including the delivery of vesting of shares, or require shares or cash or both be withheld from any Award, in each case in an amount sufficient to satisfy withholding of any federal, state or local taxes required by law, or (ii) take such other action as may be necessary or appropriate to satisfy any such withholding obligations. The Committee may determine the manner in which such tax withholding may be satisfied, and may permit shares of Common Stock (rounded up to the next whole number) to be used to satisfy required tax withholding based on the Fair Market Value of any such shares of Common Stock, as of the Settlement Date of the applicable Award. 10 15. OTHER COMPANY BENEFIT AND COMPENSATION PROGRAMS Unless otherwise specifically determined by the Committee, settlements of Awards received by a Participant under the Plan shall not be deemed a part of the Participant's regular, recurring compensation for purposes of calculating payments or benefits from any Company benefit plan, severance program or severance pay law and any country. Further, the Company may adopt other compensation programs, plans or arrangements as it deems appropriate or necessary. 16. UNFUNDED PLAN Unless otherwise determined by the Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between the Company and any Participant or other person. To the extent any person holds any rights by virtue of a grant awarded under the Plan, such right (unless otherwise determined by the Committee) shall be no greater than the right of an unsecured general creditor of the Company. 17. FUTURE RIGHTS No person shall have any claim or right to be granted an award under the Plan, and no Participant shall have any right under the Plan to be retained in the employment of the Company or its affiliates. 18. GOVERNING LAW The validity, construction and effect of the Plan, and any actions taken or relating to the Plan, shall be determined in accordance with the laws of the State of Delaware and applicable federal law. 19. SUCCESSORS AND ASSIGNS The Plan shall be binding on all successors and assigns of a Participant, including, without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant's creditors. 20. RIGHTS AS A SHAREHOLDER Except as otherwise provided in any Award Agreement, a Participant shall have no rights as a shareholder of the Company until he or she becomes the holder of record of Common Stock. 21. No Award or other transaction shall be permitted under this Plan which would have the effect of imposing liability for a participant under Section 16 of the Exchange Act. Irrespective of any other provision of this Plan or Award Agreement, any such Award or other transaction purportedly made under or pursuant to this Plan shall be void, ab initio. 11 EX-10.26 10 TIMBERLAND LEASE EXHIBIT 10.26 TIMBERLAND LEASE BY AND BETWEEN FOUR STATES TIMBER VENTURE (as Lessor) and PACKAGING CORPORATION OF AMERICA (as Lessee) January 31, 1991 This document was prepared by: Haynes R. Roberts, Esq. Sutherland, Asbill & Brennan 999 Peachtree Street, N.E. Atlanta, Georgia 30309-3996 TABLE OF CONTENTS 1. PROPERTY............................................................... 2 1.1 DESCRIPTION; LEASE TERM........................................... 2 1.2 ADDITIONS AND DELETIONS........................................... 2 1.3 ASSIGNMENT OF PERMITS............................................. 3 2. RENT................................................................... 3 2.1 BASIC RENT........................................................ 3 2.2 MANNER OF PAYMENT; BASIC RENT NET................................. 4 2.3 ADDITIONAL RENT; DEFAULT INTEREST................................. 5 2.4 TAX TREATMENT..................................................... 5 3. FINANCIAL STATEMENTS AND REGULATORY FILINGS............................ 5 4. NO COUNTERCLAIM, ABATEMENT, ETC........................................ 6 5. CONDITION AND USE OF PROPERTY; MINERAL RIGHTS.......................... 7 6. IMPOSITIONS............................................................ 8 7. COMPLIANCE, ETC........................................................ 9 7.1 COMPLIANCE WITH REQUIREMENTS, ETC................................. 9 7.2 RECORDING......................................................... 9 8. LIENS, ETC............................................................. 10 9. PERMITTED CONTESTS..................................................... 10 10. NO CLAIMS AGAINST LESSOR, ETC.......................................... 10 11. INDEMNIFICATIONS AND COVENANTS OF LESSEE............................... 11 11.1 GENERAL INDEMNIFICATION........................................... 11 11.2 ENVIRONMENTAL COVENANTS AND INDEMNITIES........................... 12 12. UTILITY SERVICES....................................................... 14 13. QUIET ENJOYMENT........................................................ 14 13.1 QUIET ENJOYMENT GENERALLY......................................... 14 13.2 LOSS OF TITLE TO PROPERTY......................................... 14 14. LESSEE'S EQUIPMENT..................................................... 14 - i- 15. INSURANCE.............................................................. 15 15.1 RISKS TO BE INSURED............................................... 15 15.2 POLICY PROVISIONS................................................. 15 15.3 EVIDENCE OF INSURANCE............................................. 16 16. TAKING................................................................. 16 16.1 LESSEE TO GIVE NOTICE, ETC........................................ 16 16.2 TOTAL TAKING...................................................... 16 16.3 PARTIAL TAXING.................................................... 16 16.4 APPLICATION OF AWARDS AND OTHER PAYMENTS.......................... 16 16.5 AWARD IF LESSEE IN DEFAULT........................................ 17 16.6 REDUCTION OF RENT UPON PAYMENT TO LESSOR.......................... 17 17. ASSIGNMENT OF SUBRENTS ETC............................................. 17 18. PERFORMANCE ON BEHALF OF LESSEE........................................ 17 19. ASSIGNMENTS, MORTGAGES, SUBLEASES, ETC................................. 18 20. EVENTS OF DEFAULT; TERMINATION......................................... 18 21. ENTRY BY LESSOR........................................................ 20 22. REPOSSESSIONS ETC...................................................... 21 23. RELETTING.............................................................. 21 24. SURVIVAL OF LESSEE'S OBLIGATIONS; DAMAGES.............................. 21 24.1 TERMINATION OF LEASE NOT TO RELIEVE LESSEE OF OBLIGATIONS......... 21 24.2 CURRENT DAMAGES................................................... 21 24.3 FINAL DAMAGES..................................................... 22 25. LESSEE'S WAIVER OF STATUTORY RIGHTS.................................... 22 26. NO WAIVER, ETC., BY LESSOR OR LESSEE................................... 23 27. LESSOR'S REMEDIES, ETC., CUMULATIVE.................................... 23 28. ACCEPTANCE OF SURRENDER................................................ 23 29. NO MERGER OF TITLE..................................................... 23 30. ESTOPPEL CERTIFICATE................................................... 23 31. CONVEYANCE BY LESSOR................................................... 24 -ii- 32. END OF LEASE TERM...................................................... 24 33. PROVISIONS SUBJECT TO APPLICABLE LAW................................... 24 34. TIMBER MANAGEMENT AND CUTTING PROVISIONS............................... 24 34.1 GENERAL TIMBER MANAGEMENT OBLIGATIONS............................. 24 34.2 TIMBER CUTTING PRIVILEGES......................................... 28 34.3 LOSS OF PRE-MERCHANTABLE PLANTED TREES BY CASUALTY................ 30 34.4 FORESTRY CONSULTANT............................................... 30 34.5 TIMBER CRUISE..................................................... 33 34.7 ANNUAL REPORTS.................................................... 34 34.8 TIMBER SPECIFICATIONS AND CALCULATIONS............................ 35 35. DISPOSITION OF PROPERTY................................................ 35 35.1 LESSEE'S OPTION TO PURCHASE....................................... 35 35.2 SALE OF TIMBERLANDS DURING THE INITIAL LEASE...................... 36 35.3 SALE OF PROPERTY DURING THE EXTENSION PERIODS..................... 39 35.4 SALES PURSUANT TO OPTION AGREEMENTS............................... 39 36. APPRAISAL.............................................................. 39 37. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSEE.................... 40 37.1 GENERAL REPRESENTATIONS AND WARRANTIES............................ 40 37.2 COVENANTS......................................................... 42 37.3 MUTUAL REPRESENTATIONS REGARDING ENFORCEABILITY................... 46 40. NOTICES, ETC........................................................... 59 41. MISCELLANEOUS.......................................................... 61 42. PARTITION OF LEASE..................................................... 61 43. FOREST TAX LAWS......................................................... 62 -iii- EXHIBITS -------- EXHIBIT A LEGAL DESCRIPTIONS EXHIBIT B PERMITTED EXCEPTIONS EXHIBIT C LIST OF IMPROVEMENTS, PERSONAL PROPERTY AND INTANGIBLES EXHIBITS D-1 CATEGORIES, ADJUSTMENT AMOUNTS AND THROUGH D-3 ADMINISTRATIVE AMOUNTS EXHIBIT E TIMBER CRUISE SPECIFICATIONS EXHIBITS F-1 AND F-2 FORMS OF ANNUAL REPORT OF FORESTRY CONSULTANT EXHIBIT G PERMITTED INVESTMENTS EXHIBIT H INITIAL CUTTING RIGHTS EXHIBIT I PERMITS EXHIBIT J OPTION AGREEMENTS EXHIBIT K SUPPLIED MATERIALS -iv- TIMBERLAND LEASE TIMBERLAND LEASE, dated January 31, 1991 by and between FOUR STATES TIMBER VENTURE, a joint venture formed under the laws of the State of Georgia ("Lessor") having its principal office and place of business at One John Hancock Place, Boston, Massachusetts 02117, and PACKAGING CORPORATION OF AMERICA, a Delaware corporation ("Lessee"), having its principal office and place of business in Evanston, Illinois. W I T N E S S E T H: WHEREAS, Tenneco Inc, ("Tenneco") has entered into that certain Asset Purchase Agreement dated as of September 26, 1990 (the "Purchase Agreement"), among Georgia-Pacific Corporation ("G-P"), Nekoosa Packaging Corporation ("NPC"), NP Northern Woodlands Inc., ("Woodlands") and Nekoosa Papers, Inc. ("Papers") (G-P, NPC, Woodlands and Papers being hereinafter referred to collectively and severally as "Sellers") and Tenneco, whereby Tenneco has the right to acquire from the Sellers the Property described in Section 1.1 hereof; WHEREAS, Metropolitan Life Insurance Company ("Metropolitan") and John Hancock Mutual Life Insurance Company ("John Hancock") desired to jointly acquire all right, title and interest to the Property which Tenneco had a right to acquire pursuant to the Purchase Agreement; WHEREAS, for the purpose of acquiring the Property from Sellers, Metropolitan and John Hancock formed Lessor; WHEREAS, pursuant to the Timberland Acquisition Agreement dated as of January 31, 1991, made by and among Tenneco, Lessee, John Hancock and Metropolitan (the "Acquisition Agreement"), Lessor acquired all of Tenneco's right to acquire the Property pursuant to the Purchase Agreement and to assume certain obligations associated therewith on the condition that Lessor lease the Property to Lessee; and WHEREAS, as of the date hereof Lessor has acquired the Property from Sellers. NOW, THEREFORE, in consideration of the premises and the mutual agreements, covenants and provisions hereinafter set forth, the parties agree as follows: DEFINITIONS Unless otherwise defined herein, capitalized terms have the meanings given to such terms in Section 39 hereof. 1. PROPERTY. 1.1 DESCRIPTION; LEASE TERM. Upon and subject to the conditions and limitations set forth below, Lessor leases to Lessee, and Lessee rents from Lessor, the following property (the "Property"): (a) all the land described on Exhibit A attached hereto and hereby made a part hereof (the "Land"), subject to the Permitted Exceptions set forth on Exhibit B attached hereto and hereby made a part hereof (the "Permitted Exceptions"); (b) all buildings, structures and other improvements now or hereafter located on the Land, including without limitation, those improvements described on Exhibit C attached hereto and hereby made a part hereof (the "Improvements"); (c) all timber and trees now or hereafter standing or lying on or planted or growing in the soil of the Land (the "Timber"); (d) all rights of way or of use, servitudes, licenses, tenements, hereditaments, appurtenances and easements now or hereafter belonging or pertaining to any of the foregoing; and (e) all personal and intangible property described on Exhibit C hereto. TO HAVE AND TO HOLD for a term commencing on the date hereof (the "Commencement Date") and expiring at midnight on December 31, 2002, unless extended or terminated as hereinafter provided. 1.2 ADDITIONS AND DELETIONS. The Property leased hereunder is intended to be the same property acquired by Lessor in accordance with the Purchase Agreement, Pursuant to Section 5.13 of the Purchase Agreement, Lessor may reconvey to the Sellers certain portions of the Property which are deemed unacceptable by Lessor, and pursuant to Section 5,16 of the Purchase Agreement the Sellers may be required to convey additional or substitute properties to Lessor. Pursuant to Section 8.3 of the Acquisition Agreement, Lessors may convey certain portions of the Property to Lessee. Any Property conveyed to or by Lessor in accordance with the provisions of the Purchase Agreement or the Acquisition Agreement shall automatically be subject to or released from this Lease, as the case may be, and Lessor and Lessee shall enter into any amendments to this Lease which are necessary from time to time to evidence such additions or deletions, The term "Property" as used in this Lease shall mean the Property described in Section 1.1 hereof together with any additions thereto or deletions therefrom contemplated by this Section 1.2 and the applicable sections of the Purchase Agreement or the Acquisition Agreement. -2- 1.3 ASSIGNMENT OF PERMITS. Upon and subject to the conditions and limitations set forth below, Lessor hereby assigns, to the extent assignable, all right, title and interest in and to the permits which are more particularly described on attached hereto and incorporated herein by this reference (the "Permits"), The parties hereto hereby agree that this is a revocable assignment and that such assignment shall be deemed revoked upon the expiration or earlier termination of this Lease or upon Lessor's repossession of the Property in accordance with the provisions of Section 22 hereof. 2. RENT. 2.1 BASIC RENT. Lessee will pay to Lessor rent during the Lease Term as follows: (a) QUARTERLY RENT. Lessee shall pay to Lessor, in advance, on the Commencement Date and thereafter on the first day of each January, April, July and October during the Lease Term an installment of rent ("Quarterly Rent") in an amount calculated as follows: (i) Each installment of Quarterly Rent paid during the First Lease Year shall be in an amount equal to 2,6875% of the Base Value; provided, however, that until such time as the Base Value can be established hereunder, Lessee shall pay Quarterly Rent in the amount of $4,646,499.00; provided, further, that Lessee's first installment of Quarterly Rent shall be reduced by an amount equal to Daily Quarterly Rent times the number of calendar days from and including January 1, 1991 to but not including the Commencement Date; provided, further, that if, upon determination of the Base Value hereunder, it is determined that Lessee has paid Quarterly Rent in excess of 2,6875% of Base Value, such excess amount shall be offset by Lessee against the immediately succeeding installments of Quarterly Rent; (ii) Installments of Quarterly Rent paid during the Second Lease Year and each successive Lease Year thereafter during the Lease Term shall be in an amount equal to the Quarterly Rent in effect at the end of the previous Lease Year less an amount equal to 2,6875% of the Annual Rent actually paid by Lessee with respect to the previous Lease Year in accordance with the provisions of subsection 2,1(b) hereof as such Annual Rent may be adjusted from time to time in accordance with the provisions hereof; and (iii) Notwithstanding the foregoing, in the event any portion of the Property is sold by Lessor free and clear of this Lease, is the subject of a Taking or is otherwise released from this Lease prior to the end of the Lease Term, installments of Quarterly Rent shall be adjusted and thereafter paid by Lessee in an amount equal to (A) the amount of Quarterly Rent which would have otherwise been payable had no such sales, Takings or releases occurred minus (B) the product obtained by multiplying the Cumulative Allocation Ratio after such sale, Taking or release times the amount of -3- Quarterly Rent which would have otherwise been payable had no such sales, Takings or releases occurred, In addition to the adjustment provided in the preceding sentence, the Quarterly Rent for the calendar quarter following such sale, Taking or release shall be reduced by an amount equal to the product of (X) the difference between the Daily Quarterly Rent prior to and the Daily Quarterly Rent after the sale, Taking or release and (Y) the actual number of days from and including the date of such sale, Taking or release to but not including the date upon which such Quarterly Rent payment becomes due. (b) ANNUAL RENT. (i) In addition to the Quarterly Rent provided for in subsection 2.1(a) above, Lessee shall pay to Lessors in arrears, commencing January 1. 1992, and continuing on the first day of each Lease Year thereafter during the Initial Lease Term, an installment of re, (the "Annual Rent") in an amount equal to $1,192,366,00 less 5.71% of the amount, if any, by which the Adjusted Base Value exceeds the Base Value; provided, however, that the Annual Rent Payment for the First Lease Year shall be equal to $1,192,366,00 less 5,71% of the amount, if any, by which the Adjusted Base Value exceeds the Base Value times eleven twelfths (11/12ths). (ii) Notwithstanding the foregoing, in the event any portion of the Property is sold by Lessor free and clear of this Lease, is the subject of a Taking or is otherwise released from this Lease prior to the end of the Lease Term, for the Lease Year in which such sale, Taking or release takes place, the Annual Rent for such year shall be reduced by an amount equal to the product of (A) the difference between the Daily Annual Rent prior to and the Daily Annual Rent after such sale, Taking or release and (B) the actual number of days from and including the date of such sale, Taking or release to but not including the first day of the next Lease Year. The installments of Annual Rent required to be paid by Lessee pursuant to subsection 2.1(b)(i) above for Lease Years beginning subsequent to the Lease Year in which such sale, Taking or release took place shall be adjusted and thereafter paid in an amount equal to (X) the Annual Rent payment which would have otherwise been payable had no such sales, Takings or releases occurred minus (Y) the product obtained by multiplying the Cumulative Allocation Ratio after such sale, Taking or release times the Annual Rent payment which would have otherwise been payable had no such sales, Takings or releases occurred. (c) BASIC RENT. The term "Basic Rent" refers collectively to the Quarterly Rent and the Annual Rent, as each may be adjusted from time to time, The parties stipulate that the Basic Rent reflects the fair rental value of the Property for the Lease Term. 2.2 MANNER OF PAYMENT; BASIC RENT NET. Basic Rent and all other sums payable to Lessor hereunder shall be wired to Lessor by Lessee before noon (E.S.T. or E.D.T., as applicable) an the due date thereof by Fedwire transfer through the Federal Reserve System of immediately available funds in U.S. dollars to the account or -4- accounts designated by Lessor by written notice at least three Business Days prior to such due date, or at such place, by such method and to such Person as Lessor from time to time may designate. An identification number confirming such wire shall also be delivered to Lessor prior to the noon deadline. Basic Rent shall be absolutely net to Lessor so that this Lease shall yield to Lessor the full amount of the installments of Basic Rent throughout the Lease Term without deduction, Nothing contained in the preceding sentence shall be construed so as to obligate Lessee to pay any Excluded Taxes. If for any reason, Lessee is required by law or order to make any payment to any tax or governmental authority of Excluded Taxes, by way of withholding or otherwise, Lessor shall within 30 days after receipt from Lessee of notice of payment of such Excluded Taxes and appropriate payment documentation with respect thereto, pay to Lessee an amount which equals the amount of such Excluded Taxes paid to such tax or governmental authority. Whenever any payment hereunder is due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. 2.3 ADDITIONAL RENT; DEFAULT INTEREST. Lessee will also pay from time to time as provided in this Lease, as additional rent, all other amounts and obligations which Lessee herein agrees to pay to Lessor or is required to pay to Lessor in accordance with the provisions of this Lease ("Additional Rent"). Lessee shall also pay Default Interest on Basic Rent and Additional Rent (if such Additional Rent is not paid within ten days after demand from Lessor for such payment) from the due date or the date of such demand, as the case may be, until payment thereof, In the event of any failure on the part of Lessee to pay any Additional Rent, Lessor shall have all the rights, powers and remedies provided for in this Lease or at law or in equity or otherwise in the case of non-payment of Basic Rent. 2.4 TAX TREATMENT. For Federal and state income tax purposes, Lessor and Lessee shall each report all amounts of Basic Rent and Additional Rent, as defined herein (but not any other item which Lessee may incur hereunder or pay to any Person other than Lessor under the terms of this Lease) as rental income and rental expense, respectively. 3. FINANCIAL STATEMENTS AND REGULATORY FILINGS. (a) Lessee, at its expense, shall furnish to Lessor as soon as practical after the end of each fiscal year of Lessee, and in any event within 120 days thereafter, a consolidated balance sheet of Lessee and its consolidated subsidiaries as of the end of such fiscal year and the related statements of income, stockholder's equity and cash flows (or such similar or additional statement then required by GAAP) for such fiscal year prepared in accordance with GAAP, setting forth in each case in comparative form the figures for the previous fiscal year, all certified by independent public accountants of nationally recognized standing who are retained by Tenneco to audit its year-end financial statements; -5- (b) Lessee shall furnish to Lessor as soon as practical after the end of each of the first three fiscal quarters of each fiscal year of Lessee, and in any event within 60 days thereafter, a balance sheet of Lessee as at the end of such period and the related statements of income, stockholder's equity and cash flows (or such similar or additional statement then required by GAAP), prepared in accordance with GAAP, using a comparable format and comparable categories as the last audited financial statement and accompanied by a certificate of the chief financial officer of Lessee to the effect that to the best of his knowledge such statements present fairly the financial condition and results of operations of Lessee, subject to normal year-end adjustments; (c) In addition to the financial statements delivered in accordance with subsections (a) and (b) above, Lessee shall furnish to Lessor as soon as practical after the end of each fiscal year of Lessee, and in any event within 120 days thereafter, a statement of Operating Expenses for the previous year, certified as being true and correct by the chief financial officer of Lessee; (d) Lessee shall provide to Lessor, within 30 days following the date of such filing, copies of any and all reports on Forms 10-K. 10-Q and 8-K (or their equivalent) and such other reports as Lessor may reasonably specify from time to time, filed with the Securities and Exchange Commission by Lessee, its ultimate parent company and any and all intermediary parent companies in accordance with the provisions of applicable law; and (e) Lessee will permit any Person designated by Lessor in writing, at the expense of Lessor, and subject to such limitations as Lessee may reasonably impose to ensure compliance with any applicable legal or contractual restrictions, to visit and inspect any of the properties of Lessee, to examine the corporate books and financial records of Lessee (other than income tax records) and to make copies thereof or extracts therefrom, and to discuss the affairs, finances and accounts of Lessee with the principal officers of Lessee, all at such reasonable times and as often as Lessor may reasonably request. 4. NO COUNTERCLAIM, ABATEMENT, ETC. Basic Rent and Additional Rent shall be paid without notice, demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction, and the obligations and liabilities of Lessee hereunder shall in no way be released, discharged or otherwise affected (except as expressly provided herein) by reason of: (a) any damage to or destruction of or any Taking of the Property or any part thereof; (b) any restriction or prevention of or interference with any use of the Property or any part thereof; (c) any title defect or encumbrance or any eviction from the Property or any part thereof by title paramount or otherwise; (d) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to Lessor, or any action taken with respect to this Lease by any trustee or receiver of Lessor (other than a rejection of this Lease by such trustee or receiver pursuant to the provisions of (S)365 of the Bankruptcy Code), or by any court, in any such proceeding; (e) any claim which Lessee has or might have against Lessor; (f) any failure -6- on the part of Lessor to perform or comply with any of the terms hereof or of any other agreement with Lessee; or (g) any other occurrence whatsoever, whether similar or dissimilar to the foregoing; whether or not Lessee shall have notice or knowledge of any of the foregoing. Except as expressly provided herein, Lessee waives all rights now or hereafter conferred by statute or otherwise (other than the right, if any, as may be available to Lessee to reject this Lease in accordance with the provisions of (S)365 of the Bankruptcy Code, to the extent that such right is not waivable under applicable law) to quit, terminate or surrender this Lease or the Property or any part thereof, or to any abatement, suspension, deferment, diminution or reduction of Basic Rent, Additional Rent or any other sum payable by Lessee hereunder. 5. CONDITION AND USE OF PROPERTY; MINERAL RIGHTS. (a) Lessee specifically acknowledges and agrees that Lessor has no greater knowledge of the Property than does Lessee, that Lessor makes no representation or warranty with respect to the title to or the condition of the Property or its fitness or availability for any particular use and that Lessor shall not be liable for any latent or patent defect therein, Except as expressly provided herein, Lessee shall have no right to avoid any duty or obligation under this Lease, including the obligation to pay rent hereunder, on account of the condition of the Property or Lessor's title thereto. Lessee shall use the Property for the production and harvesting of timber in accordance with Section 34 hereof, and other incidental and nonconflicting uses including, without limitation, farming, hunting and fishing, All other uses by Lessee shall be subject to the prior written approval of Lessor, which approval maybe given or withheld as Lessor, in its sole discretion, shall determine, provided that the use of the Property for any other purpose as may be approved by Lessor must at all times comply in all respects with all requirements, limitations and restrictions, that Lessor may from time to time impose. Except as may be expressly permitted elsewhere in this Lease, Lessee will not do or, if within Lessee's power, permit any act or thing which might materially impair the value, usefulness or marketability of the Property or any part thereof, or which constitutes a public or private nuisance or waste, Lessee expressly covenants to operate and maintain the Property as required by Section 34 hereof, During the Lease Term and except as prohibited by applicable law, Lessee shall be entitled to enter into and receive income from hunting and fishing leases, farm rental agreements and other incidental uses of the Property which do not conflict with title provisions of Section 34 hereof; provided, however, that annual rentals therefrom may not exceed $5,000,000.00 in the aggregate without the prior written consent of Lessor. (b) Subject to Section 35 hereof and notwithstanding any other provision contained in this Lease to the contrary, Lessor hereby (i) expressly retains all rights to exploit oil, gas, minerals and other subsurface reserves located on, in or under the Property (the "Mineral Rights"), (ii) shall be entitled to exploit the Mineral Rights at any time and from time to time during the Lease Term and (iii) shall be entitled to receive 100% of the income therefrom, Lessee agrees to cooperate with Lessor in connection with any such exploitation of the Mineral Rights by Lessor on the Property, In the event Lessor's exploitation of the Mineral Rights (by strip mining or otherwise) -7- materially interferes with Lessee's ability to conduct its commercial timber operations on any portion of the Property, the affected portion of the Property shall be specifically identified by Lessor and shall be released from the terms and provisions of this Lease, whereupon Basic Rent shall be reduced in accordance with the provisions of Section 2,1 hereof. 6. IMPOSITIONS. Subject to Section 9 hereof relating to contests, Lessee will pay all Impositions on or before the due date thereof, and will furnish to Lessor for inspection within 30 days after written request by Lessor, official receipts of the appropriate taxing authority or other proof satisfactory to Lessor evidencing such payment of Impositions. If by law any Imposition may be paid in installments, Lessee shall be entitled to pay in those installments as they become due from time to time; and any Imposition relating to any tax, accounting or other fiscal period of the taxing authority, part of which is included within the term of this Lease and a part of which extends beyond such term shall be apportioned between Lessor and Lessee as of the expiration of the term of this Lease; provided, however, that Lessor shall be permitted to offset any amounts which it would otherwise be required to pay to Lessee as a result of such apportionment against any Basic Rent and/or Additional Rent which is due and owing to Lessor as of the date of such apportionment. Notwithstanding the foregoing, in the event a notice of Imposition is delivered to Lessor but not to Lessee, Lessor shall promptly forward such notice to Lessee so that Lessee may pay such Imposition in a timely manner as provided herein, If Lessor receives such a notice of Imposition more than 15 Business Days prior to the due date thereof and fails to deliver such notice to Lessee on or before the fifth Business Day prior to the due date thereof, and as a result of such failure, Lessee is unable to pay such Imposition in a timely fashion, Lessee shall be permitted to offset against the next succeeding installments of Quarterly Rent any interest, penalties, fines or other costs which it is required to pay as a result of the late payment of the Imposition, The provisions of the preceding sentence shall not be applicable in the event Lessee receives notice of such Imposition from a source other than Lessor or its constituent venturers prior to the due date thereof. Lessee shall not be in default hereunder for failure to pay any impositions on or before the due date thereof if Lessee did not receive notice thereof at least five Business Days prior to the due date thereof; provided, however, that in such event, Lessee shall be required to pay such Imposition within ten Business Days following receipt of such notice (unless such Imposition is being properly contested in accordance with the provisions of Section 9 hereof). Lessor agrees to cooperate (at Lessee's expense) with Lessee in Lessee's efforts to minimize impositions with respect to the Property, including the filing of exemptions and other actions, so long as Lessor believes that such efforts are reasonable under the circumstances. Lessor shall, at the request of Lessee, forward to Lessee copies of all relevant documentation (including copies of returns) in Lessor's possession, or the possession of Lessor's agents, representatives or constituent joint venturers, relating to Impositions on the Property. -8- 7. COMPLIANCE, ETC. 7.1 COMPLIANCE WITH REQUIREMENTS, ETC. Subject to the provisions of Sections 6 and 9 hereof, Lessee, at its expense, will promptly and diligently (a) comply with all Legal Requirements and Insurance Requirements and (b) comply with any instruments of record at the time in force affecting the Property or any part thereof, other than in each case those: (i) whose application or validity is being contested in good faith by appropriate proceeding in accordance with the provisions of Section 9 hereof. (ii) compliance with which shall have been excused or exempted by a nonconforming use permit, waiver, extension or forbearance exempting the Property therefrom, or (iii) the failure with which to comply would not result in any material adverse consequences to Lessor or have a material adverse effect upon Lessee's ability to perform its obligations under this Lease. For purposes of this subsection, a material adverse consequence shall include, without limitation, any material risk of (w) the sale, forfeiture or loss of the Property or any material portion thereof, (x) a lien being created against the Property in violation of the provisions of Section 8 hereof, (y) material interference with the operation, use or disposition of the Property, or any material portion thereof, or with the payment of Basic Rent or Additional Rent under this Lease, or (z) any liability (including any criminal liability) on the part of, or any adverse effect on, the Lessor, its agents, employees, officers or constituent joint venturers, or any of their agents, employees, officers or directors other than civil liability related to tax obligations which are assumed by Lessee hereunder. 7.2 RECORDING. The parties hereto agree that: (a) Lessor or Lessee shall, at the request of the other, execute and deliver counterparts of this Lease or counterparts of a memorandum of this, Lease for the purpose of recording, but such memorandum shall not under any circumstances be deemed to modify or to change any of the provisions of this Lease; provided, however, that Lessor and Lessee agree not to record this Lease in its entirety except in those jurisdictions where the recording of a memorandum or short-form of lease does not provide adequate protection of the rights of Lessor and Lessee under this Lease against claims of third parties; (b) after the expiration or termination of this Lease, Lessee shall, at the request of Lessor, within 20 Business Days following the request of Lessor, execute and deliver to Lessor an instrument cancelling of record any memorandum of this Lease which was recorded; and (c) Lessee shall promptly, upon the reasonable request of the Lessor and at the Lessee's expense, execute, acknowledge and deliver, or cause the execution, -9- acknowledgement and delivery of, and thereafter register, file or record in the appropriate governmental office, any document or instrument necessary to preserve and protect any right of Lessor under this Lease and shall furnish to Lessor an opinion satisfactory to Lessor, of counsel satisfactory to Lessor, with respect to the adequacy of such registration, filing and recording. 8. LIENS, ETC. During the term of this Lease, Lessee will not directly or indirectly create or permit to be created or to remain, and will discharge any Lien on the Property or any part thereof, Lessee's interest therein, or Basic Rent or Additional Rent other than (a) this Lease, (b) Liens for Impositions or judgments not yet due and payable, or payable without the addition of any fine, penalty, interest or cost for non-payment, or being contested as permitted by Sections 6 or 9 hereof, (c) Permitted Exceptions, (d) Liens which are not created or permitted by Lessee but arise solely from acts or agreements of Lessor, and (e) Liens of mechanics, materialmen, suppliers or vendors, or rights thereto, incurred in the ordinary course of business for sums which under the terms of the related contracts are not at the time due. 9. PERMITTED CONTESTS. Lessee, at its expense, may contest, after prior written notice to Lessor, by appropriate legal proceedings conducted in good faith and with due diligence, the amount or validity or application, in whole or in part, of any Imposition, judgment, Lien or Legal Requirement or the application of any instrument of record referred to in Section 7.1 hereof, provided that (a) Lessee shall first make all contested payments, under protest if it desires, unless the legal proceedings instituted by Lessee shall suspend the collection of such contested amounts from Lessor, from Basic Rent and Additional Rent and from the Property, (b) neither the value or marketability of the Property or any part thereof or interest therein would be adversely affected by such contest nor would the Property or any part thereof or interest therein or any such Basic Rent or Additional Rent be in any danger of being sold, forfeited, lost or interfered with, and (c) neither Lessor nor its agents, employees, officers or constituent joint venturers, nor any of their agents, employees, officers or directors would be subject to any additional civil liability (other than additional interest of penalties or additions which Lessee is obligated to pay hereunder which may accrue with respect to any tax obligation being contested hereunder) or any criminal liability because of Lessee's failure to comply therewith and the Property would not be subject to the imposition of any Lien in violation of Section 8 hereof as a result of such failure. 10. NO CLAIMS AGAINST LESSOR, ETC. Nothing contained in this Lease shall constitute any consent or request by Lessor, express or implied, for the performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part thereof, nor as giving Lessee any right, power or authority to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Lessor or the Property or any part thereof except as permitted by Section 8 hereof. -10- 11. INDEMNIFICATIONS AND COVENANTS OF LESSEE. 11.1 GENERAL INDEMNIFICATION. Lessee will protect, defend, indemnify and save harmless Lessor from and against all litigation, liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses, but excluding any Excluded Taxes) imposed upon or incurred by or asserted against Lessor or the Property or any part thereof by reason of the occurrence or existence during the Lease Term of any of the following, unless arising solely from acts which would constitute the willful misconduct or gross negligence of Lessor: (a) ownership of the Property or any interest therein, or receipt of any rent or other sum therefrom; (b) any accident, injury to or death of persons (including workmen) or loss of or damage to property occurring on or about the Property or any part thereof or the adjoining streets or ways; (c) any use, non-use or condition of the Property or any part thereof; (d) any failure on the part of Lessee to perform or comply with any of the terms of this Lease; (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Property or any part thereof; or (f) any other loss or liability incurred or suffered by Lessor in connection with the Property or this Lease. In case any action, suit or proceeding is brought against Lessor by reason of any such occurrence, Lessee will (unless an Event of Default has occurred and is continuing hereunder, in which case Lessor may elect to control, at Lessee's expense, the defense of such action, suit or proceeding), at Lessee's expense, resist and defend such action, suit or proceeding, or cause the same to be resisted and defended by counsel designated by Lessee and approved by Lessor; provided, however, that Lessee shall consult with Lessor with respect to such defense and shall keep Lessor apprised as to the status of such defense; provided, further, that, in the event Lessee proposes to enter into a settlement agreement with respect to any such action, suit or proceeding Lessee will send notice to Lessor of such proposed settlement, and Lessor shall have a period of 30 days after receipt of such notice to reject, in its reasonable judgment, such settlement. Failure to reject such settlement within such 30-day period shall be deemed to be an acceptance of such settlement, In the event Lessor rejects such settlement, Lessor shall assume the defense of such action, suit or proceeding, at its own cost and expense; provided, -11- however, that if Lessor rejects any such proposed settlement and assumes the defense of such action, suit or proceeding, Lessee shall in any event only be obligated to indemnify Lessor for such action, suit or proceeding in the amount of the proposed settlement rejected by Lessor; provided, further, if Lessor believes that Lessee is not diligently pursuing the defense of any such action, suit or proceeding, Lessor shall have the option, but not the obligation, to assume such defense, and if Lessor assumes such defense, Lessor (i) shall conduct such defense diligently with a view to minimizing the costs of disposing of such action, suit or proceeding, (ii) Lessor shall advise Lessee of all settlement offers received in respect thereof and (iii) Lessee shall have no liability in respect of such action, suit or proceeding in excess of the amount of any settlement offer proposed to Lessor in writing by the person asserting such action, suit or proceeding to which Lessee shall have offered to perform. The obligations of Lessee under this section shall survive the expiration or earlier termination of this Lease, Lessee shall not be required to indemnify Lessor against any such occurrence which arises from acts or events not attributable to Lessee which occur after possession of the Property has been returned and delivered by Lessee to Lessor or after such Property has been released from this Lease; provided, however, if an Event of Default shall exist at the time of any such return and delivery of the Property by Lessee to Lessor, then Lessee's indemnification obligations shall continue until such time as Lessee shall have fully complied with all of its obligations under this Lease; provided, further, that Lessee shall not be required to indemnify Lessor solely on account of a decline in the market value of the Property not caused directly or indirectly by an act or omission of Lessee. 11.2 ENVIRONMENTAL COVENANTS AND INDEMNITIES. Lessee hereby covenants that: (a) Lessee will not engage in any activity on, or with respect to, the Property which would result in the generation, manufacture, refining, treatment, storage or handling or disposal of, or the conduct or performance of any abnormally dangerous activity in connection with, any Hazardous Material which would subject the Lessor to any liability under or pursuant to any Environmental Law; provided, however, that Lessee shall be permitted to use Hazardous Materials on the Property which are ordinarily used in commercial timber management activities, provided (i) the use of any such Hazardous Materials is not prohibited by any Environmental Law, (ii) that Lessee uses such Hazardous Materials in a safe and responsible manner and in accordance with the method of application approved by the manufacturer of each such Hazardous Materials, (iii) that Lessee uses such Hazardous Materials in strict accordance with any and all Environmental Laws applicable to the use thereof, and (iv) that, before using any such Hazardous Materials on all or any portion of the Property, Lessee shall have obtained any and all permits which may from time to time be required by any regulatory agency or other public body as a condition to such use. The provisions of this subsection 11,2(a) shall in no way limit the indemnity obligations of Lessee arising pursuant to the provisions of subsection 11.2(c) hereof; (b) Subject to the provisions of Section 9 hereof, Lessee will comply with the requirements of all Environmental Laws now or hereafter in effect -12- which would subject Lessor to any liability or subject the Property to any Lien under or pursuant to any Environmental Law, Lessee will promptly upon discovery notify Lessor of any release of any Hazardous Material, whether before or after the Commencement Date, at, upon, under, or within the Property which is required to be reported to any federal, state or local governmental agency or authority pursuant to the provisions of any Environmental Law, including the presence of asbestos or asbestos-containing materials, PCB's, radon gas, or urea formaldehyde foam insulation on the Property. Lessee will notify Lessor of the receipt by Lessee of any notice from any governmental agency or authority or from any tenant or other occupant or from any other person with respect to any alleged such release or presence of Hazardous Materials, promptly upon receipt of such notice, Lessee will send Lessor copies of all results of tests of underground storage tanks on the Property; (c) Lessee agrees to indemnify and hold Lessor harmless from and against any and all litigation, loss, cost, damage, liability, and expense, including but not limited to reasonable attorneys' fees, suffered or incurred by or threatened against Lessor at any time, whether before, during, or after enforcement of Lessor's rights and remedies upon default, on account of any release of any Hazardous Material (unless arising solely from acts which would constitute the willful misconduct or gross negligence of Lessor), whether before or after the Commencement Date, at, upon, under, within or adjacent to the Property, including the presence of asbestos or asbestos containing materials, PCBIs, radon gas, or urea formaldehyde foam insulation at the Property, including but not limited to (a) the imposition by any governmental authority of any Lien or any so called "super priority lien" upon the Property or any part thereof, (b) clean-up costs, (c) investigation and monitoring costs, (d) liability for personal injury or property damage or damage to the environment, and (e) fines, penalties and punitive or exemplary damages, Lessee shall not be required to indemnify Lessor against any such occurrence which arises from acts or events not attributable to Lessee which acts or events occur after possession of the Property has been returned and delivered by Lessee to Lessor or after such Property has been released from this Lease; provided, however, if an Event of Default shall exist at the time of any such return and delivery of the Property by Lessee to Lessor, then Lessee's indemnification obligations shall continue until such time as Lessee shall have fully complied with all of its obligations under this Lease. The provisions of this subparagraph shall survive the expiration or earlier termination of this Lease; and (d) Without limitation of any of Lessor's other rights under this Lease, Lessor will have the right, but not the obligation, to enter onto the Property and to take such other actions as it deems necessary or advisable to clean up, remove, resolve or minimize the impact of, or otherwise deal with, any release of any Hazardous Material, whether before or after the Commencement Date, at, under, upon or within the Property or any other breach of any Environmental Law relating to the Property upon its receipt of any notice from any person or entity, including, without limitation, the United States Environmental Protection Agency, asserting the existence of any such release or breach on or pertaining to the Property which, if true, would be reasonably expected to result in an order, suit or other action against Lessee or Lessor affecting any -13- part of the Property by any governmental agency or otherwise which, in the sole opinion of Lessor, would be reasonably expected to jeopardize Lessee's ability to perform its obligations under the Lease or materially and adversely affect the value of the Property. All costs and expenses incurred by Lessor in the exercise of any such rights will be payable by Lessee upon demand, together with Default Interest thereon. 12. UTILITY SERVICES. Lessee will pay or cause to be paid all charges for all public or private utility services and all protective services at any time rendered to or in connection with the Property or any part thereof. 13. QUIET ENJOYMENT. 13.1 QUIET ENJOYMENT GENERALLY. Lessor covenants that, so long as no Event of Default shall have occurred and be continuing hereunder, Lessee shall not be hindered or molested by Lessor (or any person claiming by, through or under Lessor) in its enjoyment of the Property, which enjoyment-is subject to the Permitted Exceptions, In the event Lessee does not have standing to pursue such action against any other Person interfering with Lessee's peaceful possession of the Property in its own name, Lessee shall be permitted to pursue in Lessor's name any action against any third party necessary to defend Lessee's interest in the Property, provided Lessee indemnifier Lessor fully against any liability, damage, costs or expenses arising out of or related to such action. 13.2 LOSS OF TITLE TO PROPERTY. In the event title to all or any portion of the Property is lost because of a title defect, whether or not such title defect is a Permitted Exception, Lessee's obligation to pay rent with respect to such portion of the Property shall not abate and Lessee will continue to pay rent to Lessor with respect to such Property without adjustment; provided, however, that Lessee's rental obligation with respect to any such portion of the Property lost because of a title defect shall abate and Basic Rent shall be adjusted in accordance with the provisions of Section 2.1 hereof as if such portion of the Property had been sold as of the date Lessor receives from the title insurance company or companies insuring Lessor's title to the Property (and/or from Lessee or any other Person to the extent that title insurance proceeds received by Lessor are insufficient) a payment of monies equal to the greater of (i) the Make-Whole Price applicable to such portion of the Property calculated as of the date possession of such portion of the Property is actually lost and (ii) the excess of (a) the value obtained by compounding quarterly the Allocated Base Value of the portion of the Property lost because of the title defect at a rate of 11% per annum from the Commencement Date of this Lease to the date possession of such portion of the Property is actually lost over (b) the sum of the values obtained by compounding quarterly at a rate of 11% per annum each payment of Allocated Quarterly Rent and Compounding annually at a rate of 11% per annum each payment of Allocated Annual Rent from the dates each such payments were actually made to the date possession of such portion of the Property is actually lost. 14. LESSEE'S EQUIPMENT. All Lessee's Equipment shall be the property of Lessee, provided that upon the occurrence of an Event of Default, Lessor shall, to the -14- extent permitted by law, have (in addition to all other rights) a right of distress for rent and a Lien on all Lessee's Equipment (other than Lessee's Equipment not owned by Lessee) then on the Property as security for all Basic Rent and Additional Rent, Any of Lessee's Equipment (other than Lessee's Equipment not owned by Lessee) not removed by Lessee at its expense within 90 days after any repossession of the Property by Lessor (whether or not this Lease has been terminated) shall be considered abandoned by Lessee and may be appropriated, sold, destroyed, or otherwise disposed of by Lessor, Lessee will pay Lessor, upon demand, all costs and expenses incurred by Lessor in removing, storing or disposing of any of Lessee's Equipment. Lessee will immediately repair at its expense all damage to the Property or any part thereof caused by any removal of Lessee's Equipment therefrom, whether effected by Lessee, or any other Person, Except as may be required by applicable law, Lessor shall not be responsible for any loss of or damage to Lessee's Equipment. 15. INSURANCE. 15.1 RISKS TO BE INSURED. Lessee, at its expense, will cause to be carried and maintained (a) all risks physical damage insurance with respect to the Improvements; (b) workers' compensation and employers' liability insurance with a limit of not less than $500,000; (c) commercial general liability insurance covering all operations of the insured against all claims for personal injury, bodily injury, death and property damage, including contractual liability, in such amount and in such form as Lessee customarily maintains with respect to similar properties owned, leased or operated by Lessee (but in no event less than $100,000,000); (d) comprehensive automobile liability insurance covering all owned, non-owned and hired automobiles or automotive equipment with a combined single limit of not less than $3,000,000 for bodily injury or property damage; and in any event shall maintain insurance in amounts and against risks which are not less than that which are customarily maintained with respect to similar properties owned, leased or operated by Lessee. The amounts of insurance specified above may not be reduced and the amount of the deductible or self-insured retention shall not exceed $25,000,000 without the prior written consent of Lessor. Any insurance described in this Section 15.1 may be carried under blanket policies as long as such policies otherwise comply with the provisions of this Section 15.1. 15.2 POLICY PROVISIONS. Lessor shall be named as a "Loss Payee" on all applicable all risks physical damage insurance policies, With the exception of the worker's compensation insurance, the general liability policies shall name Lessor as an additional insured with respect to liability arising out of the Property or related operations, To the extent such an endorsement is commercially obtainable, all policies required hereunder shall further provide that no cancellation, reduction in amount or material change in coverage shall be effective until at least 30 days after notice of such cancellation, change or reduction is tendered to Lessor by the insurer. Lessee waives all rights of subrogation against Lessor and all policies required hereunder shall each contain a clause waiving subrogation against Lessor. -15- 15.3 EVIDENCE OF INSURANCE. Upon the execution of this Lease and thereafter not less than 15 days prior to the expiration date of any applicable policy, Lessee will deliver to Lessor a certificate of the insurer, satisfactory to Lessor in substance and form I as to the issuance and effectiveness of such policy and the amount of coverage afforded thereby. 16. TAKING. 16.1 LESSEE TO GIVE NOTICE, ETC. In case of a Taking of all or any part of the Property, or the commencement of any proceedings or negotiations which might result in such Taking, the party receiving notice of the commencement of such proceedings or negotiations will promptly give written notice thereof to the other party hereto, generally describing the nature and extent of such Taking or the nature of such proceedings and negotiations and the nature and extent of the Taking which might result therefrom, as the case may be. Lessor and Lessee may each file and prosecute their respective claims for an award, but all awards and other payments on account of a Taking shall be paid to Lessor and shall be applied as hereinafter provided. 16.2 TOTAL TAKING. In case of a Taking (other than for temporary use) of all or substantially all of the Property, this Lease shall terminate as of the date of such Taking, Any Taking of the Property of the character referred to in this Section 16.2 which results in the termination of this Lease is referred to as a "Total Taking." 16.3 PARTIAL TAXING. In case of a Taking of the Property other than a Total Taking, this Lease shall remain in full force and effect as to the portion of the Property remaining immediately after such Taking, without any abatement or reduction of Basic Rent or Additional Rent, except as provided in Section 16.6. 16.4 APPLICATION OF AWARDS AND OTHER PAYMENTS. Awards and other payments on account of a Taking (less costs, fees and expenses incurred by Lessor and Lessee in connection therewith) shall be applied as follows: (a) Net awards and other payments received on account of a Taking other than a Taking for temporary use shall be paid (i) first, to Lessor in an amount up to and including the greater of the Minimum Return Price or the Make-Whole Price applicable to the portion of the Property lost as a result of such Taking, and (ii) the balance, if any, of such awards or payments shall be paid to Lessee; (b) Net awards and other payments received on account of a Taking for temporary use during the Lease Term shall be applied to the payment of the installments of Basic Rent and Additional Rent becoming due and payable hereunder during the period of such temporary Taking, and the balance, if any, of such awards and payments shall, unless an Event of Default has occurred and is continuing hereunder, be paid to Lessee; and -16- (c) Lessee hereby irrevocably assigns to Lessor any and all separate awards to which it may in the future be entitled in connection with any Taking, together with the right to collect and receive such awards, In the event separate awards are granted to Lessor and Lessee as a result of any such Taking, such awards shall be deemed a single award, shall be paid to Lessor and shall thereafter be distributed in accordance with the provisions of subsections 16.4(a) and 16.4(b) hereof. 16.5 AWARD IF LESSEE IN DEFAULT. Notwithstanding the foregoing, if at the time of any Taking or at any time thereafter, an Event of Default has occurred and is continuing under this Lease, Lessor is hereby authorized and empowered, in the name and on behalf of Lessee, to file and prosecute Lessee's claim, if any, for an award on account of any Taking and to collect such award and apply the same, after deducting all costs, fees and expenses incident to the collection thereof, to the curing of such Event of Default and any other then existing Default under this Lease. 16.6 REDUCTION OF RENT UPON PAYMENT TO LESSOR. In the event a Taking of all or any portion of the Property (other than a Taking for a temporary use) shall occur during the Lease Term, Basic Rent shall be reduced from and after the date of such Taking in accordance with the provisions of Section 2.1 hereof. 17. ASSIGNMENT OF-SUBRENTS ETC. Lessee hereby irrevocably assigns to Lessor all rents due or to become due from any sublessee or any tenant or occupant of the Property or any part thereof, and all amounts due or to become due to Lessee under any contract referred to in paragraph (j) of Section 34.1 hereof, together with the right to collect and receive such rents and amounts; provided, however, that, so long as no Event of Default has occurred and is continuing, Lessee shall have the right to collect such rents and amounts for its own use and purposes and Lessee shall not be obligated to pay over to Lessor any such rents, Lessor shall apply to the Basic Rent and Additional Rent due under this Lease the net amount (after deducting all costs and expenses incident to the collection thereof and the operation and maintenance, including repairs, of the Property or any part thereof) of any rents and amounts so collected or received by it. In the event the net amount of any such rents collected or received by Lessee during any Lease Year exceeds the total amount of Basic Rent required to be paid by Lessee in such Lease Year, Lessee shall pay to Lessor, as Additional Rent, 80% of such excess amount, Nothing contained in this section shall be construed so as to permit Lessee to sublet all or any portion of the Property without the express written consent of Lessor, which consent may be withheld by Lessor in its sole discretion, except as set forth in Section 5(a) hereof. 18. PERFORMANCE ON BEHALF OF LESSEE. In the event that Lessee shall fail to make any payment or perform any act required hereunder to be made or performed by Lessee, then Lessor may, but shall be under no obligation to, make such payment or perform such act with the same effect as if made or performed by Lessee. Entry by Lessor upon the Property or any part thereof for such purpose shall not waive or release Lessee from any obligation or default hereunder. Lessee shall promptly reimburse Lessor for all sums so paid and all costs and expenses so incurred in -17- connection with the performance of any such act by Lessor, and shall also pay to Lessor Default Interest on such sums, calculated from the date such sums were advanced or incurred by Lessor. 19. ASSIGNMENTS, MORTGAGES, SUBLEASES, ETC. Except as expressly permitted in Sections 5 and 8 hereof, Lessee's interest in this Lease may not be sold, conveyed, transferred, assigned, mortgaged, pledged or encumbered in any manner whatsoever. So long as no Event of Default shall have occurred and be continuing hereunder, Lessee shall have the right to sublease portions of the Land, provided (a) Lessee first obtains Lessor's prior written consent to each such subletting, which consent may be given or withheld by Lessor in its sole discretion, except as set forth in Section 5(a) hereof, and (b) that each such sublease shall expressly provide that the interest of the sublessee thereunder is subject and subordinate to this Lease. No such subletting nor the entry by Lessee into any contract referred to in Section 34.1(j) hereof shall release Lessee from any obligations and liabilities hereunder, Lessee shall remain primarily liable on and under the covenants, conditions and obligations of this Lease as the principal party to this Lease and not as a surety thereof. Nothing shall relieve or release Lessee of its liability hereunder except an express written release executed by Lessor. If any portion of the Land is sublet or occupied by any Person other than Lessee, or if Lessee enters into any contract referred to in Section 34.1(j) hereof. Lessor may, during the continuance of any Event of Default hereunder, collect rent from the sublessee or occupant and any amounts due under any such contract and apply the same in accordance with Section 17 hereof. The collection or application by Lessor of any such amounts shall not constitute a waiver of the provisions of this Section 19, or an acceptance of such sublessee or occupant as tenant, or a release of Lessee from the further performance by Lessee of the terms, covenants and conditions of this Lease. Any violation of any provision of this Lease, whether by act or omission, by any sublessee, occupant or Person with whom Lessee has contracted shall be a violation of such provision by Lessee, it being the intention of the parties hereto that Lessee shall assume and be liable to Lessor for any and all acts and omissions of any and all sublessees and occupants of the Land and Persons with whom Lessee has contracted; provided, however, that Lessee shall not be responsible for any acts or omissions of any sublessee under a sublease entered into in the name of Lessee pursuant to Section 23 hereof. 20. EVENTS OF DEFAULT; TERMINATION. If any one or more of the following events (each of which is referred to in this Lease as an "Event of Default") shall occur: (a) if Lessee shall fail to pay any Basic Rent within five days after the due date thereof; (b) if Lessee shall fail to pay any Additional Rent within five days after the due date thereof; (c) if Lessee shall fail to perform or comply with any term or provision of this Lease other than a failure to pay Basic Rent or Additional Rent and -18- such failure shall continue for more than 30 days from the earlier of (i) the date upon which Lessor gives notice of such failure to Lessee or (ii) the date upon which the principal operating officer of Lessee responsible for the operations of the Property determines that such failure has occurred; provided that, in the case of any such failure that is susceptible of cure by the Lessee, but that cannot with diligence be cured within such 30 day period, if Lessee shall have promptly commenced to cure the same and shall thereafter prosecute the curing thereof with diligence, the period within which such failure may be cured shall be extended for such further period (not exceeding 90 days) as shall reasonably be required for the curing thereof with diligence; (d) if Lessee shall make an assignment for the benefit of creditors, or shall be generally not paying its debts as they become due or shall commence a case under the Bankruptcy Code, or shall file any petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, or shall file any answer admitting or shall fail timely to contest the material allegations of a petition filed against it in any such proceeding, or shall seek or consent to or acquiesce in the appointment of any trustee, custodian, receiver or liquidator of Lessee or any material part of its properties; (e) if, without the consent or acquiescence of Lessee, an order shall be entered constituting an order for relief or approving a petition for relief or reorganization or any other petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or other similar relief under any present or future statute, law or regulation, or if any such petition shall be filed against Lessee and such petition shall not be dismissed within 60 days, or if, without the consent or acquiescence of Lessee, an order shall be entered appointing a trustee, custodian, receiver or liquidator of Lessee or of any material part of its properties, and such appointment shall not be dismissed within 60 days; (f) if a final judgment for the payment of money of more than $20,000,000.00 shall be rendered against Lessee and within 60 days after the entry thereif, such judgment shall not have been removed or its enforcement stayed by bond or otherwise; (g) if Lessee shall fail to comply in all material respects with the requirements of any note, mortgage, deed to secure debt, security agreement or other instrument or document evidencing, securing or otherwise relating to any indebtedness for monies borrowed of $20,000,000.00 or more owed by Lessee to Lessor or to any third party and as a result thereof such indebtedness becomes due before its stated maturity, or if Lessee shall fail to comply in all material respects with the requirements of any lease with Lessor, either of the GECC Leases or with the requirements of any Material Lease, and as i result of such failure Lessor, GECC or the lessor under such Material Lease shall terminate such lease or shall exercise its right to retake possession of the leased property without terminating such lease; -19- (h) if any representation or warranty made by Lessee under this Lease, under the Acquisition Agreement or in any officer's certificate shall prove to have been inaccurate in any material respect when made (unless such inaccuracy was unintentional and is no longer material) and Lessee shall fail to take such action as is necessary to make such warranty or representation true and accurate within a period of 30 days after Lessor shall have notified Lessee of such inaccuracy; or (i) if any one or more of the following shall occur: (ii) Lessee shall cease to be a wholly-owned subsidiary of Tenneco; (iii) Lessee shall be sold to, merged into or consolidated with any other corporation, or substantially all of its assets shall be sold, whether or not such transaction is permitted under the provisions of Section 38 hereof; (iv) 30% or more of the outstanding common stock of Lessee shall be repurchased by Lessee during any 12 month period; or (v) Lessee shall pay or declare a dividend; and as a result of the occurrence of (i), (ii), (iii) or (iv), the Net Worth of Lessee immediately thereafter shall not be at least 50% of the level of Lessee's Net Worth as of the fiscal year-end immediately preceding such occurrence; then, and in any such event (regardless of the pendency of any proceeding which has or might have the effect of preventing Lessee from complying with the terms of this Lease), Lessor, at any time thereafter so long as such event shall be continuing may give a written termination notice to Lessee, and on the date specified in such notice this Lease shall terminate and, subject to Section 24, the Lease Term shall expire and terminate, and all rights of Lessee under this Lease shall cease, unless before such date (i) all arrears of Basic Rent and Additional Rent payable by Lessee under this Lease (together with Default Interest thereon) and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by or on behalf of Lessor hereunder, shall have been paid by Lessee, and (ii) all other Defaults at the time existing under this Lease shall have been fully remedied to the satisfaction of Lessor, Lessee shall reimburse Lessor for all costs and expenses incurred by or on behalf of Lessor (including, without limitation, attorneys' fees and expenses) occasioned by any Default by Lessee under this Lease. 21. ENTRY BY LESSOR. Lessor and its authorized representatives shall have the right to enter the Property or any part thereof at any time (a) for the purpose of inspecting the same or for the purpose of doing any work under Section 18, and to take all such action thereon as may be necessary or appropriate for any such purpose (but nothing contained in this Lease shall create or imply any duty on the part of Lessor to make any such inspection or do any such work), and (b) for the purpose of showing the Property to prospective purchasers, lessees or mortgagees, and (c) during the 12-month period preceding the expiration of the Initial Lease Term and at all times during the Extension Period, to display on the Property advertisements for sale or letting if such -20- advertisements do not interfere with the business conducted on the Property, No such entry shall constitute an eviction of Lessee, During any such entry of the Property, Lessor or its representatives shall not unduly interfere with Lessee's operations. Notwithstanding the foregoing, so long as no Event of Default has occurred and is continuing under this Lease, Lessor agrees that it will enter Lessee's business offices on the Property only during Lessee's regular business hours after providing Lessee reasonable prior notice of such entry. 22. REPOSSESSIONS ETC. If an Event of Default shall have occurred and be continuing, Lessor, whether or not the Lease Term shall have been terminated pursuant to Section 20, may enter upon and repossess the Property or any part thereof by force, summary proceedings, ejectment or otherwise, and may remove Lessee and all other persons and any and all property therefrom as permitted by and in accordance with applicable law, Unless otherwise provided under applicable law, Lessor shall be under no liability for or by reason of any such entry, repossession or removal. 23. RELETTING. At any time or from time to time after the repossession of the Property or any part thereof pursuant to Section 22, whether or not the Lease Term shall have been terminated pursuant to Section 20, Lessor may (but shall be under no obligation to) relet the Property or any part thereof for the account of Lessee, in the name of Lessee or Lessor or otherwise, without notice to Lessee, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Lease Term) and on such conditions (which may include concessions or free rent) and for such uses as Lessor, in its sole discretion, may determine, and may collect and receive the rents therefor. Lessor shall not be responsible or liable for any failure to relet the Property or any part thereof or for any failure to collect any rent due upon any such reletting. 24. SURVIVAL OF LESSEE'S OBLIGATIONS; DAMAGES. 24.1 TERMINATION OF LEASE NOT TO RELIEVE LESSEE OF OBLIGATIONS. No expiration or termination of the Lease Term pursuant to Section 20 or by operation of law, or otherwise (except as expressly provided herein), and no repossession of the Property or any part thereof pursuant to Section 22, or otherwise, shall relieve Lessee of its liabilities and obligations hereunder, all of which shall survive such expiration, termination or repossession. 24.2 CURRENT DAMAGES. In the event of any such expiration, termination, or repossession, Lessee will pay to Lessor all Basic Rent and Additional Rent up to the time of such expiration, termination or repossession, and thereafter Lessee, until the end of what would have been the Lease Term in the absence of such expiration, termination or repossession, and whether or not the Property or any part thereof shall have been relet, shall be liable to Lessor for, and shall pay to Lessor, as liquidated and agreed current damages for Lessee's default, (a) all Basic Rent and Additional Rent which would be payable under this Lease by Lessee in the absence of such expiration, termination or repossession, less (b) all net rents collected by Lessor -21- from sublessees, tenants and occupants plus the net proceeds, if any, of any reletting pursuant to Section 23 after deducting from such rents and proceeds all of Lessor's reasonable expenses in connection with such collection and reletting (including, without limitation, repossession costs, brokerage commissions, accounting expenses, attorneys' fees and expenses, employees' expenses, promotional expenses, and expenses of preparation for such collection and reletting). Lessee will pay such current damages on the payment dates of installments of Basic Rent applicable in the absence of such expiration, termination or repossession, and Lessor shall be entitled to recover the same from Lessee on each such date. 24.3 FINAL DAMAGES. At any time after any such expiration, termination or repossession, whether or not Lessor shall have collected any current damages as aforesaid, Lessor shall be entitled to recover from Lessee and Lessee will pay to Lessor on demand, as and for liquidated and agreed final damages for Lessee's default and in lieu of all current damages beyond the date of such demand, an amount equal to the present value of the excess, if any, of (a) all Basic Rent and Additional Rent which would be payable under this Lease from the date of such demand (or, if it be earlier, the date to which Lessee shall have satisfied in full its obligations under Section 24.2 to pay current damages) for what would be the then unexpired Lease Term in the absence of such expiration, termination or repossession over (b) the then fair net rental value of the Property for the same period, such present value to be determined using a discount rate equal to the Average Life Treasury Rate, In the event a dispute arises between the parties as to the then fair net rental value of the Property, such fair net rental value shall be determined as of the date of calculation by an appraiser appointed by Lessor in its sole discretion who is competent, qualified by training and experience in appraising timberlands, disinterested and independent and who is a member in good standing of the Association of Consulting Foresters. All costs, fees and expenses of any such appraiser appointed by Lessor to determine the fair net rental value of the Property shall be paid by Lessee. Lessee will also pay to Lessor all reasonable expenses incurred by Lessor in connection with the reletting of the Property including, without limitation, repossession costs, brokerage commissions, accounting expenses, attorneys' fees and expenses, employees' expenses, promotional expenses, and expenses of preparation for such reletting, Upon the payment of such final damages, this Lease if not already terminated, shall be deemed terminated, If any statute or rule of law shall validly limit the amount of such liquidated final damages to less than the amount above agreed upon, Lessor shall be entitled to the maximum amount allowable under such statute or rule of law. 25. LESSEE'S WAIVER OF STATUTORY RIGHTS. In the event of any termination of the Lease Term pursuant to Section 20 or any repossession of the Property pursuant to Section 22, Lessee, so far as permitted by law, waives (a) any notice of re-entry or of the institution of legal proceedings to that end, (b) any right of redemption, re-entry or repossession, and (c) the benefits of any laws now or hereafter in force exempting property from liability for rent or for debt. -22- 26. NO WAIVER, ETC., BY LESSOR OR LESSEE. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no submission by Lessee or acceptance by Lessor of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. No waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect, or the respective rights of Lessor or Lessee with respect to any other then existing or subsequent breach. 27. LESSOR'S REMEDIES, ETC., CUMULATIVE. Each right, power and remedy of Lessor provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Lessor of any one or more of the rights, powers or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by Lessor of any or all such other rights, powers or remedies. 28. ACCEPTANCE OF SURRENDER. No termination or surrender of this Lease or surrender of the Property or any part thereof or any interest therein by Lessee shall be valid or effective unless agreed to and accepted in writing by Lessor, and no act by any representative or agent of Lessor, other than such a written agreement and acceptance by Lessor, shall constitute an acceptance thereof. 29. NO MERGER OF TITLE. There shall be no merger of the leasehold estate created by this Lease with the fee estate in the Property by reason of the fact that the same person may own or hold (a) the leasehold estate created by this Lease or any interest in such leasehold estate, and (b) the fee estate in the Property or any interest in such fee estate; and no such merger shall occur unless and until all persons having any interest in (i) the leasehold estate created by this Lease, and (ii) the fee estate in the Property, shall join in a written instrument effecting such merger and shall duly record the same. 30. ESTOPPEL CERTIFICATE. (a) BY LESSEE. Lessee will execute, acknowledge and deliver to Lessor, as soon as reasonably practicable, but in no event later than 30 days following receipt of a request therefor from Lessor, a certificate certifying that (i) this Lease is unmodified and in full force and effect (or, if there have been modifications, that the Lease is in full force and effect, as modified, and stating the modifications), (ii) the dates, if any, to which Basic Rent and Additional Rent have been paid, and (iii) no notice has been received by Lessee of any Default which has not been cured, except as to Defaults specified in said certificate. Any such certificate may be relied upon by any prospective purchaser or mortgagee of the Property or any part thereof. -23- (b) BY LESSOR. Lessor will execute, acknowledge and deliver to Lessee, within 30 days following a request therefor from Lessee, a certificate certifying that (i) this Lease is unmodified and in full force and effect (or, if there have been modifications, that the Lease is in full force and effect, as modified, and stating the modifications), (ii) the dates, if any, to which Basic Rent and Additional Rent have been paid, and (iii) Lessor is unaware of any Default which has not been cured, except for the Defaults specified in said certificate. Any such certificate may be relied upon by any permitted assignee of this Lease or any permitted sublessee of the Property or any part thereof. 31. CONVEYANCE BY LESSOR. In case the Lessor or any successor thereto shall convey or otherwise dispose of the Property by transfer which does not violate the provisions of Section 35.2(a) hereof, it shall thereupon be released from all liabilities and obligations of Lessor under this Lease (except those accruing prior to such conveyance or other disposition) and such liabilities and obligations shall be binding solely on the then owner of the Property, provided such owner expressly assumes the liabilities and obligations of Lessor under this Lease. 32. END OF LEASE TERM. Upon the expiration or other termination of the Lease Term, Lessee shall quit and surrender to Lessor the Property in good order and condition, and shall remove all Lessee's Equipment therefrom, In the event Lessee fails to so vacate the Property, such hold over shall be as a tenant at sufferance and not as a tenant at will. Lessee shall pay Lessor, on demand, as rent for the period of such hold over an amount equal to one and onequarter (1.25) times the Quarterly Rent which would have been payable by Lessee had the hold over period been a part of the Lease Term, together with the amount of any actual direct or consequential damages suffered or incurred by Lessor on account of such hold over by Lessee or any violation by Lessee of any other term or condition of this Lease during such hold over period, In no event shall the payment of rent during such hold over period cause Lessee to be or be deemed to be a tenant at will. No holding over by Lessee, whether with or without consent of Lessor, shall operate to extend the Lease Term except as otherwise expressly provided in a written agreement executed by both Lessor and Lessee. 33. PROVISIONS SUBJECT TO APPLICABLE LAW. All rights, powers and remedies provided herein may be exercised only to the extent that the exercise thereof does not violate any applicable law, and are intended to be limited to the extent necessary so that they will not render this Lease invalid, unenforceable or not entitled to be recorded under any applicable law. If any term of this Lease shall be held to be invalid, illegal or unenforceable, the validity of the other terms of this Lease shall in no way be affected thereby. 34. TIMBER MANAGEMENT AND CUTTING PROVISIONS. 34.1 GENERAL TIMBER MANAGEMENT OBLIGATIONS. Lessee covenants and agrees that the Property shall be operated for its highest and best use as timberland, having due regard to soil conditions, stand arrangements and other factors -24- relevant to the conduct of sound silvicultural and harvesting practices, Lessee agrees that any intermediate harvesting of Timber shall be carried out in a manner calculated to produce the maximum growth per acre, consistent with the production of the highest quality and greatest quantity of Merchantable Timber, Lessee shall have the right to manage the Property for maximum pulpwood production and to utilize all products, including sawtimber, as pulpwood, provided the Timber is properly accounted for by Lessee as pulpwood or sawtimber, as the case may be, in accordance with the timber classifications, specifications, utilization limits and calculation standards set forth on Exhibit E hereto. Lessee further covenants and agrees: (a) HARVESTING OPERATIONS. That all Timber cutting shall be conducted in such a manner as to realize the greatest return from the individual tree and from the timber stand, to effect suitable utilization of the Land, to assure the early and complete regeneration of stands of desirable Timber, and to bring about their optimum development both as to growth and quality; that trees shall be cut as close to the ground as practicable in order to leave the lowest stump, with jump-butting to be used when necessary; that all desirable trees which are not at the time being harvested, including young trees, shall be protected against unnecessary injury from felling, skidding and hauling; and that all measures reasonably practicable shall be used to prevent soil erosion including the proper location of skidways and roads. (b) RESTRICTIONS ON GRAZING AND USE OF FIRE. That Lessee shall not permit grazing of livestock on the Land in such a way as to be injurious to forest regeneration, soils or forest growth, or permit the use of fire for eradication of noxious growth or for any other reason whatsoever except with Lessor's prior written consent; provided, however, application of fire in a controlled manner for the benefit of timber production ("prescribed burning") may be utilized in the management of the Property, without Lessor's prior written consent, if (i) state and county fire protection agencies are notified and all fire protection and other applicable laws are followed, (ii) appropriate equipment and trained personnel are available and utilized, (M) fire is applied only when weather conditions are favorable, and (iv) the prescribed burning area is isolated from other areas by appropriate natural or man-made fire breaks. (c) SALVAGE. That to the extent economically feasible, all trees which are dead, diseased, fallen or otherwise damaged by casualty, shall be salvaged and harvested in accordance with sound silvicultural practices and shall be reported pursuant to Section 34.5 hereof. (d) FIRE PROTECTION. That all measures shall be taken which are reasonably necessary to protect the Land and the Timber from loss by fire, which measures shall be at least equal to fire-control practices generally followed on timber-producing property in the same general area, including the adoption of suitable prevention and control measures, the maintenance of adequate fire- fighting equipment, proper disposal of slash and slabs, and full cooperation with county, state and federal agencies on matters of fire prevention and control. -25- (e) MAINTENANCE OF ROADS. That an adequate system of roads and roadways shall be maintained in such manner as to permit access of mobile firefighting equipment and logging equipment to all parts of the Land. (f) REGENERATION OF THE SOUTHERN TIMBERLANDS. That Lessee shall take care to leave the Southern Timberlands in the same general condition at the end of the Lease Term as existed on the Commencement Date of this Lease. Thus, all reasonable measures shall be taken to insure proper regeneration of Timber on the Southern Timberlands. This means, all portions of the Southern Timberlands which are economically suited for growing pine trees and which have either been clear-cut or are without adequate seed source shall be site-prepared and replanted in pine seedlings using to the extent available the most superior type, so as to establish and maintain pine trees on all portions of the Southern Timberlands which are economically suited for the production of pine timber, Any clear-cut area shall be site prepared and replanted within 18 months of such clear-cutting. In areas of the Southern Timberlands which have not been clearcut but which are without adequate seed source and are economically suited for the production of pine timber, Lessee shall institute and maintain a planting program designed adequately to reforest such land. For each one acre of the Southern Timberlands clear-cut but not site-prepared and replanted prior to the expiration of the Lease Term, Lessee shall pay to Lessor the sum of $150.00 per acre to be retained as a performance deposit until the clear-cut acreage is site-prepared and replanted satisfactorily to Lessor. Lessee shall have until the expiration of the 18 month period following the clear-cutting to which the performance deposit relates to site-prepare and replant the clear-cut acreage and obtain a refund of said deposit, which shall be retained by Lessor if site preparation and replanting have not been completed by such time; provided, however, if such 18 month period shall have expired prior to the expiration of the Lease Term, then Lessee shall have a period of 12 months following the expiration of the Lease Term to complete such site preparation and replanting and to obtain a refund of said deposit. The preceding sentence shall not be construed in any way so as to relieve Lessee of its obligation to site-prepare and replant within 18 months of any clear-cutting during the Lease Term and any failure by Lessee so to site-prepare and replant within such 18 months shall constitute a Default under this Lease. (g) REGENERATION OF THE NORTHERN TIMBERLANDS. That Lessee shall take care to leave the Northern Timberlands in the same general condition at the end of the Lease Term as existed on the Commencement Date of this Lease. Thus, all reasonable measures shall be taken to insure proper regeneration of Timber on the Northern Timberlands. This means, each clear-cut area (except for Lowland Brush (Spruce) described on Exhibit D-3 hereof) within the Northern Timberlands which cannot be adequately regenerated by natural means shall be site-prepared and replanted in coniferous or hardwood seedlings suitable for the site using to the extent available the most superior type. Any clear-cut area which has not regenerated naturally within 12 months of such clear-cutting shall be siteprepared and replanted within 24 months of such clear-cutting. In areas of the Northern Timberlands which have not been clear-cut but which are unable to regenerate naturally, Lessee shall institute and maintain a planting program designed adequately to reforest such land. For each one acre of clear- -26- cut land in the Northern Timberlands requiring site preparation and replanting which is not site prepared and replanted prior to the expiration of the Lease Term, Lessee shall pay to Lessor the sum of $150,00 per acre to be retained as a performance deposit until such acreage is site-prepared and replanted satisfactorily to Lessor, Lessee shall have until the expiration of the 24 month period following the clear-cutting to which the performance deposit relates to site-prepare and replant such acreage and obtain a refund of said deposit, which shall be retained by Lessor if site preparation and replanting have not been completed by such time; provided, however, if such 24 month period shall have expired prior to the expiration of the Lease Term, Lessee shall have a period of 12 months following the expiration of the Lease Term to complete such site preparation and replanting and to obtain a refund of said deposit. The preceding sentence shall not be construed in any way so as to relieve Lessee of its obligation to site-prepare and replant within 24 months of any clear-cutting during the Lease Term which has not regenerated naturally within 12 months following such clear-cutting and any failure by Lessee so to site-prepare and replant within such 24 months shall constitute a Default under this Lease. (h) CONTROL OF DISEASE. That, to the extent economically feasible, there shall be maintained at all times in accordance with sound silvicultural practices all reasonable and effective measures to prevent the development of and to control the spread of disease and insect infestation on the Land, including, but not limited to, the shifting of logging operations to remove diseased or insect-infested trees and other trees threatened with disease or insect infestation, and all such other accepted forest sanitation and control measures as are necessary to prevent the development and spread of disease and insect infestation. (i) TRESPASS. That the Land shall be marked to indicate the boundaries thereof in a Conspicuous manner satisfactory to Lessor; that such markings shall be renewed from time to time as may be necessary clearly to maintain public notice of boundaries; and that Lessee shall cause the Land to be inspected for the purpose of preventing trespass of any type or nature, including unauthorized cutting of Timber. (j) CONTRACTS. That no contracts or agreements (whether written or oral) for the lease, sale or disposition of Timber wherein third parties are granted the privilege of entry upon the Land for cutting and removal of Timber or the care or management of all or part of the Property shall be made without the prior written approval of Lessor; provided, however, that so long as no Event of Default shall have occurred and be continuing hereunder, no prior written approval of Lessor shall be required for any such contracts or agreements which (i) have a term of 1_ months or less, but in no event expiring after December 31, 2002 (except that any such contract may expire after December 31, 2002, provided such contract expressly provides that it will terminate, without cost or penalty to Lessor, upon the sale by Lessor of all or any portion of the Property affected by such contract), (ii) require payment or delivery of goods and/or services by Lessee in an aggregate amount of less than $500,000.00, and (iii) are expressly subject and subordinate to this Lease; provided, further, however, that no written approval of Lessor shall be required in connection with the assumption by -27- Lessee of various contracts of Sellers by instrument of even date herewith pursuant to the provisions of the Purchase Agreement and the Acquisition Agreement. 34.2 TIMBER CUTTING PRIVILEGES. Lessee agrees neither to cut or remove nor permit the cutting or removal of any Timber without the prior written consent of Lessor, except as expressly provided herein, Unless a Default has occurred and is continuing under this Section 34.2 or unless an Event of Default has occurred and is continuing under any provision of this Lease, Lessee shall have the right to cut and remove Merchantable Timber from the Land, but only in strict accordance with the following provisions: (a) ANNUAL CUTTING PRIVILEGE. As soon as reasonably possible after the Commencement Date of this Lease and thereafter on or before the last day of the Fifth and Tenth Lease Years, Lessee shall cause the Forestry Consultant to deliver to the Lessor a Projected Growth Report for the next five years itemized by Category, Lessee's timber cutting right during the Lease Term shall be based upon such Projected Growth Reports as follows: (i) During each Lease Year of the Initial Lease Term, Lessee shall have the right to cut up to 100% of the average projected annual growth (net of mortality) by Category as determined by the Forestry Consultant in the Projected Growth Report applicable to such Lease Year. If mortality exceeds average projected annual growth in any Category during any Lease Year, such excess shall be deducted from Lessee's cutting rights for such Category for the following Lease Years. Lessee may, at its option, elect to cut less than 100% of such average projected annual growth during any Lease Year and, in such event, Lessee shall be permitted to cut, without penalty, the remainder of such projected growth in any subsequent Lease Year covered by the five-year Projected Growth Report applicable to such Lease Year; and (ii) During each Lease Year during the Extension Period, Lessee shall have the right to cut up to 75% of the average projected annual growth (net of mortality) by Category as determined by the Forestry Consultant in the Projected Growth Report applicable to such Lease Year, If mortality exceeds 75% of average projected annual growth in any Category during any Lease Year, such excess shall be deducted from Lessee's cutting rights for such Category for the following Lease Years; -28- provided, however, that: A. the permitted volume of cutting in any Category for any Lease Year shall be reduced by an amount equal to the excess volume, if any, cut or removed during the preceding Lease Years pursuant to paragraph (b) of this Section 34.2, multiplied by 1.5; B. the Forestry Consultant shall revise and update its Projected Growth Report annually to reflect each sale, Taking or release of all or any portion of the Property during the Lease Term and Lessee's timber cutting privilege shall be adjusted in conformity with such revised report; C. the permitted volume of cutting in any Category for the Sixth through the Fifteenth Lease Years shall be increased or decreased to correct any growth projection errors applicable to prior periods which are revealed by the Cruise performed by the Forestry Consultant at the end of the Fifth and Tenth Lease Years; D. in the event the Annual Report delivered by the Forestry Consultant indicates that variances exist between the actual growth of Timber by Category and the projections set forth in the Projected Growth Report, Lessor or Lessee, with the consent of the other, which consent is not to be unreasonably withheld by either party, shall have the right to require the Forestry Consultant to revise the Projected Growth Report to reflect such variances and Lessee's Timber cutting right shall be adjusted in conformity with such revised report; and E. until such time as the Forestry Consultant shall deliver its initial Projected Growth Report to Lessor and Lessee and provided Lessee would otherwise be permitted to cut Timber in accordance with the provisions of this Section 34.2, Lessee shall be permitted to cut the volumes of Timber by Category set forth on Exhibit H attached hereto and incorporated herein by this reference. (b) EXCESS CUTTING. Subject strictly to compliance by Lessee with this paragraph (b) of this Section 34.2, Lessee may without default cut and remove -29- Merchantable Timber in excess of the volumes permitted under paragraph (a) of this Section 34.2, provided, that such excess cutting in any Lease Year does not exceed 10% (on a non-cumulative basis) of the volume (in any Category) in such Lease Year permitted to be cut under paragraph (a) of this Section 34.2; provided further, that with respect to each such excess volume of each Category of Merchantable Timber, Lessee shall be required to pay as Additional Rent to Lessor an amount equal to the greater of (i) 150% of the amount calculated by multiplying such excess volume of each Category times the applicable Adjustment Amount Per Cord for each Category set forth on Exhibits D-1, D-2 and D-3 hereto, or (ii) 150% of the fair market value of the excess Merchantable Timber cut, as determined by the Forestry Consultant as of the last day of such Lease Year. (c) MERCHANTABLE TIMBER CUT BY OTHERS; LOSS OF MERCHANTABLE TIMBER BY CASUALTY. All Merchantable Timber on the Land which is cut or removed by any Person other than Lessee or which is lost or destroyed by fire, windstorm, disease, infestation, act of government or war or third parties or any similar cause (other than that which is lost as a result of a Taking), whether or not salvaged, shall be deemed to have been cut or removed by Lessee for purposes of this Lease; provided, however, the volumes of any Merchantable Timber so lost or destroyed shall not be deemed to have been cut or removed by Lessee for purposes of the lot limitation set forth in the first proviso in the first sentence of paragraph (b) of this Section 34.2 so long as Lessee shall have paid the Additional Rent with respect to such lost or destroyed Merchantable Timber required to be paid under the second proviso in the first sentence of paragraph (b) of this Section 34.2. (d) TITLE TO MERCHANTABLE TIMBER. Title to all Merchantable Timber located on the Property is now and shall remain vested in Lessor throughout the Lease Term; provided, however, that title to any Merchantable Timber which is cut or removed from the Property by Lessee in strict accordance with the provisions of this Section 34.2, shall, upon such cutting and removal, vest in Lessee. 34.3 LOSS OF PRE-MERCHANTABLE PLANTED TREES BY CASUALTY. In the event any Pre-Merchantable Planted Trees are lost or destroyed by fire, windstorm, disease, infestation, act of government or war or third parties or any similar cause (other than that which is lost as a result of a Taking), then, in any such event Lessee shall site-prepare and replant the acreage of such lost or destroyed Pre-Merchantable Planted Trees in the same manner and within the same time as would be required by Section 34.1 if said acreage had been clearcut. 34.4 FORESTRY CONSULTANT. (a) APPOINTMENT. Lessee hereby acknowledges and agrees that Lessor shall have the right, at all times during the Term of this Lease and at Lessee's sole cost and expense, to employ an independent forestry consulting firm or firms of established reputation to act on behalf of Lessor hereunder (the "Forestry Consultant"). Lessor and Lessee further acknowledge and agree that, with respect to the Southern -30- Timberlands, the initial Forestry Consultant shall be Resource Management, Inc., and, with respect to the Northern Timberlands, the initial Forestry Consultant shall be George Banzhaf & Company. (b) Duties. During the Lease Term the Forestry Consultant shall: (i) periodically perform a Cruise of the Property and prepare a Projected Growth Report with respect thereto in accordance with the provisions of section 34.5 hereof; (ii) upon completion of the initial Cruise, prepare an appraisal by Category of the fair market value of the Property as of the Commencement Date of this Lease (the "Property Appraisal") to be delivered to Lessor and Lessee on or before March 1, 1991; (iii) prepare an Annual Report with respect to the Property in accordance with the provisions of Section 34.7 hereof; (iv) make periodic determinations of acreage and timber volumes by Category with respect to portions of the Property to be sold, taken or otherwise released from this Lease; (v) verify any and all reports, certifications or other information provided by Lessee to Lessor in accordance with the provisions of this Lease; (vi) monitor Lessee's business and activities on the Property to assure compliance by Lessee with the provisions of this Lease; (vii) notify Lessor of any Default or Event of Default hereunder promptly upon obtaining knowledge of same; (viii) notify Lessor if for any reason it becomes impossible for such Forestry Consultant faithfully and fully to perform its obligations hereunder; (ix) accept no obligation or responsibility to Lessee which is inconsistent with the faithful discharge of such Forestry Consultant's obligations to Lessor hereunder; and (x) perform such other duties with respect to the Property and this Lease as Lessor may from time to time reasonably request. -31- (c) RECORDS. All of the records of the Forestry Consultant relating to the Property, including without limitation, all books, maps, surveys, photographs, reports and similar information, shall be and become the property of Lessor shall be held by the Forestry Consultant as agent for Lessor and shall be furnished or made available to Lessor as it may from time to time request. Lessee shall have the right to examine and make copies of the foregoing, all at Lessee's expense, as the Lessee may from time to time reasonably request. (d) PAYMENT OF FEES. Lessee covenants and agrees to pay all fees and to reimburse all expenses of the Forestry Consultant hereunder, If Lessee fails or refuses to pay any fees or to reimburse any expenses of the Forestry Consultant when due, Lessor may at its election advance and pay any such sum and said sum, together with Default Interest thereon calculated from the due date thereof, shall be paid by Lessee to Lessor as Additional Rent on or before the fifth day following the date upon which Lessor advances such amount. (e) TERMINATION OF FORESTRY CONSULTANT'S EMPLOYMENT. (i) Lessor shall have the right to terminate the employment of the Forestry Consultant at any time, with or without cause, by giving 30 days advance written notice of such termination to the Forestry Consultant and to Lessee. (ii) Lessee shall have the right to terminate the employment of the Forestry Consultant at any time for cause consisting of failure to perform, or bad faith, negligence, or misconduct in the performance of, its duties as the Forestry Consultant hereunder, by giving 30 days advance written notice of such termination to the Forestry Consultant and to Lessor. (iii) Upon the termination of the employment of the Forestry Consultant by either the Lessor or Lessee, then the other party shall have the right to propose a successor Forestry Consultant. (iv) In the event of the resignation of the Forestry Consultant, Lessor shall have the right to propose a successor Forestry Consultant. (v) In the event Lessor and Lessee, after good faith negotiations have been attempted by Lessor, do not for any reason agree in writing on the appointment of a successor Forestry Consultant within 30 days after such termination or resignation, and provided Lessor desires that a successor Forestry Consultant be appointed, then Lessor shall provide to Lessee a list of three forestry consulting firms which are acceptable to Lessor, and Lessee shall have ten Business Days following receipt of such list to select one of the three consulting firms listed thereon to act as Forestry Consultant hereunder; provided, however, if Lessee fails to make its selection within such ten-day period, Lessor shall have the right but not the obligation to appoint a successor Forestry Consultant in its sole discretion. -32- (vi) In case of termination of the employment of the Forestry Consultant by the Lessee, the effective date of such termination shall be extended, if so requested by the Lessor, until the successor Forestry Consultant has accepted the engagement and is in a position fully to perform the duties of the Forestry Consultant hereunder; provided, however, that no such extension shall be for a period in excess of 90 days from the original termination date set forth in Lessee's notice of termination. (f) No Obligation to Utilize Consultant. Notwithstanding the foregoing, Lessor shall have no obligation to utilize the services of a Forestry Consultant under the terms of this Section 34.4. For any period of time during which there is no Forestry Consultant employed and acting as such, Lessor shall have the right to take such steps as it considers necessary to make the determinations, verifications and inspections to be made by the Forestry Consultant hereunder, by its own employees or otherwise. Lessee agrees to pay and reimburse all reasonable costs and expenses incurred by Lessor in making such determinations, verifications and inspections that would otherwise be performed by the Forestry Consultant, including without limitation, travel expenses and the reasonable fees and expenses of independent foresters, surveyors, engineers and attorneys. (g) Cooperation. Lessee covenants to cooperate fully with the Forestry Consultant in good faith so as to aid the Forestry Consultant in performing its duties hereunder. 34.5 TIMBER CRUISE. Lessee shall cause the Forestry Consultant to perform a cruise (in each case, the "Cruise") of the Property at Lessee's sole expense on or before March 1, 1991 to verify the actual timber volumes and acreages by Category included in the Property as of the Commencement Date of this Lease and thereafter as of December 31, 1995 and December 31, 2000 to verify the actual timber volumes and acreages by Category included in the Property as of each of such dates. Each Cruise shall be conducted in accordance with the cruise specifications set forth on Exhibit E attached hereto and incorporated herein by this reference. The results of each Cruise shall be delivered in report form to Lessor and Lessee on or before the due date thereof and shall include a projected annual growth report for the Property for the five year period commencing on such due date, itemized by Category (in each case, the "Projected Growth Report"). In connection with the initial Cruise, the Forestry Consultant shall also prepare and deliver the Property Appraisal. In the event that Lessor or Lessee disagrees in good faith with any determination (volume and/or acreage) by the Forestry Consultant, such party shall deliver to the other party a written notice of objection (the "Objection Notice") and the parties hereto shall undertake to negotiate in good faith to resolve their differences) or, at the option of either the Lessor or Lessee, a reputable forestry consulting firm shall be appointed by the Lessor and Lessee to resolve such dispute, one-half the cost of which shall be borne by each party. In the event Lessor and Lessee, after good faith negotiations have been attempted by Lessor, do not for any reason agree on a forestry consulting firm within 30 days following the date the objection Notice is delivered by the objecting party, Lessor shall provide to Lessee a list of three -33- forestry consulting firms which are acceptable to Lessor, and Lessee shall have ten Business Days following receipt of such list to select one of the three consulting firms listed thereon to resolve the dispute; provided, however, if Lessee fails to make its selection within said ten-day period, Lessor shall have the right to appoint such reputable forestry consulting firm in its sole discretion. 34.6 SEMI-ANNUAL REPORTS. Lessee covenants to furnish to the Forestry Consultant and to the Lessor not later than 45 days after the end of each calendar semi-annual period, a semiannual report with respect to the Southern Timberlands in a form substantially similar to that attached hereto as Exhibit F-1 and incorporated herein by this reference and with respect to the Northern Timberlands in a form substantially similar to that attached hereto as Exhibit F-2 and incorporated herein by this reference, with full and accurate information furnished in completion thereof, for each management unit of the Property, including in addition to the information requested therein a current compartment map (in such detail as Lessor or the Forestry Consultant may reasonably specify from time to time) for each compartment in which a change occurred in the volumes or acreages of Land or Timber (other than a change merely by reason of timber growth) and such other information as Lessor or the Forestry Consultant may reasonably request from time to time with respect to timber activity on the Property including without limitation, new plantings, Timber cutting, Timber utilization, Timber damage by casualty, loss of Timber or Land by eminent domain or condemnation, and improvement of the Property. The information to be furnished to the Forestry Consultant and Lessor shall also include a statement setting forth the Administrative Amount of the Property by Category as of the end of the semi-annual period covered by said report. In addition, the Lessee covenants to furnish to the Forestry Consultant and to the Lessor, a synopsis of all changes in acreage and volumes of Land and Timber for the Lease Year through the semi-annual period covered by the report. 34.7 ANNUAL REPORTS. In addition to the semi-annual reports required by Section 34.6 above, Lessee covenants to furnish to the Lessor not later than 90 days after the end of every Lease Year an annual report of the Forestry Consultant (the "Annual Report") addressed to the Lessee and to the Lessor, for the preceding Lease Year. The Annual Report shall contain the following: (i) a detailed report of all matters and transactions involving or affecting the Property in such detail as may be reasonably required; (ii) the certification of the Forestry Consultant, as of December 31 of the Lease Year covered by the report, as to the acreage of Land, volume of Merchantable Timber by Category and acreage of PreMerchantable Planted Pine contained within the Property; (iii) the opinion of the Forestry Consultant as to whether the actual growth of Timber on the Property during such period was consistent with -34- the projections set forth in the Projected Growth Report applicable to such period and, if not, setting forth the variances therefrom by Category; and (iv) a reconciliation of the timber inventory and projected growth to take into account all changes in volumes and acreages of Timber and Land within the Property through December 31 of the Lease Year covered by the report. 34.8 TIMBER SPECIFICATIONS AND CALCULATIONS. The timber classifications, specifications, utilization limits and calculation standards set forth on Exhibit E to this Lease with respect to the Southern Timberlands and the Northern Timberlands are hereby agreed to by Lessor and Lessee and shall be used for all purposes under this Lease. 35. DISPOSITION OF PROPERTY. 35.1 LESSEE'S OPTION TO PURCHASE. Provided this Lease has not been terminated for any reason by either Lessor or Lessee prior thereto, Lessee shall have, at its option but with no obligation, the right to purchase all of Lessor's right, title and interest in the Property and, to the extent transferable, the Permits (the "Purchase Option") for a purchase price equal to the Purchase option Price, upon giving Lessor written notice of its election to purchase not less than 90 days prior to the expiration of the Initial Lease Term. If Lessee fails to give notice of its election to purchase within the time herein allowed or if this Lease is terminated prior to giving such notice, the Purchase option shall expire and shall be of no further force or effect. The purchase transaction shall be consummated on December 31, 2002 or on such other day during December 2002 as Lessor and Lessee shall agree to in writing (the "Option Closing Date") by delivery of limited warranty deeds and special warranty deeds to Lessee, or such other party as Lessee may direct, against payment of the Purchase Option Price in immediately available funds (excepting from such deeds such portion, if any, of the Property as shall have been sold by Lessor prior to the Option Closing Date pursuant to Section 35.2 hereof, taken by a Taking or otherwise released from this Lease pursuant to the terms hereof), and the title so to be transferred may be subject to (a) any and all defects in title and rights of third parties existing at the date Lessor acquired the Property, (b) the lien or effect of any and all Impositions and any and all Legal Requirements, (c) encumbrances and exceptions arising as a result of action taken by Lessor to enforce its rights and remedies under this Lease, and (d) any and all rights of third parties created or suffered by Lessee or by Lessor with the consent of or at the request of Lessee or as a result of any act or failure to act of Lessee, but shall be free of any other defects of title or rights of third parties created or permitted over the objections of Lessee by Lessor or Liens for Excluded Taxes, except this Lease. Lessee shall pay or cause to be paid, and shall indemnify and hold Lessor harmless against, all charges incident to the proposed conveyance (whether or not the same shall be consummated), including, without limitation, all reasonable counsel fees and expenses, all escrow fees, recording fees, title insurance premiums, survey costs and all applicable transfer taxes, deed taxes, stamp taxes or similar taxes imposed by reason of the -35- conveyance of title to the Property by Lessor to Lessee or the execution, delivery and recording of the deeds, it being the intent hereof that the Purchase Option Price paid to Lessor for the Property shall be absolutely net to Lessor and that such conveyance be effected without cost or expense to Lessor; provided, however, Lessee shall not be responsible for or obligated to indemnify Lessor for any Excluded Taxes hereunder other than transfer taxes, deed taxes, stamp taxes or similar taxes. Lessee hereby acknowledges and agrees that, in the event Lessee for any reason does not exercise the Purchase Option, the Lease Term will immediately be extended to include the Extension Period. 35.2 SALE OF TIMBERLANDS DURING THE INITIAL LEASE TERM. (a) Lessor's Right to Sell. Lessor shall have the right at all times during the Initial Lease Term to sell all or any portion of the Timberlands subject to this Lease and the Purchase Option without the consent or approval of Lessee; (b) Lessee's Right to Market; Requirements for Sale. On or before the 30th day following its receipt of the Annual Report of the Forestry Consultant each Lease Year during the Initial Lease Term, Lessor shall identify 80,000 acres of the Timberlands (as identified by Lessor from time to time hereinafter referred to as the "Pre-Approved Property") which Lessee shall be permitted to market for sale on behalf of Lessor during the twelve-month period commencing April 1 of each Lease Year during the Initial Lease Term (the "Marketing Period"). The Pre-Approved Property shall not include and shall be in addition to the Non-Strategic Lands. Lessor hereby agrees that it will sell all or any remaining portion of the Non-Strategic Lands and up to 27,000 acres of the PreApproved Property per Lease Year during the Initial Lease Term to one or more purchasers identified by Lessee, provided: (i) no Default or Event of Default shall exist under this Lease as of the date of Lessor's request pursuant to subsection 35.2(c) or as of the date of any such proposed sale; (ii) the proposed sale shall be an arm's length transaction with a Person who is not a Related Entity and who is otherwise acceptable to Lessor in its reasonable discretion; (iii) the net proceeds (after deduction of all closing costs and any other costs and expenses in connection with such sale, including any taxes imposed or recaptured under any Forest Tax Law) received by Lessor as a result of any such sale shall be no less than the greater of the Minimum Return Price or the Make-Whole Price applicable to such sale; (iv) all conveyance instruments and other documentation in connection with such sale shall be in form and substance satisfactory to Lessor; -36- (v) Lessee shall have complied fully with the requirements of subsection 35.2(c) hereof as they relate to such proposed sale; and (vi) all information and certifications set forth in the certificates required under subsection 35.2(c) shall be true, accurate and complete. Lessor's agreement to sell up to 27,000 acres of the Pre-Approved Property per Lease Year during the Initial Lease Term shall be on a cumulative basis, but in no event shall Lessor be required to (A) sell more than 80,000 acres of the Timberlands during any Lease Year or (B) process more than ten written requests for sale delivered by Lessee in accordance with the provisions of subparagraph (c) below during any Lease Year. Lessee shall pay all costs and expenses related to any such sale, including any and all expenses incurred by Lessor in connection therewith. Notwithstanding the foregoing, Lessor shall have until June 1, 1991 to identify the Non-Strategic Lands and the Pre-Approved Property for the initial Marketing Period. (c) Documentation Required. Not less than 60 days prior to the date upon which any proposed sale under subsection 35.2(b) is to occur, Lessee shall provide a written request for such sale to Lessor, which request shall include the following documentation, all of which must be in form and substance satisfactory to Lessor: (i) a legal description of the tract or tracts to be sold; (ii) if less than an entire contiguous tract (as described in the legal descriptions attached hereto as Exhibit A) is to be sold, a plat of survey of the portion of the Timberlands to be sold prepared by a reputable registered engineer or land surveyor acceptable to Lessor; (iii) a certificate from the Forestry Consultant: A. stating that access to the remaining Timberlands after such sale will not be materially impaired and will be adequate for commercial forestry operations; B. listing by Category the amounts of acreage and volumes of Land and Timber contained within the tract or tracts to be sold, which listing shall be based on the results of a current stratified cruise complying with the cruise specifications set forth on Exhibit E attached hereto, and describing any Improvements thereon; -37- C. setting forth a detailed computation of the Administrative Amount of the tract or tracts to be sold; and D. stating to the best of the knowledge and belief of the Forestry Consultant that no Default or Event of Default then exists under this Lease; (iv) a certificate from the principal operating officer of Lessee responsible for Lessee's operations on the Property: A. stating that no Default or Event of Default then exists under this Lease; B. setting forth a detailed computation of the Make-Whole Price and Minimum Return Price applicable to such sale; C. stating that the proposed sale will not impair the marketability or value of the remaining Timberlands or materially impair the accessibility of the remaining Timberlands; D. stating that, to the best of the knowledge and belief of such officer, the information contained in the certificate delivered by the Forestry Consultant in connection with such sale is true, accurate and complete; and E. stating that the proposed sale is to be an arm's length transaction with one or more Persons, none of whom is a Related Entity; and (v) a true, correct and complete copy of the contract for the sale of the tract or tracts to be sold; (d) Excess Proceeds. Any proceeds received by Lessor as a result of any sale of Timberlands in accordance with the provisions of subsection (b) above which are in excess of the greater of the Minimum Return Price or the Make-Whole Price applicable to such sale shall be paid by Lessor to Lessee; (e) Other Sales. In the event Lessee wishes to market for sale during the Initial Lease Term portions of the Timberlands which are not included in the -38- Pre-Approved Property or which are in excess of the amount of acreage which Lessor has agreed to sell pursuant to subsection 35.2(b) hereof, Lessee may submit a written request to Lessor to sell such additional property, which request shall comply with the provisions of subsection 35.2(c) hereof, Lessor shall have a period of not less than 90 days from the date Lessee makes such written request and provides such materials to evaluate the proposed sale and to decide whether to approve such sale, which approval may be given or denied by Lessor in its sole discretion; provided, however, Lessor agrees that it will, in good faith, consider such request, but Lessor shall be entitled to deny such request if Lessor determines, in its sole discretion, that such sale would not be in the best interest of Lessor for any reason; and (f) Release of Property Sold. This Lease shall terminate with respect to any portion of the Property sold pursuant to this Section 35.2(b) and Basic Rent shall thereupon be adjusted in accordance with the provisions of Section 2.1 hereof. 35.3 SALE OF PROPERTY DURING THE EXTENSION PERIODS. Lessor shall have the right at all times during the Extension Period to sell all or any portion of the Property free and clear of this Lease without the consent or approval of Lessee. In the event of such a sale during the Extension Period, Lessee shall be entitled to receive from Lessor 20% of the excess, if any, of the sales proceeds from such sale (net of all costs and expenses of such sale, including without limitation, brokerage commissions and attorney's fees) over the Adjusted Base Value of the Property. Upon the expiration of the Lease Term, Lessee's right to receive any portion of proceeds from the sale of all or a portion of the Property shall cease. 35.4 SALES PURSUANT TO OPTION AGREEMENTS. The documents described on Exhibit J attached hereto and incorporated herein by this reference (the "Option Agreements") grant to third parties options to purchase portions of the Property. Upon the sale of any portion of the Property pursuant to the provisions of any of the Option Agreements, the proceeds from such sale (less costs, fees and expenses incurred by Lessor and Lessee in connection therewith) shall be paid (i) first, to Lessor in an amount up to and including the greater of the Minimum Return Price or the Make-Whole Price applicable to the portion of the Property sold, and (ii) the balance, if any, of such proceeds shall be paid to Lessee. 36. APPRAISAL. In the event the Agreed Value has not been established by Lessor and Lessee on or before the 180th day prior to the expiration of the Initial Lease Term (the "Determination Date"), the Agreed Value shall be determined as follows: (a) Not later than the 15th day after the Determination Date, Lessor and Lessee shall each appoint one appraiser and shall give notice of such appointment to the other party. If either party shall fail or refuse so to appoint an appraiser and give notice thereof within said 15-day period, then the appraiser appointed by the other party shall appoint a second appraiser within ten days after the expiration of said 15-day period, each of the two appraisers so appointed shall individually determine -39- the Agreed Value within 30 days after the appointment of the second appraiser, and the average of the two values so determined shall be deemed to be the Agreed Value for purposes of this Lease and shall be final and binding upon the parties. If Lessor and Lessee have each appointed an appraiser and given notice thereof within said 15-day period, then the two appraisers so appointed shall appoint a third appraiser within ten days after the expiration of said 15-day period. Within 30 days after the appointment of the third appraisal, each of the three appraisers shall individually determine the Agreed Value, and the average of the two highest values determined by said appraisers shall be deemed to be the Agreed Value for purposes of this Lease and shall be final and binding upon the parties. (b) All appraisers appointed hereunder shall be competent, qualified by training and experience in appraising timberlands, disinterested and independent and shall be members in good standing of the Association of Consulting Foresters, and all appraisal reports shall be rendered in writing and signed by the appraiser making the report. Each party shall pay the costs, fees and expenses of the appraiser appointed by it and one-half of the costs, fees and expenses of the appraiser appointed by the other appraiser or appraisers. 37. REPRESENTATIONS, WARRANTIES AND COVENANTS OF LESSEE. 37.1 GENERAL REPRESENTATIONS AND WARRANTIES. Lessee hereby warrants and represents to Lessor that: (a) Lessee is a corporation duly incorporated and validly existing under the laws of the State of Delaware, is in good standing therein, is duly qualified to do business and is in good standing in the States of Florida, Georgia, Michigan and Wisconsin, and has full corporate power and authority to enter into this Lease and to perform its obligations hereunder; (b) The execution and delivery of this Lease by Lessee and the performance of its obligations hereunder have been duly authorized by all necessary corporate action and will not violate any provision of law or of its charter or by-laws or result in the breach of or constitute a default under any material indenture or other agreement or instrument to which Lessee is a party or by which Lessee or the Property may be bound or affected; (c) The consolidated balance sheet of the Lessee and its Subsidiaries dated September 30, 1990, and the related consolidated statements of income, retained earnings and cash flow which have been delivered to Lessor by Lessee have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved and fairly present (i) the financial condition of Lessee and its Subsidiaries as of the date of such balance sheet, and (ii) the results of operations of the Lessee and its Subsidiaries for the period then ended; -40- (d) No material adverse change in the business, operations, properties, assets or financial condition of the Lessee has occurred subsequent to September 30, 1990; (e) Lessee possesses all trademarks, trade names, copyrights, patents, governmental licenses, franchises, certificates, consents, permits and approvals necessary to enable it to carry on its business in all material respects as now conducted and to own or operate the properties material to its business as now owned or operated, without conflict with rights of others, and that all such trademarks, trade names, copyrights, patents, governmental licenses, franchises, certificates, consents, permits and approvals which are material to Lessee are valid and subsisting; (f) No actions, suits or proceedings are pending or, to the knowledge of the Lessee, threatened against or affecting the Lessee at law or in equity before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind, which involve any transaction herein contemplated or would have a material adverse change on the business, operations, properties, assets or financial condition of the Lessee; and that Lessee is not in default or in violation of any Legal Requirement which would have a material adverse effect on its ability to perform any of its obligations hereunder; (g) None of the materials listed on Exhibit K attached hereto and incorporated herein by this reference (the "Supplied Materials") which were furnished to Lessor in writing by Lessee or by Tenneco on behalf of Lessee in connection with this Lease contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which made except for changes reflected in the report of Dames & Moore dated December 7, 1990; and except for changes reflected in the Supplied Materials and in such report of Dames & Moore, no facts have come to the attention of any officer of Lessee which leads any such officer to believe that the Confidential offering Memorandum dated June 1990 prepared by Goldman, Sachs & Co, and Wasserstein Parella & Co., Inc., relating to the sale of the Property by Sellers, a copy of which was delivered to Lessor, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which made; provided, however, that while the projections and estimates made by Lessee that are included in the Supplied Materials were made in good faith, Lessee does not make any representation as to the reasonableness or accuracy of any estimates or projections included in any of the Supplied Materials; (h) No employee benefit plan established or maintained by the Lessee, which is subject to Part 3 of Subtitle B of Title I of ERISA, had an accumulated funding deficiency (as such term is defined in Section 302 of ERISA) as of the last day of the most recent fiscal year of such plan ended prior to the date hereof which was or would have been material to the Lessee and its Subsidiaries taken as a whole; no liability -41- to the Pension Benefit Guaranty Corporation has been, or is expected by Lessee to be, incurred with respect to any employee benefit plan maintained by the Lessee or any of its Subsidiaries, which is subject to Part 3 of Subtitle B of Title I of ERISA, which would be material to the Lessee and its Subsidiaries taken as a whole; and Lessee is in compliance in all material respects with all applicable provisions of ERISA and the regulations and published interpretations thereunder; (i) As of the date hereof, Lessee has filed all tax returns which are required to be filed by it and has paid all taxes shown to be due pursuant to such returns and all other taxes, assessments, fees and other governmental charges upon the Lessee and upon its properties, assets, income and franchises, except those being contested by the Lessee, those the nonpayment of which would not have a material adverse effect on the Lessee, or those which are not yet due and payable; and (j) All filings and notifications required to be made by Lessee and its parent company, Tenneco, in connection with this Lease and the transactions contemplated by the Purchase Agreement and the Acquisition Agreement under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, have been made, and the applicable waiting period, including any extensions thereof, has expired. No additional action of, or filing with, any governmental or public body or authority is required in connection with the execution, delivery and performance of this Lease (other than routine filings with the Securities and Exchange Commission and other governmental entities required or contemplated by this Lease). 37.2 COVENANTS. The following are additional covenants of the Lessee: (a) Except as permitted by Section 38 hereof, Lessee will at all times (i) conduct continuously and operate actively its business, (ii) keep in full force and effect its corporate existence and, where noncompliance would materially and adversely interfere with Lessee's ability to perform its obligations hereunder, comply with all the laws and regulations governing the conduct of its business, and (iii) make all such reports and pay all such franchise and other taxes and license fees and do all such other similar acts and things as may be lawfully required to maintain its rights, licenses, leases, powers and franchises under the laws of the United States and of the States of Georgia, Florida, Michigan and Wisconsin; (b) Lessee and its Subsidiaries shall not incur any Funded Debt unless immediately thereafter total Pre-Tax Cash Flow coverage of Fixed Charges would exceed 2.0 times, and total Funded Debt would not exceed 55% of Total Capital; (c) Lessee shall be permitted to incur short-term debt, including intercompany debt, for working capital purposes; provided that a portion of such short-term debt that is outstanding during any 12 month period shall be deemed to be Funded Debt at the time of determination, with such portion to be equal to the lowest daily -42- average principal amount outstanding for any period of 30 consecutive days during the preceding 12 month period; (d) Lessee shall not at any time, whether voluntarily or by operation of law, without the prior written consent of Lessor, mortgage, pledge, or otherwise encumber or place any Lien, or permit same, on its assets or any portion thereof, except for the following: (i) any Lien upon any property or assets of Lessee in existence at the Commencement Date, or created pursuant to an "after- acquired property" clause or similar term (including Liens created upon substitution of cash or collateral of similar value) in existence at the Commencement Date, or any mortgage, pledge agreement, security agreement or other similar instrument in existence on the Commencement Date; (ii) any Lien upon any property or assets of Lessee created at the time of the acquisition of such property or assets by Lessee or within 90 days after such time to secure all or a portion of the purchase price for such property or assets or debt incurred to finance such purchase price; (iii) any Lien upon any property or assets existing thereon at the time of the acquisition thereof by Lessee (whether or not the obligations secured thereby are assumed by the Lessee); (iv) the assumption by Lessee of obligations secured by any Lien existing at the time of the acquisition by Lessee of the property or assets subject to such Lien; (v) any extension, renewal or refunding of any Lien permitted by subsections (i), (ii), (iii) or (iv) of this Section 37.2(d) on substantially the same property or assets theretofore subject thereto or any part thereof, securing debt not in excess of the amount outstanding on the date of such extension, renewal or refunding; (vi) any Lien created or assumed by the Lessee in connection with the issuance of debt the interest on which is excludable from gross income of the holder of such debt pursuant to the Code for the purpose of financing, in whole or in part, the acquisition or construction of property or assets to be used by the Lessee; (vii) any governmental Lien, mechanics', materialmen's, carriers' or similar Lien incurred in the ordinary course of business which is not yet due and payable or which is being contested in good faith by appropriate proceedings and any undetermined Lien which is incidental to construction; -43- (viii) the 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; (ix) Liens for taxes and assessments which are (A) for the then current tax period or year, (B) not at the time delinquent or (C) delinquent but the validity of which is being contested at the time by Lessee in good faith; (x) Liens of, or to secure performance of, leases; (xi) any Lien upon, or deposits of, any assets in favor of any surety company or clerk of court for the purpose of obtaining indemnity or stay of judicial proceedings, provided that the aggregate book value of all assets so deposited does not exceed 25% of the consolidated Net Worth of Lessee, as shown on a balance sheet as of the end of the most recent fiscal quarter prior to any such deposit for which a balance sheet is available; (xii) any Lien upon property or assets acquired or sold by Lessee resulting from the exercise of any rights arising out of defaults on receivables; (xiii) any Lien incurred in the ordinary course of business in connection with workmen's compensation or unemployment insurance, or to secure obligations imposed by statute or governmental regulations; (xiv) any Lien upon any property or assets in accordance with customary banking practice to secure any debt incurred by Lessee in connection with the exporting of goods to, or between, or the marketing of goods in, or the importing of goods from, foreign countries; (xv) any Lien upon any additions, improvements, replacements, repairs, fixtures, appurtenances or component parts thereof attaching to or required to be attached to property or assets pursuant to the terms of any mortgage, pledge agreement, security agreement or other similar instrument, creating a Lien upon such property or assets permitted by subdivisions (i) through (xvi) inclusive of this Section 37.2(d); or (xvi) any Lien securing any debt in an amount which, together with all other debt secured by a Lien that is not otherwise permitted by this Section 37.2(d), does not at the time of the incurrence of the debt so secured exceed 12% of Lessee's total Tangible Assets, as shown on a balance sheet as of the end of the most recent fiscal quarter prior to the incurrence of such debt for which a balance sheet is available; -44- provided, however, that nothing contained in this Section 37.2(d) shall be construed to permit any Lien to be placed on the Property, Lessee's interest therein, on Basic Rent or on Additional Rent, except as permitted pursuant to the provisions of Section 8 hereof; (e) Lessee shall not pay or declare any dividend or distribution if: (i) immediately thereafter Funded Debt would exceed 50% of Total Capital; or (ii) immediately thereafter Lessee's Net Worth would be less than $800 million; or (iii) there shall exist either a Default in the payment of Basic Rent or Additional Rent or an Event of Default under any provision of this Lease, or any default shall exist under either of the GECC Leases or under any Material Lease; or (iv) there shall exist a default in the payment of money or any other default under any debt obligation of Lessee having an outstanding principal balance in excess of $20,000,000,00; or (v) such payment or declaration would cause an Event of Default to occur under subsection 20(i) hereof; provided, however, that Lessee may make distributions of funds in excess of its current requirements which would otherwise be prohibited by this covenant if, prior to such distribution, the return of such funds to Lessee is guaranteed in form and substance satisfactory to Lessor; (f) Lessee shall not make any intercompany loans, except that Lessee may make intercompany loans to Tenneco, payable upon demand, out of cash generated from Lessee's operations, subject to the following: (i) Lessee shall have the right to make such loans to Tenneco, without limitation as to amount, so long as Tenneco's long-term debt securities are rated investment grade by both Moody's and Standard & Poors; (ii) if at any time Tenneco's long-term debt securities are not rated as investment grade by either Moody's or Standard & Poors, such loans to Tenneco shall not exceed $25,000,000.00 at any time outstanding; and (iii) in determining Net Worth and Total Capital for the purposes of this Section 37.2, all intercompany loans outstanding at the time of such determination that are in excess of $100,000,000.00 shall be deducted; -45- (g) Lessee shall restrict its short term investments of surplus cash to investments listed in, and in conformance with, Tenneco Corporate Policy TCP 3-104 which is set forth on Exhibit G attached hereto and incorporated herein by this reference ("Permitted Investments") provided, however, that Lessee shall be permitted to revise Policy TCP 3-104 from time to time, but such amendment shall not be effective for purposes of this Lease until Lessee has provided Lessor a copy of such amendment. Lessor hereby expressly reserves the right to object to any specific changes in investment policy provided for in such amendment which Lessor, acting reasonably, finds unacceptable and any specific changes objected to by Lessor shall not be effective hereunder; (h) Lessee shall conduct all intercompany transactions in a manner consistent with all other Tenneco subsidiaries and such intercompany transactions shall at all times be in the best interest of Lessee. Any existing tax sharing agreements between Lessee and Tenneco shall not be revised in any way so as to materially alter the cash flow of Lessee available under such agreement. Any intercompany loan to Tenneco shall bear a market rate of interest; and (i) Lessee hereby covenants to deliver notice to Lessor of the occurrence or existence of any Default or Event of Default hereunder within five business days after the date upon which the principal operating officer of Lessee responsible for Lessee's operations with respect to this Lease determines that a Default or Event of Default has occurred. 37.3 MUTUAL REPRESENTATIONS REGARDING ENFORCEABILITY. (a) Lessor hereby warrants and represents to Lessee that this Lease has been duly executed and delivered by Lessor, and that this Lease constitutes the legal, valid and binding obligation of Lessor, enforceable against Lessor in accordance with its terms. (b) Lessee hereby warrants and represents to Lessor that this Lease has been duly executed and delivered by Lessee, and that this Lease constitutes the legal, valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms. -46- 38. NO CORPORATE MERGER, ETC. Lessee shall not enter into any merger, consolidation or other corporate reorganization with, or sell all or substantially all of its assets to, any other corporation, without the prior written consent of Lessor; provided, however, that Lessee shall be permitted to enter into a merger, consolidation or other reorganization with or a sale of all or substantially all of its assets to, another wholly-owned subsidiary of Tenneco, provided (i) the consolidated or purchasing entity would be permitted to incur an additional $1.00 of debt without breaching the covenant of Lessee contained in Section 37.2(b) hereof and would be permitted to distribute an additional $1.00 without breaching the covenant of Lessee contained in Section 37.2(e) hereof, and (ii) such merger, consolidation, reorganization or sale does not result in the occurrence of an Event of Default under Section 20(i) hereof. 39. DEFINITIONS. As used in this Lease the following terms have the following respective meanings: Additional Rent: as defined in Section 2.3. Adjusted Base Value: the value of the Property determined as of the Commencement Date by multiplying (i) the actual unit measurements of acreage and timber volume for each Category, as determined in the initial Cruise by the Forestry Consultant, by (ii) the Adjustment Amount for each Category set forth on Exhibits D-1, D-2 and D-3 hereto. Administrative Amount: shall be determined as follows: (a) Southern Timberlands: as to any Category of Bare Land, the acreage thereof multiplied by the Adjustment Amount Per Acre for such Category set forth on Exhibits D-1 and D-2 hereto; as to any Category of Pre-Merchantable Planted Pine, the acreage thereof multiplied by the Adjustment Amount Per Acre for such Category set forth on Exhibits D-1 and D-2 hereto; as to any Category of Merchantable Timber, the volume thereof multiplied by the Adjustment Amount Per Cord for such Category set forth on Exhibits D-1 and D-2 hereto; and (b) Northern Timberlands: as to any Category of Bare Land, the acreage thereof multiplied by the Adjustment Amount Per Acre for such Category set forth on Exhibit D-3 hereto; as to any Category or Merchantable Timber, the volume thereof multiplied by the Adjustment Amount Per Cord for such Category set forth on Exhibit D-3 hereto. -47- Agreed Value: the value of the Property as of the Option Closing Date as agreed to by Lessor and Lessee not less than 180 days prior to the end of the Initial Lease Term for purposes of determining the Purchase option Price; provided, however, that if Lessor and Lessee cannot agree on a value for the Property on or before said 180th day, such value shall be determined by independent appraisers in accordance with the provisions of Section 36 of this Lease. Allocated Adjusted Bass Value: for any portion of the Property, a value determined by applying the Adjustment Amounts set forth on Exhibits D-1, D-2 and D-3 to actual unit measurements of acreage and volume by Category, as determined by the Forestry Consultant, for such portion as of the date of calculation. Allocated Annual Rent Payment: for any portion of the Property being sold, taken or released during the Initial Lease Term, an amount determined by multiplying the Allocation Ratio for such portion of the Property times the Annual Rent amount determined in accordance with the provisions of Section 2.1(b)(i) hereof (giving no effect to any previous sale, Taking or release of,any portion of the Property). Allocated Base Value: for any portion of the Property, the amount determined by multiplying the Allocation Ratio for such portion of the Property times the Base Value. Allocated Quarterly Rent Payments: for any portion of the Property being sold, taken or released during the Initial Lease Term, an amount determined by multiplying the Allocation Ratio for such portion of the Property times the Quarterly Rent amount determined in accordance with the provisions of subsections 2,1(a)(i) and 2.1(a)(ii) hereof (giving no effect to any previous sale, Taking or release of any portion of the Property). Allocation Ratio: for any portion of the Property, the ratio of the Allocated Adjusted Base Value of such portion to the Adjusted Base Value. Annual Rent: as defined in paragraph (b) of Section 2.1. Appraised Value: the fair market value of the Property as of the Commencement Date of this Lease as set forth in the Property Appraisal. Assumed Value: $172,893,000.00. Average Life Treasury Rate: the yield as of the date of calculation on the United States Treasury security having a Weighted Average Life to Maturity nearest to the Weighted Average Life to Maturity of the amounts discounted in calculating the Make-Whole Price, in calculating Lessor's final damages under Section 24.3 hereof, in determining whether a lease is a Material Lease or in determining Funded Debt related to a Material Lease, plus 50 basis points. In calculating the Make-Whole Price for any sale, Taking or release of all or any portion of the Property during the First, Second and -48- Third Lease Years, the Average Life Treasury Rate shall be increased by an additional 25 basis points. Bankruptcy Code: means the United States Bankruptcy Code, 11 U,S,C, (S)(S)101-1330, as amended from time to time. Base Value: the lesser of the Appraised Value, the Adjusted Base Value or the Assumed Value. Basic Rent: as defined in Section 2.1(c) hereof. Business Day: means a day other than a Saturday, Sunday or other day on which commercial banks in Chicago or New York are required by law to close. Capital Lease: means and includes at any time any lease of property, real or personal, which in accordance with GAAP would at such time be required to be capitalized on the balance sheet of the Lessee. Capital Lease Obligation: means at any time the capitalized amount of the rental commitment under a Capital Lease which in accordance with GAAP would at such time be required to be shown on a balance sheet. Category: shall mean with respect to the: (a) Southern Timberlands: each of the categories of Land, Merchantable Timber and Pre-Merchantable Planted Pine set forth on Exhibits D-1 and D-2 hereto; and (b) Northern Timberlands: each of the Categories of Land and Merchantable Timber set forth on Exhibit D-3 hereto. Code: the Internal Revenue Code of 1986, as amended from time to time. Commencement Date: as defined in Section 1.1 hereof. Cruise: as defined in Section 34.5. Cumulative Allocation Ratio: the sum of the Allocation Ratios of each and every portion of the Property sold, taken or otherwise released during the Initial Lease Term. Daily Annual Rent: an amount determined by dividing the amount of Annual Rent required to be paid by Lessee in accordance with the provisions of subsection 2.1(b) hereof by the actual number of days in the Lease Year for which such calculation is being made, as may be adjusted from time to time in connection with any sale, Taking or release of all or any portion of the Property. -49- Daily Quarterly Rent: an amount determined by dividing the amount of Quarterly Rent required to be paid by Lessee in accordance with the provisions of subsection 2.1(a) hereof by the actual number of days in the calendar quarter for which such calculation is being made, as may be adjusted from time to time in connection with any sale, Taking or release of all or any portion of the Property. Default: any condition or event which constitutes or which, after notice or lapse of time or both, would constitute an Event of Default. Default Interest: interest calculated at a rate equal to the lesser of: (a) the greater of (i) 12.75% per annum or (ii) two percent (2%) per annum over the rate announced from time to time by The Chase Manhattan Bank, N.A. as its prime interest rate per annum (or, in the event The Chase Manhattan Bank, N,A. shall for any reason discontinue announcing its prime interest rate, the prime interest rate announced by a similar financial institution selected by Lessor), and (b) the highest rate per annum permitted to be charged in accordance with applicable law. Environmental Law: any applicable federal, state or local law, rule or regulation relating to: (a) releases or threatened releases of Hazardous Materials; (b) the manufacture, handling, transport, use, treatment, storage or disposal of Hazardous Materials or materials containing Hazardous Materials; or (c) otherwise relating to pollution of the environment or the protection of human health, including but not limited to, the Resource Conservation and Recovery Act of 1976, 42 U.S.C. (S)(S)6901 et seq., as amended, and the regulations promulgated from time to time thereunder, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C., (S)(S)9601 et seq., as amended, and the regulations promulgated from time to time thereunder, the Hazardous Materials Transportation Act, 42 U.S.C. (S)(S)1801 et seq., as amended, and the regulations promulgated from time to time thereunder, The Clean Air Act, 42 U.S.C. (S)(S)7401 et seq., as amended, and the regulations promulgated from time to time thereunder, The Clean Water Act, 33 U.S.C. (S)(S)1251 at et seq., as amended, and the regulations promulgated from time to time thereunder, and The Toxic Substances Control Act, 15 U.S.C. (S)(S)2601 et seq., as amended, and the regulations promulgated from time to time thereunder. ERISA: the Employee Retirement Income Security Act of 1974, as amended from time to time. Event of Default: as defined in Section 20. Excluded Taxes: In each instance as they apply to the Lessor (but only to the extent they apply to the Lessor): (i) taxes, assessments, fees and charges imposed on, based on, or measured by, net or gross income, gross or net receipts, capital, net worth, franchises or similar items (including without limitation, any minimum taxes or taxes on items of tax preference) other than Rent Taxes or property taxes; (ii) taxes and charges resulting from any sale, assignment or disposition of any interest in this Lease or the Property (other than (A) any property taxes or other taxes recaptured or assessed by any -50- governmental authority under any Forest Tax Law which were previously exempted or deferred, but which became due and payable as a result of such sale, assignment or disposition and (B) any transfer taxes, deed taxes, stamp taxes or similar taxes, in each case to the extent required to be paid by Lessee pursuant to the provisions of this Lease); (iii) capital gains taxes, excess profits taxes, franchise taxes, taxes on doing business and other similar taxes other than Rent Taxes or property taxes; (iv) foreign taxes; (v) taxes, assessments, fees and charges imposed by any jurisdiction that would not have been imposed but for activities of Lessor or its constituent joint venturers unrelated to this Lease and the Property or which are attributable to other activities, operations and assets of the Lessor or its constituent joint venturers; (vi) any property taxes or other taxes recaptured or assessed by any governmental authority under any Forest Tax Law which are required to be paid by Lessor in accordance with the provisions of Section 43 hereof; and (vii) any amounts specifically assessed in lieu of any of the aforementioned taxes, assessments, fees or charges, and interest, additions and penalties in respect thereof. Extension Period: a period of three years commencing January 1, 2003 and expiring December 31, 2005, during which the Lessee shall continue to lease the Property from Lessor under the terms contained herein, such extension period to (i) occur only in the event Lessee for any reason does not exercise its Purchase Option and (ii) terminate with respect to any portion of the Property upon the sale of such portion by the Lessor. Fixed Charges: all interest, capitalized interest, lease payments (whether operating or capital and including payments required under this Lease)r and amortization of debt discount required to be paid or to be incurred by Lessee in accordance with GAAP or any such items the payment or collection of which has been guaranteed by Lessee. Forest Tax Laws: collectively and severally (i) the Commercial Forest Act, Michigan Compiled Laws Annotated (S)(S)320.301-320.314; (ii) the Forestry Reserve Act, Michigan Compiled Laws Annotated (S)320.104; (iii) the Private Forestry Act, Michigan Compiled Laws Annotated (S)(S)320.271-320.281; (iv) the Forest Cropland Law, Wisconsin Statutes (S)(S)77.01-77.14; (v) the Woodland Tax Law, Wisconsin Statutes (S)77.16; (vi) the Managed Forest Land Law, Wisconsin Statutes (S)(S)77.80-77.87; (vii) Florida Statutes (S)193.461 (Agricultural Lands; classification and assessment); and (viii) any and all similar laws now enacted or which may be enacted in the future under the laws of the States of Florida, Georgia, Wisconsin or Michigan which grant tax exemptions, deferrals or reductions with respect to property taxes. Forestry Consultant: as defined in Section 34.4. Funded Debt: means without duplication, whether incurred directly, assumed or guaranteed by Lessee or secured by a Lien permitted under Section 37.2(d) hereof, the following: (i) all indebtedness for monies borrowed which by its terms matures more than one year from the date as of which any calculation of Funded Debt is -51- made, (ii) any indebtedness for monies borrowed maturing within one year from such date which is renewable at the option of the obligor beyond one year from such date, including any indebtedness for monies borrowed renewable or extendable (whether or not theretofore renewed or extended) under, or payable from the proceeds of other indebtedness for monies borrowed which may be incurred pursuant to the provisions of, any revolving credit agreement or other similar agreement but excluding all payments in respect of any indebtedness for monies borrowed otherwise covered by this definition (whether installment, serial maturity, sinking fund or otherwise) which are required to be made less than one year after any date of determination of Funded Debt, (iii) all Capital Lease Obligations, and (iv) the present value of all remaining payment obligations (calculated using a discount rate equal to the Average Life Treasury Rate) under any operating lease which is a Material Lease. GAAP: means such accounting principles as conform at the time to the generally accepted accounting principles announced by the Financial Accounting Standards Board or its equivalent. GECC Leases: means the leases of even date herewith between Lessee and certain lessors affiliated with General Electric Capital Corporation which relate to papermills located in Tomahawk, Wisconsin, and Valdosta, Georgia. Hazardous Materials: any material, waste, contaminate or other substance which is defined and/or regulated as hazardous or toxic (or as a pollutant under any Environmental Law enacted by the State of Florida) under or pursuant to any applicable Environmental Law. Impositions: all taxes, assessments (including, without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the term hereof), ground rents, water, sewer or similar rents, rates and charges, excises, levies, license fees, permit fees, inspection fees and other authorization fees and similar charges, in each case, whether general or special, ordinary or extraordinary, of every character (including all interest, additions and penalties thereon), which at any time during or in respect of the term hereof are assessed, levied, confirmed or imposed on or in respect of or become a Lien upon (a) the Property or any part thereof, or any rent therefrom (whether under this Lease or any sublease) or any estate, right or interest therein, or (b) any occupancy, use or possession of or activity conducted on the Property or any part thereof, The term "Impositions" as used herein shall specifically include all Rent Taxes and shall specifically exclude all Excluded Taxes. Improvements: as defined in paragraph (b) of Section 1. Initial Lease Term: the First through the Twelfth Lease Years, inclusive. -52- Insurance Requirements: all terms of any insurance policy covering or applicable to the Property or any part thereof, all requirements of the issuer of any such policy, and the terms of Section 15 hereof. Land: as defined in Paragraph (a) of Section 1. Lease: this Lease, as at the time amended, modified or supplemented. Lease Term: the Initial Lease Term and the Extension Period unless earlier terminated in accordance with the provisions of this Lease. Lease Year: (a) The Lease Years during the Initial Lease Term hereunder shall be as follows: First Lease Year Commencement Date through December 31, 1991 Second Lease Year January 1, 1992 through December 31, 1992 Third Lease Year January 1, 1993 through December 31, 1993 Fourth Lease Year January 1, 1994 through December 31, 1994 Fifth Lease Year January 1, 1995 through December 31, 1995 Sixth Lease Year January 1, 1996 through December 31, 1996 Seventh Lease Year January 1, 1997 through December 31, 1997 Eighth Lease Year January 1, 1998 through December 31, 1998 Ninth Lease Year January 1, 1999 through December 31, 1999 Tenth Lease Year January 1, 2000 through December 31, 2000 Eleventh Lease Year January 1, 2001 through December 31, 2001 Twelfth Lease Year January 1, 2002 through December 31, 2002 (b) The Lease Years during the Extension Period hereunder shall be as follows: Thirteenth Lease Year January 1, 2003 through December 31, 2003 Fourteenth Lease Year January 1, 2004 through December 31, 2004 Fifteenth Lease Year January 1, 2005 through December 31, 2005 -53- Legal Requirements: all laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, franchises, authorizations, directions and requirements of all governments, departments commissions, boards, courts, authorities, agencies, officials and officers, ordinary or extraordinary, which now or at any time hereafter may be applicable to the Property or any part thereof, or any of the adjoining sidewalks, curbs, vaults and vault space, if any, streets or ways, or any use or condition of the Property or any part thereof, including, but not limited to, all federal, state and local Environmental Laws. Lessees's Equipment: all of the following which are owned or held for use by Lessee: (i) all fixtures, machinery, apparatus, furniture, furnishings and other equipment and (ii) all temporary or auxiliary structures installed by Lessee in or about the Property or any part thereof. Lien: any mortgage, deed of trust, deed to secure debt, pledge, security interest, lien or other encumbrance. Make-Whole Price: With respect to the sale, Taking or release of any portion of the Property, the sum of the values calculated in (i), (ii) and (iii) below. The values in (i), (ii) and (iii) below shall be obtained by discounting at the Average Life Treasury Rate to the date of such sale, Taking or release the following amounts: (i) All Allocated Quarterly Rent Payments from each and every date of the Initial Lease Term following the date of such sale, Taking or release on which an installment of Quarterly Rent would normally be due if no such sale, Taking or release had occurred; (ii) All Allocated Annual Rent Payments from each and every date of the Initial Lease Term following the date of such sale, Taking or release on which an installment of Annual Rent would normally be due if no such sale, Taking or release had occurred; and (iii) the excess of Allocated Base Value with respect to the portion of the Property being sold, taken or released over the sum of the Allocated Annual Rent Payments with respect to the portion of the Property being sold, taken or released which would normally have been due during the Initial Lease Term if no such sale, Taking or release had occurred, from the twelfth anniversary of this Lease. Material Lease: any lease to which Lessee is a party, whether capital or operating in nature, under which the present value of all remaining payment obligations, calculated at a discount rate equal to the Average Life Treasury Rate, is greater than or equal to $20,000,000.00. Merchantable Timber: Pine Pulpwood, Hardwood Pulpwood, Pine Sawtimber, Hardwood Sawtimber, Cypress Pulpwood, Cypress Sawtimber, Conifer -54- Pulpwood and Conifer Sawtimber, as determined using the timber specifications, utilization limits and calculation standards set forth on Exhibit E attached hereto. Mineral Rights: as defined in Section 5(b) hereof. Minimum Return Price: with respect to the sale, Taking or release of all or any portion of the Property, the greater of (i) or (ii) calculated as follows: (i) the Allocated Base Value for the portion of the Property being sold or taken plus 80% of the excess, if any, of the gross sales price of, net award from or other proceeds from the portion of the Property to be sold, taken or released over the Allocated Base Value for such portion. During the Initial Lease Term only, such excess may be net of (a) Operating Expenses attributable to such portion of the Property, but only to the extent of such excess, and (b) the sum of Allocated Annual Rent Payments previously made with respect to the portion of the Property being sold, taken or released. (ii) the excess of (a) the value obtained by compounding quarterly the Allocated Base Value of the portion of the Property to be sold, taken or released at the applicable Minimum Return Rate from the Commencement Date of this Lease to the date of such sale, Taking or release over (b) the sum of the values obtained by compounding quarterly at the applicable Minimum Return Rate each Allocated Quarterly Rent Payment and compounding annually at the applicable Minimum Return Rate each Allocated Annual Rent Payment from the date each such payment was actually made to the date of such sale, Taking or release. Minimum Return Rate: 15% per annum; 13% per annum for sales of NonStrategic Lands. Moody's: means Moody's Investors Service, Inc. Net Worth: the excess of Lessee's total assets over Lessee's total liabilities as determined in accordance with GAAP. Non-Strategic Lands: not more than 30,000 acres of the Property identified by Lessee and approved by Lessor as being non-strategic which may be sold during the Lease Term in accordance with the provisions of Section 35.2. Northern Timberlands: those portions of the Property located in the States of Michigan and Wisconsin. Operating Expenses: all reasonable and customary costs and expenses incurred by Lessee during the Initial Lease Term in connection with the care and -55- maintenance of the Property, including without limitation, site preparation expenses, planting expenses and boundary and road maintenance expenses, but specifically excluding real property taxes, such expenses not to exceed the lesser of (i) $3.00 per acre of the Property per Lease Year (partial Lease Years to be prorated on a per them basis), or (ii) the excess, if any, of the Agreed Value over the Adjusted Base Value. Option Closing Date: as defined in Section 35.1 hereof. Permitted Exceptions: as defined in paragraph (a) of Section 1. Person: an individual, a corporation, an association, a partnership, a joint venture, an organization, or other business entity, or a governmental or political unit or agency. Planted Pine: growing pine trees on the Land which have been planted in accordance with standards and practices followed generally by pulp and paper companies in planting pine on their own pine-growing lands in the same area. Pre-Merchantable Planted Trees: all growing trees on the Land which have been planted by Lessee in accordance with the provisions of Sections 34.1(f) and 34.1(g) and all pre-merchantable planted pine trees otherwise located on the Southern Timberlands and identified in accordance with the provisions and specifications of Exhibit E attached hereto. Pre-Tax Cash Flow: Income before Federal income taxes for Lessee and its consolidated subsidiaries determined in accordance with GAAP, plus Fixed Charges and any and all depreciation, depletion, amortization and other non-cash items charged against income (including deferred Federal income taxes), less extraordinary non-cash gains resulting from the disposition of real or personal property by Lessee, less any and all capital expenditures. Projected Growth Report: as defined in Section 34.5 hereof. Property: as defined in Section 1. Property Appraisal: as defined in Section 34.4(b)(ii) hereof. Purchase Option Price: an amount equal to the sum of the following amounts: (a) the Remaining Base Value less the excess of(i) the sum of all installments of Annual Rent paid by Lessee during the Initial Lease Term prior to the exercise of the Purchase Option over (ii) the sum of all Allocated Annual Rent Payments associated with sales of portions of the Property sold, taken or released prior to exercise of the Purchase Option; -56- (b) 80% of the excess, if any, of the Agreed Value over the Remaining Base Value (such excess to be net of Operating Expenses attributable to the remaining unsold Property at the time the Purchase option is exercised, but only to the extent of such excess); and (c) the amount of any and all Basic Rent and Additional Rent owed to Lessor by Lessee as of the Option Closing Date. Quarterly Rent: as defined in Section 2.1(a) hereof. Related Entity: a Person (1) which directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, Lessee, (2) which beneficially owns or holds 5% or more of any class of the Voting Stock of Lessee, (3) 5% of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by Lessee or a Subsidiary or (4) which is a Subsidiary. The term "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 the ownership of voting securities, by contract or otherwise. Remaining Base Value: the excess, if any, of the Base Value over the product of the Base Value times the Cumulative Allocation Ratio. Rent Taxes: any and all rental, sales and use taxes or other similar taxes levied or imposed by any city, county or state or other governmental body having authority, including, without limitation, taxes imposed under (i) Florida Statutes (S)212.031 and (ii) Michigan Compiled Laws Annotated (S)208.1 et seq., (the "SBTA"); provided, however, that the SBTA shall be included within the definition of Rent Taxes only to the extent of the lesser of (x) the actual tax imposed on Lessor by the SBTA or (y)the deemed tax imposed on Lessor by the SBTA computed with the following modifications and limitations: (a) All income and revenue items of Lessor (including income and revenues from the sale, assignment or disposition of any interest in or portion of this Lease or the Property) other than Basic Rent shall be excluded from the computation of the SBTA; (b) All expenditures and other costs of Lessor resulting from activities associated with this Lease which are deductible in calculating the SBTA shall be deducted; (c) All adjustments to the "tax base" and "adjusted tax base" (as such terms are defined in the SBTA) of Lessor made in computing the SBTA shall be excluded from such computation if such adjustments relate to activities of Lessor which are not associated with this Lease or such adjustments increase the "tax base" or -57- "adjusted tax base" by items which are Excluded Taxes or otherwise not reimbursable by Lessee under this Lease. (d) All assets, revenues and expenditures of Lessor from activities which are not associated with this Lease shall be excluded from any allocation or apportionment factors of Lessor used in computing the SBTA; (e) All exemptions and credits available to Lessor with respect to the SBTA shall be included in the computation of the SBTA in amounts, respectively, which bear the same ratio to the sum of such exemptions and credits, respectively, as the ratio of Basic Rent bears to the total income of Lessor; and that all requests by Lessor for payment or reimbursement of tax imposed by the SBTA, under this Lease, shall be accompanied by a true copy of Lessor's actual SBTA return and a detailed computation of the deemed tax imposed by the SBTA, with the modifications and limitations set forth in provisions (a) through (e) above. Southern Timberlands: those portions of the Property located in the States of Florida and Georgia. Standard & Poors: means Standard & Poor's Corporation. Subsidiary: (a) any corporation at least a majority of whose outstanding stock having ordinary voting power for the election of a majority of the members of the board of directors (or other governing body) of such corporation (other than stock having such power only by reason of the happening of a contingency) shall at the time be owned by the Lessee and/or one or more Subsidiaries of the Lessee, and (b) any partnership or joint venture in which Lessee, either alone or in conjunction with one or more of its subsidiaries, shall at the time own more than a 50% interest. Taking: a taking during the term hereof of all or any part of the Property, or any leasehold or other interest therein or right accruing thereto, as the result of the exercise of the right of condemnation or eminent domain or a sale in lieu or in anticipation of such exercise. Tangible Assets: Lessee's total assets as determined in accordance with GAAP excluding (i) any goodwill shown on Lessee's balance sheet, (ii) any prepaid expenses, and (iii) any and all intangible assets owned by Lessee. Timber: as defined in paragraph (c) of Section 1. Timberlands: collectively, the Land, Timber and Improvements as defined in Section I hereof. Total Capital: Funded Debt plus Net Worth. -58- Unavoidable Delays: delays due to strikes, acts of God, governmental restrictions, enemy action, riot, civil commotion, fire, unavoidable casualty or other causes beyond the control of Lessee, provided that no delay shall be deemed an Unavoidable Delay if the Property or any part thereof or any interest therein, the Basic Rent or Additional Rent would be in any danger of being sold, forfeited, lost or interfered with, or if Lessor or Lessee would be in danger of incurring any civil or criminal liability for failure to perform the required act. Lack of funds shall not be deemed a cause beyond the control of Lessee. Voting Stock: securities of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). Weighted Average Life to Maturity: means (a) with respect to any United States Treasury security, the period from the date of determination to the date of maturity of such security (provided that only securities whose entire principal amount matures at one time and whose maturity cannot be accelerated by the issuer are to be considered), (b) with respect to this Lease, as of the date of determination, the number of years (rounded to the nearest one-twelfth) obtained by dividing the then Remaining Dollar-Years of this Lease by the Allocated Base Value, and (c) with respect to any lease other than this Lease, as of the date of determination, the number of years (rounded to the nearest one-twelfth) obtained by dividing the then Remaining Dollar-Years of such lease by the sum of all remaining payments to be made by Lessee to the lessor during the remaining term of such lease. For the purposes of this definition, "Remaining Dollar-Years" means the sum of the amounts obtained by multiplying each Owed Amount by the number of years (calculated to the nearest one-twelfth) which will elapse between the time of such determination and the date such Owed Amount would normally be due. For purposes of this definition, "Owed Amount" means, with respect to a sale, Taking or release of a portion of the Property, (x) each Allocated Annual Rent Payment from the date of such sale, Taking or release to the end of the Initial Lease Term, and (y) the excess of the Allocated Base Value with respect to the portion of the Property being sold, taken or released over the sum of (x) above (such excess deemed to be normally due on the 12th anniversary of this Lease), and with respect to any lease other than this Lease, any payment required to be made by Lessee to the lessor thereunder. 40. NOTICES, ETC. All notices and other communications hereunder shall be in writing and shall be sent by confirmed telecopy transmission and by first class registered or certified mail, postage prepaid, (a) if to Lessee. Packaging Corporation of America 1603 Orrington Avenue Evanston, Illinois 60204 Attention: Robert D. Harlow Senior Vice President Telecopy: (708) 570-3044 -59- with a copy to: Tenneco Inc. Tenneco Building P.O. Box 2511 Houston, Texas 77252-2511 Attention: Corporate Secretary Telecopy: (713) 757-3581 or at such other address as Lessee shall have furnished in writing to Lessor, or (b) if to Lessor. Four States Timber Venture c/o John Hancock Mutual Life Insurance Company One John Hancock Place P.O. Box 111 T-44 Boston, Massachusetts 02117 Attention: Ken Hines, Jr. Telecopy: (617) 572-1165 with copies to: John Hancock Mutual Life Insurance Company Forest Industry Financing Suite 101 12 Siebald Street Statesboro, Georgia 30458 Attention: Amos M. Connell Telecopy: (912) 764-5047 Metropolitan Life Insurance Company Suite 700 - 8717 West 110th Street Overland Park, Kansas 66210-2101 Attention: Vice President Telecopy: (913) 661-2254 Agricultural Investments East Central Branch Office Metropolitan Life Insurance Company 2230 Chester Boulevard Richmond, Indiana 47374-1288 Attention: Manager Telecopy: (913) 661-2254 Metropolitan Life Insurance Company 500 Park Boulevard - Suite 545 Itasca, Illinois 60143-1267 Attention: Associate General Counsel -60- Telecopy: (708) 250-8098 Sutherland, Asbill & Brennan 999 Peachtree Street, N.E. Atlanta, Georgia 30309-3996 Attention: Haynes R. Roberts, Esq. Telecopy: (404) 853-8806 or at such other address as Lessor shall have furnished in writing to Lessee. Each notice will be deemed delivered upon the earlier of the confirmed facsimile transmission of such notice or three days after deposit of such notice in the United States Mail. 41. MISCELLANEOUS (a) This Lease may be changed, waived, discharged, or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. It is the intention of the parties hereto to create an estate for years in the Property and to create the relationship of Lessor and Lessee and no other relationship whatsoever and nothing contained herein shall be construed to create between Lessor and Lessee any association, partnership or joint venture or the relationship of debtor and creditor or of principal and agent for any purpose whatsoever. This Lease shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto. The headings in this Lease are for purposes of reference only and shall not limit or define the meaning hereof. This Lease may be executed in any number of counterparts, each of which is an original, but all of which shall constitute one instrument. Time is of the essence with respect to each and every covenant, requirement and obligation on Lessee's part to be complied with or performed hereunder. (b) The terms and provisions this Lease shall be governed by the laws of the State of Georgia except for those matters which relate to enforcement against any of the Property, which matters shall be governed by the applicable laws of the state or states in which the Property is located. 42. PARTITION OF LEASE In the event the Persons who constitute the joint venturers of Lessor (hereinafter referred to collectively as the "Venturers" and individually as a "Venturer") shall at any time divide the Property between or among themselves in connection with a termination of Lessor, then such Venturers shall have the right to divide this Lease into two or more new, separate leases (hereinafter referred to as the "New Leases"), each of which shall be between a Venturer (or its successors, assigns or designees), as lessor, and Lessee, as lessee, shall cover and relate to the portion of the Property conveyed to such Venturer in connection with such division (and Exhibit A thereto shall describe only such portion of the Property), and shall be in the same form and contain the same terms and provisions as this Lease, except as follows: (a) each of the New Leases shall provide that in the event Lessee exercises the Purchase option under any of the New Leases, Lessee must exercise the Purchase Option under all of the New Leases, and the closing of the purchase by Lessee pursuant to Section 35.1 of each New Lease shall be contingent upon the closing of all purchases by Lessee pursuant to Section 35.1 of all of the New Leases; (b) each of the New Leases shall provide that -61- the occurrence of any Event of Default under any of the New Leases shall constitute an Event of Default under all of the New Leases; and (c) each of the following figures in this Lease shall be changed in each of the New Leases to the figure representing the pro rata share thereof of the Venturer which is the lessor thereunder: (i) the figure "$1,192,366.00" appearing in Section 2.1(b)(i); (ii) the figure "$5,000,000.00" appearing in Section 5(a); (iii) the figures "80,000" and "27,000" appearing in Section 35.2(b); (iv) the figure "$172,893,000.00" appearing in the definition of "Assumed Value" in Section 39; and (v) the figure "30,000" appearing in the definition of "Non-Strategic Lands" in Section 39. Lessee agrees to cooperate with the Venturers by executing and delivering the New Leases and taking such other actions as are reasonably necessary or desirable to accomplish such division, provided that the Venturers shall be responsible for paying all costs and expenses associated with or resulting from such division and the preparation and recordation of the New Leases. 43. FOREST TAX LAWS. Notwithstanding anything contained in this Lease to the contrary, the following agreements are made with respect to taxes imposed by and other matters associated with Forest Tax Laws: (a) Lessee shall at all times during the Lease Term comply with such requirements as are necessary to maintain and preserve the tax status and accompanying tax benefits of all portions of the Property currently enrolled in, listed or designated under any of the Forest Tax Laws as of the Commencement Date of this Lease, Lessee may, at its option, elect to subject additional portions of the Property to the provisions of any Forest Tax Law, provided such subjection does not unreasonably interfere with commercial forestry operations on the Property. Lessor agrees that it will cooperate with Lessee in complying with the provisions of the Forest Tax Laws. (b) Lessee shall pay to the appropriate governmental authorities any and all assessments or charges which may be imposed under any Forest Tax Law with respect to all or any portion of the Property, as a result of the transfer of the Property to Lessor pursuant to the Purchase Agreement, any transfer of all or any portion of the Property in accordance with Section 35.2(b) hereof (which cost may be deducted from the gross proceeds of such sale in accordance with the provisions of said Section 35.2(b)), any Taking of all or any portion of the Property (which cost may be deducted from the gross amount of any awards, payments or proceeds received in connection with such Taking in accordance with the provisions of Section 16 hereof) or as a result of Lessee's failure to comply with the provisions of any Forest Tax Law. (c) Lessor shall pay all assessments or charges which may be imposed under any Forest Tax Law relating to any transfer of all or any portion of the Property in accordance with Section 35.2(a) hereof, any mineral lease or mining activity entered into or performed by or on behalf of Lessor with respect to all or any portion of the Property or any other affirmative action taken by Lessor, without the express written consent of Lessee which changes the tax status of all or any portion of the Property under any Forest Tax Law. -62- (d) Lessee shall be responsible for preparing and filing any notices or certificates required to be filed under any Forest Tax Law in connection with the sale of the Property by Lessor to Lessee pursuant to the provisions of Section 35.1 hereof, and Lessee shall be responsible for payment of any charges or assessments imposed under any Forest Tax Law in connection with such sale; provided, however, Lessor agrees that it will cooperate with Lessee in preparing, executing and filing such notices or certificates so as to avoid, to the extent possible, the imposition of charges or assessments under any Forest Tax Law in connection with such sale. (SIGNATURES BEGIN ON FOLLOWING PAGE] -63- IN WITNESS WHEREOF, Lessor and Lessee have caused this lease to be executed and their seals to be hereunto affixed and attested by their officers thereunto duly authorized. LESSOR: FOUR STATES TIMBER VENTURE, a Georgia Joint Venture, by both of its joint venturers Signed, sealed and By: John Hancock Mutual Life delivered in the presence Insurance Company of: By: /s/ Wm. R. Gordon ----------------------------- /s/ Valerie Van Der Meer Name: ------------------------- ------------------------ Name: Title: ------------------------- ------------------------ Witness Attest: /s/ Barry P. Sanboln ---------------------- /s/ Neil Able Name: ------------------------- ------------------------ Name: Title: ------------------------- ------------------------ Witness [CORPORATE SEAL] - - ----------------------------- Name: ------------------------- Notary Public [NOTARIAL SEAL] Signed, sealed and By: Metropolitan Life Insurance delivered in the presence Company of: By: /s/ Gerald J. Hoenig ------------------------ /s/ Kathleen Curdy Name: ------------------------- ------------------------ Name: Title: ------------------------- ------------------------ Witness /s/ Sandra R. Nauman Name: /s/ Nancy J. Hammer ------------------------- ------------------------ Name: ------------------------ Title: Witness ------------------------ [CORPORATE SEAL] -64- /s/ Merrit J. Massergill ------------------------- Name: ------------------------- Notary Public [NOTARIAL SEAL] Signed, sealed and LESSEE: delivered in the presence of: PACKAGING CORPORATION OF AMERICA /s/ M. W. Meyer ------------------------- Name: By: /s/ R. D. Harlow ------------------------- ------------------------ Witness: Name: ------------------------ Title: ------------------------ /s/ W. G. Collins ------------------------- Name: Attest: /s/ Karl A. Stewart ------------------------- ------------------------ Witness Name: ------------------------ /s/ Merritt J. Massergill Title: ------------------------- ------------------------ Name: ------------------------ [CORPORATE SEAL] Notary Public [NOTARIAL SEAL] -65- FIRST, SECOND AND THIRD AMENDMENTS TO TIMBERLAND LEASE BY AND BETWEEN FOUR STATES TIMBER VENTURE (as Lessor) and PACKAGING CORPORATION OF AMERICA (As Lessee) FIRST AMENDMENT TO TIMBERLAND LEASE ---------------- THIS FIRST AMENDMENT TO TIMBERLAND LEASE, dated as of December 31, 1991, made by and between FOUR STATES TIMBER VENTURE, a joint venture formed under the laws of the State of Georgia ("Lessor"), having its principal office and place of business at One John Hancock Place, Boston, Massachusetts 02117, and PACKAGING CORPORATION OF AMERICA, a Delaware corporation ("Lessee"), having its principal office and place of business in Evanston, Illinois. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Lessor and Lessee entered into that certain Timberland Lease dated January 31, 1991 (the "Lease"), whereby Lessor leased to Lessee approximately 531,000 acres of timberland in the States of Florida, Georgia, Michigan and Wisconsin; and WHEREAS, Lessor and Lessee now desire to amend the terms and provisions of the Lease in certain respects. NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of mutual agreements, covenants and provisions hereinafter set forth and set forth in the Lease, the parties hereto hereby agree as follows: 1. Section 2.1(a)(i) of the Lease is hereby deleted in its entirety and the following provision is inserted in lieu thereof: (i) Each installment of Quarterly Rent paid during the First Lease Year shall be in the amount of $4,646,499.00; provided, however, that the installment of Quarterly Rent paid by Lessee on the Commencement Date of the Lease was reduced by $1,497,205.23 to reflect the fact that the Term of the Lease did not begin on the first day of the Calendar Quarter. 2. Section 2.1(b)(i) of the Lease is hereby deleted in its entirety and the following provision is inserted in lieu thereof: (i) In addition to the Quarterly Rent provided for in subsection 2.1(a) above, Lessee shall pay to Lessor, in arrears, commencing January 1, 1992, and continuing on the first day of each Lease Year thereafter during the Initial Lease Term, an installment of rent (the "Annual Rent") in the amount of $1,065,748.00; provided, however, that the Annual Rent Payment for the First Lease Year shall be in the amount of $976,935.67. 3. Section 34.1(g) of the Lease is hereby amended by deleting the parenthetical "(except for Lowland Brush (spruce) described on Exhibit D-3 hereof)" from the 6th and 7th lines thereof and by inserting in lieu thereof the parenthetical "(except for Lowland Brush (spruce) as defined in Article III of Exhibit E)". 4. Section 34.2 of the Lease is hereby amended by adding the following subsection 34.2(e) thereto: (e) Approved Specia1 Cutting. In addition to the Merchantable Timber which Lessee is permitted to cut and remove under the preceding provisions of this section 34.2 of this Lease, Lessee may from time to time cut and remove volumes of Timber from the Land, but only with the prior written approval of Lessor and only in strict accordance with the following provisions: (i) Request Approval. In the event Lessee desires to cut and remove additional Timber under this section 34.2(e), Lessee shall send to Lessor a written request which shall identify the location and acreage of the portion of the Land from which Lessee proposes to cut such Timber, the estimated volume of Timber to be cut therefrom, and the current per cord market value of such Timber. Such request shall also specify timber marking specifications and type of silvicultural treatment. Lessee shall also furnish such other information as Lessor may require. Lessor shall have the right, in its sole and absolute discretion, to deny such request or approve such request in whole or in part and subject to such conditions, limitations and requirements as Lessor may specify. (ii) Conduct of Cutting. Lessee shall cut no Timber under this section 34.2(e) unless (A) Lessee shall have received Lessor's written approval thereof, (B) Lessee shall comply with all conditions, limitations and requirements as may be specified by Lessor, and (C) Lessor shall have -2- approved the per cord market value for such Timber. All Timber cut or removed from any portion of the Land identified by Lessee in a request made pursuant to paragraph (i) of this section 34.2(e) and approved by Lessor shall be subject to all provisions of this section 34.2(e), and no such Timber shall be included in the volumes of Timber cut or removed pursuant to sections 34.2(a) or (b) hereof. (iii) Reporting; Payments; Special Cutting Account. On or before the tenth (10th) day of each calendar month, Lessee shall furnish to Lessor a written report showing the volume of Timber cut or removed pursuant to this section 34.2(e) during the preceding calendar month and the market value of such Timber determined by multiplying the number of cords thereof by the per cord market value approved by Lessor. Lessee shall also furnish to Lessor a calculation of the Administrative Amount for the Timber cut and such other information as Lessor may require. Lessee shall deliver to Lessor with each such report a payment equal to the greater of the market value of such Timber as determined as aforesaid or the Administrative Amount for such Timber. Each such payment shall be deposited by Lessor into one or more interest-bearing accounts with national banks (hereinafter collectively called the "Special Cutting Account"). Lessor shall not be responsible for earning any particular rate or amount of interest on the funds deposited in the Special Cutting Account. Lessor shall withdraw and disburse said funds as hereinafter provided. (iv) Application of Funds. Upon the expiration of the Lease Term, all funds in the Special Cutting Account, including all interest earned, shall be withdrawn by Lessor and shall be retained by and be the property of Lessor, provided that if Lessee exercises its Purchase Option under section 35.1 of this Lease, then the amount of such funds shall be applied as a credit against the Purchase Option Price. (v) Application of Funds Upon Default. Notwithstanding any provision of this Lease to the contrary, upon the occurrence of any Default under -3- this Lease, Lessor shall have the right to withdraw any and all funds then on deposit in the Special Cutting Account and to apply said funds in payment of any amount then due from Lessee under any provision of this Lease or in reimbursement of any sums paid by Lessor or any costs or expenses incurred by Lessor on behalf of Lessee under this Lease. Notwithstanding any provision of this Lease to the contrary, in the event of any expiration, termination or repossession referred to in section 24 of this Lease, Lessor shall have the right to withdraw any and all funds then on deposit in the Special Cutting Account and to apply said funds in payment of any damages payable to Lessor under Section 24. 5. Section 35.2(d) of the Lease is hereby amended to provide that, notwithstanding the provisions of said section, any and all cash proceeds received in connection with a proposed sale to Timothy P. Gutsch of the "Pine Lake Nursery Parcel", a 76.58 acre parcel located in Oneida County, Wisconsin, shall be paid to and retained by Lessor. Lessee shall be entitled to receive and retain any and all red pine seedlings which Timothy P. Gutsch may be obligated to provide as additional consideration for such proposed sale. 6. Section 35.3 of the Lease is hereby amended by deleting the term "Adjusted Base Value" from the 8th line thereof and by inserting in lieu thereof the term "Base Value". 7. Section 39 of the Lease is hereby amended by: (a) deleting the definition of "Adjusted Base Value" in its entirety; (b) redefining the term "Agreed Value" as follows: AGREED VALUE: the sum of (i) the value of the Property as of the Option Closing Date as agreed to by Lessor and Lessee not less than 180 days prior to the end of the Initial Lease Term; provided, however, that if Lessor and Lessee cannot agree on a value for the Property on or before said 180th day, such value shall be determined by independent appraisers in accordance with the provisions of Section 36 of this Lease, and (ii) the amount of funds, including all interest earned, in the Special Cutting Account -4- maintained by Lessor pursuant to the provisions of Section 34.2(e) of this Lease as of the Option Closing Date. (c) deleting the definition of "Allocated Adjusted Base Value" in its entirety; (d) redefining the term "Allocated Base Value" as follows: ALLOCATED BASE VALUE: for any portion of the Property, a value determined by applying the "Adjustment Amounts" set forth on Exhibits D-1, D-2 and D-3 to actual unit measurements of acreage and volume by Category, as determined by the Forestry Consultant, for such portion as of the date of calculation; (e) redefining the term "Allocation Ratio" as follows: ALLOCATION RATIO: for any portion of the Property, the ratio of the Allocated Base Value of such portion to the Base Value; (f) deleting the definition of "Assumed Value" in its entirety; (g) redefining the term "Base Value" as follows: BASE VALUE: $172,893,000.00, determined by multiplying the Adjustment Amounts set forth on Exhibits D-1, D-2 and D-3 by the actual unit measurements of acreage and volume by Category, as determined for the entire Property by the Forestry Consultant in its initial Cruise; and (h) deleting the term "Adjusted Base Value" from the definition of "Operating Expenses" and by inserting in lieu thereof the term "Base Value". 8. Section 42 of the Lease is hereby amended by (i) deleting the number "$1,192,366.00" from line 27 thereof and inserting in lieu thereof the number "$1,065,748.00", and (ii) deleting the term "Assumed Value" from the 30th and 31st lines thereof and by inserting in lieu the term "Base Value". 9. The Lease is hereby amended by deleting Exhibits D-1, D-2, D-3 and E which are attached to the Lease in their -5- entireties and by inserting in lieu thereof Exhibits D-1, D-2, D-3 and E which are attached hereto and made a part hereof by this reference. Notwithstanding the modification of Exhibit E effected hereby, the timber classifications, specifications, utilization limits and calculation standards originally set forth on Exhibit E to the Lease shall be used for purposes of determining Lessee's timber cutting privileges under Section 34.2 of the Lease during the First Lease Year. Thereafter, the timber classifications, utilization limits and calculation standards set forth on Exhibit E to this agreement shall be used for all purposes under the Lease. 10. Except as amended hereby, the terms and provisions of the Lease shall remain in full force and effect, and Lessor and Lessee hereby ratify and reaffirm the terms and provisions of the Lease, as amended hereby. IN WITNESS WHEREOF, Lessor and Lessee, acting through their duly elected and authorized officers, have caused this First Amendment to Timberland Lease to be executed under seal as of the day and year first above written. LESSOR: FOUR STATES TIMBER VENTURE, a Georgia Joint Venture, by both of its joint venturers Signed, sealed and By: John Hancock Mutual Life delivered in the presence Insurance Company of: By: /s/ Paul A. Meissner, Jr. /s/ Neil E. Auble -------------------------------- - - --------------------------- Name: Paul A. Meissner, Jr. Name: Neil E. Auble Title: Assistant Treasurer Witness Attest:/s/ James H. Young /s/ Susan A. Chase ---------------------------- - - --------------------------- Name: James H. Young Name: Susan A. Chase Title: Assistant Secretary Witness [CORPORATE SEAL] /s/ Marie C. O'Brien - - --------------------------- Name: Marie C. O'Brien Notary Public [NOTARIAL SEAL] -6- Signed, sealed and By: Metropolitan Life Insurance delivered in the presence Company of: /s/ Jacqueline A. Wollenburg By: Darrell J. Smith - - ----------------------------- ------------------------------- Name: Jaqueline A. Wollenburg Name: Darrell J. Smith ------------------------ -------------------------- Witness Title: Assistant Vice President ------------------------- /s/ Sandra J. Winters Attest: /s/ Kenneth L. Kollar - - ----------------------------- --------------------------- Name: Sandra J. Winters Name: Kenneth L. Kollar ------------------------ -------------------------- Witness Title: Assistant Secretary ------------------------- [CORPORATE SEAL] /s/ Nona Kay Jaimes - - ------------------------------ Name: Nona Kay Jaimes ------------------------- Notary Public [NOTARIAL SEAL] Signed, sealed and LESSEE: delivered in the presence of: PACKAGING CORPORATION OF AMERICA - - ------------------------- Name: By: -------------------- -------------------------------- Witness Name: --------------------------- Title: -------------------------- - - ------------------------- Name: Attest: -------------------- ---------------------------- Witness Name: --------------------------- Title: -------------------------- - - ------------------------- [CORPORATE SEAL] Name: -------------------- Notary Public [NOTARIAL SEAL] -7- Signed, sealed and By: Metropolitan Life Insurance delivered in the presence Company of: By: - - ----------------------------- ------------------------------- Name: Name: ------------------------ -------------------------- Witness Title: ------------------------- Attest: - - ----------------------------- --------------------------- Name: Name: ------------------------ -------------------------- Witness Title: ------------------------- [CORPORATE SEAL] - - ------------------------------ Name: ------------------------- Notary Public [NOTARIAL SEAL] Signed, sealed and LESSEE: delivered in the presence of: PACKAGING CORPORATION OF AMERICA /s/ M. T. Canavan - - ------------------------- Name: M. T. Canavan By: /s/ R. D. Harlow -------------------- -------------------------------- Witness Name: R. D. Harlow --------------------------- Title: Senior Vice President -------------------------- /s/ Mary C. Eckel - - ------------------------- Name: Mary C. Eckel Attest: /s/ Jaime Taronji, Jr. -------------------- ---------------------------- Witness Name: Jaime Taronji, Jr. --------------------------- Title: Assistant Secretary -------------------------- /s/ Artemis G. Vougis - - ------------------------- [CORPORATE SEAL] Name: Artemis G. Vougis -------------------- Notary Public [NOTARIAL SEAL] -7- ******* ACKNOWLEDGMENTS ******* STATE OF ILLINOIS) :ss COUNTY OF COOK) The foregoing instrument was acknowledged before me this 9th day of January, 1992 by R. D. Harlow and Jaime Taronji, Jr., as Senior Vice President and Assistant Secretary, respectively, of Packaging Corporation of America, a Delaware corporation, on behalf of the corporation. /s/ Artemis G. Vougis ------------------------------- Name: Artemis G. Vougis -------------------------- Notary Public, Cook ----------------- County,Illinois ------------------------ My Commission Expires:___________ [NOTARIAL SEAL] STATE OF GEORGIA COUNTY OF FULTON The foregoing instrument was acknowledged before me this _________ day of ___________,199_ by__________________________ and_____________________, as ___________________________________ and __________________________________, respectively, of Metropolitan Life Insurance Company, a New York corporation, as joint venturer of Four States Timber Venture, a Georgia joint venture, on behalf of the joint venture. -------------------------------- Name: --------------------------- Notary Public, ------------------ County, ------------------------- My Commission Expires: ---------- [NOTARIAL SEAL] -8- ******* ACKNOWLEDGMENTS ******* STATE OF GEORGIA) :ss COUNTY OF FULTON) The foregoing instrument was acknowledged before me this ___ day of _____________ by ____________ and __________________, as _____________________ and ___________________, respectively, of Packaging Corporation of America, a Delaware corporation, on behalf of the corporation. ------------------------------- Name: -------------------------- Notary Public, ----------------- County, ------------------------ My Commission Expires:___________ [NOTARIAL SEAL] STATE OF KANSAS COUNTY OF JOHNSON The foregoing instrument was acknowledged before me this 17th day of January, 1992 by Darrell J. Smith and Kenneth L. Kollar, as Assistant Vice- President and Assistant Secretary, respectively, of Metropolitan Life Insurance Company, a New York corporation, as joint venturer of Four States Timber Venture, a Georgia joint venture, on behalf of the joint venture. /s/ Nona Kay Jaimes ------------------------------- Name: -------------------------- Notary Public: ----------------- County, Johnson ------------------------ My Commission Expires: 9-13-93 ----------- [NOTARIAL SEAL] -8- STATE OF MASSACHUSETTS) : ss COUNTY OF SUFFOLK ) The foregoing instrument was acknowledged before me this 30th day of December, 1991 by Paul A. Meissner, Jr. and James H. Young, as Assistant Treasurer and Assistant Secretary, respectively, of John Hancock Mutual Life Insurance Company, a Massachusetts corporation, as joint venturer of Four States Timber Venture, a Georgia joint venture, on behalf of the joint venture. /s/ Marie C. O'Brien ------------------------------ Name: Marie C. O'Brien ------------------------- Notary Public, ---------------- County, Suffolk ----------------------- My Commission Expires: 8-9-96 ----------- [NOTARIAL SEAL] -9- EXHIBIT D-1 Categories, Adjustment Amounts and Administrative Amounts Applicable To The Southern Timberlands (Florida - Hudson Tract) I. Bare Land
Adjustment Amount Per Acre Administrative Exclusive Amount Category Acreage of Timber by Category -------- ------- ----------- -------------- Pine Plantations 120,229 215.00 25,849,235 Natural Pine & Hardwood 91,893 81.00 7,443,333 Non-Productive 13,790 39.00 537,810 Productive Open 5,761 215.00 1,238,615 --------- ---------- TOTAL 231,673 35,068,993 ========= ========== II. Merchantable Timber ------------------- Adjustment Administrative Volume Amount Amount Category (Cords) Per Cord by Category -------- ------- ----------- -------------- Pine Sawtimber 438,659 39.00 17,107,701 Pine Pulpwood 682,739 21.75 14,849,573 HWD Sawtimber 97,924 15.00 1,468,860 HWD Pulpwood 1,089,942 4.75 5,177,224 CY Sawtimber 111,599 16.60 1,852,543 CY Pulpwood 604,605 7.50 4,534,537 --------- ---------- TOTAL 3,025,468 44,990,438 ========= ========== III. Pre-Merchantable Planted Pine ----------------------------- Adjustment Administrative Amount Amount Category Acreage Per Acre by Category -------- ------- ----------- -------------- 0 - 5 years 13,384 150.00 2,007,600 6 - 10 years 13,124 250.00 3,281,000 11 - 15 years 25,419 350.00 8,896,650 --------- ---------- TOTAL 51,927 14,185,250 ========= ========== BUILDINGS AND IMPROVEMENTS 98,619 ========== GRAND TOTAL, HUDSON TRACT 94,343,300 ==========
EXHIBIT D-2 Categories, Adjustment Amounts and Administrative Amounts Applicable To The Southern Timberlands (Florida and Georgia) (Nekoosa and Brunswick Tracts) I. Bare Land ---------
Adjustment Amount Per Acre Administrative Exclusive Amount Category Acreage of Timber by Category -------- ------- ----------- -------------- Pine Plantations 51,253 250.00 12,813,250 Natural Pine & Hardwood 19,504 90.00 1,755,360 Non-Productive 1,873 42.00 78,666 Phosphate Lands 18,666 34.00 634,644 Productive Open 3,391 250.00 847,750 --------- ----------- TOTAL 94,687 16,129,670 ========= =========== II. Merchantable Timber ------------------- Adjustment Administrative Volume Amount Amount Category (Cords) Per Cord by Category -------- ------- ----------- -------------- Pine Sawtimber 230,931 42.00 9,699,102 Pine Pulpwood 485,741 26.00 12,629,266 HWD Sawtimber 31,037 17.00 527,629 HWD Pulpwood 284,167 6.00 1,705,002 CY Sawtimber 36,516 17.00 620,772 CY Pulpwood 114,837 5.00 574,185 --------- ----------- TOTAL 1,183,229 25,755,956 ========= =========== III. Pre-Merchantable Planted Pine ----------------------------- Adjustment Administrative Amount Amount Category Acreage Per Acre by Category -------- ------- ----------- -------------- 0 - 5 years 7,529 166.00 1,249,814 6 - 10 years 9,696 271.00 2,627,616 11 - 15 years 7,995 382.00 3,054,090 --------- ----------- TOTAL 25,220 6,931,520 ========= =========== BUILDINGS AND IMPROVEMENTS 60,000 =========== GRAND TOTAL, NEKOOSA AND BRUNSWICK TRACTS 48,877,146 =========== GRAND TOTAL, SOUTHERN TIMBERLANDS 143,220,446 ===========
EXHIBIT D-3 Categories, Adjustment Amounts and Administrative Amounts Applicable To The Northern Timberlands (Michigan & Wisconsin) I. Bare Land ---------
Adjustment Amount Per Acre Administrative Exclusive Amount Category Acreage of Timber by Category -------- ------- ----------- -------------- Productive Land and Regeneration 185,098 42.50 7,866,665 Non-Productive 4,939 10.00 49,390 Lowland Brush (Spruce) 13,641 15.00 204,615 --------- ---------- TOTAL 203,678 8,120,670 ========= ========== II. Merchantable Timber ------------------- Adjustment Administrative Volume Amount Amount Category (Cords) Per Cord by Category -------- ------- ----------- -------------- Conifer Sawtimber 400,198 14.00 5,602,772 Conifer Pulpwood 588,071 5.50 3,234,390 Hardwood Sawtimber 294,763 24.00 7,074,312 Hardwood Pulpwood 1,388,984 4.00 5,555,936 --------- ----------- TOTAL 2,672,016 21,467,410 ========= =========== BUILDINGS AND IMPROVEMENTS 84,474 =========== GRAND TOTAL, NORTHERN TIMBERLANDS 29,672,554 =========== GRAND TOTAL--ALL TIMBERLANDS 172,893,000 ===========
EXHIBIT E TIMBER CRUISE SPECIFICATIONS The Cruise shall be conducted using such forest sampling methods as are necessary to produce accuracy within a range of 5% at the confidence level of not less than 95%, and shall be reported separately with respect to the Southern Timberlands and the Northern Timberlands. The Cruise shall cover all Timber and Land within the Property and shall show by Category the acreage and volumes of Timber within the Northern and Southern Timberlands. The Cruises shall be supported by maps showing the location of sample plots. The Cruise data shall be tallied separately and dated for each sample plot and the plot location keyed on a map and flagged on the ground in a manner which will accommodate an independent field audit of timber cruise measurements. 1. Southern Timber Categories. A. Merchantable Timber Specifications. Merchantable Timber shall be classified by species, product and size in the following Categories: 1. "Pine Pulpwood" means pine timber measuring less than 9.0 inches diameter breast high ("DBH") but not less than 5.0 inches DBH, cull Pine Sawtimber trees suitable only for pulpwood regardless of size, and tops of Pine Sawtimber trees. 2. "Pine Sawtimber" means pine timber measuring not less than 9.0 inches DBH and suitable for sawtimber, veneer, poles and piling. 3. "Hardwood Pulpwood" means hardwood timber measuring less than 11.0 inches DBH but not less than 5.0 inches DBH, cull Hardwood Sawtimber trees suitable only for pulpwood regardless of size, and tops of Hardwood Sawtimber trees. 4. "Hardwood Sawtimber" means hardwood timber measuring not less than 11.0 inches DBH and suitable for sawtimber and veneer. 5. "Cypress Pulpwood" means cypress timber measuring less than 11.0 inches DBH but not less than 5.0 inches DBH, cull Cypress Sawtimber trees suitable only for pulpwood regardless of size, and tops of Cypress Sawtimber trees. 6. "Cypress Sawtimber" means cypress timber measuring not less than 11.0 inches DBH and suitable for sawtimber and veneer. B. Utilization Limits. Unless otherwise specified herein, Pine Sawtimber minimum top diameter is 6.0 inches, outside bark, and Pine Pulpwood minimum top diameter is 3.0 inches, outside bark. Hardwood Sawtimber minimum top diameter is 10.0 inches, outside bark, and Hardwood Pulpwood minimum top diameter is 4.0 inches, outside bark. Cypress Sawtimber minimum top diameter is 10.0 inches, outside bark, and Cypress Pulpwood minimum top diameter is 4.0 inches, outside bark. C. Calculations. All volumes of timber shall be measured, reported and accounted for in standard, stacked cords of 128 cubic feet including air space. Computation shall be by local volume tables mutually agreeable to Lessor and Lessee in their reasonable discretion. II. Northern Timber Categories. A. Merchantable Timber. Merchantable Timber shall be classified by species, product and size in the following Categories: 1. "Conifer Pulpwood" means all conifer species of timber measuring less than 11.0 inches DBH but not less than 5.0 inches DBH, cull Conifer Sawtimber trees suitable only for pulpwood regardless of size, and tops of Conifer Sawtimber trees. 2. "Conifer Sawtimber" means all conifer species of timber measuring not less than 11.0 inches DBH and suitable for sawtimber, veneer, poles and piling. 3. "Hardwood Pulpwood" means timber measuring less than 11.0 inches DBH but not less than 5.0 inches DBH, cull Hardwood Sawtimber trees suitable only for pulpwood regardless of size, and tops of Hardwood Sawtimber trees. 4. "Hardwood Sawtimber" means hardwood timber measuring not less than 11.0 inches DBH and suitable for sawtimber and veneer. B. Utilization Limits. Conifer Sawtimber minimum top diameter is 8 inches, outside bark, and conifer pulpwood minimum top diameter is 3 inches, outside bark. Hardwood Sawtimber minimum top diameter is 10 inches, outside bark, and Hardwood Pulpwood minimum top diameter is 4 inches, outside bark. C. Calculations. All volumes of timber shall be measured, reported and accounted for in standard, stacked cords of 128 cubic feet including air space. Computation shall be by local volume tables mutually agreeable to Lessor in their reasonable discretion. III. Other Specifications A. Calculation of Land acreage shall be based upon: 1. Surveys and aerial photographs of the Property (to the extent currently available), timber type maps and such other available information generally utilized by professional foresters; and 2. Standards of calculation and measurement generally used in the commercial forestry industry. B. Determination of Southern pre-merchantable planted pine acreage by age classes (ages 0-5; 6-10; 11-15 years) shall comply with the following guidelines: 1. A fully stocked stand shall consist of at least 250 well spaced stems per acre or 60 square feet of basal area per acre, measured at DBH; and 2. Timber volumes shall not include any trees of merchantable size class located in stands classified as pre-merchantable pine plantations. C. "Lowland Brush (Spruce)" shall have the same meaning as "lowland brush temporarily non-productive lands," as defined in that certain report of timber cruise prepared for Georgia-Pacific Corporation by Steigerwaldt Land Services, Inc. (Tomahawk, Wisconsin) dated June, 1990. SECOND AMENDMENT TO TIMBERLAND LEASE BY AND BETWEEN FOUR STATES TIMBER VENTURE (as Lessor) and PACKAGING CORPORATION OF AMERICA (as Lessee) December 31, 1992 This document was prepared by: Haynes R. Roberts, Esg. Sutherland, Asbill & Brennan 999 Peachtree Street, N.E. Atlanta, Georgia 30309-3996 SECOND AMENDMENT TO TIMBERLAND LEASE ---------------- THIS SECOND AMENDMENT TO TIMBERLAND LEASE (hereinafter referred to as "this Amendment"), dated as of December 31, 1992, made by and between FOUR STATES TIMBER VENTURE, a joint venture formed under the laws of the State of Georgia ("Lessor"), having its principal office and place of business at One John Hancock Place, Boston, Massachusetts 02117, and PACKAGING CORPORATION OF AMERICA, a Delaware corporation ("Lessee"), having its principal office and place of business in Evanston, Illinois. W I T N E S S E T H - - - - - - - - - - WHEREAS, Lessor and Lessee entered into that certain Timberland Lease dated January 31, 1991 (as amended from time to time hereinafter referred to as the "Lease"), whereby Lessor leased to Lessee approximately 531,000 acres of timberland in the States of Florida, Georgia, Michigan and Wisconsin; and WHEREAS, the Lease was amended in certain respects by that certain First Amendment to Timberland Lease dated as of December 31, 1991, made by and between Lessor and Lessee; and WHEREAS, Lessor and Lessee desire to further amend the Lease in certain respects; NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the mutual agreements, covenants and provisions hereinafter set forth, the parties hereto hereby agree as follows: ARTICLE I - AMENDMENTS ---------------------- Lessor and Lessee agree that the amendments to the Lease set forth in this Article I shall be effective and binding on the parties hereto from and after January 1, 1992. 1. Subsection 2.1(a)(iii) of the Lease is hereby deleted in its entirety and the following is inserted in lieu thereof: " (iii) In addition to the foregoing, in the event that any portion of the Property is sold by Lessor free and clear of this Lease, is the subject of a Taking or is otherwise released from this Lease during any calendar quarter during the Lease Term, then beginning with the installment of Quarterly Rent next 1 due, installments of Quarterly Rent shall be adjusted (effective as of the first day of the calendar quarter following the date on which such sale, Taking or release took place) and thereafter paid by Lessee in an amount equal to (A) the amount of Quarterly Rent installment which was payable on the first day of the calendar quarter in which such sale, Taking or release occurred (as such amount may have been previously adjusted pursuant to subsection 2.1(a)(ii) hereof), minus (B) an amount equal to 2.6875% of the sum of the Allocated Base Values of all portions of the Property sold, taken or released during such calendar quarter. In addition to the adjustment provided in the preceding sentence, if the Allocated Base Value of the portion of the Property to be sold, taken or released in any single transaction is $l,000,000 or more, the Quarterly Rent for the calendar quarter following such sale, Taking or release shall be reduced by an amount equal to the product of (X) the difference between the Daily Quarterly Rent prior to and the Daily Quarterly Rent after such sale, Taking or release and (Y) the actual number of days from and including the date of such sale, Taking or release to but not including the date upon which such Quarterly Rent payment becomes due." 2. Subsection 2.1(b)(ii) of the Lease is hereby deleted in its entirety and the following is inserted in lieu thereof: "(ii) Notwithstanding the foregoing, in the event any portion of the Property is sold by Lessor free and clear of this Lease, is the subject of a Taking or is otherwise released from this Lease prior to the end of the Lease Term, for the Lease Year in which such sale, Taking or release takes place, the Annual Rent for such year shall be reduced as follows: (A) for sales, Takings or releases occurring during the first calendar quarter of such Lease Year, by an amount equal to the product of (i) 0.61642% of the sum of the Allocated Base Values of all portions of the Property sold, taken or released during such calendar quarter times (ii) the factor 0.75; (B) for sales, Takings or releases occurring during the second calendar quarter of such Lease Year, by an amount equal to the product of (i) 0.61642% of the sum of the Allocated Base Values of all portions of the Property sold, taken or released during such calendar quarter times (ii) the factor 0.50; 2 (C) for sales, Takings or releases occurring during the third calendar quarter of such Lease Year, by an amount equal to the product of (i) 0.61642% of the sum of the Allocated Base Values of all portions of the Property sold, taken or released during such calendar quarter times (ii) the factor 0.25; and (D) for sales, Takings or releases occurring during the fourth calendar quarter of such Lease Year, Annual Rent shall not be reduced. In addition to the adjustment provided for above in this subsection (ii), if the Allocated Base Value of the portion of the Property to be sold, taken or released in any single transaction is $1,000,000 or more, the Annual Rent for the Lease Year in which such sale, Taking or release takes place shall be further reduced by an amount equal to the product of (A) the difference between the Daily Annual Rent prior to and the Daily Annual Rent after such sale, Taking or release and (B) the actual number of days from and including the date of such sale, Taking or release to the end of the calendar quarter in which such sale, Taking or release occurred. The installments of Annual Rent required to be paid by Lessee pursuant to subsection 2.1(b)(i) above for Lease Years beginning subsequent to the Lease Year in which any such sale, Taking or release took place shall be adjusted and thereafter paid in an amount equal to (X) $1,065,748 minus (Y) an amount equal to 0.61642% of the sum of the Allocated Base Values of all portions of the Property sold, taken or released during prior Lease Years." 3. Subsection 34.2(b) of the Lease is hereby amended by adding the following sentence at the end of said subsection: "Any Additional Rent payable by Lessee to Lessor under this subsection (b) shall be paid by Lessee within twenty (20) Business Days following receipt of written notice from Lessor that such Additional Rent is due." 4. Subsection 34.2(e) (iii) of the Lease is hereby deleted in its entirety and the following is inserted in lieu thereof: "(iii) Reporting; Payments; Special Cutting Account. On or before the tenth (10th) day of each calendar month, Lessee shall furnish to Lessor a written report showing the volume of Timber cut or removed pursuant to this section 34.2(e) during the 3 preceding calendar month and the market value of such Timber determined by multiplying the number of cords thereof by the per cord market value approved by Lessor. Lessee shall also furnish to Lessor a calculation of the Administrative Amount for the Timber cut and such other information as Lessor may require. Lessee shall deliver to Lessor with each such report a payment equal to the greater of the market value of such Timber as determined as aforesaid or the Administrative Amount for such Timber. Each such payment shall be deposited by Lessor into one or more interest-bearing accounts with Bank One, Champaign- Urbana or any other national bank or national banks reasonably acceptable to Lessee (hereinafter collectively called the "Special Cutting Account"). Lessor shall not be responsible for earning any particular rate or amount of interest on the funds deposited in the Special Cutting Account and Lessor shall not be responsible for any loss of such funds caused by the insolvency of the financial institution with which the Special Cutting Account is established or by any other cause not within the exclusive control of Lessor. Lessor shall withdraw and disburse said funds as hereinafter provided." 5. Subsection 35.2(b) of the Lease is hereby amended by: (a) deleting clause (iii) of said subsection 35.2(b) in its entirety and by inserting the following in lieu thereof: "(iii) for each sale of Property where the Allocated Base Value of such Property is $1,000,000 or more, the Net Sales Proceeds from any such sale shall be paid to Lessor (subject to the provisions of subsection 35.2(d) hereof) and shall be no less than the greater of the Minimum Return Price or the Make- Whole Price applicable to such sale in each case calculated as of the date such sale occurs (provided, however, if such Net Sales Proceeds from such sale are less than the greater of the Minimum Return Price or the Make-Whole Price applicable to such sale, Lessee shall be permitted to pay to Lessor an amount equal to such deficiency, and, upon payment of such amount, the condition set forth in this clause (iii) shall be deemed satisfied);" and (b) by adding the following clause (vii) to said subsection 35.2(b): "(vii) the Net Sales Proceeds from each sale of Property where the Allocated Base Value of such 4 Property is less than $1,000,000 shall be paid to Lessor and shall be deposited by Lessor into one or more interest-bearing accounts with Bank-One, Champaign-Urbana or any other national bank or national banks reasonably acceptable to Lessee (hereinafter collectively referred to as the "General Release Account"), pending disbursement to Lessor and Lessee in accordance with the provisions of subsection 35.2(g) below." 6. Subsection 35.2(c)(iv)(B) is hereby deleted in its entirety and the following is inserted in lieu thereof: "B. setting forth a detailed computation of the Net Sales Proceeds from such sale (showing all deductions from the gross sale" price and showing the amount of any deficiency which Lessee may elect to pay to Lessor in satisfaction of the requirements of subsection 35.2(b)(iii) hereof) and a detailed computation of the Make-Whole Price and Minimum Return Price applicable to such sale;" 7. Subsection 35.2(d) is hereby deleted in its entirety and the following is inserted in lieu thereof: "(d) Excess Proceeds. With respect to any sale of Property where the Allocated Base Value of such Property is $1,000,000 or more, the Net Sales Proceeds received by Lessor as a result of any such sale which are in excess of the greater of the Minimum Return Price or the Make-Whole Price applicable to such sale shall be paid by Lessor to Lessee." 8. Section 35.2 of the Lease is hereby amended by adding thereto the following subsections (g) and (h): "(g) Disbursement of Sales Proceeds From General Release Account. Within thirty (30) days after the end of each calendar quarter during the Lease Term, Lessor shall deliver to Lessee a written statement (the "Quarterly Sales Statement") setting forth a detailed computation of (i) the Make-Whole Price and the Minimum Return Price (using a Minimum Return Rate of 15% for purposes of calculating the amount determined under clause (ii) of the definition of Minimum Return Price in Section 39 hereof) applicable to all sales of Property where, on an individual sale basis, the Allocated Base Value of the Property was less than $1,000,000 which occurred during the calendar quarter then ended, such calculations to be made as if all of such sales were a single sale closing on the last day of the calendar quarter then ended. Lessor shall distribute the proceeds from all such sales made during the calendar quarter then ended that are covered by such Quarterly Sales Statement 5 (including any accrued interest) from the General Release Account on a quarterly basis in accordance with the computations set forth in the Quarterly Sales Statement as follows: (i) such proceeds shall be distributed first to Lessor until Lessor has received the greater of the Minimum Return Price or the Make-Whole Price determined as set forth above with respect to such sales; and (ii) any such proceeds remaining in the General Release Account after Lessor has received the amounts to which it is entitled pursuant to the preceding subparagraph (i) shall be distributed to Lessee. In the event that the proceeds in the General Release Account relating to sales of Property made during the preceding calendar quarter, together with interest thereon, are insufficient to pay to Lessor the greater of the Minimum Return Price or the Make-Whole Price with respect to such sales as determined above, Lessor shall note such deficiency in the Quarterly Sales Statement and Lessee shall pay to Lessor, as Additional Rent and within fifteen (15) Business Days after receipt of such Quarterly Sales Statement, an amount equal to the deficiency set forth in such statement. Lessor shall not be responsible for earning any particular rate or amount of interest on the funds deposited in the General Release Account and shall not be responsible for any loss of such funds caused by the insolvency of the financial institution with which the General Release Account has been established or by any other cause not within the exclusive control of Lessor; and (h) Net Sales Proceeds. For purposes of this Lease, the term "Net Sales Proceeds" shall mean, with respect to any sale of Property by Lessor pursuant to the provisions of Section 35.2(b) hereof, the gross sales price due to Lessor with respect to the Property sold less the following costs and expenses to the extent such costs and expenses are incurred by Lessor in connection with such sale and are customary and reasonable in amount: title insurance premiums, title examination fees and expenses, survey costs, the cost of any appraisals approved in advance in writing by Lessor, brokerage fees and commissions paid to any Person other than Lessee or a Related Entity, recording costs, transfer taxes or documentary stamp taxes, and the fees and expenses of the closing attorney to the extent such fees and expenses are not excluded by clause (iv) below. Notwithstanding the foregoing, Lessee expressly acknowledges and agrees that the costs and expenses described in clauses (i), (ii), (iii) and (iv) below may not be paid out of the 6 proceeds received by Lessor in connection with any such sale, will be paid directly by Lessee or will be reimbursed by Lessee to Lessor and will not be deducted from the gross sale price of the Property being sold for purposes of calculating the Net Sales Proceeds from such sale: (i) Any and all commissions, fees, costs or expenses of any kind incurred by or payable to Lessee or any Related Entity in connection with such sale; (ii) Any and all taxes, penalties or other amounts imposed or recaptured under any Forest Tax Law in connection with or as a result of such sale; (iii) Any and all costs and expenses incurred by Lessor in connection with such sale which are not customary and reasonable or which would not have been incurred by Lessor if the Property sold had not been encumbered by this Lease; and (iv) Any and all attorneys' fees, costs and expenses incurred by Lessor in connection with such sale which directly or indirectly relate to questions or issues regarding this Lease or which would not have been incurred by Lessor if the Property sold had not been encumbered by this Lease. Lessor agrees that it will, in good faith, endeavor to keep such attorneys' fees reasonable under the circumstances, but Lessee shall, in any event, pay all attorneys' fees covered by the preceding sentence of this clause (iv)." 9. Section 39 of the Lease is hereby amended as follows: (a) by amending the definition of "Make-Whole Price" as follows: (i) by inserting the following language in the fourth line of the definition of "Make-Whole Price" after the word "discounting": "(on a quarterly basis for the values in (i), on an annual basis for the values in (ii) and on a semi-annual basis for the values in (iii))"; and (ii) by adding the following language at the end of the definition of "Make-Whole Price": 7 "For purposes of calculating the values of (i), (ii) and (iii) above, each Lease Year shall be deemed to consist of 360 days and four 90-day quarters."; (b) by amending the definition of "Minimum Return Price" as follows: (i) by deleting clause (i) in the definition of Minimum Return Price and inserting in lieu thereof the following: "(i) the Allocated Base Value for the portion of the Property being sold, taken or released plus 80% of the excess, if any, of the Net Sales Proceeds of, net award from or other proceeds from the portion of the Property to be sold, taken or released over the Allocated Base Value for such portion. During the Initial Lease Term only, such excess may be net of (a) Operating Expenses attributable to such portion of the Property, but only to the extent of such excess, and (b) the sum of Allocated Annual Rent Payments previously made or to be made on January 1 of the following calendar year with respect to the portion of the Property being sold, taken or released; and (ii) by inserting the following language at the end of clause (ii) in the definition of "Minimum Return Price": "For purposes of calculating the values in (a) and (b) of this subsection (ii), each Lease Year shall be deemed to consist of 360 days and four 90-day quarters; and"; (c) by adding a definition of "Net Sales Proceeds" which reads as follows: "Net Sales Proceeds: as defined in Subsection 35.2(h) hereof"; and (d) by amending the definition of "Non-Strategic Lands" to read as follows: "Non-Strategic Lands: The approximately 30,327 (plus or minus) acres of Timberlands which were identified by Lessor in June 1991 as being non- strategic which may be sold during the Lease Term in accordance with the provisions of subsection 35.2." 8 10. Subsection 43(b) of the Lease is hereby amended by deleting the parenthetical "(which cost may be deducted from the gross proceeds of such sale in accordance with the provisions of said Section 35.2(b))" from lines 7, 8 and 9 thereof. 11. The Lease is hereby amended by deleting Exhibit C thereto in its entirety and by inserting in lieu thereof the Exhibit C which is attached hereto as Schedule 1 and incorporated herein by this reference. 12. The Lease is hereby amended by deleting Exhibit D-3 thereto in its entirety and by inserting in lieu thereof the Exhibit D-3 which is attached hereto as Schedule 2 and incorporated herein by this reference. 13. The Lease is hereby amended by deleting Exhibit I thereto in its entirety and by inserting in lieu thereof the Exhibit I which is attached hereto as Schedule 3 and incorporated herein by this reference. 14. The Lease is hereby amended by deleting Exhibit J thereto in its entirety and by inserting in lieu thereof the Exhibit J which is attached hereto as Schedule 4 and incorporated herein by this reference. ARTICLE II - GENERAL PROVISIONS 1. Unless otherwise defined herein, capitalized terms in this Agreement shall have the meanings given to such terms in Section 39 of the Lease. 2. Except as amended hereby, the terms and provisions of the Lease shall remain in full force and effect, and Lessor and Lessee hereby ratify and reaffirm as of the date hereof the terms and provisions of the Lease, as amended hereby. 3. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. 4. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto. * * * * * * * * * * * * * * * * * * * * * * * * * [SIGNATURES BEGIN ON FOLLOWING PAGE] 9 IN WITNESS WHEREOF, Lessor and Lessee have caused this Second Amendment to Timberland Lease to be executed and their seals to be hereunto affixed and attested by their officers thereunto duly authorized. LESSOR: FOUR STATES TIMBER VENTURE, a Georgia Joint Venture, by both of its joint venturers Signed, sealed and By: John Hancock Mutual Life delivered in the presence Insurance Company of: By: /s/ Henry J. Desautel --------------------------- /s/ Neil E. Auble Name: Henry J. Desautel ------------------------------ ----------------------- Name: Neil E. Auble Title: Assistant Treasurer ------------------------- ---------------------- Witness Attest: /s/ Barry P. Sanborn -------------------------- /s/ Susan Chase Name: Barry P. Sanborn - - -------------------------------- ------------------------- Name: Susan Chase Title: Assistant Secretary --------------------------- ------------------------ Witness [CORPORATE SEAL] /s/ Marie C. O'Brien - - --------------------------------- Name: Marie C. O'Brien ---------------------------- Notary Public [NOTARIAL SEAL] 10 Signed, sealed and By: Metropolitan Life Insurance delivered in the presence Company of: /s/ Kathleen D. Condy By: /s/ Gerald J. Hoenig - - ----------------------------- ------------------------------- Name: Kathleen D. Condy Name: Gerald J. Hoenig ------------------------ -------------------------- Witness Title: Associate General Counsel ------------------------- /s/ Sherrill D. Ciuba Attest: /s/ Nancy J. Hammer - - ----------------------------- --------------------------- Name: Sherril D. Ciuba Name: Nancy J. Hammer ------------------------ -------------------------- Witness Title: Assistant Secretary ------------------------- [CORPORATE SEAL] /s/ Patricia A. Monahan - - ------------------------------ Name: Patricia A. Monahan ------------------------- Notary Public State of Georgia My Commission Expires 2-18-98 [NOTARIAL SEAL] Signed, sealed and LESSEE: delivered in the presence of: PACKAGING CORPORATION OF AMERICA /s/ Maura T. Canavan - - ------------------------- Name: Maura T. Canavan By: /s/ R. D. Harlow -------------------- -------------------------------- Witness Name: R. D. Harlow --------------------------- Title: Senior Vice President -------------------------- /s/ Ramona Christian - - ------------------------- Name:Ramona Christian Attest: /s/ John R. Olsen -------------------- ---------------------------- Witness Name: John R. Olsen --------------------------- Title: Assistant Secretary -------------------------- /s/ Artemis G. Vougis - - ------------------------- [CORPORATE SEAL] Name: Artemis G. Vougis -------------------- Notary Public [NOTARIAL SEAL] 11 ******* ACKNOWLEDGMENTS ******* STATE OF GEORGIA COUNTY OF DE KALB The foregoing instrument was acknowledged before me this 11th day of March, 1993 by Gerald J. Hoenig and Nancy J. Hammer, as Associate General Counsel and Assistant Secretary, respectively, of Metropolitan Life Insurance Company, a New York corporation, as joint venturer of Four States Timber Venture, a Georgia joint venture, on behalf of the joint venture. /s/ Patricia A. Monahan ------------------------------- Name: Patricia A. Monahan -------------------------- Notary Public, State of Georgia ----------------- My Commission Expires: 2-18-97 ----------- [NOTARIAL SEAL] STATE OF MASSACHUSETTS) : ss COUNTY OF SUFFOLK ) The foregoing instrument was acknowledged before me this _________ day of ___________,1993 by__________________________ and_____________________, as ___________________________________ and __________________________________, respectively, of John Hancock Life Insurance Company, a Massachusetts corporation, as joint venturer of Four States Timber Venture, a Georgia joint venture, on behalf of the joint venture. -------------------------------- Name: --------------------------- Notary Public, ------------------ County, ------------------------- My Commission Expires: ---------- [NOTARIAL SEAL] 12 ******* ACKNOWLEDGMENTS ******* STATE OF ________________ COUNTY OF _______________ The foregoing instrument was acknowledged before me this ____ day of _____, 1993 by ________________ and ___________________, as ___________________ and ___________________, respectively, of Metropolitan Life Insurance Company, a New York corporation, as joint venturer of Four States Timber Venture, a Georgia joint venture, on behalf of the joint venture. ------------------------------- Name: -------------------------- Notary Public, ----------------- County, ------------------------ My Commission Expires: ----------- [NOTARIAL SEAL] STATE OF MASSACHUSETTS) :SS COUNTY OF SUFFOLK ) The foregoing instrument was acknowledged before me this 18th day of February, 1993 by Henry J. Desautel and Barry P. Sanborn, as Assistant Treasurer and Assistant Secretary, respectively, of John Hancock Life Insurance Company, a Massachusetts corporation, as joint venturer of Four States Timber Venture, a Georgia joint venture, on behalf of the joint venture. /s/ Marie C. O'Brien -------------------------------- Name: Marie C. O'Brien --------------------------- Notary Public, Suffolk ------------------ County, Massachusetts ------------------------- My Commission Expires: 8/9/96 ---------- [NOTARIAL SEAL] STATE OF ILLINOIS : ss STATE OF COOK The foregoing instrument was acknowledged before me this 4th day of February, 1993 by R.D. Harlow and John R. Olsen, as Senior Vice President and Assistant Secretary, respectively, of Packaging Corporation of America, a Delaware corporation, on behalf of the corporation. /s/ Artemis G. Vougis ------------------------- Name: Artemis G. Vougis Notary Public, Cook County, Illinois My Commission Expires: 6-29-96 ----------- [NOTARIAL SEAL] SCHEDULE 1 TO SECOND AMENDMENT TO TIMBERLAND LEASE - - ------------------------------------------------------------------------------ EXHIBIT C -------- BUILDINGS, STRUCTURES AND IMPROVEMENTS PERSONAL AND INTANGIBLE PROPERTY -------------------------------- I. Description of Buildings, Structures and Other Improvements Located on Timberlands ----------------------------------------- State Location County ----- -------- ------ Central Repair Shop, Section 21-TlN-R14E Hamilton FL Office, Parts Supply Nekoosa Forest House, Storage Building and Related Improvements Seed Orchard Location - Section 25 T1S, R14E Hamilton FL buildings and Nekoosa Forest improvements Corea/Damascas Woodyard Land Lot 161, 13th Miller GA buildings and land district improvements Jasper Woodyard Section 6, TIN, R14E Hamilton FL Minocqua Woodlands Office Section 23, T39N, Oneida WI R6E Pine Lake Shop Section 31, T39N, Oneida WI R5E II. Description of Personal and Intangible Property ----------------------------------------------- Title records, aerial photographs, maps, charts, surveys, financial records and other records relating to the Timberlands which were acquired by Lessor from Sellers pursuant to that certain Bill of Sale and Assignment of even date herewith from Sellers to Lessor. 14 SCHEDULE 2 TO SECOND AMENDMENT TO TIMBERLANDS LEASE - - ------------------------------------------------------------------------------- EXHIBIT D-3 ----------- CATEGORIES, ADJUSTMENT AMOUNTS AND ADMINISTRATIVE AMOUNTS APPLICABLE TO THE NORTHERN TIMBERLANDS (MICHIGAN AND WISCONSIN) Wisconsin Timberlands - Exhibit D-3-A Michigan Timberlands - Exhibit D-3-B 15 Wisconsin Allocation Steigerwaldt Cruise Updated 11-20-92 EXHIBIT D-3-A Categories, Adjustment Amounts and Administrative Amounts Applicable To The Southern Timberlands (Wisconsin) I. Bare Land
Adjustment Amount Per Acre Administrative Exclusive Amount Category Acreage of Timber by Category -------- ------- ----------- -------------- Productive Land and 138,852 70.00 9,719,640 Regeneration Non-Productive 28,421 21.40793 608,435 Lowland Brush (Spruce) --------- -------- ---------- TOTAL 167,273 10,328,075 ========== Adjustment Administrative Volume Amount Amount Category (Cords) Per Cord by Category -------- ------- ----------- -------------- Conifer Sawtimber 135,600 19.00 2,576,400 Conifer Pulpwood 560,500 6.75 3,783,375 Hardwood Sawtimber 104,100 29.00 3,018,900 Hardwood Pulpwood 1,034,300 5.25 5,430,075 --------- ----- ---------- TOTAL 1,834,500 14,808,750 ---------- BUILDING AND IMPROVEMENTS 84,474 ---------- GRAND TOTAL, WISCONSIN TIMBERLANDS 25,221,299 ==========
Michigan Allocation Steigerwaldt Cruise Updated 11-20-92 EXHIBIT D-3-B Categories, Adjustment Amounts and Administrative Amounts Applicable To The Northern Timberlands (Michigan) I. Bare Land
Adjustment Amount Per Acre Administrative Exclusive Amount Category Acreage of Timber by Category -------- ------- ----------- -------------- Productive Land and 33,267 40.00 1,330,680 Regeneration Non-Productive 3,138 16.50 51,775 Lowland Brush (Spruce) --------- ----- ----------- TOTAL 36,405 1,382,455 =========== Adjustment Administrative Volume Amount Amount Category (Cords) Per Cord by Category -------- ------- ----------- -------------- Conifer Sawtimber 21,200 10.00 212,000 Conifer Pulpwood 173,100 1.50 259,650 Hardwood Sawtimber 78,700 19.50 1,534,650 Hardwood Pulpwood 425,000 2.50 1,062,500 --------- ----- ----------- TOTAL 698,000 3,068,800 ----------- BUILDING AND IMPROVEMENTS 0 ----------- GRAND TOTAL, MICHIGAN TIMBERLANDS 4,451,255 =========== GRAND TOTAL--ALL TIMBERLAND 172,893,000 ===========
SCHEDULE 3 TO SECOND AMENDMENT TO TIMBERLANDS LEASE - - -------------------------------------------------------------------------------- EXHIBIT I -------- PERMITS ------- 1. Water Use Permits (Suwanee River Management District) # 2-91-00079 (Central Repair Shop) # 2-83-00054 (Grain Bins) # 2-83-00069 (Hickman Seed Orchard) # 2-89-00049 (Clone Bank) 2. Surfacewater Management System Permits (Suwanee River Water Management District) # 4-91-00060 (Central Repair Shop) 16 SCHEDULE 4 TO SECOND AMENDMENT OF TIMBERLAND LEASE - - ------------------------------------------------------------------------------- EXHIBIT J -------- OPTION AGREEMENTS ----------------- 1. Option Agreement to Acquire Timberlands between Nekoosa Packaging Corporation and Owens-Illinois Development Corporation dated February 23, 1988 (65O plus or minus acres, Columbia County, Florida). 2. Deed to Phosphate Rock by and among Owens-Illinois Development Corporation, Owens-Illinois, Inc. and Occidental Chemical Corporation, dated July 9, 1973 recorded in Deed Book 104, Page 16, Hamilton County, Florida records and in Deed Book 307, Page 323, Columbia County, Florida records (Land in Hamilton and Columbia Counties, Florida). 3. Deed to Phosphate Rock by and among Owens-Illinois Development Corporation, Owens-Illinois, Inc. and Occidental Chemical & Phosphate Corporation dated September 4, 1975 recorded in Deed Book 125, Page 23, Hamilton County, Florida records and in Deed Book 352, Page 166, Columbia County, Florida records (Land in Hamilton and Columbia Counties, Florida). 4. Deed to Phosphate Rock by and among Owens-Illinois Development Corporation, Owens-Illinois, Inc. and Occidental Chemical and Phosphate Corporation dated June 25, 1975, recorded in Deed Book 121, Page 339, Hamilton County, Florida records (Land in Hamilton County, Florida). 5. Deed to Phosphate Rock by and among Owens-Illinois Development Corporation, Owens-Illinois, Inc. and Monsanto Company dated July 9, 1973, recorded in Deed Book 307, Page 257, Columbia County, Florida records (Land located in Columbia County, Florida). 17 THIRD AMENDMENT TO LEASE AGREEMENT This THIRD AMENDMENT TO LEASE AGREEMENT (this "Amendment") dated as of December 31, 1993, by and between FOUR STATES TIMBER VENTURE, a joint venture formed under the laws of the State of Georgia ("Lessor"), and PACKAGING CORPORATION OF AMERICA, a Delaware corporation ("Lessee"). W I T N E S S E T H: WHEREAS, Lessor and Lessee entered into that certain Timberland Lease dated January 31, 1991 (the "Original Lease"), whereby Lessor leased to Lessee approximately 531,000 acres of timberland in the States of Florida, Georgia, Michigan and Wisconsin; WHEREAS, the Lease was amended by that certain First Amendment to Timberlands Lease dated as of December 31, 1991, made by and between Lessor and Lessee, and further amended by that certain Second Amendment to Timberlands Lease dated as of December 31, 1992 (hereinafter, the Original Lease, as amended by the First Amendment and the Second Amendment thereof, and as further amended hereby and from time to time, shall be referred to as the "Lease"); WHEREAS, the parties desire to further amend the Lease in certain respects and to make additional agreements relating to the Lease. NOW, THEREFORE, in consideration of the premises and the mutual agreements, covenants and provisions hereinafter set forth, the parties agree as follows: I. CAPITALIZED TERMS All capitalized terms not otherwise defined herein or modified hereby shall have the meaning ascribed to such terms in the Lease. II. AMENDMENTS TO LEASE 2.1 Amendment to Section 3. The text of Section 3 of the Lease is hereby deleted in its entirety and replaced with the following text such that Section 3, as revised, reads in its entirety as follows: 3. FINANCIAL STATEMENTS AND REGULATORY FILINGS. Lessee shall furnish to Lessor: (a) within 60 days after the end of each of the first three quarterly fiscal periods of each year, a consolidated balance sheet of Lessee and its consolidated subsidiaries as of the close of such period, together with the related consolidated statements of income and cash flows for the portion of Lessee's fiscal year then ended, setting forth in each case in comparative form the figures for the corresponding portion of Lessee's previous fiscal year, all in reasonable detail and certified (subject to normal year-end adjustments) by an authorized financial officer of Lessee as fairly presenting the financial condition of Lessee for such period and being prepared in accordance with generally accepted accounting principles; (b) within 120 days after the close of each of Lessee's fiscal years, a consolidated balance sheet of Lessee and its consolidated subsidiaries as of the close of such year, together with the related consolidated statements of income and cash flows for such fiscal year, setting forth in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by a recognized national firm of independent public accountants, including their opinion thereon that such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied; (c) within 60 days after the end of each quarter and within 120 days after the close of each fiscal year of Lessee, a certificate of Lessee, signed by the chief financial officer of Lessee, or his authorized designee, demonstrating, in a form from time to time approved by Lessor, compliance with the Lease and setting forth the method of calculating Debt and Funded Debt for purposes of such Sections and to the effect that the signer has reviewed, or caused to be reviewed by persons under such officer's supervision, all of the relevant documents and agreements and has made, or caused to be made under such officer's supervision, a review of the transactions (including filings required under this Amendment and the Lease) and condition of Lessee during the preceding fiscal period, and that such review has not disclosed the existence during such period, nor does the signer have knowledge of the existence as at the date of such certificate, of any condition or event that constitutes a Default or Event of Default or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Lessee has taken or is taking or proposes to take with respect 2 thereto, provided, however, that the reporting of any such condition or event shall not affect any of the remedies available to Lessor under this Lease; (d) concurrently with the delivery of the financial statements referred to in clause (b) above, a letter of such independent public accountants substantially in the form of Exhibit A; (e) promptly upon their becoming available, all statements or reports or other information filed by or on behalf of Lessee with or delivered to the Securities and Exchange Commission; (f) promptly after a responsible officer of Lessee becoming aware of the existence thereof, an Officer's Certificate stating that a Default or Event of Default has occurred and specifying the nature and period of existence thereof and what action Lessee has taken or is taking or proposes to take with respect thereto, provided, however, that the reporting of any such condition or event shall not affect any of the remedies available to Lessor under this Lease; (g) within 120 days after the close of each year, unaudited operating income statements before interest expense and income tax for each major operating group in existence for the reporting period and in formats used by management of Lessee at the time; (h) within 120 days after the close of each year, a statement of Operating Expenses for the previous year, certified as being true and correct by the chief financial officer of Lessee; (i) from time to time such other information as Lessor may reasonably request. In addition to furnishing the foregoing items to Lessor, Lessee will permit any Person designated by Lessor in writing, at the expense of Lessor, and subject to such limitations as Lessee may reasonably impose to ensure compliance with any applicable legal or contractual restrictions, to visit and inspect any of the properties of Lessee, to examine the corporate books and financial records of Lessee (other than income tax records) and to make copies thereof or extracts therefrom, and to discuss the affairs, finances and accounts of Lessee with the principal officers of Lessee, all at such reasonable times and as often as Lessor may reasonably request. 3 2.2 Amendment to Section 37.2(b). The text of Section 37.2(b) of the Lease shall be deleted in its entirety and replaced with the following text such that Section 37.2(b), as revised, shall read in its entirety as follows: (b) Neither Lessee nor any of its Subsidiaries shall incur any Funded Debt unless immediately thereafter, upon giving pro forma effect thereto, Cash Flow Coverage of Fixed Charges would exceed (i) 1.1 at each quarterly calculation date commencing December 31, 1993, through and including December 31, 1994, (ii) 1.25 at each quarterly calculation date after January 1, 1995, through and including December 31, 1995, and (iii) 2.0 at each quarterly calculation date after December 31, 1995, and Funded Debt of Lessee and its Subsidiaries, on a consolidated basis, would not exceed 55% of the Total Capital of Lessee and its Subsidiaries, on a consolidated basis. For purposes of the foregoing, "Cash Flow Coverage of Fixed Charges" means, for the four fiscal quarterly periods ending immediately prior to the date of determination thereof, the ratio of Net Income before taxes plus depreciation and interest expense and lease rentals minus capital expenditures (other than a Known Modification) to interest expense and lease rentals and dividends on all mandatorily redeemable preferred stock of Lessee and its Subsidiaries. 2.3 Amendment to Section 37.2(c). Section 37.2(c) of the Lease is hereby deleted in its entirety. 2.4 Amendment to Section 37.2(e). The text of Section 37.2(e) of the Lease is hereby deleted in its entirety and replaced with the following text such that Section 37.2(e), as revised, reads in its entirety as follows: (e) Lessee shall not pay or declare any Restricted Payment (other than as permitted by Section 37.2(f)) if: (i) immediately after the making thereof Funded Debt of Lessee and its Subsidiaries, on a consolidated basis, would exceed 50% of Total Capital of Lessee and its Subsidiaries, on a consolidated basis; or (ii) the making thereof would cause Lessee's Net Worth to be less than $800 million; or (iii) there shall exist any Default or Event of Default under this Lease; or (iv) such payment or declaration would cause an Event of Default to occur under subsection 20(i) hereof. 4 2.5 Amendment to Section 37.2(f). The text of Section 37.2(f) of the Lease is hereby deleted in its entirety and replaced with the following text such that Section 37.2(f), as revised, reads in its entirety as follows: (f) Neither Lessee nor any of its Subsidiaries shall make or permit to exist any loan or advance to Tenneco Inc. or any of its Affiliates except loans or advances to Tenneco Inc. that are payable upon demand, bear interest payable at least annually, at a rate equal to the prime rate as quoted by Morgan Guaranty Trust Company of New York from time to time and are made out of cash generated in the ordinary course of operations of Lessee or its Subsidiaries and only if (I) Tenneco Inc. owns, directly or indirectly, all the outstanding securities of Lessee and either (i) all publicly held debt obligations of Tenneco Inc. having a maturity of one year or more from the date of issue are rated at least investment grade by Moody's and Standard & Poors, or (ii) arrangements have been made which are in all respects satisfactory to Lessor, whereby return of the amount loaned or advanced is unconditionally guaranteed, (II) Funded Debt of Lessee and its Subsidiaries, on a consolidated basis, does not exceed 55% of the excess of Total Capital of Lessee and its Subsidiaries, on a consolidated basis, over the aggregate amount of all loans and advances to Tenneco Inc. and (III) no Default or Event of Default exists. 2.6 Amendments to Section 39. (a) The defined terms "Fixed Charges" and "Pretax Cash Flow", as defined in the Lease, are hereby deleted in their entirety without replacement. (b) The definitions of the terms "Funded Debt", "Net Worth" and "Total Capital" as set forth in the Lease are hereby deleted and replaced in their entirety by the following definitions: Funded Debt: of any Person on any date means (i) all Debt (except Debt for borrowed money with a maturity of less than one year from the date of determination of Funded Debt) and (ii) that portion of any Debt for borrowed money with a maturity of less than one year from the date of determination of Funded Debt that was outstanding at any time during the 12 full calendar months preceding the date as of which Funded Debt is being determined which is equal to the lowest daily average principal amount of all such Debt that was outstanding for any period of 30 consecutive days during such 12-month period. 5 Net Worth: of any Person on any date means the sum or the capital stock and surplus (including earned surplus, capital surplus and the balance of the current profit and loss account not transferred to surplus) accounts of such Person on such date which would appear on a balance sheet of such Person on such date prepared in accordance with generally accepted accounting principals, minus any amounts attributable to good will added to such balance sheet after December 31, 1990; provided, however, that the resulting Net Worth shall be adjusted so as to eliminate the effect of implementation of Statement of Financial Accounting Standards Nos. 106 and 109 of the Financial Accounting Standards Board. Total Capital: of any Person means Funded Debt of such Person plus Net Worth of such Person. (c) Section 39 of the Lease is hereby further amended by adding the following definitions: Affiliate: of the specified Person means any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with, such specified Person. Debt: of any Person means at any date, without duplication, (i) all obligations for borrowed money created or assumed by such Person, (ii) all obligations of such Person to pay the deferred purchase price of property or services, except such obligations arising in the ordinary course of business and maturing less than one year from the date of creation thereof, (iii) all obligations of such Person as lessee under capital leases and the net present value (discounted semiannually in each case at a rate of 9% per annum) of all rentals under operating lease (excluding (x) all operating leases which are of motor vehicles or office equipment with an original term equal to or less than 5 years and (y) all other operating leases the net present value of which, as so determined, is less than $5,000,000 individually and not more than $30,000,000 in the aggregate), (iv) all Debt of others secured by a Lien on any asset of such Person and upon which such Person customarily pays interest, whether or not such Debt is assumed by such Person, (v) the aggregate liquidation value of all preferred stock of such Person that is mandatorily redeemable on any date on or before the date which is 22 1/2 years from January 30, 1991, and (vi) to the extent required to be reflected on a balance sheet of such Person prepared in accordance with generally accepted accounting principals or in the footnotes thereto, all 6 Debt of others directly or indirectly guaranteed by such Person. Known Modification: those capital expenditures identified in Exhibit B hereto which have been or are to be financed by General Electric Capital Corporation pursuant to a certain Participation Agreement dated as of January 30, 1991. Net Income: of any Person with reference to any period means the net income (or deficit) of such Person for such period, after deducting all operating expenses, provisions for all taxes and reserves (including reserves for deferred income taxes) and all other proper deductions, all determined in accordance with generally accepted accounting principles; provided that there shall be excluded (a) the income (or deficit) of any Subsidiary of such Person to the extent that any such Subsidiary is prevented by contract or by law from paying dividends or similar distributions, (b) any extraordinary gain, (c) any write-up of any asset, (d) any gain arising from the acquisition of any securities or the extinguishment of any Debt of such Person, (e) any net income or gain (but not any net loss) during such period from any change in accounting, from any discontinued operations or the disposition thereof, from any extraordinary events or from any prior period adjustments and (f) in the case of a successor to such Person by consolidation or merger or as a transferee of all or substantially all its assets, any earnings of the successor prior to such consolidation, merger or transfer of assets. Restricted Payments: means (a) any loan or advance to any Affiliate of Lessee, (b) the declaration or payment of any dividend on, or the incurrence of any liability to make any other payment or distribution, direct or indirect, on account of, any shares of any class of stock of Lessee now or hereafter outstanding, except a dividend payable solely in shares of such class, and (c) any payment or distribution on account of any redemption, retirement, purchase or other acquisition, direct or indirect, of any shares of any class of stock of Lessee now or hereafter outstanding, or of any warrants, options or other rights to acquire any such shares of stock, or any other payment or distribution, direct or indirect, in respect thereof. 7 III. ADDITIONAL AGREEMENTS 3.1 Information Provided by Lessee. Copies of all information required to be provided to the Lessor by Lessee pursuant to Section 3 of the Lease shall also be provided to the following parties at the addresses set forth below: Metropolitan Life Insurance Company:
Metropolitan Life Insurance Co. Metropolitan Life Insurance Co. Metropolitan Life Insurance Co. Corporate Investments 8717 West 110th Street Agricultural Investments One Lincoln Centre Suite 700 East Central Branch Office Suite 800 Overland Park, Kansas 66210-2101 2230 Chester Boulevard Oakbrook Terrace, Illinois 60181 Attention: Senior Vice President Richmond, Indiana 47374-1288 Attn: Vice President Attn: Manager John Hancock Mutual Life Insurance Company: John Hancock Mutual Life Insurance Company John Hancock Mutual Life Bond and Corporate Finance Department 12 Siebald Street, Suite 101 200 Clarendon Street, 57th Floor Statesboro, Georgia 30458 Boston, Massachusetts 02117 Attn: Mr. Amos Connell Attn: Mr. Ken Hines
3.2 Waiver. Lessor hereby waives any violation of or non-compliance by Lessee with subsections (b),(c), (e) and (f) of Section 37.2 of the Lease for the period commencing and including December 31, 1993, through and including the date this agreement is executed to the extent that any such violation or non- compliance has occurred. 3.3 No Dividends. During the period commencing December 31, 1993 and ending December 31, 1995, unless otherwise restricted in the Lease, Lessee shall not pay or declare any dividend unless immediately thereafter Lessee would be permitted to incur an additional $1 of Funded Debt. 3.4 Agreement Regarding Sale of Timberlands. Contemporaneously with the execution of this Amendment, the Lessor and the Lessee shall have entered into an agreement regarding sales of Non-Strategic Lands and Pre-Approved Property (the "Letter Agreement"), the form and terms of which Letter Agreement are set forth on Exhibit C hereto and incorporated herein by this reference for all purposes as if the terms and provisions thereof were fully stated herein. IV. REPRESENTATIONS AND WARRANTIES OF LESSEE Lessee hereby makes the following additional representations and warranties under the Lease as of the date hereof: 8 (a) Lessee is a corporation duly incorporated and validly existing under the laws of the state of Delaware, is in good standing therein, is duly qualified to do business and is in good standing in the States of Florida, Georgia, Michigan and Wisconsin, and has full corporate power and authority to enter into the Lease and this Amendment and to perform its obligations thereunder and hereunder; (b) The execution and delivery of the Lease and this Amendment by Lessee and the performance of its obligations thereunder and hereunder have been duly authorized by all necessary corporate action and will not violate any provision of law or of its charter or by-laws or result in the breach of or constitute a default under any material indenture or other agreement or instrument to which Lessee is a party or by which Lessee or the Property may be bound or affected; (c) The consolidated balance sheet of the Lessee and its Subsidiaries dated December 31, 1993, and the related consolidated statements of income, retained earnings and cash flow which have been delivered to Lessor by Lessee have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved and fairly present (i) the financial condition of Lessee and its Subsidiaries as of the date of such balance sheet, and (ii) the results of operations of the Lessee and its Subsidiaries for the period then ended; (d) No material adverse change in the business, operations, properties, assets or financial condition of the Lessee has occurred subsequent to December 31, 1993; (e) Lessee possesses all trademarks, trade names, copyrights, patents, governmental licenses, franchises, certificates, consents, permits and approvals necessary to enable it to carry on its business in all material respects as now conducted and to own or operate the properties material to its business as now owned or operated, without conflict with rights of others, and that all such trademarks, trade names, copyrights, patents, governmental licenses, franchises, certificates, consents, permits and approvals which are material to Lessee are valid and subsisting; (f) No actions, suits or proceedings are pending or, to the knowledge of the Lessee, threatened against or affecting the Lessee at law or in equity before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind, which involve any transaction herein contemplated or would have a material adverse change on the business, operations, properties, assets or financial condition of the Lessee; and that Lessee is not in default or in violation of any Legal Requirement which would have a material adverse effect on its ability to perform any of its obligations hereunder (except as 9 related to the incurrence of debt under the Valdosta, Tomahawk and Counce leases which are currently under negotiation); (g) The Packaging Corporation of America Amendments to Existing Leveraged Lease Documentation March 1994 prepared by J.P. Morgan (the "Memorandum"), relating to the amendment of the Lease, a copy of which was delivered to Lessor, does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which they were made. (h) No employee benefit plan established or maintained by the Lessee, which is subject to Part 3 of Subtitle B of Title I of ERISA, had an accumulated funding deficiency (as such term is defined in Section 302 of ERISA) as of the last day of the most recent fiscal year of such plan ended prior to the date hereof which was or would have been material to the Lessee and its Subsidiaries taken as a whole; no liability to the Pension Benefit Guaranty Corporation has been, or is expected by Lessee to be, incurred with respect to any employee benefit plan maintained by the Lessee or any of its Subsidiaries, which is subject to Part 3 of Subtitle B of Title I of ERISA, which would be material to the Lessee and its Subsidiaries taken as a whole; and Lessee is in compliance in all material respects with all applicable provisions of ERISA and the regulations and published interpretations thereunder; (i) As of the date hereof, Lessee has filed all tax returns which are required to be filed by it and has paid all taxes shown to be due pursuant to such returns and all other taxes, assessments, fees and other governmental charges upon the Lessee and upon its properties, assets, income and franchises, except those being contested by the Lessee, those the nonpayment of which would not have a material adverse effect on the Lessee, or those which are not yet due and payable; and (j) All filings and notifications required to be made by Lessee and its parent company, Tenneco, in connection with the Lease and this Amendment and the transactions contemplated by the Purchase Agreement and the Acquisition Agreement under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, have been made, and the applicable waiting period, including any extensions thereof, has expired. No additional action of, or filing with, any governmental or public body or authority is required in connection with the execution, delivery and performance of the Lease or this Amendment (other than routine filings with the Securities and Exchange Commission and other governmental entities required or contemplated by the Lease). 10 V. MISCELLANEOUS 5.1 Remainder in Full Force and Effect. All terms and provisions of the Lease shall remain in full force and effect, except as amended hereby or waived. 5.2 Counterparts. This Amendment may be executed in any number of counterparts, no one of which needs to be executed by all the parties, and this Amendment shall be binding upon all the parties with the same force and effect as if all the parties had signed the same document, and each such signed counterpart shall constitute an original of the Amendment. 5.3 Successors and Assigns. This Amendment shall be binding upon and shall inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, subject to any limitations on assignment set forth in the Lease. IN WITNESS WHEREOF, Lessor and Lessee, acting through their duly elected and authorized officers, have caused this Third Amendment to Timberland Lease to be executed under seal as of the day and year first above written. LESSOR: FOUR STATES TIMBER VENTURE, a Georgia Joint Venture, by both of its joint venturers Signed, sealed and By: John Hancock Mutual Life delivered in the presence Insurance Company of: By: /s/ Ken Hines, Jr. -------------------------------- - - --------------------------- Name: Ken Hines, Jr. Name: Title: Sr. Investment Officer ---------------------- Witness Attest:/s/ James H. Young ---------------------------- - - --------------------------- Name: James H. Young Name: Title: Assistant Secretary ---------------------- Witness [CORPORATE SEAL] /s/ Marie C. O'Brien - - --------------------------- Name: Marie C. O'Brien Notary Public [NOTARIAL SEAL] 11 Signed, sealed and By: Metropolitan Life Insurance delivered in the presence Company of: By: - - ----------------------------- ------------------------------- Name: Name: ------------------------ -------------------------- Witness Title: ------------------------- Attest: - - ----------------------------- --------------------------- Name: Name: ------------------------ -------------------------- Witness Title: ------------------------- [CORPORATE SEAL] - - ------------------------------ Name: ------------------------- Notary Public [NOTARIAL SEAL] Signed, sealed and LESSEE: delivered in the presence of: PACKAGING CORPORATION OF AMERICA /s/ Terrance M. Phillips - - -------------------------- Name: Terrance M. Phillips By: /s/ R. A. Page --------------------- -------------------------------- Witness Name: R. A. Page --------------------------- Title: Vice President Chief Financial Officer -------------------------- /s/ Armina Will - - -------------------------- Name: Armina Will Attest: /s/ Jaime Taronji, Jr. --------------------- ---------------------------- Witness Name: Jaime Taronji, Jr. --------------------------- Title: Assistant Secretary -------------------------- /s/ Ramona Christian - - -------------------------- [CORPORATE SEAL] Name: --------------------- Notary Public [NOTARIAL SEAL] OFFICIAL SEAL RAMONA CHRISTIAN NOTARY PUBLIC STATE OF ILLINOIS MY COMMISSION EXP. OCT. 9, 1996 12 Signed, sealed and By: Metropolitan Life Insurance delivered in the presence Company of: /s/ Sherrill D. Ciuba By: /s/ Gerald J. Hoenig - - ----------------------------- ------------------------------- Name: Sherrill D. Ciuba Name: Gerald J. Hoenig ------------------------ -------------------------- Witness Title: Associate General Counsel ------------------------- /s/ Kathleen D. Crady Attest: /s/ Nancy J. Hammer - - ----------------------------- --------------------------- Name: Kathleen D. Crady Name: Nancy J. Hammer ------------------------ -------------------------- Witness Title: Assistant Secretary ------------------------- [CORPORATE SEAL] /s/ Sandra R. Newman - - ------------------------------ Name: Sandra R. Newman ------------------------- Notary Public [NOTARIAL SEAL] Notary Public, Georgia, State at Large My Commission Expires Jan. 12, 1998 Signed, sealed and LESSEE: delivered in the presence of: PACKAGING CORPORATION OF AMERICA By: - - ------------------------- -------------------------------- Name: Name: -------------------- --------------------------- Witness Title: -------------------------- Attest: - - ------------------------- ---------------------------- Name: Name: -------------------- --------------------------- Witness Title: -------------------------- - - ------------------------- [CORPORATE SEAL] Name: -------------------- Notary Public [NOTARIAL SEAL] 12 ******* ACKNOWLEDGMENTS ******* STATE OF ILLINOIS) :ss COUNTY OF COOK) The foregoing instrument was acknowledged before me this 25th day of May, 1994 by Robert Page, as Vice President and Chief Financial Officer, respectively, of Packaging Corporation of America, a Delaware corporation, on behalf of the corporation. /s/ Ramona Christian ------------------------------- OFFICIAL SEAL Name: RAMONA CHRISTIAN -------------------------- NOTARY PUBLIC STATE OF ILLINOIS Notary Public, MY COMMISSION EXP. OCT. 9, 1996 ----------------- County, ------------------------ My Commission Expires:___________ [NOTARIAL SEAL] STATE OF :ss COUNTY OF The foregoing instrument was acknowledged before me this _________ day of ___________,199_ by__________________________ and_____________________, as ___________________________________ and __________________________________, respectively, of Metropolitan Life Insurance Company, a New York corporation, as joint venturer of Four States Timber Venture, a Georgia joint venture, on behalf of the joint venture. -------------------------------- Name: --------------------------- Notary Public, ------------------ County, ------------------------- My Commission Expires: ---------- [NOTARIAL SEAL] 13 COMMONWEALTH OF MASSACHUSETTS ) ) : ss COUNTY OF SUFFOLK ) The foregoing instrument was acknowledged before me this 25th day of May, 1994 by Ken Hines and Jim Young, as Senior Investment Officer and Assistant Secretary, respectively, of John Hancock Mutual Life Insurance Company, a Massachusetts corporation, as joint venturer of Four States Timber Venture, a Georgia joint venture, on behalf of the joint venture. /s/ Marie C. O'Brien ------------------------------ Name: Marie C. O'Brien ------------------------- Notary Public, ---------------- County, Suffolk ----------------------- My Commission Expires: AUGUST 9, 1996 --------------- [NOTARIAL SEAL] 14 EXHIBIT A To Four States Timber Venture c/o John Hancock Mutual Life Insurance Company Metropolitan Life Insurance Company We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Packaging Corporation of America (a Delaware corporation) as of December 31, 19__, and the related consolidated statements of income, stockholder's equity and cash flows for the year then ended, and have issued our report thereon dated February ___, 19__. In connection with our audit, nothing came to our attention that caused us to believe that Packaging Corporation of America was not in compliance with the terms, covenants, provisions or conditions of Section 20 regarding events of default under the Timberland Lease dated as of January 31, 1991, between Four States Timber Venture and Packaging Corporation of America, insofar as they related to accounting matters. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. This report is intended solely for the information and use of the Board of Directors and management of Packaging Corporation of America and Four States Timber Venture and should not be used for any other purpose. Date: ---------------------------- 15 EXHIBIT B Revised 1-25-91 Tomahawk & Valdosta Non-Severable Modifications and Improvements (Thousands of Dollars)
Total 1991 1992 1993 ------ ------ ------- ------ Valdosta - - -------- TRS Fibreline Carryover 2,300 2,300 TRS Recovery 16,500 7,500 5,000 4,000 Papermachine 38,900 9,000 18,000 11,900 New Lime Kiln 18,100 8,100 10,000 Powerhouse Control Center 1,200 800 400 No. 4 Evaporator 1,200 400 800 Woodyard 2,300 1,400 900 Boiler Alterations 5,000 1,000 2,000 2,000 Tomahawk - - -------- Woodroom 3,600 300 3,300 Pulp Mill 24,000 900 15,000 8,100 #2 Papermachine 1,700 1,700 #4 Papermachine 8,900 1,900 2,000 5,000 Steam Generation 3,400 1,400 500 1,500 ------- ------ ------ ------ Total 127,100 34,900 58,000 34,200
16 EXHIBIT C Packaging Corporation of America [Tenneco Logo Appears Here] A Tenneco Company Corporate Offices 1603 Orrington Avenue Evanston, Illinois 80201-3853 (708) 492-5713 May 24, 1994 Mr. E. Kendall Hines, Jr. John Hancock Mutual Life Insurance Company John Hancock Tower - 57th Floor 200 Clarendon Street Boston, MA 02117 Dear Ken: This document constitutes a letter of agreement (hereinafter known as "Letter of Agreement") which states the revised agreement of the parties as to matters covered in Sections 35.2 and 39 of the Lease Agreement between Four States Timber Venture ("Four States") and Packaging Corporation of America ("PCA") dated January 31, 1991. All capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Lease Agreement. This revised agreement is limited to the following items: 1. No additions to Pre-Approved Property are required to be made until at least 50% (minimum 7,833 acres) of the existing 15,665 acres of Non-Strategic Lands as of April 19, 1994 have been sold; except, however, at Four States' option, additional lands may be added to enhance the sale of undesirable Pre-Approved Property. 2. PCA shall use its best efforts to market Non-Strategic Lands and Pre-Approved Property according to the following priorities: Northern Lands: --------------- Priority I All remaining Non-Strategic Lands Priority II All remaining Pre-Approved Property Southern Lands: --------------- Priority I All remaining Non-Strategic Lands Priority II Pre-Approved Property in the Southern Timberlands containing 50% or greater hardwood, cypress, and non-productive land types Priority III All other Pre-Approved Property [PCA Logo Appears Here] [Printed on Recycled Paper Logo Appears Here] Mr. E. Kendall Hines May 24, 1994 Page Two 3. The Net Sales Proceeds to Four States on land sales shall be as follows: Priority I and II The Net Sales Proceeds to Four States shall be the greater of A or B: A - Minimum Return Price - The following changes shall be used to calculate the Minimum Return Price: (i) Minimum Return Rate shall be 10.75%, and (ii) Allocated Base Value, plus 70% of the excess (as determined in accordance with the definition of Minimum Return Price in the Lease), shall be used to calculate the amount defined in section (i) of the definition of Minimum Return Price. B - Make-Whole Price Priority III No change from the Lease Agreement 4. The current Pre-Approved Property pool shall be reduced through sales down to 60,000 acres. Once 50% of the Non-Strategic Lands have been sold (7,833 acres), Four States shall maintain the pool of Pre-Approved Property at 60,000 acres. 5. All land sales with an Allocated Base Value of less than $1,000,000 will be pooled on an annual basis, rather than on a quarterly basis, and shall be subject to the following: a. At the end of the first quarter, a tentative settlement will be made as provided in Section 35.2 of the Lease Agreement. In the event Net Sales Proceeds exceed the greater of Minimum Return Price or the Make-Whole Price (such an excess is hereafter referred to as an "Excess"), each party will receive its share as provided in Section 35.2 of the Lease Agreement. In the event PCA is required to make up a shortage in the amount due Four States, all Net Sales Proceeds will be distributed to Four States, and a credit due to Four States will be established. b. At the end of the second quarter, a tentative settlement will be made based on all sales occurring during the first and second quarters, as in item 5(a) above. If there is an Excess, each party will receive its share. If PCA is required to make up a shortage in the amount due Four States, all Net Sales Proceeds will be distributed to Four States, and a revised credit due to Four States will be established. Mr. E. Kendall Hines May 24, 1994 Page Three c. The above process will be continued through the third and fourth quarters and a final cash settlement will be made at the end of the fourth quarter of the calendar year with calculations to be made as if all such sales were a single transaction closing on the 1st day of the calendar year then ended. d. Separate pools will be maintained for (i) Priority I and II lands, and (ii) Priority III lands and other lands. e. If at any time during the calendar year, the sum of all unpaid credits to Four States from both (i) Priority I and II lands, and (ii) Priority III lands and other lands exceeds $500,000, Lessee will within ten days pay the Lessor the entire credit amount. Notwithstanding any language to the contrary in the Lease Agreement, or any prior amendments to the Lease Agreement, and contingent upon acceptance of these changes by Four States, PCA agrees to abide by this Letter of Agreement during the Initial Lease Term, or until both parties mutually consent to any further revisions. If you accept the terms of this Letter of Agreement, please sign the document below, and return an original copy to my attention. Sincerely, /s/ Robert D. Harlow Reviewed - - --------------------- Robert D. Harlow PCA Law Department Senior Vice President Primary Mills Group By /s/ J.R. Olsen -------------------- Agreed to this day of , 1994 ---------- ----------- - - -------------------------------------------------------- Four States Timber Venture by John Hancock Mutual Life Insurance Co., Joint Venturer E. Kendall Hines Sr. Investment Officer EX-12 11 COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12 TENNECO INC. AND CONSOLIDATED SUBSIDIARIES COMBINED WITH 50% OWNED UNCONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31, ------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (DOLLARS IN MILLIONS) Income from continuing operations.................... $361 $218 $258 $238 $165 Add: Interest........................................... 216 195 160 104 101 Portion of rentals representative of interest factor............................................ 54 60 57 52 47 Preferred stock dividend requirements of majority- owned subsidiaries................................ 21 21 23 -- -- Income tax expense and other taxes on income....... 163 194 231 114 115 Amortization of interest capitalized............... 2 2 2 1 -- Undistributed (earnings) losses of affiliated companies in which less than a 50% voting interest is owned.......................................... 2 (1) -- -- -- ---- ---- ---- ---- ---- Earnings as defined.............................. $819 $689 $731 $509 $428 ==== ==== ==== ==== ==== Interest............................................. $216 $195 $160 $104 $101 Interest capitalized................................. 2 6 5 2 1 Portion of rentals representative of interest factor. 54 60 57 52 47 Preferred stock dividend requirements of majority- owned subsidiaries on a pre-tax basis............... 33 37 42 -- -- ---- ---- ---- ---- ---- Fixed charges as defined......................... $305 $298 $264 $158 $149 ==== ==== ==== ==== ==== Ratio of earnings to fixed charges................... 2.69 2.31 2.77 3.22 2.87 ==== ==== ==== ==== ====
EX-21 12 SUBSIDIARIES EXHIBIT 21 TENNECO INC. AND SUBSIDIARIES AND AFFILIATES As of December 31, 1997 TENNECO INC. (DELAWARE) Aircal S.A. (France)................................................................. 100% (Tenneco Inc. owns all shares except seven which are held by its four directors and Tenneco Packaging Inc., 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 Inc. owns 98%; Tenneco Packaging International Holdings Inc. owns 2%) Altapack SPA (Italy).............................................................. 100 Spaac Srl (Italy) (In Liquidation)................................................ 100 Autopartes Walker, S.A. de C.V. (Mexico)............................................. 99.98 (Tenneco Inc. owns 99.98%; and Tenneco Automotive Inc. owns .02%) Proveedora Walker S.A. de C.V. (Mexico).......................................... 99.99 (Autopartes Walker , S.A. de C.V. owns 49,999 shares; and Tenneco Automotive Inc. owns 1 share) Tenneco Automotive Servicios de Mexico, S.A. de C.V. (Mexico)............... 99.99 (Proveedora Walker S.A. de C.V. owns 49,999 shares, and Monroe-Mexico, S.A. de C.V. owns 1 share) Counce Limited Partnership (Texas Limited Partnership)............................... 95 (Tenneco Inc. owns 95%, as Limited Partner; and Tenneco Packaging Leasing Company owns 5%, as General Partner) Counce Finance Corporation (Delaware)............................................. 100 Greenmont Insurance Company (Vermont)................................................ 100 Kobusch Packaging Egypt Ltd. (Egypt)................................................. 99 (Tenneco Inc. owns 99%; and Kobusch Folien GmbH owns 1% or 140 shares) Monroe-Mexico S.A. de C.V. (Mexico).................................................. 0.01 (Tenneco Inc. owns 0.01%; and Tenneco Automotive Inc. owns 99.99%) Omni-Pac GmbH (Germany).............................................................. 1 (Tenneco Deutschland Holdinggesellschaft mbH owns 99%; and Tenneco Inc. owns 1%) Omni-Pac S.A.R.L. (France)........................................................ 3 (Omni-Pac GmbH owns 3%; and Tenneco Inc. owns 97%) Omni-Pac S.A.R.L. (France)........................................................... 97 (Tenneco Inc. owns 97%; and Omni-Pac GmbH owns 3%) Protective & Flexible Packaging B.V. (Netherlands)................................... 100 Nederlandse Pillo-Pak Maatshcappij B.V. (Netherlands)............................. 100 Scriptoria N.V. (Belgium)............................................................ 99.6 (Tenneco 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).............................................. less than 1 (Tenneco Inc. owns >99%; and Scriptoria N.V. owns less than 1%)
1 Subsidiaries of Tenneco Inc. (Delaware) Sentinel GmbH Verpackungen (Germany)................................................. 100% (Tenneco Inc. owns >99%; and Scriptoria N.V. owns less than 1%) Tenneco Asia Inc. (Delaware)......................................................... 100 Tenneco Asheville Inc. (Delaware).................................................... 100 Tenneco Automotive Foreign Sales Corporation Limited (Jamaica)....................... 1 (Tenneco Inc. owns 1%; and Tenneco Automotive Inc. owns 99%) Tenneco Automotive Inc. (Delaware)................................................... 100 (Tenneco Inc. owns 100% of the common stock; and Tenneco Packaging Inc. owns 100% of the non-voting preferred stock.) Autopartes Walker, S.A. de C.V. (Mexico).......................................... 0.02 (Tenneco Inc. owns 99.98%; Tenneco Automotive Inc. owns 0.02%. The subsidiaries of Autopartes Walker are listed on page 1 hereof.) 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%) Consorcio Terranova S.A. de C.V. (Mexico)......................................... 99.99 (Tenneco Automotive Inc. owns 99.99%; and Josan Latinamericana S.A. de C.V., an unaffiliated company, owns 0.01%) 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 Monroe Auto Pecas S.A. (Brazil)................................................... 6.33 (Tenneco Automotive Inc. owns 6.33%; Walker do Brasil Industria Auto Pecas Ltda. owns 79.19%; and Monteiro Aranha S/A, an unaffiliated company, owns 14.48%) Monroe-Mexico S.A. de C.V. (Mexico)............................................... 99.99 (Tenneco Automotive Inc. owns 99.99%; and Tenneco Inc. owns 0.01%) Tenneco Automotive Servicios Mexico, S.A. de C.V. (Mexico)..................... 0.01 (Monroe-Mexico, S.A. de C.V. owns 1 share, and Proveedora Walker S.A. de C.V. owns 99.99%) Precision Modular Assembly Corp. (Delaware)....................................... 100 Proveedora Walker S.A. de C.V. (Mexico)........................................... less than 1 (Tenneco Automotive Inc. owns 1 share; and Autopartes Walker S.A. de C.V. owns 49,999 shares. The subsidiaries of Proveedora Walker S.A. de C.V. are listed above.) Rancho Industries Europe B.V. (Netherlands)....................................... 100 Tenneco Automotive Foreign Sales Corporation Limited (Jamaica).................... 99 (Tenneco Automotive Inc. owns 99%; and Tenneco Inc. owns 1%) Tenneco Automotive International Sales Corporation (Delaware)/1/.................. 100 Tenneco Automotive Japan Ltd. (Japan)............................................. 100
- - --------- /1/ In dissolution. 2 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Automotive Inc. (Delaware) Tenneco International Holding Corp. (Delaware).................................... 4.77% (Tenneco Inc. owns 95.23% of Common Stock and 75% of $8.00 Junior Preferred Stock; Tenneco Automotive Inc. owns 4.77% of Common Stock and 25% of $8.00 Junior Preferred Stock; and MW Investors L.L.C., an unaffiliated company, owns of Variable Rate Voting Participating Preferred Stock. The subsidiaries of Tenneco International Holding Corp. are listed beginning on page 5 hereof.) The Pullman Company (Delaware).................................................... 100 Monroe Axios Produtos de Elastomeros Limitada (Brazil)......................... 99 (The Pullman Company owns 99%; and Peabody International Corporation owns 1%) Clevite Industries Inc. (Delaware)............................................. 100 Peabody International Corporation (Delaware)................................... 100 Monroe Axios Produtos de Elastomeros Limitada (Brazil)...................... 1 (Peabody International Corporation owns 1%; and The Pullman Company owns 99%) 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 Pullmex, S.A. de C.V. (Mexico)........................................... 0.1 (The Pullman Company owns 99.9%; and Peabody World Trade Corporation owns 0.1%) 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 Pullmex, S.A. de C.V. (Mexico)................................................. 99.9 (The Pullman Company owns 99.9%; and Peabody World Trade Corporation owns 0.1%) Tenneco Automotive Trading Company (Delaware)........................................ 100 Tenneco Brake, Inc. (Delaware)....................................................... 100 Tenneco Brazil Ltda. (Brazil)........................................................ 100 Walker do Brazil Industria Auto Pecas Ltda. (Brazil).............................. 100 Monroe Auto Pecas S.A. (Brazil)................................................ 79.19 (Walker do Brazil Industria Auto Pecas Ltda. owns 79.19%; Tenneco Automotive Inc. owns 6.33%; and Monteiro Aranha S/A, an unaffiliated company owns 14.48%)
3 Subsidiaries of Tenneco Inc. (Delaware) Tenneco Business Services Holdings Inc. (Delaware)................................... 100% Tenneco Business Services Inc. (Delaware)......................................... 100 Tenneco Deutschland Holdinggesellschaft mbH (Germany)................................ 99.97 (Tenneco Inc. owns 99.97%; and Atlas Bermoegensverwaltung, 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%) Gillet-Abgassysteme Zwickau Gmbh (Germany)..................................... 100 Mastra-Gillet Industria e Comercio Ltda. (Brazil).............................. 50 (Heinrich Gillet GmbH & Co. KG owns 50%; and Mastra Industria e 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%) Kobusch Folien GmbH (Germany)..................................................... 100 Kobusch Packaging Egypt Ltd. (Egypt)........................................... 1 (Tenneco Inc. owns 99%; and Kobusch Folien GmbH owns 1% or 140 shares) Nord-West Verpackung GmbH (Germany)............................................... 100 Nord-West Wohnungsbau GmbH (Germany)........................................... 100 Omni-Pac Ekco GmbH Verpackungsmittel (Germany).................................... 100 Omni-Pac Poland Sp. z o.o. (Poland)............................................ 100 PCA Embalajes Espana, S.L. (Spain)............................................. 1 (Omni-Pac Ekco GmbH Verpackungsmittel owns 1%; and Tenneco Forest Products GmbH owns 99%) Omni-Pac GmbH (Germany)........................................................... 99 (Tenneco Deutschland Holdinggesellschaft mbH owns 99%; and Tenneco Inc. owns 1%) Omni-Pac ApS (Denmark)......................................................... 100 Omni-Pac A.B. (Sweden)......................................................... 100 Omni-Pac S.A.R.L. (France)..................................................... 3 (Omni-Pac GmbH owns 3%; and Tenneco Inc. owns 97%) Sengewald Verpackungen GmbH (Germany)............................................. 100 Sengewald Klinikprodukte GmbH (Germany)........................................ 100 Sengewald France S.A.R.L. (France)/1/.......................................... 100
- - --------------- /1/ In dissolution 4 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Deutschland Holdinggesellschaft mbH (Germany) Walker Deutschland GmbH (Germany)................................................. 99% (Tenneco Deutschland Holdinggesellschaft mbH owns 99%; and Tenneco Inc. owns 1%) Walker Gillet (Europe) GmbH (Germany)............................................. 100 Tenneco Inc. (Nevada)................................................................ 100 Tenneco International Business Development Limited (Delaware)........................ 100 Tenneco International Finance Limited (United Kingdom)/1/............................ 100 Tenneco International Finance B.V. (Netherlands)..................................... 100 Tenneco International Holding Corp. (Delaware)....................................... 95.23 (Tenneco Inc. owns 95.23% of Common Stock and 75% of $8.00 Junior Preferred Stock; Tenneco Automotive Inc. owns 4.77% of Common Stock and 25% of $8.00 Junior Preferred Stock; and MW Investors L.L.C., an unaffiliated company, owns of Variable Rate Voting Participating Preferred Stock) Alupak, S.A. (Switzerland)........................................................ 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 Monroe Auto Equipement France, S.A. (France)...................................... 99.4 (Tenneco International Holding Corp. owns 99.4%; S.A. Monroe Europe N.V. owns 1 share; and each of Larry Stevenson, Geert Everaert, Theo Bonneu, Joe Budo and Robert Vlassenroot own 1 share) Monroe Equipement Coordination Center N.V. (Belgium)........................... 0.1 (S.A. Monroe Europe N.V. owns 99.9%; and Monroe Auto Equipement France, S.A. owns 0.1%) Monroe Packaging N.V. (Belgium)................................................ 0.1 (S.A. Monroe Europe N.V. owns 99.9%; and Monroe Auto Equipement France, S.A. owns 0.1%) Tenneco Automotive Italia S.r.l. (Italy)....................................... 15 (Tenneco International Holding Corp. owns 85%; and Monroe Auto Equipement France, S.A. owns 15%) S.A. Monroe Europe N.V. (Belgium)................................................. 100 Monroe Amortisor Imalat Ve Ticaret A.S. (Turkey)............................... 99.85 (S.A. Monroe Europe N.V. owns 99.85%; and various unaffiliated individual stockholders own 0.15%)
- - --------------- /1/ In dissolution 5 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco International Holding Corp. (Delaware) Subsidiaries of S.A. Monroe Europe N.V. (Belgium) Monroe Auto Equipement France. S.A. (France)................................... less than 1% (Tenneco International Holding Corp. owns 99.4%; S.A. Monroe Europe N.V. owns 1 share; and each of Larry Stevenson, Geert Everaert, Theo Bonneu, Joe Budo and Robert Vlassenroot own 1 share. The subsidiaries of Monroe Auto Equipement France S.A. are listed above.) Monroe Equipement Coordination Center N.V. (Belgium)........................... 99.9 (S.A. Monroe Europe N.V. owns 99.9%; and Monroe Auto Equipement France, S.A. owns 0.1%) Monroe Packaging N.V. (Belgium)................................................ 99.9 (S.A. Monroe Europe N.V. owns 99.9%; and Monroe Auto Equipement France, S.A. owns 0.1%) Tenneco Automotive Italia S.r.l. (Italy).......................................... 85 (Tenneco International Holding Corp. owns 85%; and Monroe Auto Equipement France, S.A. owns 15%) Tenneco Automotive Polska Sp. z.O.O............................................... 1 (Tenneco Espana Holdings, Inc. owns 99%; Tenneco International Holdings Corp. owns 1%) Tenneco Automotive Sweden A.B. (Sweden)........................................... 100 Tenneco Canada Inc. (Ontario)..................................................... 100 Tenneco Credit Canada Corporation (Alberta).................................... 100 Tenneco Espana Holdings, Inc. (Delaware).......................................... 100 Fric-Rot S.A.I.C. (Argentina).................................................. 48.72 (Tenneco Espana Holdings, Inc. owns 48.72%; and Maco Inversiones S.A. owns 51.28%) Maco Inversiones S.A. (Argentina).............................................. 100 Fric-Rot S.A.I.C. (Argentina)............................................... 51.28 (Maco Inversiones S.A. owns 51.28%; and Tenneco Espana Holdings, Inc. owns 43.04%) 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 Packaging Hexacomb S.A. (Spain)..................................... 100 Tenneco Automotive Polska Sp. z.O.O. (Poland).................................. 99 (Tenneco Espana Holdings, Inc. owns 99%; Tenneco International Holdings Corp. owns 1%) 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%)
6 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco International Holding Corp. (Delaware) Subsidiaries of Tenneco Espana Holdings, Inc. (Delaware) Walker Argentina S.A.I.C. (Argentina).......................................... 100% Tenneco Holdings Danmark A/S (Denmark)............................................ 100 Gillet Exhaust Technologie (Proprietary) Limited (South Africa)................ 100 Gillet Lazne Belohrad, s.r.o. (Czech Republic)................................. 100 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 Tenneco Automotive Port Elizabeth (Proprietary) Limited (South Africa)......... 100 Tenneco Automotive Portugal - Componentes para Automovel, S.A. (Portugal)...... 99.9 (Tenneco Holdings Danmark A/S owns 99.9%; and Walker Danmark A/S owns 0.01%) Walker Danmark A/S (Denmark)................................................... 100 Walker France S.A. (France)/1/.................................................... 100 (Tenneco International Holding Corp. owns 470,373 shares; Daniel Bellanger owns 16 shares; Robert Bellanger owns 8 shares; and each of Walker Europe, Inc., Alain Bellanger and Theodore Bonneu own 1 share) Gillet Tubes Technologies G.T.T. (France)...................................... 100 Wimetal S.A. (France).......................................................... 99 (Walker France S.A. owns 99%; Tenneco Europe Limited owns 1 share, Walker Limited owns 1 share; and each of Kenneth Allen, Daniel Bellanger, Herman Weltens and Theo Bonneu, affiliated persons, owns 1 share) Walker France Constructeurs S.A.R.L. (France).................................. 100 Tenneco Management Company (Delaware)................................................ 100 Tenneco Packaging - Chile Holdings Inc. (Delaware)................................... 100 Tenneco Packaging - Chile S.A. (Chile)............................................ 100 Tenneco Packaging Hungary Holdings Inc. (Delaware)................................... 100 Tenneco Packaging Inc. (Delaware).................................................... 100 A&E Plastics, Inc. (Delaware)..................................................... 100 American Cellulose Corporation (Delaware)......................................... 50 (Tenneco Packaging Inc. owns 50%; and Larry E. Homan, an unaffiliated individual, owns 50%) The Corinth and Counce Railroad Company (Mississippi)............................. 100 Marinette, Tomahawk & Western Railroad Company (Wisconsin)..................... 100 Valdosta Southern Railroad Company (Florida).................................... 100
- - --------------- /1/ Daniel Bellanger is expected to transfer 8 shares to Jim Gray in March 1998. 7 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Packaging Inc. (Delaware) Dahlonega Packaging Corporation (Delaware)........................................ 100% Dixie Container Corporation (Virginia)............................................ 100 Dixie Convoy Corporation (North Carolina)......................................... 100 Dongguan PCA Packaging Co., Ltd. (Peoples Republic of China)...................... 50 (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. (Israel).................... 50 (Glacier-Cor US Holding Corporation owns 50%; and non-affiliates owns 50%) Ha'Lakoach Ha' Neeman Ha' Sheesheem Ou' Shena'yim Ltd. (Israel)............. 99 (Glacier-Cor US Holding Corporation owns 99%; and Hexacomb Corporation owns 1%) Hexacomb Corporation (Illinois)................................................... 100 Ha'Lakoach Ha' Neeman Ha' Sheesheem Ou' Shena'yim Ltd. (Israel)................ 1 (Hexacomb Corporation owns 1%; and Glacier-Cor US Holding Corporation owns 99%) Hexacomb International Sales Corporation (U.S. Virgin Islands)................. 100 Hexajapan Company, Ltd. (Japan)................................................ 60 (Hexacomb Corporation owns 60%; and non-affiliates owns 40%) Packaging Corporation of America (Nevada)......................................... 100 PCA Box Company (Delaware)........................................................ 100 PCA Hydro, Inc. (Delaware)........................................................ 100 PCA Romania Srl (Romania)......................................................... 50 (Tenneco Packaging Inc. owns 50%; and Kraftcorr Inc., an unaffiliated company, owns 50%) PCA Tomahawk Corporation (Delaware)............................................... 100 PCA Valdosta Corporation (Delaware)............................................... 100 PCA West Inc. (Delaware).......................................................... 100 Coast-Packaging Company (California General Partnership)....................... 50 (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 Suncor, Inc. (South Carolina)..................................................... 100 Tenneco AVI Acquisition Inc. (Delaware)........................................... 100 Tenneco CAP Acquisition Inc. (Delaware) (In dissolution).......................... 100 Tenneco CPI Holding Company (Delaware)............................................ 100 Tenneco Foam Products Company (Delaware).......................................... 100
8 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Packaging Inc. (Delaware) Tenneco Forest Products GmbH (Germany)............................................ 100% PCA Embalajes Espana S.L. (Spain).............................................. 99 (Tenneco Forest Products GmbH owns 99%; and Omni-Pac Ekco GmbH Verpackungsmittel owns 1%) 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 Hungary Packaging Material Limited (Hungary)/1/................. 100 TPHH Property Development Kft. (Hungary)....................................... 100 Budafok Recycling Limited (Hungary)............................................ 63.8 (Tenneco Packaging Hungary Packaging Material Limited owns 63.8%; and Asco Hungaria Kft., an unaffiliated company, owns 36.2%) Tenneco Plastics Company (Delaware)............................................... 100 Tenneco Protective Packaging Inc. (Delaware)...................................... 100 AVI Technologies, Inc. (Delaware).............................................. 100 Tenneco Rochester Acquisition Inc. (Delaware)..................................... 100 798795 Ontario Limited (Ontario).................................................. 100 Astro-Valcour, Ltd. (Ontario).................................................. 100 Honeycomb Constructions Services Limited (Ontario)............................. 100 Shearmat Structures Ltd. (Manitoba)......................................... 100 PCA Canada Inc. (Ontario)...................................................... 100 Zhejing Zhongbao Packaging (Peoples Republic of China)............................ 37.5 (Tenneco Packaging Inc. owns 37.5%; and non-affiliates own 62.5%) Tenneco Packaging International Holdings Inc. (Delaware)............................. 100 Airpack SPA (Italy)............................................................... 2 (Tenneco Inc. owns 98%; and Tenneco Packaging International Holdings Inc. owns 2%) Scriptoria N.V. (Belgium)......................................................... less than 1 (Tenneco Inc. owns approximately 99.6%; Tenneco Packaging International Holdings Inc. owns less than 1% or 18 shares 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) Wellenfoam N.V. (Belgium)......................................................... less than 1 (Tenneco Inc. owns 99+%; and Tenneco Packaging International Holdings Inc. owns less than 1% or 1 share) Tenneco Packaging Leasing Company (Delaware)......................................... 100
- - --------------- /1/ This company is commonly referred to as "Tenneco Packaging Hungary Kft." 9 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Tenneco Packaging Leasing Company (Delaware) Counce Limited Partnership (Texas Limited Partnership)............................ 5% (Tenneco Inc. owns 95%, as Limited Partner; and Tenneco Packaging Leasing Company owns 5%, as General Partner) Counce Finance Corporation (Delaware).......................................... 100 Tenneco PPI Company (Delaware)....................................................... 100 Tenneco Retail Receivables Company (Delaware)........................................ 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)....................................... 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.).................................................. less than 1 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group owns less than 1% or 1 share) J&W Baldwin (Holdings) Ltd. (U.K.)................................................ 99.9 (The Baldwin Group, Ltd. holds all of the shares of J&W Baldwin (Holdings) Ltd., except for one share which is held jointly by The Baldwin Group, Ltd. and P. W. Taylor) Baldwin Packaging Limited (U.K.)............................................... 99.9 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group owns less than 1% or 1 share) Jiffy Rugated Products Limited (U.K.)....................................... 99.9 (Baldwin Packaging Limited owns 99.9%; and The Baldwin Group owns less than 1% or 1 share) J&W Baldwin (Manchester) Limited (U.K.)..................................... 99.9 (Baldwin Packaging Limited owns 99.9%; and The Baldwin Group owns less than 1% or 1 share) Jifcour (UK) Limited (U.K.).................................................... 99.9 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group, Ltd. owns less than 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 less than 1% or 1 share) Pentland Packaging Limited (Scotland).......................................... 99.9 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group, Ltd. owns less than 1% or 1 share)
10 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of The Baldwin Group, Ltd. (U.K.) J&W Baldwin (Manchester) Limited (U.K.)........................................... less than 1% (Baldwin Packaging Limited owns 99.9%; and The Baldwin Group, Ltd. owns less than 1% or 1 share) Jifcour (UK) Limited (U.K.)....................................................... less than 1 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group, Ltd. owns less than 1% or 1 share) Jiffy Packaging Company Ltd. (U.K.)............................................... less than 1 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group, Ltd. owns less than 1% or 1 share) Jiffy Rugated Products Limited (U.K.)............................................. less than 1 (Baldwin Packaging Limited owns 99.9%; and The Baldwin Group, Ltd. owns less than 1% or 1 share) Pentland Packaging Limited (Scotland)............................................. less than 1 (J&W Baldwin (Holdings) Ltd. owns 99.9%; and The Baldwin Group owns less than 1% or 1 share) Thompson and Stammers Dunmow (Number 6) Limited (United Kingdom)/1/.................. 100 Thompson and Stammers Dunmow (Number 7) Limited (United Kingdom)/1/.................. 100 TMC Texas Inc. (Delaware)............................................................ 100 Walker Deutschland GmbH (Germany).................................................... 1 (Tenneco Inc. owns 1%; and Tenneco Deutschland Holdinggesellsschaft mbH owns 99%) Walker Europe, Inc. (Delaware)....................................................... 100 Walker Electronic Silencing Inc. (Delaware).......................................... 100 Walker Limited (United Kingdom)...................................................... 100 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 equity) Omni-Pac U.K. Limited (United Kingdom)............................................ 100 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 Europe Limited (Delaware)................................................. 100 Wimetal S. A. (France)......................................................... less than 1 (Tenneco Europe Limited owns 1 share; Walker Limited owns 1 share; Walker France S.A. owns 99%; and each of Kenneth Allen, Daniel Bellanger, Herman Weltens and Theo Bonneu, affiliated persons, owns 1 share)
- - --------------- /1/ In Dissolution 11 Subsidiaries of Tenneco Inc. (Delaware) Subsidiaries of Walker Limited (United Kingdom) Tenneco Management (Europe) Limited (United Kingdom).............................. 100% Tenneco Packaging Limited (Scotland)............................................. 100 Alpha Products (Bristol) Limited (United Kingdom).............................. 100 Tenneco Packaging (Caerphilly) Limited (United Kingdom)........................ 100 Tenneco Packaging (Films) Limited (United Kingdom)............................. 100 Tenneco Packaging (Livingston) Limited (Scotland).............................. 100 Brucefield Plastics Limited (Scotland)...................................... 100 Polbeth Packaging (Corby) Limited (Scotland)................................ 100 Tenneco Packaging (Stanley) Limited (United Kingdom)........................... 100 Tenneco Packaging (UK) Limited (United Kingdom)................................... 100 Wimetal S. A. (France)............................................................ less than 1 (Tenneco Europe Limited owns 1 share; Walker Limited owns 1 share; Walker France S.A. owns 99%; and each of Kenneth Allen, 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 Wellenfoam N.V. (Belgium)............................................................ 99.9 (Tenneco Inc. owns 99.9%; and Tenneco Packaging International Holdings Inc. owns less than 1% or 1 share) Wood Products Leasing Company (Delaware).................................... 100
12 EX-23 13 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated February 17, 1998, included in the Annual Report of Tenneco Inc. on Form 10-K for the year ended December 31, 1997, into the following Registration Statements previously filed with the Securities and Exchange Commission:
REGISTRATION NO. FORM SECURITIES REGISTERED ---------------- ---- --------------------- 333-24291 S-3 $700,000,000 Tenneco Inc. debt securities of which $100,000,000 remains available for issuance. 333-17485 S-8 17,000,000 shares of Common Stock, par value $.01 per share of Tenneco Inc. (formerly New Tenneco Inc.) ("Common Stock") issuable under the 1996 Tenneco Inc. Stock Ownership Plan. 333-30933 S-8 5,000 shares of Common Stock issuable under the Tenneco Thrift Plan for Hourly Employees ("Hourly Thrift Plan") and the Tenneco Thrift Plan ("Salaried Thrift Plan"). 333-17487 S-8 462,000 shares of Common Stock issuable under the Hourly Thrift Plan and the Salaried Thrift Plan. 333-41535 S-8 33,796 shares of Common Stock issuable under the 1996 Tenneco Inc. Stock Ownership Plan. 333-27279 S-8 64,000 shares of Common Stock issuable under the Hourly Thrift Plan. 333-23249 S-8 2,500,000 shares of Common Stock issuable under the 1997 Employee Stock Purchase Plan. 333-27281 S-8 395,000 shares of Common Stock issuable under the Hourly Thrift Plan and Salaried Thrift Plan. 333-41537 S-8 2,100 shares of Common Stock issuable under the Hourly Thrift Plan.
ARTHUR ANDERSEN LLP Houston, Texas March 13, 1998 EX-24 14 POWERS OF ATTORNEY TENNECO INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a Director of Tenneco Inc. (the "Company"), whose signature appears immediately below, constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of them, severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the exchanges on which the Company's common stock is listed. Each of said attorneys shall have the power to act hereunder with or without the other of said attorneys and shall have full power and authority to do and perform, in the name and on behalf of the undersigned, each and every act and thing requisite and necessary to be done, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this instrument this 10th day of March, 1998. /s/ Mark Andrews ------------------------------------- Mark Andrews TENNECO INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a Director of Tenneco Inc. (the "Company"), whose signature appears immediately below, constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of them, severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the exchanges on which the Company's common stock is listed. Each of said attorneys shall have the power to act hereunder with or without the other of said attorneys and shall have full power and authority to do and perform, in the name and on behalf of the undersigned, each and every act and thing requisite and necessary to be done, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this instrument this 10th day of March, 1998. /s/ W. Michael Blumenthal ------------------------------------- W. Michael Blumenthal TENNECO INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a Director of Tenneco Inc. (the "Company"), whose signature appears immediately below, constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of them, severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the exchanges on which the Company's common stock is listed. Each of said attorneys shall have the power to act hereunder with or without the other of said attorneys and shall have full power and authority to do and perform, in the name and on behalf of the undersigned, each and every act and thing requisite and necessary to be done, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this instrument this 10th day of March, 1998. /s/ Clifton R. Wharton, Jr. ------------------------------------- Clifton R. Wharton, Jr. TENNECO INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in her capacity as a Director of Tenneco Inc. (the "Company"), whose signature appears immediately below, constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of them, severally, her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for her and in her name, place and stead, in any and all capacities, to execute an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the exchanges on which the Company's common stock is listed. Each of said attorneys shall have the power to act hereunder with or without the other of said attorneys and shall have full power and authority to do and perform, in the name and on behalf of the undersigned, each and every act and thing requisite and necessary to be done, as fully and to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this instrument this 10th day of March, 1998. /s/ M. Kathryn Eickhoff ------------------------------------- M. Kathryn Eickhoff TENNECO INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a Director of Tenneco Inc. (the "Company"), whose signature appears immediately below, constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of them, severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute an Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the exchanges on which the Company's common stock is listed. Each of said attorneys shall have the power to act hereunder with or without the other of said attorneys and shall have full power and authority to do and perform, in the name and on behalf of the undersigned, each and every act and thing requisite and necessary to be done, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this instrument this 10th day of March, 1998. /s/ Peter T. Flawn ------------------------------------- Peter T. Flawn TENNECO INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a Director of Tenneco Inc. (the "Company"), whose signature appears immediately below, constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of them, severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the exchanges on which the Company's common stock is listed. Each of said attorneys shall have the power to act hereunder with or without the other of said attorneys and shall have full power and authority to do and perform, in the name and on behalf of the undersigned, each and every act and thing requisite and necessary to be done, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this instrument this 10th day of March, 1998. /s/ Henry U. Harris, Jr. ------------------------------------- Henry U. Harris, Jr. TENNECO INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a Director of Tenneco Inc., (the "Company"), whose signature appears immediately below, constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of them, severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the exchanges on which the Company's common stock is listed. Each of said attorneys shall have the power to act hereunder with or without the other of said attorneys and shall have full power and authority to do and perform, in the name and on behalf of the undersigned, each and every act and thing requisite and necessary to be done, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this instrument this 10th day of March, 1998. /s/ Belton K. Johnson ------------------------------------- Belton K. Johnson TENNECO INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a Director of Tenneco Inc. (the "Company"), whose signature appears immediately below, constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of them, severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the exchanges on which the Company's common stock is listed. Each of said attorneys shall have the power to act hereunder with or without the other of said attorneys and shall have full power and authority to do and perform, in the name and on behalf of the undersigned, each and every act and thing requisite and necessary to be done, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this instrument this 10th day of March, 1998. /s/ Larry D. Brady ------------------------------------- Larry D. Brady TENNECO INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a Director of Tenneco Inc. (the "Company"), whose signature appears immediately below, constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of them, severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the exchanges on which the Company's common stock is listed. Each of said attorneys shall have the power to act hereunder with or without the other of said attorneys and shall have full power and authority to do and perform, in the name and on behalf of the undersigned, each and every act and thing requisite and necessary to be done, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this instrument this 10th day of March, 1998. /s/ William L. Weiss ------------------------------------- William L. Weiss TENNECO INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a Director of Tenneco Inc. (the "Company"), whose signature appears immediately below, constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of them, severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the exchanges on which the Company's common stock is listed. Each of said attorneys shall have the power to act hereunder with or without the other of said attorneys and shall have full power and authority to do and perform, in the name and on behalf of the undersigned, each and every act and thing requisite and necessary to be done, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this instrument this 10th day of March, 1998. /s/ Sir David Plastow ------------------------------------- Sir David Plastow TENNECO INC. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, in his capacity as a Director of Tenneco Inc. (the "Company"), whose signature appears immediately below, constitutes and appoints Theodore R. Tetzlaff and Karl A. Stewart, and each of them, severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute an Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and the exchanges on which the Company's common stock is listed. Each of said attorneys shall have the power to act hereunder with or without the other of said attorneys and shall have full power and authority to do and perform, in the name and on behalf of the undersigned, each and every act and thing requisite and necessary to be done, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this instrument this 10th day of March, 1998. /s/ Roger B. Porter ------------------------------------- Roger B. Porter EX-27.1 15 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Tenneco Inc. and Consolidated Subsidiaries Financial Statements and is qualified in its entirety by reference to such Financial Statements. 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 41 0 729 0 950 2,115 5,284 1,829 8,332 1,661 2,633 0 0 2 2,526 8,332 7,220 7,220 5,274 5,274 1,280 0 216 548 163 361 0 0 (46) 315 1.85 1.84
EX-27.2 16 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Tenneco Inc. and Consolidated Subsidiaries Financial Statements and is qualified in its entirety by reference to such Financial Statements. 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 40 0 795 0 954 2,190 5,141 1,795 8,388 1,699 2,638 0 0 2 2,596 8,388 5,352 5,352 3,894 3,894 926 0 157 440 138 285 0 0 0 285 1.67 1.67
EX-27.3 17 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Tenneco Inc. and Consolidated Subsidiaries Financial Statements and is qualified in its entirety by reference to such Financial Statements. 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 81 0 808 0 936 2,147 5,029 1,747 8,257 1,687 2,663 0 0 2 2,536 8,257 3,521 3,521 2,563 2,563 628 0 98 273 82 180 0 0 0 180 1.05 1.05
EX-27.4 18 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Tenneco Inc. and Consolidated Subsidiaries Financial Statements and is qualified in its entirety by reference to such Financial Statements. 1,000,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 116 0 678 0 910 2,025 4,870 1,690 7,622 1,721 2,045 0 0 2 2,553 7,622 1,629 1,629 1,207 1,207 303 0 45 114 33 76 0 0 0 76 .44 .44
EX-27.5 19 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Tenneco Inc. and Consolidated Subsidiaries Financial Statements and is qualified in its entirety by reference to such Financial Statements. 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 62 0 561 0 878 1,923 4,870 1,618 7,587 1,621 2,067 0 0 2 2,644 7,587 6,572 6,572 4,854 4,854 1,166 0 195 433 194 218 428 (236) 0 410 2.35 2.34
EX-27.6 20 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Tenneco Inc. and Consolidated Subsidiaries Financial Statements and is qualified in its entirety by reference to such Financial Statements. 1,000,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 165 0 529 0 882 2,048 4,685 1,586 8,535 2,190 1,531 0 0 957 2,705 8,535 4,886 4,886 3,580 3,580 832 0 145 440 171 254 518 (1) 0 771 4.51 4.48
EX-27.7 21 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Tenneco Inc. and Consolidated Subsidiaries Financial Statements and is qualified in its entirety by reference to such Financial Statements. 1,000,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 229 0 477 0 820 2,102 4,332 1,584 7,924 1,710 1,573 0 0 957 2,612 7,924 3,233 3,233 2,347 2,347 543 0 100 314 126 178 478 0 0 656 3.85 3.82
EX-27.8 22 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Tenneco Inc. and Consolidated Subsidiaries Financial Statements and is qualified in its entirety by reference to such Financial Statements. 1,000,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 237 0 470 0 880 1,999 4,259 1,531 7,940 1,680 1,680 0 0 957 2,575 7,940 1,539 1,539 1,132 1,132 260 0 47 114 49 60 435 0 0 495 2.91 2.89
EX-27.9 23 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Tenneco Inc. and Consolidated Subsidiaries Financial Statements and is qualified in its entirety by reference to such Financial Statements. 1,000,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 354 0 351 0 838 1,946 4,138 1,480 7,413 1,559 1,648 0 0 957 2,191 7,413 5,221 5,221 3,804 3,804 784 0 160 512 231 258 477 0 0 735 4.19 4.17
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